Question

Lincoln Company purchased merchandise from Grandville Corp. on September 30, 2018. Payment was made in the form of a noninterest-bearing note requiring Lincoln to make six annual payments of $7,200 on each September 30, beginning on September 30, 2021. (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.)

Required:
Calculate the amount at which Lincoln should record the note payable and corresponding purchases on September 30, 2018, assuming that an interest rate of 11% properly reflects the time value of money in this situation.

Answer 1

Annual payment = $2700

Date of first payment = September 30, 2021

Interest rate = 11%

Number of annual payment = 6

Present value of annual paymnet as on September 30, 2020 =

$2700 x Present value annuity factor(11%,6)

= $2700 x 4.2305 = $11422.35

Period from September 30, 2018 to September 30, 2020 = 2 years

Present value as on September 30, 2018 =

$11422.35 x Present value interest factor (11%,2)

= $11422.35 x 0.8116 = $9270.38

Amount at which Lincoln should record the note payable and corresponding purchases on September 30, 2018 is $9270.38