Sheridan Co. accepts a note receivable from a customer in exchange for some dama

Question

Sheridan Co. accepts a note receivable from a customer in exchange for some damaged inventory. The note requires the customer make semiannual installments of $36,000 each for 10 years. The first installment begins six months from the date the customer took delivery of the damaged inventory. Sheridan’s management estimates that the fair value of the damaged inventory is $535,589.

What interest rate is Sheridan implicitly charging the customer? Express the rate as an annual rate but assume semiannual compounding

Explanation / Answer

PV of the note = fair value of the damaged inventory = $535,589.

Semiannual installments= $36,000 each for 10 years ie 20 periods

PVIFA factor value = $535,589 / $36,000 = 14.8775

Now when we refer PVIFA table for 20 period we will get 3 % for the value 14.8775

Annual rate assume semiannual compounding = 3 % * 2 = 6 %

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