Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2014. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2016. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years is $317,520. On January 1, 2014, Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. On Straight Industries' balance sheet for the year ended December 31, 2014, the book value of the liability for notes payable, including accrued interest would be closest to:
A) $342,922.
B) $349,520.
C)$345,013.
D)$347,213.

Question

Quizplus · Accepted Answer

The correct answer is A. The book value of the liability for notes payable, including accrued interest would be closest to $342,922. The present value of the note is $317,520. The difference between the present value and the face value of the note is the amount of interest that will be paid over the life of the note. The amount of interest that will be paid in 2014 is $25,402 ($400,000 x 8% x 1/3). The book value of the liability for notes payable, including accrued interest would be $342,922 ($317,520 + $25,402).

Straight Industries Purchased a Large Piece of Equipment from Curvy