E143 On January 1 Kasey Enterprises borrowed 40000 for three

E14.3 On January 1, Kasey Enterprises borrowed $40,000 for three years. Kasey signed a n bearing note. Assuming that the market rate of interest is 9 percent on the date the note is made and that interest is compounded annually, what is the face value of the note? What is the amount of interest expense shown on the budgeted income statement for the first two years? Describe the cash inflows and outflows Kasey must plan for with this note.

Solution

A)Face value = $ 40000

B)Issue price = Face value *1/(1+i)^n

               40000 * 1/(1+.09)^3

               40000* 1/ 1.295029

              40000*.77218

               30887.20    [rounded to 30887]

Interest expense for year1 = 30887*.09 = 2779.83

Interest expense for year2 = 33666.83*.09= 3030.01

**carrying value at year2 = 30887+2779.83 = 33666.83

Interest expense =carrying value *rate

3)Cash Inflow = 30887

cash outflow = (40000)