Question

Lincoln Company purchased merchandise from Grandville Corp. on September 30, 2016. Payment was made in the form of a noninterest-bearing note requiring Lincoln to make six annual payments of $7,200 on each September 30, beginning on September 30, 2019. (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.)

Required:

Calculate the amount at which Lincoln should record the note payable and corresponding purchases on September 30, 2016, assuming that an interest rate of 11% properly reflects the time value of money in this situation. Amount recorded

Answer 1

Notes payable will be recorded at present value of future value.
Step-1:Calculation of present value of six annual payments at September 30, 2018
Year	Cash flow	Discount factor	Present Value
a	b	c=1.11^-a	d=b*c
1	$             7,200	0.9009	$         6,486.49
2	7,200	0.8116	5,843.68
3	7,200	0.7312	5,264.58
4	7,200	0.6587	4,742.86
5	7,200	0.5935	4,272.85
6	7,200	0.5346	3,849.41
	Total		30,459.87
Step-2:Calculation of present value of above payment at September 30, 2016
Present Value		=	Future Value x Discount factor
		=	30,459.87	x (1.11^-2)
		=	24,721.92
Thus,
Amount recorded			$ 24,721.92