Danville Corporation bought a new machine and agreed to pay for it in equal annual installments of $6,000 at the end of each of the next five years.Assume the prevailing interest rate for this type of transaction is 12%.Assume the present value of an ordinary annuity of $1 at 12% for five periods is 3.60.The future amount of an ordinary annuity of $1 at 12% for five periods is 6.35.The present value of $1 at 12% is 0.567.How much should Danville record as the note payable on the balance sheet if financial statements were prepared today?

Question

Quizplus · Accepted Answer

To determine the note payable, we need to calculate the present value of the annuity due. Since the installments are due at the end of each year, we need to use the future value of an annuity of $1 at 12% for five years, which is 6.35, and discount it back to the present using the present value of an annuity of $1 at 12% for five years, which is 3.60. 
PV of annuity due = $6,000 x (1 - 1/1.12^5) / 0.12 x 1.12 = $21,600 
Therefore, the answer is B) $21,600.

Danville Corporation Bought a New Machine and Agreed to Pay