Question

On January 2, 2022, McClelland Company purchased a machine and signed a noninterest-bearing note in payment. The note matures in 4 years and requires McClelland to pay 70,000 at maturity. McClelland also had the option to purchase the machine in cash from a different vendor for56,505. At what amount should the machine be recorded upon purchase?

1) $70,000
2) $56,505
3) $13,495

Answer 1

The machine should be recorded at the present value of the future payments, which is $56,505, the cash purchase price.

Step-by-step explanation:

The machine purchased by McClelland Company should be recorded at the present value of the payments to be made, given that the note is noninterest-bearing. We know that the company could purchase the machine for $56,505 in cash. This cash purchase price represents the present value of the machine, considering the alternative of paying $70,000 at a future date. Since there's a choice between paying cash immediately or paying a higher amount in the future, it's clear that the present value (cash price) is the fair value of the machine on the purchase date. Therefore, according to proper accounting practices and the concept of present value, the machine should be recorded at $56,505, the cash purchase price, which is the present value of the future payment.