Answered: On January 1, 2021, the Montgomery…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

On January 1, 2021, the Montgomery Company agreed to purchase a building by making six payments. The first three are to be $26,000 each, and will be paid on December 31, 2021, 2022, and 2023. The last three are to be $41,000 each and will be paid on December 31, 2024, 2025, and 2026. Montgomery borrowed other money at a 12% 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?

Expert Solution

Step 1

Answer:

Part 1:

$\begin{array}{rcl} P V f a c t o r f o r d e f e r r e d a n n u i t y & = & P V A f a c t o r, \\ n & = & 6, \\ i & = & 12 % - P V A f a c t o r, \\ n & = & 3, \\ i & = & 12 % \\ = & 4.1114 - 2.4018 \\ = & 1.7096 \end{array}$

$\begin{array}{rcl} A m o u n t R e c o r d e d & = & $ 26, 000 (P V A f a c t o r, n = 3, i = 12 %) + $ 41, 000 (P V f a c t o r f o r d e f e r r e d a n n u i t y) \\ = & $ 26, 000 (2.4018) + $ 41, 000 (1.7096) \\ = & $ 62, 446.8 + $ 70, 093.6 \\ = & $ 132, 540.4 \end{array}$

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