# LIBERTY ACCT 301 CHAPTER 6 Summer B 2015

June 1, 2016

Question
(ACCT 301 – Summer B 2015 3)

Assignment:

Chapter 6

1.

Answer each of the following independent questions.

Required:

Alex Meir recently won a lottery and has the option of receiving one of the following three prizes: (1) \$90,000 cash immediately, (2) \$35,000 cash immediately and a six-period annuity of \$9,400 beginning one year from today, or (3) a six-period annuity of \$17,700 beginning one year from today. (.mhhe.com/connect/007802532x/Images/FV%20of%20\$1.jpg”>FV of \$1,.mhhe.com/connect/007802532x/Images/PV%20of%20\$1.jpg”>PV of \$1,.mhhe.com/connect/007802532x/Images/FVA%20of%20\$1.jpg”>FVA of \$1,.mhhe.com/connect/007802532x/Images/PVA%20of%20\$1.jpg”>PVA of \$1,.mhhe.com/connect/007802532x/Images/FVAD%20of%20\$1.jpg”>FVAD of \$1and.mhhe.com/connect/007802532x/Images/PVAD%20of%20\$1.jpg”>PVAD of \$1)(Use appropriate factor(s) from the tables provided.)

1.1

Assuming an interest rate of 5%, determine the PV value for the above options.

1.2

Which option should Alex choose?

2.

The Weimer Corporation wants to accumulate a sum of money to repay certain debts due on December 31, 2022. Weimer will make annual deposits of \$180,000 into a special bank account at the end of each of 10 years beginning December 31, 2013. Assuming that the bank account pays 6% interest compounded annually, what will be the fund balance after the last payment is made on December 31, 2022?

2.

On September 30, 2013, Ferguson Imports leased a warehouse. Terms of the lease require Ferguson to make 10 annual lease payments of \$55,000 with the first payment due immediately. Accounting standards require the company to record a lease liability when recording this type of lease. (.mhhe.com/connect/007802532x/Images/FV%20of%20\$1.jpg”>FV of \$1,.mhhe.com/connect/007802532x/Images/PV%20of%20\$1.jpg”>PV of \$1,.mhhe.com/connect/007802532x/Images/FVA%20of%20\$1.jpg”>FVA of \$1,.mhhe.com/connect/007802532x/Images/PVA%20of%20\$1.jpg”>PVA of \$1,.mhhe.com/connect/007802532x/Images/FVAD%20of%20\$1.jpg”>FVAD of \$1and.mhhe.com/connect/007802532x/Images/PVAD%20of%20\$1.jpg”>PVAD of \$1)(Use appropriate factor(s) from the tables provided.)

Assume an 8% interest rate. What amount should Ferguson record the lease liability on September 30, 2013, before the first payment is made?

3.

Johnstone Company is facing several decisions regarding investing and financing activities. Address each decision independently. (.mhhe.com/connect/007802532x/Images/FV%20of%20\$1.jpg”>FV of \$1,.mhhe.com/connect/007802532x/Images/PV%20of%20\$1.jpg”>PV of \$1,.mhhe.com/connect/007802532x/Images/FVA%20of%20\$1.jpg”>FVA of \$1,.mhhe.com/connect/007802532x/Images/PVA%20of%20\$1.jpg”>PVA of \$1,.mhhe.com/connect/007802532x/Images/FVAD%20of%20\$1.jpg”>FVAD of \$1and.mhhe.com/connect/007802532x/Images/PVAD%20of%20\$1.jpg”>PVAD of \$1)(Use appropriate factor(s) from the tables provided.)

1.

On June 30, 2013, the Johnstone Company purchased equipment from Genovese Corp. Johnstone agreed to pay Genovese \$19,000 on the purchase date and the balance in five annual installments of \$7,000 on each June 30 beginning June 30, 2014. 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?

2.

Johnstone needs to accumulate sufficient funds to pay a \$490,000 debt that comes due on December 31, 2018. 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, 2013.

3.

On January 1, 2013, Johnstone leased an office building. Terms of the lease require Johnstone to make 20 annual lease payments of \$129,000 beginning on January 1, 2013. A 12% interest rate is implicit in the lease agreement. At what amount should Johnstone record the lease liability on January 1, 2013,beforeany lease payments are made?

4.

Harding Company is in the process of purchasing several large pieces of equipment from Danning Machine Corporation. Several financing alternatives have been offered by Danning (.mhhe.com/connect/007802532x/Images/FV%20of%20\$1.jpg”>FV of \$1,.mhhe.com/connect/007802532x/Images/PV%20of%20\$1.jpg”>PV of \$1,.mhhe.com/connect/007802532x/Images/FVA%20of%20\$1.jpg”>FVA of \$1,.mhhe.com/connect/007802532x/Images/PVA%20of%20\$1.jpg”>PVA of \$1,.mhhe.com/connect/007802532x/Images/FVAD%20of%20\$1.jpg”>FVAD of \$1and.mhhe.com/connect/007802532x/Images/PVAD%20of%20\$1.jpg”>PVAD of \$1)(Use appropriate factor(s) from the tables provided.):

1.

Pay \$1,130,000 in cash immediately.

2.

Pay \$402,000 immediately and the remainder in 12 annual installments of \$90,000, with the first installment due in one year.

3.

Make 12 annual installments of \$132,000 with the first payment due immediately.

4.

Make one lump-sum payment of \$1,720,000 six years from date of purchase.

Required:

Determine the present value, assuming that Harding can borrow funds at an 7% interest rate.

Determine the best alternative for Harding.

5.

Kiddy Toy Corporation needs to acquire the use of a machine to be used in its manufacturing process. The machine needed is manufactured by Lollie Corp. The machine can be used for 12 years and then sold for \$11,000 at the end of its useful life. Lollie has presented Kiddy with the following options (.mhhe.com/connect/007802532x/Images/FV%20of%20\$1.jpg”>FV of \$1,.mhhe.com/connect/007802532x/Images/PV%20of%20\$1.jpg”>PV of \$1,.mhhe.com/connect/007802532x/Images/FVA%20of%20\$1.jpg”>FVA of \$1,.mhhe.com/connect/007802532x/Images/PVA%20of%20\$1.jpg”>PVA of \$1,.mhhe.com/connect/007802532x/Images/FVAD%20of%20\$1.jpg”>FVAD of \$1and.mhhe.com/connect/007802532x/Images/PVAD%20of%20\$1.jpg”>PVAD of \$1)(Use appropriate factor(s) from the tables provided.):

1.

Buy machine.The machine could be purchased for \$161,000 in cash. All maintenance and insurance costs, which approximate \$6,000 per year, would be paid by Kiddy.

2.

Lease machine.The machine could be leased for a 12-year period for an annual lease payment of \$26,000 with the first payment due immediately. All maintenance and insurance costs will be paid for by the Lollie Corp. and the machine will revert back to Lollie at the end of the 12-year period.

Required:

Assuming that a 11% interest rate properly reflects the time value of money in this situation and that all maintenance and insurance costs are paid at the end of each year, find the present value for the following options. Ignore income tax considerations.(Negative amounts should be indicated by a minus sign.)

6.

Award: 1 out of 1.00 point