Hey guys, I have a question that needs your help:
House Publishers offered a contest in which the winner would receive $1,000,000, payable over 20 years. On December 31, Year 1, House announced the winner of the contest and signed a note payable to the winner for $1,000,000, payable in $50,000 installments every January 2. Also on December 31, Year 1, House purchased an annuity for $418,250 to provide the $950,000 prize monies remaining after the first $50,000 installments, which was paid on January 2, Year 2.
In its December 31, Year 1, balance sheet, what amount should House report as note payable-contest winner, net of current portion?
a. $368,250 b. $418,250 c. $900,000 d. $950,000
And the explanation is:
“b” is correct. $418,250 note payable at Dec 31, Year 1, net of current portion (of $50,000 paid on Jan 2, Year 2).
$418,250 (the amount of the annuity purchased) is the present value of the 19 payments of $50,000, after the first payment. The first payment of $50,000 has a present value of $50,000 and is classified as current.
But my question is, why the answer is not $50,000? The question is asking us what is the net of current portion, I think the PV of the 19 payments is the long-term portion. Where did I wrong? I got really confused.