Question

Johnstone Company is facing several decisions regarding investing and financing activities. Address each decision independently. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

1. On June 30, 2018, the Johnstone Company purchased equipment from Genovese Corp. Johnstone agreed to pay Genovese $10,000 on the purchase date and the balance in five annual installments of $8,000 on each June 30 beginning June 30, 2019. Assuming that an interest rate of 10% properly reflects the time value of money in this situation, at what amount should Johnstone value the equipment?
2. Johnstone needs to accumulate sufficient funds to pay a $400,000 debt that comes due on December 31, 2023. The company will accumulate the funds by making five equal annual deposits to an account paying 6% interest compounded annually. Determine the required annual deposit if the first deposit is made on December 31, 2018.
3. On January 1, 2018, Johnstone leased an office building. Terms of the lease require Johnstone to make 20 annual lease payments of $120,000 beginning on January 1, 2018. A 10% interest rate is implicit in the lease agreement. At what amount should Johnstone record the lease liability on January 1, 2018, before any lease payments are made?
  

Answer 1

Answer 1.

Initial Payment = $10,000
Annual Installments = $8,000
Number of payments = 5
Interest Rate = 10%

Present Value = $10,000 + $8,000 * PVA of $1 (10%, 5)
Present Value = $10,000 + $8,000 * 3.7908
Present Value = $40,326.40

Value of equipment is $40,326.40

Answer 2.

Debt due in 5 years = $400,000
Interest rate = 6%

Annual Deposit * FVAD of $1 (6%, 5) = $400,000
Annual Deposit * 5.9753 = $400,000
Annual Deposit = $66,942.25

Answer 3.

Annual lease payment = $120,000
Number of payments = 20
Interest rate = 10%

Present Value = $120,000 * PVAD of $1 (10%, 20)
Present Value = $120,000 * 9.3649
Present Value = $1,123,788.00