Question

Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. The land reported on the balance sheet is closest to:

(A) $100,000
(B) $38,550
(C) $61,446
(D) $71,446

Answer 1

(D) $71,446

Step-by-step explanation:

we will calcualte the present value for an 11 payments annuity-due (there is eleven payment of 10,000 if we count the one at purchase date) which couta is 10,000 discounted at 10%

`C * (1-(1+r)^(-time) )/(rate) (1 +r ) = PV\\`

C 10,000

time 11

rate 0.1

`10000 * (1-(1+0.1)^(-11) )/(0.1) (1 + 0.10) = PV\\`

PV $71,445.6711

rounding to the nearest dollars: 71,446