McClelland Corporation agreed to purchase some landscaping equipment from Agri-Products for a cash price of $500,000. Before accepting delivery of the equipment, McClelland learned that the same equipment could be purchased from another dealer for $460,000. To avoid losing the sale, Agri-Products have offered McClelland a "no interest" payment plan-McClelland would pay $100,000 at delivery, $200,000 one year later, and the final $200,000 in two years.
1. McClelland would usually pay annual interest of 9% on a loan of this type. What is the present value of the Agri-Products loan at the delivery date?
2. What journal entry would McClelland make if it accepts the deal and buys from Agri-Products?
3. What should McClelland do?
The solution displays the calculations to arrive at a present value, shows the journal entry and discusses a decision for McClelland.