3. MMMM Corporation produced waste removal equipment at a cost of $380,000 for t

Question

3. MMMM Corporation produced waste removal equipment at a cost of $380,000 for the Camden, New Jersey plant of GLF Petrochemicals. Upon delivery of the equipment on November 1, 2018, MMMM Corporation accepted a five-year, $850,000 note bearing 4% (APR) interest from GLF Petrochemicals to finance the equipment. Under the terms of the note, interest was due quarterly with the $850,000 face value of the note due in full at maturity in five years. MMMM Corporation determined that an interest rate of 9.6% was appropriate for providing financing to GLF Petrochemicals over five years. Your Answer Compute the fair value of the sales transaction implied by the terms of the agreement. (6 points including inputs in table below) a. SUPPORTING CALCULATIONS using a Financial Calculator or Excel: FINANCIAL CALCULATOR INPUTS EXCEL I/Y PV PMT FV MODE Formula b. 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) Your Answers Sales Revenue Interest Revenue

Explanation / Answer

Solution:

Face value of note received = $850,000

APR = 4%, 1% quarterly

Period = 5 years, 20 quarterly periods

Market rate of interest = 9.6%, 2.4% quarterly

Fair value of sales transaction = Present value of interest and face value note discounted at 2.4

= $8,500 * Cumulative PV factor at 2.4% for 20 periods + $850,000 * PV factor at 2.4% for 20th period

=$8,500 * 15.73744 + $850,000 * 0.622302

= $662,725

Solution b:

Sales revenue to recognized by MMMM corporation in December 31, 2018 = $662,725

Interest revenue for 2018 = $662,725 * 9.6% * 2/12 =$10,604

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