On December 31, 2017, Seller Company sold goods to Buyer Company and in return received a $40,000, 5%, 3- year note with interest paid annually. Assume that Buyer Company's borrowing rate is 8%.
The present value factor or an ordinary annuity at 8% for 3 periods is 2.57710 and the present value factor for a single sum at 8% for 3 periods is .79383.
The present value factor or an ordinary annuity at 5% for 3 periods is 2.72325 and the present value factor for a single sum at 5% for 3 periods is .86384.
How much sales revenue will Seller Company recognize on December 31, 2017?
Interest = 40,000*5% = 2,000
Borrowing rate = 8%
Therefore present value is to be calculated on 8%
Present value of interest = 2000* present value factor at 8% for 3 periods
= 2000*2.57710
= $5,154.20
Present value of the single payment to be received at the end of 3 years
= 40,000*present value factor for a single sum at 8% for 3 periods
= 40000*0.79383
= $31,753.20
Total sales to be recognised = 31,753.20 + 5,154.20
= $36,907.40
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