Question

Problems 8-8 Imputing interest on a nominal interest-bearing note and fair value option (LO 8-4, LO 8-5)

On January 2, 2017, Criswell Acres purchased from Mifflinburg Farm Supply a new tractor that had a cash selling price of $109,837. As payment, Criswell gave Mifflinburg Farm Supply $25,000 in cash and a $100,000, five-year note that provided for annual interest payments at 6%. At the time of the sale, the interest rate normally charged to farms with Criswell’s credit rating is 10%. Use the following links to the present value tables to calculate answers. (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.)

Required:

Determine the note receivable balance that Mifflinburg Farm Supply will report on December 31, 2018.

Determine Mifflinburg Farm Supply’s note receivable balance on December 31, 2018, assuming that the company reports notes receivable at fair value and the relevant rate of interest at that time has fallen to 8%. Assume that the December 31, 2018, interest payment has been made.

(Round your final answers to the nearest whole dollar.)

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	3. Notes receivable balance 4. Total fair value

Answer 1

Interest paid per year (100000*6%)			6000
Present value of notes
Year	Payment	Discount factor @ 10%	Present value
0	25000	1	25000
1	6000	0.909091	5455
2	6000	0.826446	4959
3	6000	0.751315	4508
4	6000	0.683013	4098
5	6000	0.620921	3726
5	100000	0.620921	62092
Present value of new tractor			109837
Present value of notes (109837-25000 cash paid)			84837

Amortization table of notes receivable
Year	Beginning balance of notes	Cash receipt	Interest revenue	Increase in notes (interest revenue - cash receipt)	Ending balance of notes (beginning balance of notes + increase in notes)
1	84837	6000	8484	2484	87321
2	87321	6000	8732	2732	90053
3	90053	6000	9005	3005	93058
4	93058	6000	9306	3306	96364
5	96364	6000	9636	3636	100000
100000 notes receivable received at end of 5 year and balance become zero.
Note receivable balance that Mifflinburg Farm Supply will report on December 31, 2018 (Ending balance of notes for first year)					87321

Year	Payment	Discount factor @ 8%	Present value
2019	6000	0.925926	5555.56
2020	6000	0.857339	5144.03
2021	6000	0.793832	4762.99
2022	106000	0.73503	77913.16
Mifflinburg Farm Supply’s note receivable balance on December 31, 2018, assuming that the company reports notes receivable at fair value and the relevant rate of interest at that time has fallen to 8%.			93375.75
Answer rounded			93376