[Iggy1985]

I just took a Wiley mcq that stated the first payment on january 1, year 2 was “end of year” and therefore an ordinary annuity.. is this because the beginning of year 2 is the same as being the end of year 1? Am I just confusing myself?

On January 1, year 1, Robert Harrison signed an agreement to operate as a franchisee of Perfect Pizza, Inc. for an initial franchise fee of $40,000. Of this amount, $15,000 was paid when the agreement was signed and the balance is payable in five annual payments of $5,000 each beginning January 1, year 2. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. Harrison’s credit rating indicates that he can borrow money at 12% for a loan of this type. Information on present and future value factors is as follows:

Present value of $1 at 12% for 5 periods .567

Future amount of $1 at 12% for 5 periods 1.762

Present value of an ordinary annuity of $1 at 12% for 5 periods 3.605

Harrison should record the acquisition cost of the franchise on January 1, year 1, at:

$33,025

This answer is correct. The acquisition cost is equal to the $15,000 down payment plus the present value of the $25,000 loan. The loan is payable in 5 equal installments of $5,000 at the end of each year (ordinary annuity).

Down payment on 1/1/Y1 $15,000

Present value of ordinary annuity ($5,000 × 3.605) 18,025

Total acquisition cost $33,025

FAR - 89 (8/19/14) Wiley TB, Wiley Book, Books from School, Ninja Audio/Notes
AUD - 92 (10/14/14) Wiley TB, Wiley Book, Ninja Audio
BEC - 82 (5/8/15) Mostly Ninja MCQ, sprinkles of Becker lectures and Ninja Audio
REG - (8/14/15)

[M.O.D.]

Yes relative to the date when signed, Jan 1, yr 1, the first payment is due at the end of the year, Jan 1, yr 2.

Therefore it is an ordinary annuity relative to Jan 1, yr 1.

If the contract had been signed Jan 1, yr 2, then it could be an annuity-due. However, note that in that case, the first payment would be considered a cash payment, and not part of the loan (according to Gleim anyway), like the 15000 payment is here.

So a loan would always be a recorded and calculated as an ordinary annuity and never an annuity due, as far as I can see.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[Iggy1985]

thanks!

FAR - 89 (8/19/14) Wiley TB, Wiley Book, Books from School, Ninja Audio/Notes
AUD - 92 (10/14/14) Wiley TB, Wiley Book, Ninja Audio
BEC - 82 (5/8/15) Mostly Ninja MCQ, sprinkles of Becker lectures and Ninja Audio
REG - (8/14/15)

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