Accounting, Analysis, and Principles (Part Level Submission) Ayayai Co. accepts

Question

Accounting, Analysis, and Principles (Part Level Submission) Ayayai Co. accepts a note receivable from a customer in exchange for some damaged inventory. The note requires the customer make semiannual installments of $60,900 each for 10 years. The first installment begins six months from the date the customer took delivery of the damaged inventory. Ayayai's management estimates that the fair value of the damaged inventory is $758,949 Click here to view factor tables (al) What interest rate is Ayayai implicitly charging the customer? Express the rate as an annual rate but assume semiannual compounding. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, eg, 7%.) The interest rate is

Explanation / Answer

SOLUTION

A. Semiannual Installment = $60,900

Number of years = 10 years

Total = ($ 60,900 * 10 years * 2 times a year) = $1,218,000

Fair Value of Damaged Inventory = $758,949

Interest = $1,218,000 - $758,949 = $459,051

Interest per year = $459,051 / 10 = $45,905

Rate = Interest per year /  Fair Value of Damaged Inventory * 100

= $45,905 / $758,949 * 100 = 6.05%

Annual Rate = 6.05% * 2 = 12.1%

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