Lyle,Inc. ,purchased certain plant assets under a deferred payment contract on December 31,2017.The agreement was to pay $20,000 at the time of purchase and $20,000 at the end of each of the next five years.The plant assets should be valued at

Question

Quizplus · Accepted Answer

The plant assets should be valued at the present value of the payments. Since the payments are an ordinary annuity, we need to use the present value of an ordinary annuity formula to calculate the present value. The formula is:

Present value = Payment x [1 - (1 / (1 + i)n)] / i

Where payment = $20,000, n = 5, and i = the imputed interest rate.

Since the payments are on a deferred payment contract, we know that the interest rate implicit in the contract must be used to calculate the present value. Therefore, we cannot simply use a market interest rate or another rate. We need to determine the interest rate implicit in the contract and use that rate in the formula.

Assuming we have determined that the interest rate implicit in the contract is 10%, we can calculate the present value as:

Present value = $20,000 x [1 - (1 / (1 + 0.1)5)] / 0.1
Present value = $75,034.81

Therefore, the plant assets should be valued at $75,034.81, which is less than the original cost of $120,000. This is because the contract requires additional payments beyond the initial purchase price, and the present value of those future payments is less than the nominal value because of the time value of money. The correct answer is C) $120,000 less imputed interest.

Lyle,Inc ,Purchased Certain Plant Assets Under a Deferred Payment Contract