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1. On June 30, 2018, the Johnstone Company purchased equipment from Genovese Corp. Johnstone...

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1. On June 30, 2018, the Johnstone Company purchased equipment from Genovese Corp. Johnstone agreed to pay Genovese $21,000 on the purchase date and the balance in six annual installments of $9,000 on each June 30 beginning June 30, 2019. Assuming that an interest rate of 12% properly reflects the time value of money in this situation, at what amount should Johnstone value the equipment?

Table values are based on:

n =i =

Cash Flow

Amount

Present Value

Installments

Down Payment

Value of the equipment

2. Johnstone needs to accumulate sufficient funds to pay a $510,000 debt that comes due on December 31, 2023. The company will accumulate the funds by making five equal annual deposits to an account paying 8% interest compounded annually. Determine the required annual deposit if the first deposit is made on December 31, 2018.

Table or calculator function:

Future Value:

n =

i =

Annual deposit

3. On January 1, 2018, Johnstone leased an office building. Terms of the lease require Johnstone's to make 10 annual lease payments of $131,000 beginning on January 1, 2018. A 12% 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?

Table or calculator function:

Payment

n = i =

liability:

Financing Activities

Financing activities are actions that investors take to finance the operations or expansions of their businesses. These effects of these activities are reflected in the long-term liabilities and equity of investors.

Answer and Explanation:

Requirement 1

Equipment should be recorded at its Cash Price Equivalent. But in the absence of such, it is recorded at the present value of payments or fair value at the time of acquisition, whichever is lower.

Since Cash Price Equivalent and fair value is not available, we will use the discounted value of payments.

Annual Payments = $9,000

PV of 12% ordinary annuity for 6 periods = 4.11141

Present Value of Annual Payments = $9,000 x 4.11141 = $37,002.69

Add: Down Payment - $21,000

Present Value of Equipment = $58,002.69

Requirement 2

Future Value of Debt = $510,000

Future Value factor of 8% for 5 periods = 5.86660

Required Annual Deposits = $510,000 / 5.86660 = $86,932.81

To raise a total of $510,000, Johnstone should invest $86,932.81 annually to pay off its debt due in December 31, 2023.

Requirement 3

Lease liability are recorded at the present value of the total minimum lease payments.

Annual Payment = $131,000

Present Value factor of 12% annuity due for 10 periods = 6.32825

We use annuity due because the payments are made in advance.

Present Value of Lease Liability = $131,000 x 6.32825 = $829,000.75

Lease liability is recorded at its present value. An interest expense is also recognized annually for the whole life of lease.


Learn more about this topic:

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What Is Financing? - Definition & Types

from Corporate Finance: Help & Review

Chapter 8 / Lesson 7
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