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

Answer 1. First we need to find the PV of the annuity, for this the input on financial calculator will be

Function used = PV

i= 0.1

n=6

FV=0

PMT = 7000

Thus the present value of the remaining amount= $ 30,486.82

Thus the total value for the equipment = $24000 + $ 30,486.82 = $54,486.82

Answer 2. Input values are as follows

Table or calculator function = PMT

Future value = 540000

n= 5

i= 0.06

Annual deposit = 95794.06 =$95794

Answer 3. We need to find out the PV of the annuity

Function used = PV

i= 0.1

n=15

FV=0

PMT = 134000

PV= 1,019,214.65, this is the value which the Johnstone should record as lease liability on January 1, 2021