Trader Trust accepts a $500,000 non-interest bearing 10-year note from Coffee Co.in exchange for Cash on 1/1/16.Coffee Co.promises to repay $500,000 at maturity.The market rate on 1/1/16 was 4%.What is the carrying value of this note on the balance sheet on 12/31/16?

Question

Quizplus · Accepted Answer

The carrying value of the note is the present value of the future cash flows from the note discounted at the market rate of interest.

On 1/1/16, the present value of the note would be:

PV = $500,000 / (1 + 0.04)^10 = $340,748

This is the initial carrying value of the note.

On 12/31/16, the carrying value of the note would be:

PV = $500,000 / (1 + 0.04)^9 = $351,293

This is because there is one less year of cash flows to discount, and the discount rate remains the same. Therefore, the correct answer is C.

Trader Trust Accepts a $500,000 Non-Interest Bearing 10-Year Note from Coffee