Lincoln Company purchased merchandise from Grandville Corp. on September 30, 201
ID: 2401673 • Letter: L
Question
Lincoln Company purchased merchandise from Grandville Corp. on September 30, 2016. Payment was made in the form of a noninterest-bearing note requiring Lincoln to make six annual payments of $7,200 on each September 30, beginning on September 30, 2019. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Calculate the amount at which Lincoln should record the note payable and corresponding purchases on September 30, 2016, assuming that an interest rate of 11% properly reflects the time value of money in this situation.
Lincoln Company purchased merchandise from Grandville Corp. on September 30, 2016. Payment was made in the form of a noninterest-bearing note requiring Lincoln to make six annual payments of $7,200 on each September 30, beginning on September 30, 2019. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Explanation / Answer
Notes payable will be recorded at present value of future value. Step-1:Calculation of present value of six annual payments at September 30, 2018 Year Cash flow Discount factor Present Value a b c=1.11^-a d=b*c 1 $ 7,200 0.9009 $ 6,486.49 2 7,200 0.8116 5,843.68 3 7,200 0.7312 5,264.58 4 7,200 0.6587 4,742.86 5 7,200 0.5935 4,272.85 6 7,200 0.5346 3,849.41 Total 30,459.87 Step-2:Calculation of present value of above payment at September 30, 2016 Present Value = Future Value x Discount factor = 30,459.87 x (1.11^-2) = 24,721.92 Thus, Amount recorded $ 24,721.92
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