Question

On January 1, 2016, Cobb Co. received, for the sale of a parcel of land, a ten-year note receivable having a face amount of $2,000,000 and a stated interest rate of 8% payable annually each December 31. The market rate of interest for this type of note is 10%. Present value factors are as follows: At 8% At 10% Present value of 1 for 10 periods 0.46319 0.38554 Present value of an ordinary annuity of 1 for 10 periods 6.71008 6.14457 The amount to record as proceeds for the sale of the land is: a) $2,000,000 b) $1,960,200 c) $1,840,000 d) $1,754,211 e) None of the above

Answer 1

d) $1,754,211

Step-by-step explanation:

The computation of the proceeds for the sale of the land is shown below:

= Interest expense × PVIFA for 10 years at 10% + Face value × PVIF for 10 years at 10%

= $160,000 × 6.14457 + $2,000,000 × 0.38554

= $983,131.20 + $771,080

= $1,754,211

The interest expense would be

= $2,000,000 × 8%

= $160,000

Simply we multiply the interest expense and face value with its present value interest annuity factor and present value interest factor so that the accurate amount can come.