On November 1, year 1, a company purchased a new machine
that it does not have to pay for until November 1, year 3.
The total payment on November 1,... Accounting MCQs | Accounting MCQs

On November 1, year 1, a company purchased a new machine
that it does not have to pay for until November 1, year 3.
The total payment on November 1, year 3, will include both
principal and interest. Assuming interest at a 10% rate, the cost
of the machine would be the total payment multiplied by what
time value of money concept?

Present value of annuity of $1.
Present value of $1.
Future amount of annuity of $1.
Future amount of $1.Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

(b) The requirement is to determine what time value of
money concept would be used to determine the cost of a machine
when a payment (principal plus interest) is to be made in
two years. Answer (b) is correct because the cost of the machine
is to be recorded immediately; therefore, the cost of the present
value of a lump-sum payment would be used. Answer (c) is incorrect
because a future amount would be used in computing the
payment and not the cost of the machine. Also, a lump-sum
payment is involved and not an annuity. Answer (d) is incorrect
because a future amount would be used in computing the payment
and not the cost. Answer (a) is incorrect because a lumpsum
payment is involved, not an annuity.