On January 1, 2014, Boston Company completed the following transactions (use a 1

ID: 2424618 • Letter: O

Question

On January 1, 2014, Boston Company completed the following transactions (use a 10 percent 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.) Links to the tables for FV, PV, FVA & PVA: http://lectures.mhhe.com/connect/0077516958/fv.jpg

http://lectures.mhhe.com/connect/0077516958/pv.jpg

http://lectures.mhhe.com/connect/0077516958/fva.jpg

http://lectures.mhhe.com/connect/0077516958/pva.jpg

Answer the bellow questions using the information provided:

Borrowed $112,000 for eight years. Will pay $11,200 interest at the end of each year and repay the $112,000 at the end of the 8th year.

Established a plant addition fund of $560,000 to be available at the end of year 9. A single sum that will grow to $560,000 will be deposited on January 1, 2014.

Agreed to pay a severance package to a discharged employee. The company will pay $89,000 at the end of the first year, $130,500 at the end of the second year, and $149,000 at the end of the third year.

Purchased a $190,000 machine on January 1, 2014, and paid cash, $47,000. A nine-year note payable is signed for the balance. The note will be paid in nine equal year-end payments starting on December 31, 2014.

In transaction (a), determine the present value of the debt.

In transaction (b), what single sum amount must the company deposit on January 1, 2014?

What is the total amount of interest revenue that will be earned?

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

In transaction (d), what is the amount of each of the equal annual payments that will be paid on the note?

What is the total amount of interest expense that will be incurred?

http://lectures.mhhe.com/connect/0077516958/pv.jpg

http://lectures.mhhe.com/connect/0077516958/fva.jpg

http://lectures.mhhe.com/connect/0077516958/pva.jpg

Answer the bellow questions using the information provided:

Explanation / Answer

Part 1)

The present value of debt can be calculated with the use of following formula:

Present Value of Debt = Interest*PVA(Interest Rate,Years) + Maturity Value*PVIF(Interest Rate,Years)

Where PVIFA is Present Value Interest Factor for an Annuity and PV is Present Value of $1

Here, Interest = $11,200, Interest Rate = 10%, Years = 8 and Maturity Value = 112,000

Using these values in the above formula and with the use of relevant tables, we get,

Present Value of Debt = 11,200*PVA(10%,8) and 112,000PV(10%,8Years) = 11,200*5.3349 + 112,000*.4665 = $111,998.88 or $111,999

__________

Part 2)

The single sum amount the company must deposit on January 1, 2014 can be calculated with the use of following formula:

Single Sum Amount = Amount at End of 9 Years*PV(Interest Rate,Years)

Here, Amount at End of 9 Years = $560,000, Interest Rate = 10% and Years = 9

Using these values in the above formula for Single Sum Amount, we get,

Single Sum Amount = 560,000*PV(10%,9) = 560,000*.4241 = $237,496

__________

The amount of interest earned can be calculated with the use of following formula:

Interest Earned = Amount after 9 Years - Single Sum Amount Calculated in 2a)

Interest Earned = 560,000 - 237,496 = $322,054

__________

Part 3)

The present value of payments can be calculated with the use of following formula:

Present Value of Payments = Cash Flow Year 1*PV(Interest Rate,Year 1) + Cash Flow Year 2*PV(Interest Rate,Year 2) + Cash Flow Year 3*PV(Interest Rate,Year 3)

Using the information provided in the question, we get,

Present Value of Payments = 89,000*PV(10%,1) + 130,500*PV(10%,2) + 149,000*PV(10%,3) = 89,000*.9091 + 130,500*.8264 + 149,000*.7513 = $300,698.80 or $300,699

__________

Part 4)

The amount of equal annual payment can be calculated as follows

Equal Payment Amount = Present Value of Note/PVA(Interest Rate,Years)

Here Present Value of Note = 190,000 - 47,000 = 143,000, Rate = 10% and Years = 10

Using these values in the above formula for Equal Payment Amount, we get,

Equal Payment Amount = 143,000/PVA(10%,9) = 143,000/5.7590 = $24,830.70 or $24,831

__________

The amount of interest expense can be calculated with the use of following formula:

Amount of Interest Expense = Equal Payment Amount (as calculated in Part 4 a))*Number of Years - Amount of Note = 24,830.70*9 - 143,000 = $80,746.30 or $80,746

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