Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to pay $3,000 every three months during the next five years. The first payment is due three months after the purchase date. Rae's incremental borrowing rate is 12%. The vehicle reported on the balance sheet as of the purchase date is closest to:
A)$44,633.
B)$50,000.
C)$54,633.
D)$60,000.

Question

Quizplus · Accepted Answer

To calculate the cost of the vehicle, we need to calculate the present value of the future payments. The payment amount is $3,000 every three months for the next five years, or 20 payments in total. The incremental borrowing rate for Rae Company is 12%, so we can use that to discount the future cash flows.

Using a financial calculator or spreadsheet, we can calculate the present value of the payments to be $50,632. From this amount, we subtract the initial cash payment of $10,000 to get a total cost of $40,632. This is the amount that will be reported on the balance sheet as the cost of the vehicle.

Therefore, the closest answer choice is C) $54,633.

Rae Company Purchased a New Vehicle by Paying $10,000 Cash