On January 1, 2011, Boston Company completed the following transactions (use a 9
ID: 2368780 • Letter: O
Question
On January 1, 2011, Boston Company completed the following transactions (use a 9 percent annual interest rate for all transactions a. Borrowed $103,000 for nine years. Will pay $9,270 interest at the end of each year and repay the $103,000 at the end of the 9th year. b. Established a plant addition fund of $520,000 to be available at the end of year 8. A single sum that will grow to $520,000 will be deposited on January 1, 2011. c. Agreed to pay a severance package to a discharged employee. The company will pay $84,000 at the end of the first year, $122,500 at the end of the second year, and $146,000 at the end of the third year. d. Purchased a $130,000 machine on January 1, 2011, and paid cash, $35,000. A eight-year note payable is signed for the balance. The note will be paid in eight equal year-end payments starting on December 31, 2011. In transaction (a), determine the present value of the debt. (Round "PV Factors" to 4 decimal places. Round intermediate calculations and final answer to the nearest whole dollar amount.) In transaction (c), determine the present value of this obligation. (Round "PV Factors" to 4 decimal places. Round intermediate calculations and final answer to the nearest whole dollar amount). In transaction (b), what single sum amount must the company deposit on January 1, 2011? (Round "PV Factors" to 4 decimal places and final answer to the nearest whole dollar amount.) What is the total amount of interest revenue that will be earned? Use http://lectures.mhhe.com/connect/0078111021/Tables/presentvaluedecimal.jpg and http://lectures.mhhe.com/connect/0078111021/Tables/pvannuitydecimal.jpgExplanation / Answer
On January 1, 2011, Boston Company completed the following transactions (use a 9 percent annual interest rate for all transactions
a. Borrowed $103,000 for nine years. Will pay $9,270 interest at the end of each year and repay the $103,000 at the end of the 9th year.
In transaction (a), determine the present value of the debt.
1. We find PV of ANnuity of $1 for 9 Yrs at 9% = 5.9952
PV of $1 for 9Yrs @9% = 0.4604
So PV of debt = 9270*5.9952 + 103000*0.4604 = $1,02,997
b. Established a plant addition fund of $520,000 to be available at the end of year 8. A single sum that will grow to $520,000 will be deposited on January 1, 2011.
In transaction (b), what single sum amount must the company deposit on January 1, 2011?
PV of $1 for 8Yrs @9% = 0.5019
So Single amount deposited = 520000*0.5019 = $2,60,988
c. Agreed to pay a severance package to a discharged employee. The company will pay $84,000 at the end of the first year, $122,500 at the end of the second year, and $146,000 at the end of the third year.
In transaction (c), determine the present value of this obligation
PV = 84000*PVIF(1,9%) + 122500*PVIF(2,9%)+146000*PVIF(3,9%)
= 84000*0.9174 + 122500*0.8417 + 146000*0.7722 =$2,92,911
d. Purchased a $130,000 machine on January 1, 2011, and paid cash, $35,000. A eight-year note payable is signed for the balance. The note will be paid in eight equal year-end payments starting on December 31, 2011.
What is the total amount of interest revenue that will be earned?
So Note Payable amt = 130000-35000 = 95000
So PVIFA(8,9%) = 5.5348
So Annual Inst = 95000/5.5348 = $17,164
So 8 Ints =8*17164 = $1,37,312
So Int Rev = 137312-95000 = $42,312
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