[Anonymous]

On December 30, 2005, Bart, Inc. purchased a machine from Fell Corp. in exchange for a non-interest bearing note requiring eight payments of $20,000. The first payment was made on December 30, 2005, and the others are due annually on December 30. At date of issuance, the prevailing rate of interest for this type of note was 11%. Present value factors are as follows:

Period // The present value of an ordinary annuity of 1 at 11% // The present value of an annuity in advance of 1 at 11%

7 // 4.712 // 5.231

8 // 5.146 // 5.712

On Bart’s December 31, 2005 balance sheet, the note payable to Fell was

A. $94,240

B. $102,920

C. $104,620

D. $114,240

A. (Correct!) The note payable balance at the end of 2005 is the present value of a $20,000 ordinary annuity for seven periods. The first payment reduced the liability immediately by the amount of the payment because it was due at the date the liability originated. The remaining seven payments begin one year from the December 31, 2005 balance sheet, making the annuity an ordinary annuity. Thus, the liability balance on that date is: $20,000(4.712) = $94,240.

---

Why do you choose ordinary annuity over annuity due? Yes, the first payment is already paid and there are 7 left, but these 7 payments are still due at the beginning of the period, hence why I think you use annuity due. Am I missing something here?

[Ima_Audit_You]

Think about it this way. You owe 8 payments of $20,000, starting NOW. After you make that payment TODAY, you have to make 7 more payments, the first being A YEAR from now on Dec 30 2006.

You are trying to calculate the PV of 7 payments, starting in a year, not NOW. If you used the annuity due instead you would be calculating it as if you paid $20,000 NOW, then are paying another $20,000 NOW, with 6 more payments every year after.

Hope this helps.

FAR 5/1 - 83
REG 7/7 - 79
AUD 11/20 - 85
BEC 8/27 - ALMOST THERE!!

3 for 3! Study high, get high grades!!

[Ima_Audit_You]

Think about it this way. You owe 8 payments of $20,000, starting NOW. After you make that payment TODAY, you have to make 7 more payments, the first being A YEAR from now on Dec 30 2006.

You are trying to calculate the PV of 7 payments, starting in a year, not NOW. If you used the annuity due instead you would be calculating it as if you paid $20,000 NOW, then are paying another $20,000 NOW, with 6 more payments every year after.

Hope this helps.

FAR 5/1 - 83
REG 7/7 - 79
AUD 11/20 - 85
BEC 8/27 - ALMOST THERE!!

3 for 3! Study high, get high grades!!

[Anonymous]

Thanks. That does help. *sigh* about 1000 more topics to go lol.

[Anonymous]

Thanks. That does help. *sigh* about 1000 more topics to go lol.

[Determined CPA]

The Ninja notes explain it this way: Maybe this will help, too.

An ordinary annuity DUE – due the beginning of the month. Think of a mortgage payment DUE at the beginning of each month.

An ordinary annuity – Due at the end of the month. This example says December 30 so you know it's just an ordinary annuity. If the example said due on the first of the month, it would be an annuity due.

A - 75
B - 78 God is good.
F - 77 Answered prayers.
R - 84! Done!!

Paperwork sent - waiting for license!!
Still on a cloud and in shock. Through God, all things will happen.

[Determined CPA]

The Ninja notes explain it this way: Maybe this will help, too.

An ordinary annuity DUE – due the beginning of the month. Think of a mortgage payment DUE at the beginning of each month.

An ordinary annuity – Due at the end of the month. This example says December 30 so you know it's just an ordinary annuity. If the example said due on the first of the month, it would be an annuity due.

A - 75
B - 78 God is good.
F - 77 Answered prayers.
R - 84! Done!!

Paperwork sent - waiting for license!!
Still on a cloud and in shock. Through God, all things will happen.

[Anonymous]

You can still figure it as an annuity due, just be sure to subtract that first payment. A $20,000 annuity due for 8 periods is $114,240 (20,000 x 5.712) . That is the balance on Dec 30, before the first payment. On Dec 31, after the payment, it is now $94,240.

I don't mean to confuse you, just letting you know you can figure it either way.

[Anonymous]

You can still figure it as an annuity due, just be sure to subtract that first payment. A $20,000 annuity due for 8 periods is $114,240 (20,000 x 5.712) . That is the balance on Dec 30, before the first payment. On Dec 31, after the payment, it is now $94,240.

I don't mean to confuse you, just letting you know you can figure it either way.

[Determined CPA]

Very impressive, Chris! Your FAR exam was/is today and you're still helping fellow BEC testers out!

Good luck on your exam!

A - 75
B - 78 God is good.
F - 77 Answered prayers.
R - 84! Done!!

Paperwork sent - waiting for license!!
Still on a cloud and in shock. Through God, all things will happen.

[Determined CPA]

Very impressive, Chris! Your FAR exam was/is today and you're still helping fellow BEC testers out!

Good luck on your exam!

A - 75
B - 78 God is good.
F - 77 Answered prayers.
R - 84! Done!!

Paperwork sent - waiting for license!!
Still on a cloud and in shock. Through God, all things will happen.

[Anonymous]

Thanks! I took it Monday. I guess it should show 5/2014.

[Anonymous]

Thanks! I took it Monday. I guess it should show 5/2014.

[Anonymous]

@Determined CPA

This question is for FAR. But I could see something like this be on BEC as well.

[Anonymous]

@Determined CPA

This question is for FAR. But I could see something like this be on BEC as well.

[watermelon]

I am super late to this thread, but I was working on this recently and confused by a few things. I am trying to figure out the journal entry also if the question was asking the PV of the notes payable at year end, I would definitely answer it right but “the amount on balance sheet” confused me. Below is the journal entry I put together, which I thought was gonna help me.. Must be wrong somewhere. Really hope someone could help out!!

When purchase the machine:
Dr Machine 114,240 (20,000*5.712)
Dr Discount on Notes Payable 45,760
Cr Notes Payable 160,000 (20,000*8)

When pay for the first annuity:
Dr Interest Expense 12,566.4 (114,240*11%*1/12)
Dr Notes Payable 18,952.8 (PLUG)
Cr Cash 20,000

[Author]

Replies