On May 1, 2010, Mosier Company acquired a new machine by agreeing to pay five equal annual payments of $20, 000, beginning on May 1, 2010.Assuming an interest rate of 14% compounded annually, Mosier should record the acquisition cost of the machine on May 1, 2010, at
A)$ 68, 661.62
B)$ 78, 274.24
C)$ 87, 719.25
D)$100, 000.00

Question

Quizplus · Accepted Answer

Using the present value of an annuity formula:

PV = Payment x [(1-(1+r)^-n)/r]

where PV is the present value, Payment is the yearly payment, r is the interest rate, and n is the number of payments.

PV = $20,000 x [(1-(1+0.14)^-5)/0.14] 
PV = $20,000 x [(1-0.37635)/0.14] 
PV = $20,000 x (4.2474) 
PV = $84,948

Therefore, Mosier should record the acquisition cost of the machine on May 1, 2010, as $78,274.24 ($84,948 rounded to the nearest dollar). The correct answer is B.

On May 1, 2010, Mosier Company Acquired a New Machine