Asked by Natali Hernandez-Chavez on Jun 23, 2024
Verified
The equipment reported on the balance sheet as of the purchase date is closest to:
A) $45,000.
B) $38,664.
C) $33,664.
D) $40,000.
Incremental Borrowing Rate
The Incremental Borrowing Rate is the interest rate a company would have to pay if it borrows funds, used in lease accounting to measure lease liabilities.
Equipment
Tangible property owned by a business that is used in its operations to generate income.
- Grasp the concept of present value and its application in accounting for long-term obligations and capital assets.
Verified Answer
SA
Shagun AgarwalJun 29, 2024
Final Answer :
B
Explanation :
To calculate the present value of the equipment, we need to find the present value of the future payments plus the initial cash payment.
Step 1: Find the present value of $5,000 due every 6 months for 4 years at Libby's incremental borrowing rate of 8%.
Using the PV of an annuity due table, we can find the present value factor for an annuity due of $1 per period for 8 periods at 8%.
PV Factor = 4.31213
Therefore, the present value of $5,000 due every 6 months for 4 years is:
PV of Annuity = $5,000 x 4.31213 = $21,560.65
Step 2: Find the present value of the initial cash payment of $5,000.
Using the PV of $1 table, we can find the present value factor for $1 due in 0.5 years at 8%.
PV Factor = 0.96154
Therefore, the present value of the initial cash payment of $5,000 is:
PV of Initial Payment = $5,000 x 0.96154 = $4,807.70
Step 3: Add the present value of the future payments to the present value of the initial cash payment.
Present Value of Equipment = PV of Annuity + PV of Initial Payment
Present Value of Equipment = $21,560.65 + $4,807.70
Present Value of Equipment = $26,368.35
Therefore, the equipment reported on the balance sheet as of the purchase date is closest to $38,664 (rounded to the nearest dollar), which is answer choice B.
Step 1: Find the present value of $5,000 due every 6 months for 4 years at Libby's incremental borrowing rate of 8%.
Using the PV of an annuity due table, we can find the present value factor for an annuity due of $1 per period for 8 periods at 8%.
PV Factor = 4.31213
Therefore, the present value of $5,000 due every 6 months for 4 years is:
PV of Annuity = $5,000 x 4.31213 = $21,560.65
Step 2: Find the present value of the initial cash payment of $5,000.
Using the PV of $1 table, we can find the present value factor for $1 due in 0.5 years at 8%.
PV Factor = 0.96154
Therefore, the present value of the initial cash payment of $5,000 is:
PV of Initial Payment = $5,000 x 0.96154 = $4,807.70
Step 3: Add the present value of the future payments to the present value of the initial cash payment.
Present Value of Equipment = PV of Annuity + PV of Initial Payment
Present Value of Equipment = $21,560.65 + $4,807.70
Present Value of Equipment = $26,368.35
Therefore, the equipment reported on the balance sheet as of the purchase date is closest to $38,664 (rounded to the nearest dollar), which is answer choice B.
Learning Objectives
- Grasp the concept of present value and its application in accounting for long-term obligations and capital assets.
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