On January 1, 2014, Boston Company completed the following transactions (use a 8

Question

On January 1, 2014, Boston Company completed the following transactions (use a 8 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.)

Borrowed $112,000 for seven years. Will pay $8,960 interest at the end of each year and repay the $112,000 at the end of the 7th year.

Established a plant addition fund of $510,000 to be available at the end of year 4. A single sum that will grow to $510,000 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 $142,000 at the end of the third year.

Purchased a $130,000 machine on January 1, 2014, and paid cash, $33,000. A four-year note payable is signed for the balance. The note will be paid in four equal year-end payments starting on December 31, 2014.

Borrowed $112,000 for seven years. Will pay $8,960 interest at the end of each year and repay the $112,000 at the end of the 7th year.

Established a plant addition fund of $510,000 to be available at the end of year 4. A single sum that will grow to $510,000 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 $142,000 at the end of the third year.

Purchased a $130,000 machine on January 1, 2014, and paid cash, $33,000. A four-year note payable is signed for the balance. The note will be paid in four equal year-end payments starting on December 31, 2014.

Explanation / Answer

a)Presen value of future cash flow = (Annual interest *PVA!@8% ,7years) + (repayment amount * PV@8%,7year)

                                  =(8960 * 5.20637) +(112000 * .58349)

                                  = 46649.08 + 65350.88

                                  = $ 111,999.96

so appropriate factor is PVA@ 8% ,7years and PV@8%,7year

2)Appropriate factor is FV@8%,4years

Future value = single deposits *FV@ 8%,4years

510,000 = single deposit * 1.36049

single deposit at beginning of 1 jan = 510,000 / 1.36049

                                                   = $ 374,864.94

c)present value of future cash flow = (PV@8%1 * cash flowof 1 year ) +(PV@8%,2 *cash flow of 2year)+(PV@8%,3* cash flow of 3year)

                   =(.92593 * 89000 ) +(.85734 *130500 )+(.79383 *142000)

                   = 82407.77 + 111882.87 + 112723.86

                  =$ 307,014.50

d)loan amount = 130,000 -33,000 = $ 97,000

Equated installment = loan amount /PVA@ 8%,4year

                            = 97,000 / 3.31213

                           = $ 29,286.29

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