Question

On December 31, 1991, Jet Co. received two $10,000 notes receivable from customers in exchange for services rendered. On both notes, interest is calculated on the outstanding principal balance at the annual rate of 3% and payable at maturity. The note from Hart Corp., made under customary trade terms, is due in nine months and the note from Maxx, Inc. is due in five years. The market interest rate for similar notes on December 31, 1991, was 8%. The compound interest factors to convert future values into present values at 8% follow:

Present value of $1 due in nine months: .944
Present value of $1 due in five years: .680
At what amounts should notes receivable to Maxx be reported in Jet's December 31, 1991, balance sheet?

a. $9,440 $6,800
b. $9,652 $7,820
c. $10,000 $6,800
d. $10,000 $7,820

Answer 1

Answer:

Hart Corp.'s note should be reported at $10,000

Maxx Inc.'s note should be reported at $7,883

Explanation:

Interest bearing notes that represent current accounts (due within one year) should be reported at face value. Hart Corp.'s note is due in nine months, so it should be reported at = $10,000

Maxx Inc.'s note must be recorded at present value because it is due in 5 years.

FV = $10,000 x 1.03⁵ = $11,592.74

now we must determine its present value using an 8% discount rate:

PV = $11,592.74 x 0.680 = $7,883