Question

On December 31, 2021, Flint Corporation sold for $100,000 an old machine having an original cost of $180,000 and a book value of $80,000. The terms of the sale were as follows: $20,000 down payment $40,000 payable on December 31 each of the next two years The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of transaction. What should be the amount of the notes receivable net of the unamortized discount on December 31, 2021 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.) A :

Answer 1

Answer:

The amount of notes receivable net of the unamortized discount on Dec 31, 2021 is $30,364.4/-

Explanation:

For the sale of the asset, Flint Corporation accepts a down payment of $20,000/- and remaining by way of notes receivable on December 31 for the next two years.

The present value of notes payable is calculated as future value multiplied by Present value factor at discount rate of 9%, for two years i.e 0.75911. Hence multiplying $40,000/- by the present value factor 0.75911, we get $30,364.4/-.

The value of notes receivable in Dec 31, 2021 should be $30,364.4/-, which is  payable in Dec 31 2022.

The present value are calculated taking into consideration the interest rate and number of years taken for payment. The problem requires the calculation of present value of the notes receivable, net of the unamortized discount on Dec 31,2021. Hence the above approach is adopted to arrive at the present value of note receivable for $40,000/-, to be received in 2 years.