Question

Emmett & Gracie (E & G) is considering a significant equipment replacement. E & G would like to replace some of their equipment before December 31, 2016. The equipment originally cost $500,000 and the equipment’s accumulated depreciation balance at the end of 2016 is will be $450,000. At this point the equipment is depreciated to its salvage value.Your long-term asset accountant, Joe, tells you about this equipment option 3 as follows:

Purchase new equipment by giving a non-interest-bearing note with five payments of $120,000 to the supplier (starting on the first day of note's term and each year after) and selling the old equipment for $60,000 ($50,000 Book value so $10,000 gain on sale of equipment). The first $120,000 payment would be made in late December 2019. The prevailing interest rate for obligations of this nature is 10% that is more efficient and sell the old equipment, The estimated life of any new equipment is 7 years.

Please note: I have determined the first step to figuring out this problem is determining the Carrying Value of the annuity due, as it is paid at the start of the year. I had came up with the carrying value of $454,894.41 but am pretty sure that amount changes as the first payment is at the start of the loan on day 1.

Answer 1

Yes carrying amount is not $ 454894.41 as the first payment is at the start of the year so the carrying amount would be $ 500282 as first payment to be made is at the start of year so Discounting factor will be taken as 1 and then subsequently further discounting factor of 10% Table is shown below

Year Amount Discounting factor PV

1 $ 120000 1 $ 120000

2 $ 120000 .909 $ 109080

3 $ 120000 .826 $ 99120

4 $ 120000 .751 $ 90120

5 $ 120000 .683 $ 81962

___________

$ 500282

So carrying amount is $ 500282