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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Lyle Inc. purchased certain plant assets under a deferred payment contract. The agreement was to pay $20,000 at the time of purchase and $20,000 at the end of each of the next 5 years. The plant assets should be valued at:

  1. a. present value of a $20,000 ordinary annuity for 5 years
  2. b. $120,000
  3. c. $120,000 minus imputed interest
  4. d. $120,000 plus imputed interest

To determine

State the manner in which the plant assets must be valued.

Explanation

Property, Plant, and Equipment:

“Property, Plant, and Equipment” refers to the fixed assets, having a useful life of more than a year that is acquired by a company to be used in its business activities, for generating revenue.

Justification for the incorrect option b:

The plant assets is not valued at “$120,000”. Therfore, it is an incorrect option.

Justification for the incorrect option d:

The plant assets are not valued at “$12,000 including the Imputed interest”. Therefore, it is an incorrect option.

Justification for the incorrect option c:

The plant assets are not valued at “$12,000 minus the imputed interest”. Therefore, it is an incorrect option.

Justification for the correct option a:

The plant asset purchased on deferred future payments (long-term credit contracts) must be accounted at the “present value of a $20,000 ordinary annuity for 5 years”...

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