Bob's Excavating purchased some equipment by issuing a three-year 6% note for $8,000 when the market rate for an obligation of this nature was 8%. The interest is payable annually. Actuarial information for three periods follows:
At the date of purchase, what amount should be debited to Equipment?

Question

Bob's Excavating purchased some equipment by issuing a three-year 6% note for $8,000 when the market rate for an obligation of this nature was 8%. The interest is payable annually. Actuarial information for three periods follows:  
At the date of purchase, what amount should be debited to Equipment?

Quizplus · Accepted Answer

To find the amount to be debited to Equipment, we need to calculate the present value of the note payable, which is the initial cash inflow for the purchase of the equipment. Using the present value formula, we get:

PV = FV / (1 + i)n
PV = $8,000 / (1 + 0.08)3
PV = $6,350.66

Therefore, the amount to be debited to Equipment is $6,350.66. Choice C is the best option.

Bob's Excavating Purchased Some Equipment by Issuing a Three-Year 6