Question

Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of $19,485. What should be the total interest revenue earned by Leaf over the life of this note?

a. $5,045
b. $5,560
c. $8,000
d. $9,000

Answer 1

b. $5,560

Step-by-step explanation:

The computation of the total interest revenue is shown below:

The five equal annual year-end payments = $5,009

For five years, the total amount is

= $5,009 × 5 years

= $25,045

And, the present value of recording the note is $19,485

So, the total interest revenue earned would be

= Five years amount - present value of recording the note

= $25,045 - $19,485

= $5,560