Lincoln Company purchased merchandise from Grandville Corp. on September 30, 201

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 $4,400 on each September 30, beginning on September 30, 2019. (FV of $1. PV of $1. FVA of $1. PVA of S1. 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 9% properly reflects the time value of money in this situation.

Explanation / Answer

Answer: First, you need to calculate the present value of the 6 annual payments as of September 30, 2019.
It's an annuity due with 6 periods at 9 % interest with payments of $4400. That value is $21514.47.

Next, you need to calculate the present value of $21514.47 as of September 30, 2016. It's a single amount of $21514.47 for 3 periods at 9% interest. That value is $16613.11, which will be the answer to your problem. I used a financial calculator, so if you use present value tables, your answer will probably be a little different due to rounding.

The entry on September 30, 2016 would be:
Debit Purchases (or Inventory) $16613.11
Credit Note Payable $16613.11

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