Kiely Company Inc. has buildings that cost $1,000,000, with accumu- lated depreciation of $600,000 and a carrying amount of $400
,000 on December 31, Year 1. On that date, Kiely Company determines that the market value for these buildings is $750,000. Kiely Company wishes to carry buildings on the Decem- ber 31, Year 1, balance sheet at a revalued amount. Under treatment 1, Kiely Com- pany would restate both the buildings account and accumulated depreciation on buildings such that the ratio of net carrying amount to gross carrying amount is 40 percent ($400,000/$1,000,000) and the net carrying amount is $750,000. To ac- complish this, the following journal entry would be made at December 31, Year 1:
Record the necessary journal entries for the elimination of accumulated depreciation and the entry to revalue the building.
Record the necessary journal entries for the elimination of accumulated depreciation and the entry to revalue the building.
1 answer:
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Answer: Proposal C
Explanation:
The way to solve this is to calculate the Present Values of all these payments. The smallest present value is the best.
Proposal A.
Periodic payment of $2,000 makes this an annuity.
Present value of Annuity = Annuity * ( 1 - ( 1 + r ) ^ -n)/r
= 2,000 * (1 - (1 + 0.5%)⁻⁶⁰) / 0.5%
= $103,451.12
Proposal B
Present value = Down payment + present value of annuity
= 10,000 + [2,200 * ( 1 - ( 1 + 0.5%)⁻⁴⁸) / 0.5%]
= 10,000 + 93,676.70
= $103,676.70
Proposal C
Present value = Present value of annuity + Present value of future payment
= [500 * (1 - (1 + 0.5%)⁻³⁶) / 0.5%] + [116,000 / (1 + 0.5%)⁶⁰]
= 16,435.51 + 85,999.17
= $102,434.68
<em>Proposal C has the lowest present value and so is best. </em>
