Assume that on January 1, Bush Enterprises borrowed $4.760 from Banking Corporation, promising to pay $5,000 at

Question:

Assume that on January 1, Bush Enterprises borrowed $4.760 from Banking Corporation, promising to pay $5,000 at the end of o year. The effective rate of interest on the loan is proximately 5 percent ([$5.000 — $4,760]/$4.760). Suppose that the general rate of inflation for that year was 10 percent.

REQUIRED:

a. How much interest revenue did Banking Corporation recognize for the year?

b. Do you think that Banking Corporation is helter off at the en4 of the veal by the amount of the interest revenue? Did Banking Corporation have more or Less purchasing power at the end of the year? How much?

c. Which of the two parties, Bush Enterprises or Banking Corporation, seems to have ended up with the better deal? Could one determine this from a careful examination of the financial statements prepared on the basis of GAAP? Why or why not?

Financial Statements
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