Question

1. Veterans and Co. bought a building and agreed to pay the seller $15,000 every year for 20 years (starting one year from today). Assuming an annual effective interest rate of 5%, what is the value of Veterans and Co. note payable at the time of the purchase? (2 points)

2. Company A agreed to pay Company B $1,100 every month for a year (starting one month from today, so 12 payments in total) in exchange for a piece of equipment. Assuming an annual effective interest rate of 12%, what is the value of Company A’s note payable at the time of the purchase? (2 points)

3. Pie in the Sky Co. bought a machine on December 31, 2018 and agreed to pay the seller $4,000 annually for 5 years (starting on December 31, 2019). Assuming an annual effective interest rate of 8%, Pie in the Sky made the following journal entry to record the purchase.

Dr. Machine 15,970.84

                      Cr. Note Payable 15,970.84

What amount of interest expense, if any, should Pie in the Sky record for the year ending December 31, 2019 related to this note payable? (1 point)

Answer 1

Q1)

Yearly Payment = 15000

No. Of years = 20

Interest Rate = 5%

Value of note payable at the time of purchase=

15000× 20= 300000

Interest = 300000× 5%= 15000

Q2)

Monthly Payment= 1100

Time = 1 Year (12 Payments)

Interest rate = 12%

Value of companys note payable at the time of purchase =

1100× 12= 13200

Interest = 13200× 12% = 1584

Q3 )

As Per the journal Entry :-

Notes Payable = 15970.84

Interest to be Recorded = 15970 .84 × 8% = 1277.66

Note :- If there was no value given as notes payable.The value will be calculated as Per the Yearly installment and the no. Of years to be paid