Question

Greenwell Farm Equipment sells a tractor to Farmer for $130,000 on January​ 1, 2019. The tractor is delivered that day. Greenwell agrees that the Farmer may delay the payment for 2 years. The market rate of interest is 10​%. Refer to Greenwell Farms. How much interest revenue will Greenwell report over the life of this​ contract? (Do not round intermediary​ calculations, and round your final answer to the nearest whole​ number.) Use the formula approach

Answer 1

Present value of interest is $5,062 and future value is $5,796

Step-by-step explanation:

The formula for finding the Present value of the interest reported as revenue is calculated as under:

Present Value of $40,000 receivable in 2 years = $40,000 / (1+7%)^2

Present Value of $40,000 receivable in 2 years = $34,938

The difference of the future value receivable and present value of the future amount receivable is the interest's present value which is given as under:

Interest Present value = $40,000 - $34,938 = $5,062

Using the compounding formula, the future value of the interest that will be recorded in the financial statement will be = $5,062 * (1 + 7%)^2 years

Future value of interest = $5796