Question

Johnstone Company is facing several decisions regarding investing and financing activities. Address each decision independently. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

1. On June 30, 2018, the Johnstone Company purchased equipment from Genovese Corp. Johnstone agreed to pay Genovese $18,000 on the purchase date and the balance in six annual installments of $6,000 on each June 30 beginning June 30, 2019. 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 $480,000 debt that comes due on December 31, 2023. The company will accumulate the funds by making five equal annual deposits to an account paying 5% interest compounded annually. Determine the required annual deposit if the first deposit is made on December 31, 2018.
3. On January 1, 2018, Johnstone leased an office building. Terms of the lease require Johnstone to make 20 annual lease payments of $128,000 beginning on January 1, 2018. A 10% interest rate is implicit in the lease agreement. At what amount should Johnstone record the lease liability on January 1, 2018, before any lease payments are made?

Answer 1

1. The amount of the equipment should be $54,000. The interest rate is included on the annual installments

6 annual payments of 6,000 + 18,000 paid on the purchase date=54,000

Account                Debit           Credit

Assets                  54,000

Cash                                       18,000

Liability                                  36,000

Total                    54,000         54,000

2. To determine the required annual deposit we use the formula pv=fv1+rn-1r being,

Pv:present value

Fv: future value 480,000

N: time, 5 years

R: interest rate.

pv=480000(1+0.05)5-10.05 = 86867.90 this is the required annual deposit.

3.

It is recorded as an asset because the company will lease for almost all theuseful life of the building

Account                Debit           Credit

Assets                  2.560,000

Lease Liability                         2,560,000

Total                    2,560,000    2,560,000

Note: the interest is already added on the annual payments