Question

On January 1, 2021, The Barrett Company purchased merchandise from a supplier. Payment was a noninterest-bearing note requiring five annual payments of $33,000 on each December 31 beginning on December 31, 2021, and a lump-sum payment of $230,000 on December 31, 2025. A 12% interest rate properly reflects the time value of money in this situation.

Required:
Calculate the amount at which Barrett should record the note payable and corresponding merchandise purchased on January 1, 2021.

Table value are based on:

n=	?
i=	?

cash flow	amount	present value
payment	?	?
lump sum	?	?
Amount recorded	=	?

Answer 1

Payment was a non interest-bearing note requiring five annual payments of $33,000 on each December 31 beginning on December 31, 2021, and a lump-sum payment of $230,000 on December 31, 2025.

Present values of 5 annual payments = Annual payments x Present value annuity factor (i%, n)

= 33,000 x Present value annuity factor (12%, 5)

= 33,000 x 3.60478

= $118,958

Present value of lump-sum payment = Lump-sum payment x Present value factor (i%, n)

= 230,000 x Present value factor (12%, 5)

= 230,000 x 0.56743

= $130,532

n=	5 years
i=	12%

cash flow	amount	present value
payment	165,000	$118,958
lump sum	230,000	$130,532
Amount recorded	=	$249,490