A) Credulous Company purchased equipment on January 1, 2012 under the following terms: 

a. P200, 000 downpayment 

b. Five annual payments of P100, 000, the first installment note to be paid on December 31, 2012. The same equipment was available at a cash price of P580, 000. 

 

Required: How much is the cost of equipment____________________

 

B) On January 1, 2012, Enrich Company purchased a machine under the following terms: 

a. 100,000 downpayment 

b. four annual payments of P200, 000, the first installment to be paid on December 31, 2012.

 

The fair value of the machine is not clearly determinable on the date of acquisition. 

The prevailing rate of interest for this type of obligation is 10%. The present value factors at 10% for four periods are: 

Present value of 1 .683 

Present value of ordinary annuity of 1 3.170 

 

Required: How much is the cost of the machine_________________ 

A. The cost of equipment is _ P580, 000.

B. The cost of the machine is __ 734,000

Step-by-step explanation

A. Credulous Company purchased equipment on January 1, 2012 under the following terms: 

a. P200, 000 downpayment 

b. Five annual payments of P100, 000, the first installment note to be paid on December 31, 2012. The same equipment was available at a cash price of P580, 000. 

The cost of equipment is _ P580, 000.

Explanation:

The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. 

B. On January 1, 2012, Enrich Company purchased a machine under the following terms: 

a. 100,000 down payment 

b. four annual payments of P200, 000, the first installment to be paid on December 31, 2012.

The fair value of the machine is not clearly determinable on the date of acquisition. 

The prevailing rate of interest for this type of obligation is 10%. The present value factors at 10% for four periods are: 

Present value of 1 .683 

Present value of ordinary annuity of 1 3.170 

The cost of the machine is __ 734,000

Explanation:

The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. But since the cash price equivalent and fair value  of the machine is not clearly determinable on the date of acquisition, the purchase price will be used. This is computed by adding cash paid for down payment plus the present value of the next annual payment (if installment).

PV of ordinary annuity of 1 is used if the next payment is after a year (year end) and annually paying for the same amount while PV of 1 is used when paying for lump sum amount after credit terms.

PV of ordinary annuity 3.170 x 200,000 = 634,000

Initial down payment                                     100,000

Total cost of machine                                   734,000