Question

On January 1, 2021, the Montgomery Company agreed to purchase a building by making six payments. The first three are to be $45,000 each, and will be paid on December 31, 2021, 2022, and 2023. The last three are to be $60,000 each and will be paid on December 31, 2024, 2025, and 2026. Montgomery borrowed other money at a 10% annual rate. (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:
1. At what amount should Montgomery record the note payable and the corresponding cost of the building on January 1, 2021?
2. How much interest expense on this note will Montgomery recognize in 2021?
(For all requirements, Round your final answers to the nearest whole dollar amount.)

Answer 1

Present Value:-
The future value of today’s amount which is discounted at a specific interest rate to disclose its current worth is called as present value.

1.PV = $45,000 (2.48685*) + 60,000 (1.86841**) = $224,012

*Present value of an ordinary annuity of $1: n= 3, i= 10% (from PVA of $1)

From PVA of $1 PVA factor, n= 6, i= 10% =4.35526 – PVA factor, n= 3, i= 10% = 2.48685 = PV factor for deferred annuity=1.86841 **

2.$224,012 × 10% = $22,401 = Interest in the year 2021