On December 31, 2016, Ashton Corporation performed forensic psychic consultation

Question

On December 31, 2016, Ashton Corporation performed forensic psychic consultation services for the Edamame Private Detective Agency. Ashton was short of cash, and Ashton agreed to accept a $200,000 note receivable due December 31, 2018, bearing interest at 8% payable semi-annually. The market rate for a note of similar risk is 6%.

What interest rate would you use to compute the cash interest payment?

What interest rate would you use to compute the present value of the note?

Calculate the present value of the note receivable:

Provide the journal entry for the issue of the note receivable:

Explanation / Answer

The interest rate to be used to compute the cash interest payment is 8% ( 4% for semi-annual interest payment)

The interest rate to be used to compute the present value of the note is 6% (3% for semi-annual interest )

Present value of the note payable = 8,000 x PVAi=3%, n=4 + 200,000 x PVi=3%, n=4 = 8,000 x 3.7171 + 200,000 x 0.8885 = 29,736.80 + 177,700 = $ 207,436.80

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