Greenwell Farm Equipment sells a tractor to Farmer for $130,000 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 10 %. 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

Eliza Frye

Business

5 June, 12:18

Greenwell Farm Equipment sells a tractor to Farmer for $130,000 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 10 %. 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

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Nathalie · Answer 1

Present value of interest is $5,062 and future value is $5,796

Explanation:

The formula for finding the Present value of the interest reported as revenue is calculated as under:

Present Value of $40,000 receivable in 2 years = $40,000 / (1+7%) ^2

Present Value of $40,000 receivable in 2 years = $34,938

The difference of the future value receivable and present value of the future amount receivable is the interest's present value which is given as under:

Interest Present value = $40,000 - $34,938 = $5,062

Using the compounding formula, the future value of the interest that will be recorded in the financial statement will be = $5,062 * (1 + 7%) ^2 years

Future value of interest = $5796