Question

On January 1, the Fulmar Company sold personal property to the Austin Company. The personal property had cost Fulmar $40,000. Fulmar frequently sells similar items of property for $44,000. Austin gave Fulmar a noninterest-bearing note payable in six equal annual installments of $10,000 with the first payment due this December 31. Collection of the note is reasonably assured. A reasonable rate of interest for a note of this type is 10%. The present value of an annuity of $1 in arrears at 10% for six periods is 4.355. What amount of sales revenue from this transaction should be reported in Fulmar's income statement for the year ended December 31?

Answer 1

The sales revenue from this transaction that should be reported in Fulmar's income statement for the year ended December 31 is $43,550.

Step-by-step explanation:

The sales revenue from this transaction that should be reported in Fulmar's income statement for the year ended December 31 is the present value of the note receivable.

To calculate the present value, we need to discount the future cash flows using the given interest rate of 10%. The annual installment payment is $10,000 for six years, so the total cash inflow over the six years is $60,000.

Using the present value of an annuity formula, we can calculate the present value as follows:

Present Value = Annual Payment x Present Value of Annuity Factor

Present Value = $10,000 x 4.355

Present Value = $43,550

Therefore, Fulmar should report $43,550 as the sales revenue on the income statement for the year ended December 31.