Question

Keith’s Trucking Company is replacing part of their fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2018. The note agreement will require $6 million in annual payments starting on December 31, 2018 and continuing for a total of six years (final payment December 31, 2023). Kenworthy will charge Keith’s Trucking the market interest rate of 8% compounded annually. (Round to the nearest dollar).

A). (2-1/2 pts) How much will Keith’s Trucking record as a debit to their equipment account and as a credit to their notes payable account on January 1, 2018? $__________

B). (2-1/2 pts) What is the remaining obligation on January 1, 2019 after the first payment has been made? $__________

C). (2-1/2 pts) Kate's grandmother promises to give her $6,000 at the end of three years and $6,000 at the end of six years. How much is the money worth today if Kristen could earn 5% annual interest on the funds? (Round to the nearest dollar). $__________

D). (2-1/2 pts) Laura deposits $12,000 in the bank today. She will be earning 6% interest annually on her deposit. How much money will she have in the bank at the end of 10 years? (Round to the nearest dollar). $__________

E). (2-1/2 pts) If the market rate of interest is 8%, a rational person would just as soon receive $80,000 four years from now as what amount today (round to the nearest dollar)? $__________

F). (2-1/2 pts) On January 1, 2014, Rich Company acquired a truck that had a purchase price of $100,000. The seller agreed to allow Rich to pay for the truck over a three-year period at 12% interest with equal payments due at the end of each year. The amount of each annual payment the company must make is (round to the nearest dollar) $__________

Answer 1

A	PV of annuity of cash flows	PV(RATE,NPER,PMT)
		$27,737,278
	Debit to Equipment	$27,737,278
	Credit to notes payable	$27,737,278
B	opening note payable	27,737,278
	Interest at 8% for one year	2,218,982.24
	Less: paid on 31 dec 2018	(6,000,000)
	Remaining obligation on 1 jan 2019	23,956,260
C	Money received after 3 years	6,000
	Money received after 6 years	6,000
	PV factor for 3 years @ 5%	0.86
	PV factor for 6 years @ 5%	0.75
	PV of cash flow after 3 years	5,183
	PV of cash flow after 6 years	4,477
	PV today	9,660
D	Compound interest rate	Principal * interest rate ^n- principal
	Interest for 10 years	9,490
	Principal	12,000
	Money after 10 years	21,490
E	Money received after 4 years	80,000
	PV factor for 4 years @ 8%	0.74
	PV of cash flow after 4 years	58,802
F	EMI	[P x R x (1+R)^N]/[(1+R)^N-1]
	rate	12%
	Nper	3 years
	Principal	100,000
	EMI of the truck	41,635