On January 1, 2022, Seamus Company purchased equipment by issuing a four-year, non-interest-bearing note with face amount ofP1,600,000. The note is payable in annual installments of P400,000. The first installment is due on December 31, 2022. There was noequivalent cash price for the equipment and the note had no ready market. The prevailing rate of interest for the note of the same type is9%.a. At what amount should the note be initially measured?
Question
On January 1, 2022, Seamus Company purchased equipment by issuing a four-year, non-interest-bearing note with face amount ofP1,600,000. The note is payable in annual installments of P400,000. The first installment is due on December 31, 2022. There was noequivalent cash price for the equipment and the note had no ready market. The prevailing rate of interest for the note of the same type is9%.a. At what amount should the note be initially measured?
Solution
The note should be initially measured at the present value of the future payments.
Here are the steps to calculate it:
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Identify the cash flows: The note is payable in annual installments of P400,000 for four years.
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Identify the discount rate: The prevailing rate of interest for the note of the same type is 9%.
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Calculate the present value of each cash flow: The present value of each cash flow is calculated by dividing the cash flow by (1 + discount rate) raised to the power of the period number.
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Sum up the present values: The initial measurement of the note is the sum of the present values of all cash flows.
Let's calculate:
Year 1: P400,000 / (1 + 0.09)^1 = P366,972.48 Year 2: P400,000 / (1 + 0.09)^2 = P336,697.70 Year 3: P400,000 / (1 + 0.09)^3 = P308,808.89 Year 4: P400,000 / (1 + 0.09)^4 = P283,479.17
Add these up: P366,972.48 + P336,697.70 + P308,808.89 + P283,479.17 = P1,295,958.24
So, the note should be initially measured at P1,295,958.24.
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