MMMM Corporation produced pollution abatement equipment at a cost of $950,000 fo

Question

MMMM Corporation produced pollution abatement equipment at a cost of $950,000 for the main production facility of Quest Aeronautics. Upon delivery of the equipment on June 30, 2018, MMMM Corporation accepted a zero-interest note with a total face value of $2,000,000 payable in semi- annual installments of $250,000 over four years from Quest Aeronautics to finance the equipment. The first semi-annual payment of $250,000 was due from Quest Aeronautics on December 31, 2018. 2. MMMM Corporation determined that an interest rate of 8.5% was appropriate for providing financing to Quest Aeronautics over four years Your Answer a. Compute the fair value of the sales transaction implied by the terms of the agreement. (6 points including inputs in table below) SUPPORTING CALCULATIONS using a Financial Calculator or Excel: EXCEL I/Y PV PMT FV MODE Formula Determine the amounts of sales revenue and interest revenue that MMMM Corporation should recognize in its income statement for the year ended December 31, 2018. (4 points) b. Your Answers Sales Revenue Interest Revenue

Explanation / Answer

Solution a:

Semiannual installment = $250,000

Implied interest rate = 8.50%, 4.25% semiannual

Period = 4 years, 8 semiannual periods

Fair value of sales transaction = $250,000 * Cumulative PV Factor at 4.25% for 8 periods

= $250,000 * 6.663782 = $1,665,946

Solution b:

Sales revenue to be regonized by MMMM corporation in income statement of Dec 31, 2018 = $1,665,946

Interest revenue for 2018 = $1,665,946 * 4.25% = $70,803

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