Ask Question
13 February, 21:29

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.) Promised to pay a fixed amount of $6,000 at the end of each year for seven years and a one-time payment of $115,000 at the end of the 7th year. Established a plant remodeling fund of $490,000 to be available at the end of Year 8. A single sum that will grow to $490,000 will be deposited on January 1 of this year. Agreed to pay a severance package to a discharged employee. The company will pay $75,000 at the end of the first year, $112,500 at the end of the second year, and $150,000 at the end of the third year. Purchased a $170,000 machine on January 1 of this year for $34,000 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
Answers (1)
  1. 13 February, 22:00
    0
    This question is incomplete, here's the remaining part to complete the question:

    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,?

    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?

    Explanation:

    a) A sum of $6,000 is to be paid at the end of each year for 7 years and the principal amount $115,000 to be paid at the end of 7th year.

    PV=$6,000 / (1+0.07) ^1 + $6,000 / (1+0.07) ^2 + $6,000 / (1+0.07) ^3 + $6,000 / (1+0.07) ^4 + $6,000 / (1+0.07) ^5 + $6,000 / (1+0.07) ^6 + $6,000 / (1+0.07) ^7 + $115,000 / (1+0.07) ^7

    PV=$5,607.47 + $5,240.63 + $4,897.78 + $4,577.37 + $4,277.91 + $3,998.05 + $3,736.49 + $71,616.22

    PV=$103,951.92

    b) Let the single sum that will grow to $490,000 at 7% interest per annum at the end of 8 years be X

    FV=PV (1+i) ^n

    $490,000 = X (1+0.07) ^8

    Thus,

    X = $490,000 / (1.07) ^8

    X = $490,000/1.7182

    X = $285,182

    Thhus, a single sum of $285,182 needs to be deposited for 8 years at 7% interest p. a.

    The total amount of interest revenue is ($490,000-$285,182) = $204,818

    c) PV = $75,000 / (1.07) ^1 + $112,500 / (1.07) ^2 + 150,000 / (1.07) ^3

    PV = $70,093.45 + $98,261.85 + $122,444.68

    = $290,800

    FV = $75,000 * (1.07) ^1 + $112,500 * (1.07) ^2 + 150,000 * (1.07) ^3

    = $80,250 + $85,867 + $91,878

    = $257,995

    d) The cost of the machine is $170,000. Immediate cash paid $34,000. Loan Amount is ($170,000-$34,000) = $136,000

    The PVA factor at 7% p. a compounded annually for 5 years is 4.1002

    Thus, the PMT = 136,000/4.1002

    = $33,169

    Thus, the amount of each annual payment is $33,169 for 5 years.

    The total amount to be paid is ($34,000+$33,169*5)

    =$34,000+$165845

    =$199845

    The interest expense is ($199845 - $170,000)

    = $29,845
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “On January 1, Boston Company completed the following transactions (use a 7% annual interest rate for all transactions) : (FV of $1, PV of ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers