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%. The land reported on the balance sheet is closest to:
A)$100,000.
B)$38,550.
C)$110,000.
D)$71,446.

Question

Quizplus · Accepted Answer

To determine the value of the land, we need to calculate the present value of the future payments.

We can use the formula:

PV = PMT * (1 - (1+r)^-n) / r

Where: 
PMT = the payment amount ($10,000) 
r = the incremental borrowing rate (10%) 
n = the number of payments remaining (10)

PV = 10,000 * (1 - (1+0.1)^-10) / 0.1 
PV = 10,000 * (1 - 0.386) / 0.1 
PV = 10,000 * 6.14 
PV = 61,400

So the present value of the future payments is $61,400.

We also need to add the initial payment of $10,000, so the total value of the land on the balance sheet is:

$61,400 + $10,000 = $71,400

Therefore, the closest answer is D) $71,446.

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