Ace Co. sold King Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments. This note was discounted to yield a 9% rate to King. The present value factors of an ordinary annuity of $1 for five periods are as follows:

8% 3.992
9% 3.890
What should be the total interest revenue earned by King on this note?

A. $9,000
B. $8,000
C. $5,560
D. $5,050

C. $5,560.

Explanation:

Ace Co. has sold King Co. at 8% rate, we will use this rate annuity which is 3.992 to find Present value of payments by King Co on this note.

Present value of payment = $20,000 / 3.992

PV = $5,010.

Total payments = $5,010 * 5 years = $25,050

Present value of note = $5010 * 3.890 = $19488.9

Total revenue earned by King Co. = $25,050 - $19,489

Total revenue earned by King Co. = $5,560.