Question

On Jan 1, 2017, ABC Co. sold $20,000 worth of merchandise to Customer George and received a 10-year note receivable with 8% interest rate as payment. The note contract stated that George is required to make ten equal annual year-end payments to ABC Co. starting Dec 31, 2017.

The present value factors of an ordinary annuity of $1 for ten periods are as follows:

8%	6.71008
9%	6.41766

ABC Co. preferred not to wait to collect the annual payments, so it discounted the note receivable at Citi Bank with interest rate of 9%. What is the amount of cash ABC Co.

received from Citibank?

How was ABC’s net income affected by the discounting transaction?  

Answer 1

A / 1	B	C	D
2	Data
3	Worth of Merchandise	$         20,000.00
4	No of yearly Note	10
5	Rate of Interest	8%
6	We have to compute yearly amount of receipt
7	Use PMT formula	$2,980.59	=PMT(C5,C4,-C3,0,0)
8	There fore yearly amount receivable is	$2,980.59
9
10	Now the above yearly receivable is discounted @9% and received amount today
11	Worth of Merchandise	$         20,000.00
12	No of yearly Note	10
13	Rate of Interest	9%
14	Annuity receivable for each year	$2,980.59
15	We have to compute present value
16	Use PV formula	($19,128.40)	=PV(C13,C12,C14,0,0)
17	Therefore the present value of amount receivable against discounting from CITI Bank	$19,128.40