R Company was indebted to A Inc.at January 1,2014.The note called for a $25,000 payment to be made on December 31,2014 and also on December 31,2015.The note was non-interest bearing yet 10% was the prevailing rate at the time the note was issued.What is the book value of the note on R's January 1,2014 balance sheet (rounded)?

Question

Quizplus · Accepted Answer

Since the prevailing interest rate is 10%, we can calculate the present value of the note's future payments using the present value of an annuity formula. 
PV = (Payment / (1 + r)^n) + (Payment / (1 + r)^(n+1))
Where:
PV = present value
Payment = $25,000
r = 10%
n = 2
PV = ($25,000 / (1 + 0.1)^1) + ($25,000 / (1 + 0.1)^2) = $43,388. 
Therefore, the book value of the note on R's January 1, 2014 balance sheet should be $43,388.

R Company Was Indebted to a Inc