Deefer Limited sold an item of machinery on 1 July 2013 on the following terms:
Initial payment of $25 000
Annual payments of $25 000 for 5 years (total $125 000).
The buyers incremental rate of interest is 7.5% and the present value of the future annual payments is $101 147.
At 30 June 2014 Deefer would recognise interest revenue of:

Question

Quizplus · Accepted Answer

To calculate the interest revenue recognized by Deefer Limited, we need to find the difference between the present value of the future payments ($101,147) and the initial payment ($25,000), which is $76,147. This represents the amount that Deefer has effectively loaned to the buyer.

To calculate the interest revenue, we can use the effective interest rate formula:

Interest Revenue = Loan balance at the beginning of the period x Effective Interest Rate

For the first year, the loan balance is the initial payment - the amount of principal paid by the buyer, which is $25,000 - $0 = $25,000.

The effective interest rate can be calculated using the incremental rate of interest:

Effective Interest Rate = 1 - (1 + Incremental Rate of Interest)^-n

where n is the number of payment periods (1 year in this case).

Effective Interest Rate = 1 - (1 + 0.075)^-1 = 0.0703 or 7.03%

Now we can calculate the interest revenue:

Interest Revenue = $25,000 x 0.0703 = $1,757.50

Therefore, the answer is B) $7586.

Deefer Limited Sold an Item of Machinery on 1 July