Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years.The first payment is due six months after the purchase date.Libby's incremental borrowing rate is 8%.(FV of $1,PV of $1,FVA of $1,and PVA of $1)(Use the appropriate factor(s)from the tables provided. )
- The liability reported on the balance sheet as of the purchase date,after the initial $5,000 payment was made,is closest to:
A)$45,000.
B)$33,664.
C)$38,664.
D)$40,000.

Question

Quizplus · Accepted Answer

The liability reported on the balance sheet after the initial $5,000 payment is the present value of the remaining payments. Given the incremental borrowing rate of 8% and payments every six months for four years (8 payments), we use the Present Value of an Annuity (PVA) formula. The PVA of $5,000 paid semi-annually at an 8% annual rate (4% per period) for 8 periods is calculated using the PVA factor from the tables. Subtracting the initial $5,000 payment from the total value gives us the liability amount, which is closest to $33,664.

Libby Company Purchased Equipment by Paying $5,000 Cash on the Purchase