Question:
On January 1, 2013, the Montgomery Company agreed to purchase a building by making six payments.
The first three are to be $25,000 each, and will be paid on December 31, 2013, 2014, and 2015. The last
three are to be $40,000 each and will be paid on December 31, 2016, 2017, and 2018. Montgomery
borrowed other money at a 10% annual rate.
Required:
1. At what amount should Montgomery record the note payable and corresponding cost of the building on
January 1, 2013?
2. How much interest expense on this note will Montgomery recognize in 2013?
Answer:
Requirement 1
Present value of payments 4–6:
PVA = $40,000 x 2.48685 = $99,474
Present value of an ordinary annuity of $1: n = 3, i = 10% (from Table 4)
PV = $99,474 x .75131 = $74,736
Present value $1: n = 3, i = 10% (from Table 2)
Present value of all payments:
$ 62,171 (PV of payments 1–3: $25,000 x 2.48685)
On January 1, 2013, the Montgomery Company agreed to purchase a building by making six payments.
The first three are to be $25,000 each, and will be paid on December 31, 2013, 2014, and 2015. The last
three are to be $40,000 each and will be paid on December 31, 2016, 2017, and 2018. Montgomery
borrowed other money at a 10% annual rate.
Required:
1. At what amount should Montgomery record the note payable and corresponding cost of the building on
January 1, 2013?
2. How much interest expense on this note will Montgomery recognize in 2013?
Answer:
Requirement 1
Present value of payments 4–6:
PVA = $40,000 x 2.48685 = $99,474
Present value of an ordinary annuity of $1: n = 3, i = 10% (from Table 4)
PV = $99,474 x .75131 = $74,736
Present value $1: n = 3, i = 10% (from Table 2)
Present value of all payments:
$ 62,171 (PV of payments 1–3: $25,000 x 2.48685)
