Chapter 5, Problem 5.7P

Deferred annuities

• LO6–7

On January 1, 2018, the Montgomery Company agreed to purchase a building by making six payments. The first three are to be $25,000 each, and will be paid on December 31, 2018, 2019, and 2020. The last three are to be $40,000 each and will be paid on December 31, 2021, 2022, and 2023. Montgomery borrowed other money at a 10% annual rate.

Required:

1. At what amount should Montgomery record the note payable and corresponding cost of the building on January 1, 2018?

2. How much interest expense on this note will Montgomery recognize in 2018?