Rachel Corporation purchased a building by paying $90,000 cash on the purchase date,agreeing to pay $50,000 every year for the next nine years and $100,000 ten years from the purchase date; the first payment is due one year after the purchase date.Rachel's incremental borrowing rate is 10%.At what amount would the building be reported at on the balance sheet as of the purchase date?
A)$326,500
B)$460,000
C)$287,950
D)$416,500

Question

Quizplus · Accepted Answer

The building ($416,500) is equal to the present value of the nine annual payments [$50,000 F1F1F1S1F1F1F10 5.7590 (present value of a 10%, 9-period ordinary annuity)], plus the present value of the payment due ten years from today [$100,000 F1F1F1S1F1F1F10 .3855 (present value of a 10-period, 10% single sum)], plus the initial $90,000 cash payment.

Rachel Corporation Purchased a Building by Paying $90,000 Cash on the Purchase