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. 3. In transaction (c), determine the present value of this obligation. Present value

Answer 1

(3)

present value = {$77000 x PVF(7%,1)} + {$114500 x PVF(7%,2)} + {$152000 x PVF(7%,3)}

= ($77000 x 0.9345794393) + ($114500 x 0.8734387283) + ($152000 x 0.8162978769)

= 71,962.6168224299 + 100,008.7343872827 + 124,077.2772874095

= $296,048.6284971221

where,

PVF(7%,1) = 0.9345794393

PVF(7%,2) = 0.8734387283

PVF(7%,3) = 0.8162978769

(4a)

principal amount of note payable = $180000 - $36000 = $144000

therefore,

present value of the annuity = annuity x PVAF(7%,5)

annuity = $144000/4.10020

= $35120.24

where,

PVAF(7%,5) = 4.10020

(4bj

total amount of interest expense = ($35120.24 x 5) - $144000

= $31601.20