Question

On July 1, 2021, Markwell Company acquired equipment. Markwell paid $175,000 in cash on July 1, 2021, and signed a $700,000 noninterest-bearing note for the remaining balance which is due on July 1, 2022. An interest rate of 5% reflects the time value of money for this type of loan agreement. (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.) For what amount will Markwell record the purchase of equipment? a) $834,048. b) $841,666. c) $741,666. d) $875,000.

Answer 1

Answer: b) $841,666.

Explanation:

Markwell will record the equipment at the present value of the amounts spent to purchase it.

Present value of the cash paid = $175,000

Present value of the noninterest-bearing note after a year = 700,000/(1 + 5%)

= $666,667

Total = 175,000 + 666,667

= $841,667

As per the options;

= $841,666