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On January 1, 2021, The Barrett Company purchased merchandise from a supplier. Payment was a noninterestbearing note requiring five annual payments of $20,000 on each December 31 beginning on December 31, 2021, and a lump-sum payment of $100,000 on December 31, 2025. A 10% interest rate properly reflects the time value of money in this situation.Required:Calculate the amount at which Barrett should record the note payable and corresponding merchandise purchased on January 1, 2021.

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anthougo

Answer:

Barrett Company

The amount at which Barrett should record the note payable and corresponding merchandise purchased on January 1, 2021 is:

= $125,500.

Explanation:

a) Data and Calculations:

Non-interest-bearing note annual payment = $20,000

Date of annual payments = December 31

Lump sum payment on December 31, 2025 = $100,000

Interest rate reflecting the time value of money = 10%

The amount for the note payable and corresponding merchandise on January 1, 2021 is:

PV annuity factor for 4 years at 10% = 3.170

Total PV of annual payments = $63,400 ($20,000 * 3.170)

PV of lump-sum payment =         62,100 ($100,000 * 0.621)

Total PV of payments =           $125,500

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