Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase date and agreeing to pay $10,000 every three months during the next two years. The first payment is due three months after the purchase date. Rusty's incremental borrowing rate is 8%. The liability reported on the balance sheet as of the purchase date, after the initial $50,000 payment was made, is closest to:
A)$123,255.
B)$130,000.
C)$80,000.
D)$73,255.

Question

Quizplus · Accepted Answer

To calculate the liability reported on the balance sheet as of the purchase date, we need to calculate the present value of the remaining payments using the incremental borrowing rate of 8%.

Using the formula for present value of an annuity, we can calculate the present value of the remaining payments:

PV = PMT x ((1 - (1 / (1 + r)n)) / r)

Where:
PMT = $10,000
r = 8%/4 = 2%
n = 8 quarters (2 years x 4 quarters per year) - 1 (since the first payment is made on the purchase date)

PV = $10,000 x ((1 - (1 / (1 + 0.02)^7)) / 0.02) = $73,255

Therefore, the liability reported on the balance sheet as of the purchase date, after the initial $50,000 payment was made, is closest to $73,255 (choice D).

Rusty Corporation Purchased a Rust-Inhibiting Machine by Paying $50,000 Cash