Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. On the balance sheet as of the purchase date, after the initial $10,000 payment was made, the liability reported is closest to:

Question

Quizplus · Accepted Answer

The liability reported on the balance sheet as of the purchase date after the initial $10,000 payment was made, can be calculated using the present value of an annuity formula.

PV Annuity = Payment per period × [1 − (1 + r)-n ÷ r]

Where:
Payment per period = $10,000
r = 10%
n = 10

PV Annuity = $10,000 × [1 − (1 + 0.10)-10 ÷ 0.10]
PV Annuity = $61,446 (rounded to nearest whole amount)

Therefore, the liability reported on the balance sheet is closest to option C, $61,446.

Short Company Purchased Land by Paying $10,000 Cash on the Purchase