Question

On January 1, 2018, Laramie Inc. acquired land for $6.2 million. Laramie paid $1.2 in cash and signed a 6% note requiring the company to pay the remaining $5 million plus interest on December 31, 2019. An interest rate of 6% properly reflects the time value of money for this type of loan agreement. For what amount should Laramie record the purchase of land?

Multiple Choice

$6.8 million.

$5.0 million.

$5.6 million.

$6.2 million.

Answer 1

$6.2 million

Step-by-step explanation:

The land must be recorded at the price acquired which is in-accordance with the International Accounting Standard IAS 16 Property, Plant & Equipment, which says that the Non current assets must be recorded at the fair market value at the time of purchase which is the price at which the asset is acquired and in this case it is $6.2 million.

Answer 2

$6.2 million

Step-by-step explanation:

Since the note in this scenario is interest bearing and the face amount recorded on the note for the land is $5 million. Also, the cash paid on January 1, 2018 is $1.2 million. Hence, the total amount that Laramie Inc. should record for the purchase of the land is face amount recorded on the note plus amount paid in cash.

Thus,

5 million + 1.2 million

= $6.2 million.