On January 1, 2014, Ellsworth Company completed the following transactions (use an 8 percent annual interest rate for all transactions):
a. Borrowed $2,000,000 to be repaid in five years. Agreed to pay $150,000 interest each year for the five years.
b. Established a plant addition fund of $1,000,000 to be available at the end of year 10. A single sum that will grow to $1,000,000 will be deposited on January 1, 2014.
c. Purchased a $750,000 machine on January 1, 2015, and paid cash, $400,000. A four-year note payable is signed for the balance. The note will be paid in four equal year-end payments starting on December 31, 2014.

Required (show computations and round to the nearest dollar):
1. In transaction (a), determine the present value of the obligation.
2. In transaction (b), what single amount must the company deposit on January 1, 2014? What is the total amount of interest revenue that will be earned?
3. In transaction (c), what is the amount of each of the equal annual payments that will be paid on the note? What is the total amount of interest expense that will be incurred?

  • CreatedJuly 01, 2014
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