Answer:
a. On June 30, 2021, the Johnstone Company purchased equipment from Genovese Corp. Johnstone agreed to pay Genovese $22,000 on the purchase date and the balance in five annual installments of $5,000 on each June 30 beginning June 30, 2022. Assuming that an interest rate of 11% properly reflects the time value of money in this situation, at what amount should Johnstone value the equipment.
we must determine the present value of the annual installments:
PV = $5,000 x 3.6959 (PV annuity factor, 11%, 5 periods) = $18,479.50
Dr Equipment 40,479.50
Dr Discount on notes payable 6,520.50
Cr Cash 22,000
Cr Notes payable 25,000
b. Johnstone needs to accumulate sufficient funds to pay a $400,000 debt that comes due on December 31, 2023. The company will accumulate the funds by making five equal annual deposits to an account paying 6% interest compounded annually. Determine the required annual deposit if the first deposit is made on December 31, 2018.
we should use the future value of an annuity due formula:
FV = annual savings x annuity due factor
annual savings = FV / annuity due factor
FV = $400,000
FV annuity due factor, 6%, 6 periods = 7.39384
annual savings = $400,000 / 7.39384 = $54,099.09
c. On January 1, 2018, Johnstone leased an office building. Terms of the lease require Johnstone to make 20 annual lease payments of $120,000 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?
we should use the present value of an annuity due formula:
PV = annual lease payment x annuity due factor
annual lease payment = $120,000
PV annuity due factor, 10%, 20 periods = 9.36492
PV = $120,000 x 9.36492 = $1,123,790.40
Dr Right of use asset 1,123,790.40
Cr Lease liability 1,123,790.40