Question

Lincoln Company purchased merchandise from Grandville Corp. on September 30, 2021. Payment was made in the form of a noninterest-bearing note requiring Lincoln to make six annual payments of $5,600 on each September 30, beginning on September 30, 2024. (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. Round your final answer to nearest whole dollar amount.)

Required:
Calculate the amount at which Lincoln should record the note payable and corresponding purchases on September 30, 2021, assuming that an interest rate of 8% properly reflects the time value of money in this situation.
  

Answer 1

Answer:

Cost of Purchase = $22195.

Explanation:

Computation of purchase price as on September 30,2021:

Step 1 :

Present Value of Annual payment as at September 30,2023:

Present Value = Annual payment x Present Value Annuity factor (r,n)

= $5600 x Present value Annuity factor(8%,6)

= $5600 x 4.62288 = $25888.13

Step 2:

Present Value as on September 30th , 2021:

Present value = Present Value of Annual payment as at September 30,2023 x Present Value Interest factor(r,n)

= $25888.13 x Present value interest factor(8%,2)

= $252888.13 x 0.85734

= $22194.93 i.e $22195.