Question

On January 1, 2016, Ott Company sold goods to Fox Company. Fox signed a noninterest-bearing note requiring payment of $60,000 annually for seven years. The first payment was made on January 1, 2016. The prevailing rate of interest for this type of note at date of issuance was 10%. Information on present value factors is as follows:

Periods / Present Value of 1 at 10%/ Present Value of Ordinary Annuity of 1 at 10%
6/.56/4.36
7/.51/4.87
Ott should record sales revenue in January 2016 of
a) $214,200
b) $261,600
c) $292,600
d) $321,600

Answer 1

Ott Company should record sales revenue of $321,600 on January 1, 2016, by calculating the present value of an ordinary annuity of the six future payments and adding the immediate first payment.

Step-by-step explanation:

The student's question deals with the concept of present value and recording sales revenue on a noninterest-bearing note. The note involves annual payments of $60,000 for seven years, with the first payment made on January 1, 2016. Using the present value of an ordinary annuity at a 10% rate, we calculate the total present value of these payments to determine the sales revenue Ott Company should record on January 1, 2016.

Firstly, since the first payment is made immediately, we treat it as a separate present value calculation. Thus, $60,000 is part of the sales revenue recorded. The remaining six payments form an ordinary annuity, and we apply the present value factor for an ordinary annuity of 1 at 10% for six periods, which is 4.36. We multiply the annual payment amount by this factor:

$60,000 × 4.36 = $261,600

This amount represents the present value of the six payments. Adding the immediate payment:

$261,600 + $60,000 = $321,600

Therefore, Ott Company should record sales revenue of $321,600 in January 2016.