Question

Short Company purchased land by paying $22,000 cash on the purchase date and agreed to pay $22,000 for each of the next seven years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. On the balance sheet as of the purchase date, after the initial $22,000 payment was made, the liability reported is closest to: (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Answer 1

CALCULATION OF LIABILITY TO BE REPORTED :

Short company agreed to pay $22,000 for each of the next 7 years beginning one year from the purchase date. So, it has to pay from next year which is one year from the date of purchase.

The present value of all those cash outflows of $22,000 per annum @ borrowing rate of 10% for a period of 7 years is $ 107,096

And a cash of $22,000 paid as on purchase date shall not be considered in liability , as it is already paid.

So , the liability to be reported is closest to $ 107,096.

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