Question

On January 1, 2017, Aggie Security Systems purchased a new piece of high-tech security equipment. Aggie financed this purchase by making a cash down payment of $8,000 and agreeing to pay $60,000 at the end of 8 years. Assume interest is compounded annually. The equipment should be recorded on January 1, 2017, at what amount, assuming an appropriate interest rate of 5%. What is the carrying value of the note on December 31, 2018?

Answer 1

1)
	Cost at which equipement should be recorded					$ 48,610.36
	Working:
	Equipment is recorded at its cost and cost of an assets is the
	amount of money paid in cash and value of any kind.
	In this case, partly paid in cash and partly financed by notes payable.
	So, Cost of Asset will be amount of cash and value of in kind.
	Value of Notes payable is always present value of cash flow from notes payable.
	a.	Calculation of value of notes payable as of today:
		Value of Notes payable			=	Present Value
					=	Future Value x Present Value of 1
					=	$       60,000	x	0.67683936
					=	$ 40,610.36
		Working:
		Present Value of 1			=	(1+i)^-n		Where,
					=	(1+0.05)^-8		i	5%
					=	0.676839		n	8
	b.	Value of equipment			=	Cash paid + Present Value of Notes Paayble
					=	$   8,000.00	+	$ 40,610.36
					=	$ 48,610.36
2)
	Carrying Value of note on December 31, 2018				$ 44,772.92
	Working:
	Notes Amortization table:
	Year	Beginning Carrying Value (1)			Interest for the Year (2) = (1) x 5%			Ending Carrying Value (1) +(2)
	1/1/2017							$ 40,610.36
	12/31/2017	$ 40,610.36			$   2,030.52			$ 42,640.88
	12/31/2018	$ 42,640.88			$   2,132.04			$ 44,772.92
	12/31/2019	$ 44,772.92			$   2,238.65			$ 47,011.57
	12/31/2020	$ 47,011.57			$   2,350.58			$ 49,362.15
	12/31/2021	$ 49,362.15			$   2,468.11			$ 51,830.26
	12/31/2022	$ 51,830.26			$   2,591.51			$ 54,421.77
	12/31/2023	$ 54,421.77			$   2,721.09			$ 57,142.86
	12/31/2024	$ 57,142.86			$   2,857.14			$ 60,000.00