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

Solution :-
1)

Table values are based on: 6 n = 10% i= Cash Flow Amount Present Value 30,485 24,000 54,485 Installments Down Payment 7,000 24,000 Value of the equipment

Explanation -

PV = $24,000 + 7,000 (4.355*) = $54,485 = Equipment

*Present value of an ordinary annuity of $1: n = 6, i = 10% (from PVA of $1)

The present value of installments = Installment amount*Cumulative discounting factor

= $7000 × 4.355

= $30, 485

Value of the equipment = Down payment + Present value of all payments

2)

Table or calculator function: Future Value: FVAD of $1 $540,000 n = 6% i = 90,372 Deposit:

Explanation :-

$540,000 = Annuity amount × 5.9753*

*Future value of an annuity due of $1: n = 5, i = 6% (from FVAD of $1)

Annuity amount = $540,000/5.9753

Annuity amount = $90,372 = Required annual deposit

3)

Explanation :-

Table or calculator function: Payment: PVAD of $1 134,000 15 10% i= Liability 1,121,137

PVAD = $134,000 (8.36669*) = $1,121, 137 = Lease liability

*Present value of an annuity due of $1: n = 15, i = 10% (from PVAD of $1)