Question

On June 30, 2016, Kimberly Farms purchased custom-made harvesting equipment from a local producer. In payment, Kimberly signed a noninterest-bearing note requiring the payment of $92,000 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? Table or calculator function: Future Value: Present Value: How much interest expense will Kimberly recognize in its income statement for this note for the year ended December 31, 2016?

Answer 1

calculation of initial value of equipment

future value = 92000

n= 2

i= 8%

present value = 92000*0.85734 = 78875.28

therefore initial value = 78875.28

interest expenses= initial value of equipment*interest rate*no of years

interest expenses= 78875.28*8%*6/12

interest expeses = 3155.011