Question

On December 31,2020 , Sheffield Corp. sold an old machine. The terms of the sale were as follows: $59,000 down payment $46,500 payable on December 31 each of the next two years (end of year payments) The agreement of sale made no mention of interest: however, 8% 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 31,2020 rounded to the nearest dollar?

a.$82.922
b.$59.000
c.$93.000
d.$81.799

Answer 1

To calculate the amount of the notes receivable net of the unamortized discount, we need to find the present value of the future payments using the discount rate of 8%. The down payment is not discounted, but the payments in the next two years need to be discounted. The amount of the notes receivable net of the unamortized discount on December 31, 2020 is $83,000 (option c).

Step-by-step explanation:

To determine the amount of the notes receivable net of the unamortized discount on December 31, 2020, we need to calculate the present value of the future payments using the discount rate of 8%. The down payment of $59,000 will not be discounted since it was received immediately. For the payments of $46,500 in each of the next two years, we need to calculate their present value. Using the present value formula:

PV = Future Value / (1 + interest rate)^n

Where PV is the present value, Future Value is the future payment, interest rate is 8%, and n is the number of years. For the first payment, n = 1, and for the second payment, n = 2. Plugging in the values, we get:

PV = $46,500 / (1 + 0.08)^1 + $46,500 / (1 + 0.08)^2

PV = $43,055.56 + $39,927.47

PV = $82,982.03

Rounded to the nearest dollar, the amount of the notes receivable net of the unamortized discount on December 31, 2020 is $83,000 (option c).