Question

Lincoln Company purchased merchandise from Grandville Corp. on September 30, 2018. Payment was made in the form of a noninterest-bearing note requiring Lincoln to make six annual payments of $5,400 on each September 30, beginning on September 30, 2021.

(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.)
Calculate the amount at which Lincoln should record the note payable and corresponding purchases on September 30, 2018, assuming that an interest rate of 9% properly reflects the time value of money in this situation.

Answer 1

Merchandise inventory 20,388.82 debit

Note payable 20,388.82 credit

Step-by-step explanation:

First we calculate the present value of the annuity at 9% discount rate

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 5,400.00

time 6

rate 0.09

`5400 * (1-(1+0.09)^(-6) )/(0.09) = PV\\`

PV $26,404.1168

Then, we discount this value by the three year grace period between the purchase and the first payment

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity 26,404.12

time 3.00

rate 0.09000

`(26404.1168220993)/((1 + 0.09)^(3) ) = PV`

PV 20,388.8228