Question

Starcents, Inc. purchased equipment and agreed to pay the supplier $10,000 each year for the next 3 years and an additional $100,000 at the end of the 3rd year. The supplier charges 6% interest per year. The entry to record this purchase includes a debit to Equipment of _______.

Answer 1

$110,692

Step-by-step explanation:

To determine the cost of the equipment that Starcents purchased, we must find the present value of its cash flows:

1. Cash flow year 1 $10,000
2. Cash flow year 2 $10,000
3. Cash flow year 3 $10,000 + $100,000 = $110,000

the discount rate is 6%

equipment purchase cost = ($10,000 / 1.06) + ($10,000 / 1.06²) + ($110,000 / 1.06³) = $9,434 + $8.900 + $92,358 = $110,692