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.)

Borrowed $117,600 for eight years. Will pay $7,300 interest at the end of each year and repay the $117,600 at the end of the 8th year.

Established a plant remodeling fund of $491,950 to be available at the end of Year 9. A single sum that will grow to $491,950 will be deposited on January 1 of this year.

Agreed to pay a severance package to a discharged employee. The company will pay $76,300 at the end of the first year, $113,800 at the end of the second year, and $151,300 at the end of the third year.

Purchased a $176,500 machine on January 1 of this year for $35,300 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.

1. In transaction (a), determine the present value of the debt

2-a. In transaction (b), what single sum amount must the company deposit on January 1 of this year?

2-b. What is the total amount of interest revenue that will be earned?

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

1)
Interest	7300
Repayment at the end	117600
Number of years	8 years
year	Cash Flow	Discount factor @7%	Present value at 7%
0		1
1	$           7,300.00	0.934579	$                    6,822.43
2	$           7,300.00	0.873439	$                    6,376.10
3	$           7,300.00	0.816298	$                    5,958.97
4	$           7,300.00	0.762895	$                    5,569.14
5	$           7,300.00	0.712986	$                    5,204.80
6	$           7,300.00	0.666342	$                    4,864.30
7	$           7,300.00	0.62275	$                    4,546.07
8	$           7,300.00	0.582009	$                    4,248.67
8	$       117,600.00	0.582009	$                  68,444.27
Present value of the debt			$                112,034.75
2a) Amount to be invested
491950	PVAF7%,9years
491950	0.5439	267571.6
2b) Interest revenue to be earned
491950-267572	224378
3) present value of the obligation
year	Cash Flow	Discount factor @7%	Present value at 7%
		1
1	76300	0.934579	71308.41121
2	113800	0.873439	99397.32728
3	151300	0.816298	123505.8688
present value of the obligation			294211.6073
4) Annual payments will be paid on the note payable
Note payable (176500-35300)	141200
	1
1	0.934579439
2	0.873438728
3	0.816297877
4	0.762895212
5	0.712986179
	4.100197436
Annual payment(141200/4.100197)	34437.36606
4b) interest expense incured
Total Amount to be paid -Amount of liability
((34437.36606*5)+35300)-176500	30986.83028