Question

On January 1, 2021, The Barrett Company purchased merchandise from a supplier. Payment was a noninterest-bearing note requiring five annual payments of $38,000 on each December 31 beginning on December 31, 2021, and a lump-sum payment of $280,000 on December 31, 2025. A 10% interest rate properly reflects the time value of money in this situation. ((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 Barrett should record the note payable and corresponding merchandise purchased on January 1, 2021.

Answer 1

Answer:

The Barrett Company

Amount to record the note payable and merchandise purchase on January 1, 2021:

= $294,340

Explanation:

a) Calculation of Present Value of Future Cash Outflows by January 1, 2021:

1. Dec. 31, 2024, present value of $38,000 annuity for 4 years = $38,000 x 3.170 = $120,460

2. Dec. 31, 2025, present value of $280,000 for 5 years = $280,000 x 0.621 = $173,880

Total payment = $294,340 ($120,460 + 173,880)

b) The present value of $38,000 as an annuity lasting 4 years is calculated using the annuity factor of 3.170 at 10% interest rate.

c) The present value of $280,000 after 5 years is calculated using the discount factor of 0.621 at 10% interest rate.

d) These produce a value when added that gives the amount at which the note payable and corresponding merchandise purchased on January 1, 2021 by the Barrett Company should be recorded.