Question:
Johnstone Company is facing several decisions regarding investing and financing activities. Address each
decision independently.
1. On June 30, 2013, the Johnstone Company purchased equipment from Genovese Corp. Johnstone
agreed to pay Genovese $10,000 on the purchase date and the balance in five annual installments of
$8,000 on each June 30 beginning June 30, 2014. Assuming that an interest rate of 10% properly reflects
the time value of money in this situation, at what amount should Johnstone value the equipment?
2. Johnstone needs to accumulate sufficient funds to pay a $400,000 debt that comes due on December
31,2018. The company will accumulate the funds by making five equal annual deposits to an account
paying6% interest compounded annually. Determine the required annual deposit if the first deposit is
made onDecember 31, 2013.
3. On January 1, 2013, Johnstone leased an office building. Terms of the lease require Johnstone to make
20 annual lease payments of $120,000 beginning on January 1, 2013. A 10% interest rate is implicit in
thelease agreement. At what amount should Johnstone record the lease liability on January 1, 2013,
before any lease payments are made?
Answer:
1. PV = $10,000 + 8,000 (3.79079) = $40,326 = Equipment
Present value of an ordinary annuity of $1: n = 5, i = 10% (from Table 4)
2. $400,000 = Annuity amount x 5.9753
Future value of an annuity due of $1: n = 5, i = 6% (from Table 5)
Annuity amount = $400,000
5.9753
Johnstone Company is facing several decisions regarding investing and financing activities. Address each
decision independently.
1. On June 30, 2013, the Johnstone Company purchased equipment from Genovese Corp. Johnstone
agreed to pay Genovese $10,000 on the purchase date and the balance in five annual installments of
$8,000 on each June 30 beginning June 30, 2014. Assuming that an interest rate of 10% properly reflects
the time value of money in this situation, at what amount should Johnstone value the equipment?
2. Johnstone needs to accumulate sufficient funds to pay a $400,000 debt that comes due on December
31,2018. The company will accumulate the funds by making five equal annual deposits to an account
paying6% interest compounded annually. Determine the required annual deposit if the first deposit is
made onDecember 31, 2013.
3. On January 1, 2013, Johnstone leased an office building. Terms of the lease require Johnstone to make
20 annual lease payments of $120,000 beginning on January 1, 2013. A 10% interest rate is implicit in
thelease agreement. At what amount should Johnstone record the lease liability on January 1, 2013,
before any lease payments are made?
Answer:
1. PV = $10,000 + 8,000 (3.79079) = $40,326 = Equipment
Present value of an ordinary annuity of $1: n = 5, i = 10% (from Table 4)
2. $400,000 = Annuity amount x 5.9753
Future value of an annuity due of $1: n = 5, i = 6% (from Table 5)
Annuity amount = $400,000
5.9753
