A Two-Year Note Was Issued in an Arm's-Length Transaction at Face

question 23

Multiple Choice

A two-year note was issued in an arm's-length transaction at face value solely for cash at the beginning of the year. There were no other rights or privileges exchanged. The interest rate is specified at 10 percent per year. Principal and interest are payable at maturity. The prevailing rate of interest for a loan of this type is 15 percent per year. What annual interest rate should be used to record interest expense for this year and next year?
This year             Next Year

• A) 10 percent     15 percent
• B) 10 percent     10 percent
• C) 15 percent    10 percent
• D) 15 percent    15 percent

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