15 POINTS

Jason Motors manufactured an automobile costing $30,000 cash

during 2018. Assume that Jason Motors sells this car to you

1/1/2019. You paid $5,000 cash and issued a note agreeing to pay

$14,414 annually on 12/31/2019, 2020, and 2021. Based on the

interest rate appropriate for this note of 4% on 1/1/2021 the

present value of the note is $40,000. The interest rate appropriate

for this note on 12/31/2019 is 5% resulting in a present value of

remaining cash flows of $26,802. The interest rate appropriate for

this note is 8% 12/31/2020, resulting in a present value of the

remaining cash flows of $13,346.

Ignoring taxes, assume Jason Motors accounts for this note for the each of

the 3 years using its initial present value and the historical interest rate

(Approach 1). What is the effect on the balance sheet and income

statement. For example, the first transaction response is cash decreases

$30,000, and inventory increases $30,000, resulting in no change in total

assets.

1.

Manufacture of automobile during 2018.

2.

Sale of automobile on 1/1/2019.

3. Cash received and interest revenue recognized 12/31/2019.

4. Cash received and interest revenue recognized 12/31/2020

5.

Cash received and interest revenue recognized 12/31/2021

III. 25 POINTS Jason Motors manufactured an automoblle costing $30,000 cash during 2018. Assume that Jason Motors sells this car to you 1/1/2019. You pald $5,000cash and issued a note agreeing to pay $14,414 annually on 12/31/2019,2020, and 2021 . Based on the interest rate appropriate for this note of 4% on 1/1/2021 the present value of the note is $40,000. The interest rate appropriate for this note on 12/31/2019 is 5% resulting in a present value of remaining cash flows of $26,802. The interest rate appropriate for this note is 8%12/31/2020, resulting in a present value of the remaining cash flows of $13,346. Ignoring taxes, assume Jason Motors accounts for this note for the each of the 3 years using its initial present value and the historical interest rate (Approach 1). What is the effect on the balance sheet and income statement. For example, the first transaction response is cash decreases $30,000, and inventory increases $30,000, resulting in no change in total assets. 1. Manufacture of automobile during 2018. 2. Sale of automobile on 1/1/2019. 3. Cash recelved and interest revenue recognized 12/31/2019. 4. Cash recelved and interest revenue recognized 12/31/2020 5. Cash recelved and interest revenue recognized 12/31/2021