Question

1. On June 30, 2018, the Johnstone Company purchased equipment from Genovese Corp. Johnstone agreed to pay Genovese $22,000 on the purchase date and the balance in five annual installments of $5,000 on each June 30 beginning June 30, 2019. Assuming that an interest rate of 11% 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 $520,000 debt that comes due on December 31, 2023. The company will accumulate the funds by making five equal annual deposits to an account paying 7% 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 10 annual lease payments of $132,000 beginning on January 1, 2018. An 11% 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

Solution 1:

Value of equipment = Down payment + Present value of annual installments

= $22,000 + $5,000 * Cumulative PV factor at 11% for 5 periods

= $22,000 + $5,000 * 3.695897 = $40,479.49

Solution 2:

Let annual deposit amount = X

Now future value of annual deposti = 520,000

n = 5

i = 7%

X * Cumulative FV factor for annuity due at 7% for 5 periods = $520,000

X * 6.153291 = $520,000

X = $84,507.63

Hence annual deposit amount = $84,507.63

Solution 3:

Amount of lease liability to be recorded on january 1, 2018 = Present value of minimum lease payment

= $132,000 * Cumulative PV Factor for annuity due at 11% for 10 periods

= $132,000 * 6.537048

= $862,890.27