Noninterest-Bearing Note Receivable On January 1, 2001, Amherst Corporation sold equipment to South Company for $18,040. In payment, Amherst agreed to accept a 3-year note that called for payments of $7,000 to be received annually beginning on December 31, 2001. Amherst considers an 8 percent rate of interest on such notes to be appropriate.

a. Compute the interest income to be recorded in each of the 3-years by Amherst Corporation and the balance of the note receivable at the end of each year.

b. Why does the amount of interest income decline each period?