### Effective-interest method

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On January 1, 2010, Jacobs Company sold property to Dains Company which originally cost Jacobs \$760,000. There was no established exchange price for this property. Danis gave Jacobs a \$1,200,000 zero-interest-bearing note payable in three equal annual installments of \$400,000 with the first payment due December 31, 2010. The note has no ready market. The prevailing rate of interest for a note of this type is 10%. The present value of a \$1,200,000 note payable in three equal annual installments of \$400,000 at a 10% rate of interest is \$994,800. What is the amount of interest income that should be recognized by Jacobs in 2010, using the effective-interest method?

a) \$0.

b) \$40,000.

c) \$99,480.

d) \$120,000.

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