APPENDIX 9 NOTES_Completed (1)

Annuity payment or receipt made at end of each period

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: od An amount that, if invested at a compound interest now, would provide for a series of equal payments at the end of each period Example 1: Would you rather have $25,000 today or receive 3 equal payments of $9,000 at the end of each year? Interest rate = 10% PV of Ordinary Annuity (PVOA) 10% 3 periods 2.4869 Example 2: Sampson Company just purchased a piece of equipment and financed this purchase with a loan from the bank. Sampson must make annual loan payments of $13,000 at the end of each year for the next five years. Interest is compounded annually on the loan at a rate of 7%. What is the cost of the equipment? PVOA 5 periods 7% 4.1002 This example is similar to the Capital Lease example in Chapter 9 lecture notes. The equipment is recorded at the present value of the ordinary annuity. Record the purchase and periodic interest expense payments: 1. Purchase: Dr. Equipment 53,303 Cr. Notes Payable 53,303 2. Interest expense payments, we use the Amortization table to illustrate the periodic interest expense Year Payment Interest Expense Discount Reduction of Carrying Value Amortization N/P of N/P 0 53,303 1 13,000 53,303*7% 3,731 13,000-3,731 53,303-9,269 =3,731 =9,269 =44,034 2 13,000 44,034*7% 3,082 13,000-3,082 44,037-9,918 =3,082 =9,918 =34,116 3 13,000 2,388 2,388 10,612 23,504 4 13,000 1,645 1,645 11,355 12,149 5 13,000 850 850 12,150 0 At the end of the first year, the journal entry is Dr. Interest Expense 3,731 Notes Payable 9,269 Cr. Cash 13,000 The journal entries at the end of the following years are very similar....
View Full Document

This note was uploaded on 09/14/2013 for the course ECON 101 taught by Professor Drwang during the Fall '11 term at National Taiwan University.

Ask a homework question - tutors are online