Question

78. 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%. At what amount would the liability be reported at on the balance sheet as of the purchase date, after the initial $50,000 payment was made? A. $123,255 B. $130,000 C. $80,000 D. $73,255

80. Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to pay $50,000 every year for the next nine years and $100,000 ten years from the purchase date; the first payment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. At what amount would the liability be reported at on the balance sheet as of the purchase date, after the initial $90,000 payment was made?
A. $326,500
B. $460,000
C. $287,950
D. $416,500

Answer 1

Question No. (78)

Answer -

Step - (1) - Calculation of Present value of remaining payments -

Formula =

p [1 - (1+r)-n / r]

Here,

p = Quarterly payment = $10000

r = Adjusted Rate = (8% / 4) = 2%

n = Number of payments = (4 * 2 years) = 8

Putting the values in the above formula, we get

= $10000 [1 - (1+0.02)^-8 / 0.02]

= $10000 * 7.325481

= $73255

.

Step - (2) - Calculation of amount of liability to be reported on the balance sheet as of the purchase date -

= Initial cash payment made on the purchase date + Present value of remaining payments

= $50000 [Given in question] + $73255 [As per step - (1)]

= $123255

Therefore, Option - (A) is Correct.

.

Question No. (80)

Answer -

Calculation of amount of liability to be reported on the balance sheet as of the purchase date -

	Particulars	Formula used	Calculation	Amount($)
A.	Initial cash payment made on the purchase date	-	Given in question	90000
B.	Present value of remaining payments	p [1 - (1+r)-n / r] p = Annual payment = $50000 r = Rate = 10% n = Number of payments = 9	$50000 [1 - (1+0.1)-9 / 0.1]	287950
C.	Present value of the payment due at 10th year from the purchase date	C / ( 1 + r )n C = Payment due in 10th year = $100000 r = Rate = 10% n= 10	$100000 / (1+0.1)10	38550
Liability to be reported on the balance sheet as of the purchase date			A + B + C	416500

Therefore, Option - (D) is Correct.