Question

Polo Publishers purchased a multi-color offset press with terms of $40,000 to be paid at the date of purchase, and a noninterest-bearing note requiring payment of $30,000 at the end of each year for five years. The interest rate implicit in the purchase contract is 11%. Polo would record the asset at:

Answer 1

Answer:

$150,876.91  

Explanation:

To calculate, the present value of an ordinary annuity formula is used as follows:

PV = P × [{1 - [1 ÷ (1+r)]^n} ÷ r] …………………………………. (1)

Where;

PV = Present value of the payments =?

P = yearly payment = $30,000

r = interest rate = 11% = 0.11

n = number of years = 5

Substitute the values into equation (1) to have:

PV = $30,000 × [{1 - [1 ÷ (1+0.11)]^5} ÷ 0.11] = $110,876.91

Amount to record = $40,000 + $110,876.91 = $150,876.91