Question

On June 30, 2021, Kimberly Farms purchased custom-made harvesting equipment from a local producer. In payment, Kimberly signed a noninterest-bearing note requiring the payment of $60,000 in two years. The fair value of the equipment is not known, but an 8% interest rate properly reflects the time value of money for this type of loan agreement. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

At what amount will Kimberly initially value the equipment?
How much interest expense will Kimberly recognize in its income statement for this note for the year ended December 31, 2021?(Round your answers to the nearest dollar value.)

Answer 1

Initial Value of equipment	$ 51,440
Interest expense for note for year ending 31 march 2021	$ 2,058

Calculation:

1. Initial value of equipment:

Total payment to be made (amount to note )	$ 60,000
Duration	2 years
Interest rate	8%

To determine the initial value of equipment , Present value of total payment amount to be calculated.

Formula for calculation of present value:

Present value = Future value * PV factor of $ 1 @ given percentage for n year

=$ 60,000 * PV factor of $1 @ 8% for 2 years

= $ 60,000 * 0.85734

= $ 51,440 Answer

2. Interest expense to be recognised for year ended 31 Dec 2021

Interest will be charged on initial amount for 6 months , i.e. from 30 june 2021 to 31 dec 2021.

Formula :

interest expense = Initial amount * anuual interest rate * no. of months / 12

= $ 51440 * 8% * 6/12

= $ 4,115 / 2

= $ 2,058 Answer