Question

On December 30, 2020, Axle, Inc. purchased a machine from Grant Corp. in exchange for a zero-interest-bearing note requiring eight payments of $150,000. The first payment was made on December 30, 2020, and the others are due annually on December 30. At date of issuance, the prevailing rate of interest for this type of note is 11%. Present value factors are as follows:

                                                Present Value of Ordinary          Present Value of

                        Period              Annuity of 1 at 11%                   Annuity Due of 1 at 11%

    7                              4.712                                        5.231

    8                              5.146                                        5.712

What will be the net realizable value of the note payable on Axle's 12/31/20 balance sheet?

	a.	$706,800
	b.	$1,050,000
	c.	$1,200,000
	d.	$856,800

Answer 1

On December 30, 2020, Axle, Inc. purchased a machine from Grant Corp. in exchange for a zero-interest-bearing note requiring eight payments of $150,000.

Remaining 7 annual payments of $150,000 are to be made at the end of each year.

Interest Rate (i) = 11%

Present value of all return payment = Annual Payment x Present Value Annuity factor (i %, n)

= 150,000 x Present value annuity factor (11% , 7)

= 150,000 x 4.712

= $706,800

Net realizable value of note payable of 12/31/20 = $706,800

Option a is correct.

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