Greenwell Farm Equipment sells a tractor to Farmer for $40,000 on January 1, 2019. The tractor is delivered that day. Greenwell agrees that the Farmer may delay the payment for 2 years. The market rate of interest is 7%. Refer to Greenwell Farms. How much interest revenue will Greenwell report over the life of this contract? (Do not round intermediary calculations, and round your final answer to the nearest whole number.) Use the formula approach.

Question

Quizplus · Accepted Answer

The correct answer is A.The interest revenue is calculated as the present value of the future payment minus the principal amount. The present value of the future payment is calculated as the future payment divided by (1 + r)^n, where r is the market rate of interest and n is the number of years. In this case, the future payment is $40,000, the market rate of interest is 7%, and the number of years is 2. Therefore, the present value of the future payment is $40,000 / (1 + 0.07)^2 = $34,938. The interest revenue is then calculated as $34,938 - $40,000 = $5,062.

Greenwell Farm Equipment Sells a Tractor to Farmer for $40,000