Question

Short Company purchased land by paying $15,000 cash on the purchase date and agreed to pay $15,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 11%. On the balance sheet as of the purchase date, after the initial $15,000 payment was made, the liability reported is closest to: (FV of $1, PV of $1, FVA of $1, and PVA of $1).
a. $103,338.
b. $150,000.
c. $52,828.
d. $88,338.

Answer 1

Answer:

Option D is the correct answer,$ 88,338.48  

Explanation:

The liability reported in the balance sheet can be computed by using the pv formula in excel which is stated thus:

=-pv(rate,nper,pmt,fv)

rate is the incremental borrowing rate of 11% per year

nper is the number of payments required to settle the obligation which is 10

pmt is the amount of yearly payment in order to fully settle the debt owed which is $15,000 per year

fv is the future worth of total payments which is not unknown,hence taken as zero

=-pv(11%,10,15000,0)=$ 88,338.48  

The correct answer is $ 88,338.48