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 = PV of Interest Payments + PV of Repayment
PV annuity for 7 years @7% = 5.3898, PV factor for 7th year @7% = 0.6228

Present Value of Debt = $8000 x 5.3898 + $119000 x 0.6228 = $117232

2-a
Amount to deposit = $493000 / (1.07)⁸
= $493000 / 1.7182 = $286928

2-b.
Interest Revenue = $493000 - $286928 = $206072