On January 1, 2013, the Montgomery company agreed to purchase a building by maki
ID: 2704475 • Letter: O
Question
On January 1, 2013, the Montgomery company agreed to purchase a building by making six payments. The first three are to be $39,000 each, and will be paid on December 31, 2013, 2014, and 2015. The last three are to be $54,000 each and will be paid on December 31, 2016, 2017, and 2018. Montgomery borrowed other money at a 12% annual rate. (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.)
At what amount should Montgomery record the note payable and corresponding cost of the building on January 1, 2013?
Amount Recorded:
How much interest expense on this note will Montgomery recognize in 2013?
Interest Expense:
On January 1, 2013, the Montgomery company agreed to purchase a building by making six payments. The first three are to be $39,000 each, and will be paid on December 31, 2013, 2014, and 2015. The last three are to be $54,000 each and will be paid on December 31, 2016, 2017, and 2018. Montgomery borrowed other money at a 12% annual rate. (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.)
TABLE 1 Future Value of $1 FV = $1 (1 + i)n TABLE 3 Future Value of an Ordinary Annuity of $1 TABLE 5 Future Value of an Annuity Due of $1 TABLE 2 Present Value of $1 TABLE 4 Present Value of Ordinary Annuity of $1 Table 6 Present Value of an Annuity Due of $1Explanation / Answer
1. At what amount should Montgomery record the note payable and corresponding cost of the building on January 1, 2013?
Present value of payments:
PVA = $54000 *2.40183 = $129,698.82
Present value of an ordinary annuity of $1: n= 3, i= 12% (from Table 4)
PV = $129,698.82*0.71178 = $92,317.03
Present value $1: n= 3, i= 12% (from Table 2)
Present value of all payments:
$93,671.37 (PV of payments 1-3: $39000*2.40183)
$92,317.03 (PV of payments 4-6 calculated above)
-------------------------
$185,988.40
The note payable and corresponding building should be recorded at $185,988.40.
2. How much interest expense on this note will Montgomery recognize in 2013?
$185,988.40*12% = $22,318.61 .... Interest in the year 2013
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