What Amount Should Be Recorded as the Cost of a Machine

question 94

Multiple Choice

What amount should be recorded as the cost of a machine purchased December 31, 2015, which is to be financed by making 8 annual payments of $8,000 each beginning December 31, 2016? The applicable interest rate is 8%.

• A)$56,000
• B)$49,975
• C)$85,093
• D)$45,973

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Definitions:

Cash Equivalent

Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Compensating Balance

A minimum bank account balance that a borrower agrees to maintain as a condition for obtaining a loan, often used to offset the bank's credit risk.

Legal Restrictions

Regulations or limitations prescribed by law that affect the actions of individuals, businesses, or governments.

Compensating Balance

A compensating balance is a minimum account balance that a borrower agrees to maintain in an account with a lender as part of a loan agreement.