On January 1 2017, George Company purchased a new building. George paid $25,000 as a down payment and issued a long-term note to finance the balance. The note, which carries an interest rate of 4%, requires George to make annual payments of $55,000 for six years, with the first payment due on December 31, 2017. What amount should George record as the cost of the new building (rounded to the nearest whole dollar)

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Tundexi Tundexi · Answer 1 · 2021-11-23T15:12:57+01:00

The amount that George should record as the cost of the new building is $313,315.50.

Here, we are to determine the amount that George should record as the cost of the new building using the information given below.

Given Information

$25,000 paid as a down payment

interest rate of 4%

Required to make annual payments of $55,000 for 6 years and first payment due on Dec. 31, 2017.

PV factor of $1 annuity = (1 - (1 + i)^-n) / i

PV factor of $1 annuity = (1 - (1.04)^-6) / 0.04

PV factor of $1 annuity = 0.20968547427 / 0.04

PV factor of $1 annuity = 5.2421

Present value of payments = Annual payments to be made * PV factor of $1 annuity

Present value of payments = $55,000 * 5.2421

Present value of payments = $288,315.50

Cost of the new building = Cash down payment + Present value of payments

Cost of the new building = $288,315.50 + $25,000

Cost of the new building = $313,315.50

Therefore, the amount that George should record as the cost of the new building is $313,315.50.

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