[Anonymous]

In doing my final review for FAR, I keep finding things I’m not 100% on and this was one of them. Hope someone can help me out!

A company issued a note payable for $500,000 on December 31, 2010. Payments are due in 5 annual installments of $100,000 and the first one is due on the day the note payable was issued.

So my question is, to figure out the PV do you…

a) Take the PV of an annuity due for 5 periods for $500,000

b) Take the PV of an ordinary annuity for 4 periods for $400,000 ?

Thanks in advance!

[Anonymous]

I think (you might want to double check) the answer should be:

annuity due for 5 periods for $100,000 (the annual payment amount, NOT the face value of the payable).

[Anonymous]

See??!! This studying has fried my brain so much I can't even get the question right, more the less the answer!

So, this is what my question should say…

a) Take the PV of an annuity due for 5 periods for $100,000

b) Take the PV of an ordinary annuity for 4 periods for $100,000 ?

Thanks for pointing that out, atelery!

[Anonymous]

Hmmm… Since you are making the first payment at the date of inception of the note and the rest of the payments are at the end of the period you can take the rest of it as an ordinary annuity for 4 periods for $100,000 (b).

I'm using Yaeger and Cindy pointed that out at one of the MCQ's. Always double check anyways… I am retaking FAR in 6 days and already reviewed those PV topics. Actually I am struggling (BIG time) with Stockholders' Equity and everything related.

Good luck!!!

[Anonymous]

@AJaime – I am also using Yaeger and thought I had remembered Cindy saying that. But then in doing some of the MCQ's in the Wiley testbank, I have gotten the answer incorrect with that approach. I don't know if there's something slightly different in the question that I'm not picking up on or what. But some MCQ's use approach a and others use b and I can't figure out why! Thanks for replying and good luck to you as well.

[Anonymous]

i am struggling with most of the FAR topics , so scared.

but i think for this particular question, the

a) PV of an annuity due for 5 periods for $100,000

is equivalent to

b) 1 + PV of an ordinary annuity for 4 periods for $100,000

because it pays $100,000 right away which means it is the present value (so it is “1”, no discount here) , and the rest 4 installments are 4 ordinary annuities for $100,000.

so the answer should be either “a)” or “1+ b)”

[Anonymous]

Brilliant cocacpa! You are exactly right!!!!!!! I just tried entering them using the PV formula in Excel and the 2 answers were off by exactly 100,000 which is the initial principal payment. I guess that's why they do it both ways in the MCQ solutions since they both work (and I must have been getting them wrong for a different reason – no surprise there). THANK YOU! I feel so much better knowing this now.

[Anonymous]

@apbandj, you are very welcome!

hope we all have good luck on the beast FAR exam!

[Anonymous]

You got that right! Best of luck to you on FAR! It sounds like you know more than you're giving yourself credit for 🙂

[Anonymous]

@apbandj,

Becker also mentions something about 1+rate or 1-rate, the due rate to get the ord rate and whatsoever, but I don't really get it and I always go with this:

when you see pay at the beginning, use the annuity due rate

when you see pay at the end, use the ordinary rate

Hope this helps 🙂 Good Luck with FAR.

[Anonymous]

Thanks so much, atelery. Best of luck to you as well! Crossing my fingers that you only have one more to take!

[Author]

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