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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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On January 1, 2019, Ken Company sold a machine to Burns Company. Burns signed a non-interest-bearing note requiring payment of $30,000 annually for 7 years. The first payment was made on January 1, 2019. The prevailing rate of interest for this type of note at the date of issuance was 10%. Information on present value factors is as follows:

Chapter M, Problem 10MC, On January 1, 2019, Ken Company sold a machine to Burns Company. Burns signed a non-interest-bearing

Ken should record the sale in January 2019 at:

  1. a. $107,100
  2. b. $130,800
  3. c. $146,100
  4. d. $160,800

To determine

Determine the amount at which Company k should record the sale on January 2016.

Explanation

Company K sold machinery and accepts to receive $30,000 annually for 7 years. It will receive first payment on the same date of sale. Thus, this is an annuity due.

Present value of an annuity due table is not available, however it can use present value of ordinary annuity table for calculating the value of sale.

Company K has to take the factor of present value of ordinary annuity in the 10% column for 6 periods and add 1.­­­s

Present valueD=Cash flow×PDn=7, i=10%=$30,000×POn-1=6, i=10%+1=$30,000×(4

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