Question

On December 30, 2018 Harper Co. finances the purchase of equipment by issuing a note payable....

On December 30, 2018 Harper Co. finances the purchase of equipment by issuing a note payable. The note will be paid off in 10 equal annual installments of $1,500 beginning on December 30, 2018. The market rate of interest for notes of this type is 5%. On Harper’s December 31, 2018 balance sheet, the net note payable is
a. $10,662 b. $11,583 c. $12,162 d. $9,209 e. $10,083
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Answer #1

The right option is "a. $10,662".

As the 10 equal annual installments begin on December 31, 2018, therefore, the company will now have to pay only 9 installments of $1,500 from the next year. The first installment is due on December 30, 2018 which must have been paid on that day only.

The market rate of interest is 5%, so the installments will be discounted at this rate for a period of 9 years.
Net amount to be recorded as note payable = Annual installment * PV annuity factor @ 5% for 9 periods

PV annuity factor @ 5% for 9 periods ( using the table ) = 7.1078

Amount to be recorded as note payable on December 31, 2018 = $1,500 * 7.1078 = $10,661.7 or $10,662.

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