Question

Example: Ordinary Annuity On Jan 1, 20x1 Sparky sold some new equipment to ABC Co. on an installment contract basis. The contract required five equal annual payments of principal & interest in the amount of $10,000, and the first payment is due on December 31, 20x1. The customer's normal cost to borrow is 6% APR. From PVOA table: the factor for 6%, 5n = 4.2124 Jan'x1 Dec 'x1 Dec 'x2 Dec 'x3 Dec'x4 Deg'X5 $10,000 10,000 10,000 10,000 10,000 $ 1. How much Revenue can Sparky recognize on Jan 1, 20x1? 2. What is the Original Cost of the equipment to ABC?
ya so how do I do this...

thanks

Answer 1

1. Revenue to be recognized on Jan 01

Under Installment sale basis, revenue is recognized at the time of cash collection and not at the time of sale. Hence the revenue to be recognized on Jan 01 is NIL.

2. Actual Cost of the equipment

The actual cost of the equipment is nothing but the present valued of all the instalments

Actual Cost = Equated annual amount * PVOA (6%, 5n)

= $10,000 * 4.2124

= $ 42,124