Question

Question: Pueblo Co. acquires machinery by paying \(10,000 cash and signing a \)5,000, 2-year, zero-interest-bearing note payable. The note has a present value of \(4,208, and Pueblo purchased a similar machine last month for \)13,500. At what cost should the new equipment be recorded?

Short answer

Answer

Pueblo Co. records the new equipment at $14,208.

Step-by-step solution

Note payable in balance sheet

Note payable is shown on the liabilities side of the balance sheet under the head long term liabilities.

Calculation of cost of new equipment

$$\begin{gathered} \mathbf{CostofEquipment}\mathbf{=}\mathbf{CashPaid}\mathbf{+}\mathbf{PresentValueofNotePayable} \\ \mathbf{=}\mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{208} \\ \mathbf{=}\mathbf{\$}\mathbf{14}\mathbf{,}\mathbf{208} \end{gathered}$$