Question

On January 1, 2014, Shannon Company completed the following transactions (assume a 14 percent annual interest rate): (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)

a.	Bought a delivery truck and agreed to pay $55,000 at the end of three years.
b.	Rented an office building and was given the option of paying $11,600 at the end of each of the next three years or paying $28,000 immediately.
c.	Established a savings account by depositing a single amount that will increase to $91,600 at the end of seven years.
d.	Decided to deposit a single sum in the bank that will provide 3 equal annual year-end payments of $35,000 to a retired employee (payments starting December 31, 2014).

a.	What is the cost of the truck that should be recorded at the time of purchase?

b.	Which option for the office building should the company select?
	multiple choice Pay in single installment OR Pay in three installments

c.	What single amount must be deposited in this account on January 1, 2014?

Answer 1

(a) -- What is the cost of the truck that should be recorded at the time of purchase?

Answer -

		Explanation
Cost of the truck	$37123	Amount * PVIF of $1 (i%, n) = $55000 * PVIF of $1 (14%, 3) = $55000 * 0.67497 = $37123

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(b) -- Which option for the office building should the company select?

Answer -

	Explanation
Pay in three installments	The present value of the three installments: Annuity amount * PVAF of $1 (i%, n) = $11600 * PVAF of $1(14%, 3) = $11600 * 2.32163 = $26931 The present value of the three installments is less than paying the $28000 immediately.

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(c) -- What single amount must be deposited in this account on January 1, 2014?

Answer -

		Explanation
Amount to deposit	$36607	Amount * PVIF of $1 (i%, n) = $91600 * PVIF of $1 (14%, 7) = $91600 * 0.39964 = $36607