Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years. The first payment is due six months after the purchase date. Libby's incremental borrowing rate is 8%. The equipment reported on the balance sheet as of the purchase date is closest to:

Question

Quizplus · Accepted Answer

To find the equipment cost on the purchase date, we need to calculate the present value of the payment stream at Libby's incremental borrowing rate of 8%.

We can use the present value annuity formula to calculate the present value of the payment stream:

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

where PV is the present value, PMT is the periodic payment, r is the discount rate, and n is the number of periods.

In this case, PMT is $5,000, r is 8%, and n is 8 (the total number of payments over four years, with payments every six months). Plugging in these values, we get:

PV = $5,000 x [1 - (1 / (1 + 0.08)^8)] / 0.08 
PV ≈ $33,664

Therefore, the equipment cost on the purchase date is approximately $33,664.

Libby Company Purchased Equipment by Paying $5,000 Cash on the Purchase