Morrow Enterprises purchased a building on January 1, 2015, in exchange for a three-year, non-interest-bearing note with

Question:

Morrow Enterprises purchased a building on January 1, 2015, in exchange for a three-year, non-interest-bearing note with a face value of $693,000. Independent appraisers valued the building at $550,125.

a. At what amount should this building be capitalized?

b. Compute the present value of the note’s future cash flows, using the following discount rates:

(1) 6 percent

(2) 8 percent

(3) 10 percent

c. What is the effective interest rate of this note?

d. Explain how one could more quickly compute the effective interest rate on the note.

Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...