Rae Company purchased a new vehicle by paying $11,500 cash on the purchase date
ID: 2494195 • Letter: R
Question
Rae Company purchased a new vehicle by paying $11,500 cash on the purchase date and agreeing to pay $4,500 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 $11,500 payment was made, is closest to
Rae Company purchased a new vehicle by paying $11,500 cash on the purchase date and agreeing to pay $4,500 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 $11,500 payment was made, is closest to
Explanation / Answer
Liability after initial payment = Present value of 20 instalments of $4500 paid quarterly
Discounting rate used = 4% / 4 = 1%
Present value of annuity of $4,500 = $4,500 * (1 - 1.01-20)/ 0.01 = $4500 * 18.0456 = $81,205.20
Liability reported on the balance sheet as of the purchase date, after the initial $11,500 payment was made, is closest to $81,205.20
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