Anderson Company has purchased equipment that requires annual payments of $20,000 to be paid at the end of each of the next 6 years. The discount rate is 12%. What amount will be used to record the equipment?

Question

Quizplus · Accepted Answer

The present value of an annuity formula can be used to determine the amount to record the equipment:

PV = PMT x [1 - (1 / (1+r)^n)] / r

Where: 
PMT = annual payment 
r = discount rate 
n = number of periods

Using the values given: 
PMT = $20,000 
r = 12% 
n = 6

PV = $20,000 x [1 - (1 / (1+0.12)^6)] / 0.12

PV = $82,220

Therefore, the amount to record the equipment is $82,220. Option B is correct.

Anderson Company Has Purchased Equipment That Requires Annual Payments of $20,000