On June 1, 2014, Molser Company acquired a new machine by agreeing to pay five equal annual payments of $20,000, beginning on June 1, 2014. Assuming an interest rate of 14% compounded annually, Molser should record the acquisition cost of the machine on June 1, 2014, at
A) $68,661.62
B) $78,274.24
C) $87,719.25
D) $100,000.00

Question

Quizplus · Accepted Answer

We can use the present value of an annuity formula to calculate the cost of the machine:
PV = PMT x [(1 - (1 / (1 + r)^n)) / r]
where PV is the present value, PMT is the equal annual payment, r is the interest rate (14% compounded annually), and n is the number of payments (5).
Plugging in the numbers, we get:
PV = $20,000 x [(1 - (1 / (1 + 0.14)^5)) / 0.14] = $78,274.24
Therefore, Molser should record the acquisition cost of the machine on June 1, 2014, at $78,274.24. Answer choice B is the best choice.

On June 1, 2014, Molser Company Acquired a New Machine