Question

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 $115,600 for nine years. Will pay $6,300 interest at the end of each year and repay the $115,600 at the end of the 9th year.

B. Established a plant remodeling fund of $490,450 to be available at the end of Year 10. A single sum that will grow to $490,450 will be deposited on January 1 of this year.

C. Agreed to pay a severance package to a discharged employee. The company will pay $75,300 at the end of the first year, $112,800 at the end of the second year, and $150,300 at the end of the third year.

D. Purchased a $171,500 machine on January 1 of this year for $34,300 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.

2-a. In transaction (b), what single sum amount must the company deposit on January 1 of this year? (Round your answer to nearest whole dollar.)

2-b. What is the total amount of interest revenue that will be earned? (Round your answer to nearest whole dollar.)

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

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

4-b. What is the total amount of interest expense that will be incurred?

Answer 1

2-a) Amount to be deposit*FVF(7%, 10 yrs) = Required Future value

Amount to be deposited*(1.07)¹⁰ = $490,450

  Amount to be deposited*1.96715136 = $490,450

Amount to be deposited = $490,450/1.96715136 = $249,320

Therefore the company must deposit $249,320 on January 1 of this year.

2-b) Total Interest revenue Earned = Future value - Amount deposited

= $490,450 - $249,320 = $241,130

3) Present Value of the Obligation = $75,300*PVF(7%, 1 yr)+$112,800*PVF(7%, 2 yrs)+$150,300*PVF(7%, 3 yrs)

= ($75,300*0.93458)+($112,800*0.87344)+($150,300*0.81630)

= $70,373.87+$98,524.03+$122,689.89 = $291,587.79 or $291,588

Therefore the present value of obligation is $291,588.

4-a) Balance due on Note = $171,500 - $34,300 = $137,200

Annual Equal payments over 5 years = [Balance due on Note/PVAF(7%, 5 yrs)]

= $137,200/4.10020 = $33,462

4-b) Gross amount over 5 years = $33,462*5 yrs = $167,310

Total Amount of interest expense = $167,310 - $137,200 = $30,110