I am having a lot of trouble with this question:
“On December 30, Year 1, Chang Co. sold a machine to Door Co. in exchange for a non-interest-bearing note requiring ten annual payments of $10,000. Door made the first payment on December 30, Year 1. The market interest rate for similar notes at date of issuance was 8%. Information on present value factors is as follows:
Period PV1 @ 8% PVOA 1 @ 8%
9 0.5 6.25
10 0.46 6.71
In its December 31, Year 1 balance sheet, what amount should Chang report as note receivable?”
a. $62,500
b. $46,000
c. $45,000
d. $67,100
The answer is A, 62,500. I thought it would be C, 45,000 because it's asking for the PV of the note receivable, so wouldn't that be a PV of 1 ($90,000), and not an annuity ($10,000)? The explanations for each wrong answer all say “The note constitutes an annuity with nine payments since the first payment is made on December 31, Year 1” which doesn't really explain the annuity vs. PV1 issue I am having…
AUD: 78
BEC: 81
FAR: 72 (TBD)
REG: TBD (2/14/14) <3
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