5. Gilmores Clothes purchased some equipment by issuing a three-year 7% note for

Question

5.   Gilmores Clothes purchased some equipment by issuing a three-year 7% note for $7,000 when the interest rate for an obligation of this nature was 9%. The interest is payable annually. Actuarial information for three periods follows:

7%

9%

Future amount of 1

1.225043

1.295029

Future amount of annuity of 1

3.214900

3.278100

Present value of 1

0.816298

0.772183

Present value of annuity of 1

2.624316

2.531295

At the date of purchase, what amount should be debited to Equipment?

a.

$7,587.66

b.

$6,716.96

c.

$6,350.66

d.

$6,645.61

7%

9%

Future amount of 1

1.225043

1.295029

Future amount of annuity of 1

3.214900

3.278100

Present value of 1

0.816298

0.772183

Present value of annuity of 1

2.624316

2.531295

Explanation / Answer

Interest on note at 7% = $7000*7% = $490 Present value of interest on note for three periods = $490*2.531295 = $1240.3346 present value of rate of the equipment $7000*0.772183 = $5405.2810 Amount should be debited to equipment : $5405.2810+ $1240.3346 = 6645.61 Ans: D $6645.61

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