On January 2, 2020, Gabon Corp. purchases a new machine. The company makes a $ 2,000 cash down payment, and agrees to pay four annual instalments of $ 4,000 each, starting December 31, 2020, signing a non-interest-bearing note to this effect. The cash equivalent price of the machine is not known, but the appropriate interest rate for this type of transaction is 9% p.a. Rounding to the nearest dollar (if necessary), Gabon should record the cost of the machine at
A) $ 18,000.
B) $ 16,000.
C) $ 14,959.
D) $ 12,959.

Question

Quizplus · Accepted Answer

First, we need to find the present value of the four annual instalments of $ 4,000 each using the appropriate interest rate of 9% p.a.
PV = $ 4,000 x (1 - 1/ (1+0.09)^4) / 0.09
PV = $ 12,959.07 (rounded to the nearest dollar)

Then, we need to add the cash down payment of $ 2,000 to find the total cost of the machine:
Total cost = $ 12,959.07 + $ 2,000
Total cost = $ 14,959.07 (rounded to the nearest dollar)

Therefore, Gabon should record the cost of the machine at $ 14,959.