Alden Trucking Company is replacing part of its fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2014. Alden financed $37,908,000, and the note agreement will require $10 million in annual payments starting on December 31, 2014 and continuing for a total of four more years (final payment December 31, 2018). Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. After the first payment was made, the note and interest payable liability on December 31, 2014 is closest to:
A) $32,908,000.
B) $31,698,800.
C)$40,000,000.
D)$27,908,000.

Question

Quizplus · Accepted Answer

We can use the present value formula to calculate the initial amount of the note:

PV = FV / (1 + r)n

where PV is the present value, FV is the future value (in this case, the amount financed), r is the interest rate, and n is the number of periods.

Plugging in the given values, we get:

PV = $37,908,000 / (1 + 0.10)1
PV = $34,461,818.18

This means that on January 1, 2014, Alden Trucking Company received $34,461,818.18, and that amount will be paid back over the next five years.

To calculate the interest expense for the first year (2014), we can multiply the outstanding balance at the end of the year by the interest rate:

Interest expense = $34,461,818.18 x 0.10
Interest expense = $3,446,181.82

This means that after the first payment is made, the remaining balance on the note will be:

Remaining balance = $34,461,818.18 - $10,000,000 - $3,446,181.82
Remaining balance = $20,015,636.36

Therefore, the note and interest payable liability on December 31, 2014 is:

Note and interest payable liability = $20,015,636.36 + $10,000,000
Note and interest payable liability = $30,015,636.36

This is closest to choice B) $31,698,800.

Alden Trucking Company Is Replacing Part of Its Fleet of Trucks