Question

On October 1, 2018, Justine Company purchased equipment from Napa Inc. in exchange for a noninterest-bearing note payable in five equal annual payments of $500,000, beginning Oct 1, 2019. Similar borrowings have carried an 11% interest rate. The equipment would be recorded at:

Answer 1

Answer:

$1,551,222.84

Explanation:

We should assume the interest are implicity charged in the note payments.

In order to record the equipment at their fair value at the momnet of purchase, we will discount the note using 11% discount rate

The note will be an annuity for $500,000 during 4 year at rate 11%

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 500000

time     4

rate             0.11

$500000 \times \frac{1-(1+0.11)^{-4} }{0.11} = PV$

PV

This is the value of the equipment at present value, without the interest charged on the note.

Under this value it should be recorded.