Question

On January 1, 2021, The Barrett Company purchased merchandise from a supplier. Payment was a noninterest-bearing note requiring five annual payments of $40,000 on each December 31 beginning on December 31, 2021, and a lump-sum payment of $300,000 on December 31, 2025. A 9% interest rate properly reflects the time value of money in this situation. ((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 Barrett should record the note payable and corresponding merchandise purchased on January 1, 2021. (Round your final answer to nearest whole dollar amount.) Table values are based on: n = i = Cash Flow Amount Present Value Payments Lump Sum Amount recorded

Answer 1

Note payable and corresponding merchandise purchases would be recorded at present value of future amount payable.
In this case payments are made at year end and we need to calculate present value and thus we would use PVA of $1 table and PV table
Calculations are shown below
Tables values are based on:
n=	5
i=	9%
Cash flow	Amount	Present value
Payments	40000	$155,586	40000*3.88965
Lump sum	300000	$194,979	300000*0.64993
Amount recorded		$350,565
Present value of annuity payment is calculated using PVA of $1 table. In i=9% column, n=5 years would give discount factor of 3.88965
Present value of lumpsum payment is calculated using PV of $1 table. In i=9% column, n=5 years would give discount factor of 0.64993
Thus, amount would be recorded at $350,565.