[wishiwasaCPA]

On December 30, Year 1, Bart, Inc. purchased a machine from Fell Corp. in exchange for a non-interest bearing note requiring eight payments of $20,000. The first payment was made on December 30, Year 1 and the others are due annually on December 30. At date of issuance, the prevailing rate of interest for this type of note was 11%. Present value factors are as follows:

Period 7 for the present value of an ordinary annuity of 1 at 11%: 4.712

Period 7 for the present value of an annuity in advance of 1 at 11%: 5.231

Period 8 for the present value of an ordinary annuity of 1 at 11%: 5.146

Period 8 for the present value of an annuity in advance of 1 at 11%: 5.712

The answer is 4.712 (ordinary annuity) times 20,000 = 94,240

My question: how is this an ordinary annuity? Everything about it says to me its an annuity due and Becker (once again) does not explain why it’s an ordinary annuity. Typical Becker, give the answer, without answering “why?”, only “how?”.

[lauren725]

The first payment is an annuity due but the following 7 payments are an ordinary annuity. What was the actual question? I am not seeing it in your post.

AUD - 73,91
FAR - 79 - Thank you God!
BEC - 73,79!!!!
REG - 92 whatttt??!

I used Becker review + flashcards, Ninja Audio, Ninja MCQ supplement on BEC and REG.

Done! Praise God!

[wishiwasaCPA]

I thought an annuity due meant the first payment is made right away (so it covers the year in advance) and subsequent payments are also made to cover the year in advance, which is what the question suggests.

My question is why is this considered an ordinary annuity, when all of the facts suggest it is an annuity due? I'm missing something probably obvious here. I thought an annuity due applied to the note as a whole, not just the first and subsequent payments separately.

The question is from becker, and is worded exactly the way becker words it.

[Anonymous]

There is no question in your original post. You can use either the ordinary annuity for 7 periods or the annuity due for 8 periods.

At year end, the balance is either 4.712 x 20,000 = 94,240, or 5.712 x 20,000 – 20,000 (the first payment) = 94,240.

[Anonymous]

If you see the 30th or the 31st when it comes to payments, then it is an ordinary annuity. If payments are due on the first of the month, then it is an annuity due. That's what worked for me anyway.

[smeech8000]

Chris S nailed it. I'm assuming the question was asking what to use to calculate the balance sheet amount for 12/31/X1.

FWIW, I don't see an actual question in the fact pattern from your first post, OP.

B 92
A 99
R 90
F 92

Becker Self-Study

OH CPA since 2/18/14

[Author]

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