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, 2021, the Johnstone Company purchased equipment from Genovese Corp. Johnstone agreed to pay Genovese $24,000 on the purchase date and the balance in six annual installments of $7,000 on each June 30 beginning June 30, 2022. 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 $540,000 debt that comes due on December 31, 2026. 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, 2021. 3. On January 1, 2021, Johnstone leased an office building. Terms of the lease require Johnstone to make 15 annual lease payments of $134,000 beginning on January 1, 2021. A 10% interest rate is implicit in the lease agreement. At what amount should Johnstone record the lease liability on January 1, 2021, before any lease payments are made?

Answer 1

Johnstone Company Requirement 1 Table Values are based on n = 6 I = 10% Cashflow Amount Present Value Installment 7000 3 0487 Down Payment 24000 24000 Price of Equipment 54487 Interest = 7000 x 4.35526 30487 Principal = 24000 x 1 24000 Present value (price) of the bonds 54487 Present value of an ordinary annuity of $1: n = 6, i = 10% (PVA of $1) Requirement 2 Table or calculator function: FVAD of $1 Future Value: 540000 n = 5 I = 6% Deposit: 90372 Future value of an annuity due of $1: n = 5, i = 6% (from FVAD of $1) Annuity amount = 540000 / 5.9753 = 90372 Requirement 3 Table or calculator function: PVAD of $1 Payment: n = 15 I = 10%. Liability: 11,21,136 PVAD = $134,000 (8.36669*) = $1,121,136 = Lease liability Present value of an annuity due of $1: n = 15, i = 10% (from PVAD of $1)