Hi all,

I'm looking at a Becker question from F5 and trying to understand the answer.  I understand what an Annuity Due is (paid at beg of pd) and an Ord Annuity is (paid at end of pd). 

On 12/30/89, Bart Inc. purchased a machine from Fell Corp. in exchange for a noninterest bearing note requiring eight payments of $20,000.  The first payment was made on 12/30/89, and the others are due annually on 12/30.  At date of issuance, the prevailing rate of interest for this type of note was 11%.  Present value factors are:

Period       PV, ORD ANN, $1 @ 11%      PV, ANN in ADV, $1 @ 11%

7           ;          4.712         & nbsp;         & nbsp;         & nbsp;    5.231

8           ;          5.146         & nbsp;         & nbsp;         & nbsp;    5.712

On Bart's 12/31/89 balance sheet, the note payable to Fell was:

a.  $94,240

b.  $102,920

c.  $104,620

d.  $114,240

Answer is "a" $94,240.  7 unpaid installments of $20,000 each * ORD annuity factor of 4.712. 

I realize that from 12/31/89, there are 7 remaining payments at the end of each year, but one would initially think that the first payment of $20,000 is prepaid for the year to follow.  This would serve as an annuity due. 

Maybe someone could explain a way to remember this easily.  Thanks!

Even if a day after, no interest has been accrued on the annuity, so there are two approches. you may calculate 20,000 * 5.712= 114,240 as present value of all annuity payments & take out first payment 20,000 which is principal only & so your notes payable on the balance sheet is 94,240.

Or you can multiply 20,000 with adv annuity factor (5.712-1)=4.712 for notes payable balace to get the same answer.

Hope this helps.