Question

! Required information [The following information applies to the questions displayed below.] On January 1, Boston Company completed the following transactions (use a 7% annual interest rate for all transactions): FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.) a. Borrowed $119,000 for seven years. Will pay $8,000 interest at the end of each year and repay the $119,000 at the end of the 7th year. b. Established a plant remodeling fund of $493,000 to be available at the end of Year 8. A single sum that will grow to $493,000 will be deposited on January 1 of this year. c. Agreed to pay a severance package to a discharged employee. The company will pay $77,000 at the end of the first year, $114,500 at the end of the second year, and $152,000 at the end of the third year. d. Purchased a $180,000 machine on January 1 of this year for $36,000 cash. A five-year note is signed for the balance. The note will be paid in five equal year-end payments starting on December 31 of this year. Required: 1. In transaction (a), determine the present value of the debt. (Round your answer to nearest whole dollar.) Present value

Answer 1

1.) Present value of debt  = Interest x PVA(r%,n) + Amount to be paid at the end of n yr x PV_(r%,n) (where r%=interest rate,

=$8,000 x PVA_(7%,7) + $119,000 x PV_(7%,7)     n= number of years)

= $8,000 x 5.389 + $119,000 x .623

   = $43,112 + $74137  

=$117,249

2.a) Amount to be deposited on Jan 1 = $493,000 x PV_(7%,8)

= $493,000 x .582

=$286,926

So, the company has to deposit $286,926 on Jan 1 so as to turn the investment in $493,000 at the end of 8yr.

2.b) Company is earning interest only in part b),

so, the amount of interest the company earned = $493,000 - $286,926

= $206,074