Question - On January 1, 2014, Hansel Company purchased a truck. The company issued a note to the seller of the truck agreeing to pay $200,000 on December 31, 2017 (i.e. single large payment four years later). No cash changes hands on January 1, 2014. The market interest rate on January 1, 2014 for this note is 10%. The market interest rates at the end of 2014, 2015, 2016, and 2017 for this note are 9%, 10%, 9%, and 12%, respectively. Assume annual compounding.
1. Prepare the journal entry on December 31, 2015 to recognize interest expense. Notice this is the second year the Note is outstanding.
2. Prepare the journal entries on December 31, 2017 to recognize interest expense and the redemption of the note.
3. Will the interest expense in 2016 be greater or smaller than the interest expense in2015? Explain your answer.