Rae Company purchased a new vehicle by paying $10,900 cash on the purchase date
ID: 2493979 • Letter: R
Question
Rae Company purchased a new vehicle by paying $10,900 cash on the purchase date and agreeing to pay $3,900 every three months during the next five years. The first payment is due three months after the purchase date. Rae's incremental borrowing rate is 4%. The liability reported on the balance sheet as of the purchase date, after the initial $10,900 payment was made, is closest to
a) 78,700
b) 70,378
c) 82,278
d) 88,900
Rae Company purchased a new vehicle by paying $10,900 cash on the purchase date and agreeing to pay $3,900 every three months during the next five years. The first payment is due three months after the purchase date. Rae's incremental borrowing rate is 4%. The liability reported on the balance sheet as of the purchase date, after the initial $10,900 payment was made, is closest to
a) 78,700
b) 70,378
c) 82,278
d) 88,900
Explanation / Answer
As interest rate is 4% per annum ,
Discounting factor calculation :
1st installment = 1/(1+(0.04/4))
5th installment = 1/(1+0.04+0.01)
20th installment = 1/(1+0.04+0.16)
Liability to be reported :
Installment Cash Flow Discount factor @4% anually Present value 1 3900 0.990 3861.39 2 3900 0.980 3823.53 3 3900 0.971 3786.41 4 3900 0.962 3750.00 5 3900 0.952 3714.29 6 3900 0.943 3679.25 7 3900 0.935 3644.86 8 3900 0.926 3611.11 9 3900 0.917 3577.98 10 3900 0.909 3545.45 11 3900 0.901 3513.51 12 3900 0.893 3482.14 13 3900 0.885 3451.33 14 3900 0.877 3421.05 15 3900 0.870 3391.30 16 3900 0.862 3362.07 17 3900 0.855 3333.33 18 3900 0.847 3305.08 19 3900 0.840 3277.31 20 3900 0.833 3250 Hence it is nearer to b) 70378Related Questions
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