Question

Problem 5-9 (Algo) Noninterest-bearing note; annuity and lump-sum payment [LO5-3, 5-8] On January 1, 2021, The Barrett Company purchased merchandise from a supplier. Payment was a noninterest-bearing note requiring five annual payments of $21,000 on each December 31 beginning on December 31, 2021, and a lump sum payment of $110,000 on December 31, 2025. An 11% interest rate properly reflects the time value of money in this situation. ((FV of $1. PV of $1. FVA of $1. PVA of $1. EVAD 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 Amount Present Value Cash Flow Payments Lump Sum Amount recorded

Answer 1

We are required to calculate present values as on January 1,2021.

Annual payments of $21,000 each are to be made on every December 31, beginning December 31,2021 and going up to December 31,2025.

So, this is an ordinary annuity of $21,000 for a period of 5 years (n=5).Further, interest rate is given as 11% (i=11%)

Further, at the end of 5 years, on December 31,2025, a lumpsum of $110,000 is payable. Here also, n=5 years, i = 11%

Now, using the present value tables, we get Present value interest factor for an ordinary annuity(PVIFA) at i=11% and n=5 as 3.696, and Present value interest factor (PVIF) for lumpsum at i=11% for n=5 years as 0.593.

So, present value of five payments = $21,000 * 3.696 = $77,616

Present value of lumpsum = $110,000 * 0.593 = $65,230

So, total present value of liability = $77,616 + $65,230 = $142,846

Therefore,

Table values are based on:
n=	5
i=	11%
Cash Flow	Amount	Present value
Payments	$21,000	$77,616
Lumpsum	$110,000	$65,230
Amount recorded total		$142,846