Question

On January 1, 2021, the Montgomery Company agreed to purchase a building by making six payments. The first three are to be $25,000 each, and will be paid on December 31, 2021, 2022, and 2023. The last three are to be $40,000 each and will be paid on December 31, 2024, 2025, and 2026. Montgomery borrowed other money at a 10% annual rate. (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: 1. At what amount should Montgomery record the note payable and corresponding cost of the building on January 1, 2021

Answer 1

Answer:

1. The amount Montgomery should record the note payable and corresponding cost of the building on January 1, 2021. is $136,907.65.

2. The amount of interest expense on this note which Montgomery will recognize in 2021 is $13,690.76.

Explanation:

Note: This question is not complete. The complete question is therefore presented before answering the question as follows:

On January 1, 2021, the Montgomery Company agreed to purchase a building by making six payments. The first three are to be $25,000 each, and will be paid on December 31, 2021, 2022, and 2023. The last three are to be $40,000 each and will be paid on December 31, 2024, 2025, and 2026. Montgomery borrowed other money at a 10% annual rate. (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:

1. At what amount should Montgomery record the note payable and corresponding cost of the building on January 1, 2021?

2. How much interest expense on this note will Montgomery recognize in 2021?

Explanation of the answer is now given as follows:

1. At what amount should Montgomery record the note payable and corresponding cost of the building on January 1, 2021?

Note: See the attached excel file for the calculation of the present value of all payments (In bold red  color).

From the attached excel file, we have:

Present value of all payments = $136,907.65

This present value of all payments of $136,907.65 is the amount Montgomery should record the note payable and corresponding cost of the building on January 1, 2021.

2. How much interest expense on this note will Montgomery recognize in 2021?

This can be calculated as follows:

Interest expense = Cost of the building * Interest rate = $136,907.65 * 10% = $13,690.76

Therefore, the amount of interest expense on this note which Montgomery will recognize in 2021 is $13,690.76.

Download xlsx