Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to pay $3,000 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 12%.(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 $10,000 payment was made,is closest to:
A)$44,632.
B)$50,000.
C)$54,633.
D)$60,000.

Question

Quizplus · Accepted Answer

The liability is the present value of the remaining payments. Using the present value of an annuity formula with a 12% annual rate (3% quarterly) over 20 periods (5 years), the present value of the $3,000 payments is calculated. Subtracting the initial $10,000 payment from the total cost gives the liability.

Rae Company Purchased a New Vehicle by Paying $10,000 Cash