On January 1, 20X1, Tie Company purchased a machine that had a sticker (list) price of $22,000. The seller agreed to allow Tie Company to pay for the machine over a three-year period at 10% interest on the unpaid balance and with equal payments of $8,444 due at the end of 20X1, 20X2, and 20X3. What is the amount that should be debited to the asset account, Machinery, on the day the contract was initiated is (rounded to the nearest dollar)?
A) $20,999
B) $22,000
C) $25,332
D) $27,865

Question

Quizplus · Accepted Answer

The amount debited to the Machinery account should be the present value of the payments. The present value of an annuity formula is used to calculate this, considering the interest rate and payment schedule. The present value of the three $8,444 payments at 10% interest is approximately $20,999.

On January 1, 20X1, Tie Company Purchased a Machine That