On January 1, 2017, Crown Company sold property to Leary Company. There was no established exchange price for the property, and Leary gave Crown a $400,000 zero-interest-bearing note payable, promising 5 equal annual installments of $80,000, with the first payment due December 31, 2017. The prevailing rate of interest for a note of this type is 8%. Required:
What is the carrying value of the notes payable at 12/31/14, after the first payment is made (assuming that the effective-interest method is used)?

Leary Company

The carrying value of the notes payable at December 31, 2017, after the first payment is made (assuming that the effective-interest method is used) is:

= $320,000

Explanation:

a) Data and Calculations:

0% Note payable = $400,000

Payment period = 5

Annual installmental payments = $80,000

Prevailing rate of interest for similar note = 8%

Schedule

PeriodPV                 PMT            Interest               FV

1$-591,650.08$80,000.00$-47,332.01$558,982.09

2$-558,982.09$80,000.00$-44,718.57$523,700.66

3$-523,700.66$80,000.00$-41,896.05$485,596.71

4$-485,596.71$80,000.00$-38,847.74$444,444.44

5$-444,444.44$80,000.00$-35,555.56$400,000.00

Total                     $400,000.00    $-208,349.93

Carrying value

Ending value   = $400,000

Interest expense   -47,332.01

Cash repayment   -32,667.99

Carrying value = $320,000

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Explanation: