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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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On May 1, 2019, a company purchased a new machine that it does not have to pay for until May 1, 2021. The total payment on May 1,2021, will include both principal and interest. Assuming interest at a 10% rate, the cost of the machine would be the total payment multiplied by what time value of money concept?

  1. a. future value of annuity of 1
  2. b. future value of 1
  3. c. present value of annuity of 1
  4. d. present value of 1

To determine

Identify the time value of money concept that would be used to multiply with the total payment, to calculate the cost of the machine.

Explanation

Present Value: The value of today’s amount expected to be paid or received in the future at a compound interest rate is called as present value.

In the given case, machinery is purchased by a company on May 1, 2019, and it does not pay for it until May 1, 2021. Later, the total payment (principal plus 10% interest) is made on May 1, 2021.

Payment is not made in installment, so the concept of annuity does not applicable here...

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