[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.

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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?

[watermelon]

NVM! i got it, when the first annuity was paid, all Debit goes to Notes Payable since there is no interest paid yet. 🙂

[Author]

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