Question

On January 1, Year 1, the ABC Company purchased a machine and signed a note promising to pay $30,000 in 3 years, on December 31, Year 3. This amount represents the total amount that ABC will pay in this transaction. The machine is custom made and not easily appraised. ABC's implicit interest rate is 8%.

Required:
1. At what amount would ABC report the note on its December 31, year 1 balance sheet?

Answer 1

$25,720.17

Step-by-step explanation:

The amount that ABC would report the note in its balance sheet at December 31,year 1 is the present value of the note discounted using the implicit interest rate of 8% plus the unwounded interest for year 1.

The unwounded interest is the interest amount applicable to the present value in each year.

PV=FV*(1+r)^-n

PV is the value of note now which is unknown

FV is the amount payable in three years,the $30,000

r is the implicit interest rate of 8%

n is the number of years it would ABC to pay the $30,000 which is 3

PV=$30,000*(1+8%)^-3=$ 23,814.97

The unwounded interest for year=$23,814.97 *8% =$=$1905.20

Carrying value=$23,814.97+$1905.20 =$25,720.17