Question

Pie Co. uses the installment sales method to recognize revenue. Customers pay the installment notes in 24 equal monthly amounts, which include 12% interest. What is an installment note's receivable balance six months after the sale?A. 75% of the original sales price.
B. Less than 75% of the original sales price.

C. The present value of the remaining monthly payments discounted at 12%.

D. Less than the present value of the remaining monthly payments discounted at 12%.

Answer 1

Answer:

C. The present value of the remaining monthly payments discounted at 12%.

Explanation:

To answer the question I have used following values to workout

Original Sales Value = 500,000

Interest rate  = 12%

Numbers of periods = 24

First I calculate the Equal annual installment payment by using following excel formula

=PMT(rate,nper,pv,[fv],[type])

Where

PMT = Equal Annual Payment

rate = Interst rate = 12%/12 = 1%

nper = Tota numbers of payment = 24 payments

pv = oroginal sales value = 500,000

FV = Value outstanding after 24 payments = 0

Type = The payment made at the start or end of the year ( 0 for the payment made at the end of the period and 1 for the payment made at the beginning of the period ) = 0

placing values in the formula

=PMT(1%,24,50,000,0,0)

= $23,536.74  

Now use these values to make the schedule which is attached with this answer.

After six Payment

Outstanding value = 385,961.72  

Original sales price = 500,000

Percentage of outstanding balance to original sales value = 385,961.72 / 500,000 = 0.77 = 77%

The reamining balance is above 75% of the original sales price.

Note:

A payment schedule is attached for reference

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