Question

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 interest revenue will Seller Company recognize on December 31, 2018?

Answer 1

Interest = 40,000*5% = 2,000

Borrowing rate = 8%

Therefore present value is to be calculated on 8% and interest to be calculated at 5 %.

Present value of interest = 2000* present value factor or an ordinary annuity 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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