Question

1.On June 30, 2021, the Johnstone Company purchased equipment from Genovese Corp. Johnstone agreed to pay Genovese $20,000 on the purchase date and the balance in five annual installments of $8,000 on each June 30 beginning June 30, 2022. Assuming that an interest rate of 10% properly reflects the time value of money in this situation, at what amount should Johnstone value the equipment?

2. Johnstone needs to accumulate sufficient funds to pay a $500,000 debt that comes due on December 31, 2026. The company will accumulate the funds by making five equal annual deposits to an account paying 9% interest compounded annually. Determine the required annual deposit if the first deposit is made on December 31, 2021.

3. On January 1, 2021, Johnstone leased an office building. Terms of the lease require Johnstone to make 20 annual lease payments of $130,000 beginning on January 1, 2021. A 10% interest rate is implicit in the lease agreement. At what amount should Johnstone record the lease liability on January 1, 2021, before any lease payments are made?

Answer 1

Present is the value of amount tobe received in fututre as on today

Future value is amount accumulated valued at future date

1)

Year	Cash flows	Pv 10 %	Discounted cash flows
0	20000	1	20000
1	8000	0.909	7272
2	8000	0.826	6608
3	8000	0.751	6008
4	8000	0.683	5464
5	8000	0.621	4968
			50320

Value of equipment today is 50320 if we use present values to 4 decimal answer would be 50326.3

Above can also be calculated using cumulative present values as each year amount is same

it will be 10000(as its in year zero) + 8000 x pvvalue for 5 years cumilative

20000 + 8000x3.79079 = 50326.3

2) Here we need 50000 in future so our future value is given

Present value (1+r)n = Future value

Pv x pv 9% cumulative for 5 years = 500000

PV x3.8897 = 500000

Required deposit = 500000/3.8897 = 128545 per year

This means if we invest 128545 @ 9 % per year for 5 year we will accumulate 500000

3) Lease are recorded at present value of minimum lease payment

Lease payment = 130000

Lease term = 20 year ( we will use 19 years for present value as first installment is paid today and present value factor of that is one)

Amount = 130000

Present value factor @10 % for 19 years( 1 years because first payment is made today value of whose will be one so we will add 1 to pv cator of 19 ) =8.36492

Pv factor for 20 year is 1+8.36492 = 9.36492

lease will be recored at = 130000 x 9.36492=1217439.6

since lease payments are from begining