Question

On December 31, Year 1, Jet Co. received two $10,000 notes receivable from customers in exchange for services rendered. On both notes, interest is calculated on the outstanding principal balance at the annual rate of 3% and payable at maturity. The note from Hart Corp., made under customary trade terms, is due in nine months and the note from Maxx, Inc. is due in five years. The market interest rate for similar notes on December 31, Year 1 was 8%. The compound interest factors to convert future values into present values at 8% follow:

Answer 1

Answer:

Hart's note should be reported at $10,000 and Maxx's note should be reported at $7,820

Explanation:

Since Hart's note is a current note (due within one year) it should be reported at future value = $10,000

Marxx's note must be reported at present value:

present value =  future value x discount factor = {$10,000 [1 + (3% x 5)]} x 0.68

present value = $11,500 x 0.68 = $7,820

*we use simple interest to calculate the future value of Marxx's debt since Jet Co. doesn't charge compound interest