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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
13,0003,731
53,3039,269
=3,731
=9,269
=44,034
2
13,000
44,034*7%
3,082
13,0003,082
44,0379,918
=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....
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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.
 Fall '11
 DrWang

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