Question:
Lincoln Company purchased merchandise from Grandville Corp. on September 30, 2013. Payment was
made in the form of a noninterest-bearing note requiring Lincoln to make six annual payments of $5,000
on each September 30, beginning on September 30, 2016.
Required:
Calculate the amount at which Lincoln should record the note payable and corresponding purchases on
September 30, 2013, assuming that an interest rate of 10% properly reflects the time value of money in
this situation.
Answer:
PVA = $5,000 x 4.35526= $21,776
Present value of an ordinary annuity of $1: n = 6, i = 10% (from Table 4)
PV = $21,776 x .82645= $17,997
Present value of $1: n = 2, i = 10% (from Table 2)
Or alternatively:
From Table 4,
PVA factor, n = 8, i = 10% = 5.33493
– PVA factor, n = 2, i = 10% = 1.73554
= PV factor for deferred annuity = 3.59939
PV = $5,000 x 3.59939 = $17,997
Lincoln Company purchased merchandise from Grandville Corp. on September 30, 2013. Payment was
made in the form of a noninterest-bearing note requiring Lincoln to make six annual payments of $5,000
on each September 30, beginning on September 30, 2016.
Required:
Calculate the amount at which Lincoln should record the note payable and corresponding purchases on
September 30, 2013, assuming that an interest rate of 10% properly reflects the time value of money in
this situation.
Answer:
PVA = $5,000 x 4.35526= $21,776
Present value of an ordinary annuity of $1: n = 6, i = 10% (from Table 4)
PV = $21,776 x .82645= $17,997
Present value of $1: n = 2, i = 10% (from Table 2)
Or alternatively:
From Table 4,
PVA factor, n = 8, i = 10% = 5.33493
– PVA factor, n = 2, i = 10% = 1.73554
= PV factor for deferred annuity = 3.59939
PV = $5,000 x 3.59939 = $17,997
