P 6-10 Noninterest-bearing note; annuity and lump-sum payment LO6-3, LO6-7 The B

Question

P 6-10 Noninterest-bearing note; annuity and lump-sum payment LO6-3, LO6-7 The Barret Company purchased merchandise from a supplier Payment was a poninterest-bearing note requiring five annual payments of $20,000 on each December 31 beginning on December 31, 2018, and a lump-sum payment of $100,000 on December 31, 2022. A 10% interest rate properly reflects the time value of money in this situation. Required: Calculate the amount at which Barrett should record the note payable and corresponding merchandise purchased on January 1, 2018.

Explanation / Answer

The question is based on the concept of present value of annuity and present value of lump-sum payment. Annuity is the same amount at regular interval of time. Merchandise will be recorded at the present value of future payment. Present Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.10)^-5)/0.10 i 10% =            3.7908 n 5 Present Value of 1 = (1+i)^-n = (1+0.10)^-5 =            0.6209 Present Value of annual payment            20,000 x      3.7908 = $     75,815.74 Present Value of lump-sum payment        1,00,000 x      0.6209 = $     62,092.13 Present Value of future Payment $ 1,37,907.87 So, Notes Payable and Merchandise will be recorded at $ 1,37,907.87

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