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? Multiple Choice a. $834,048. b. $841,666. c. $741,666. d. $875,000.

Answer 1

Answer $841,666

Explanation: see attached file

Answer 2

Answer:

The correct option is B,$841,666

Explanation:

The equipment value in the books of accounts should reflect when the payments are made, which implies that the payments made and promise made should be stated in today's terms.

The payment of $175,000 made immediately reflect today's value of the payment as it is made immediately,however the promise to pay $700,000 in a year's time should brought to today's terms as well as discounting with 5% discount rate

                         Amount              present value

Cash                  $75,000            $75,000*1                               =$75,000.00

Promise            $700,000          $700,000*(1+5%)^-1                =$ 666,666.67

Total present values                                                                       $841,666.67