Present Value Paper 1

1

On July 1, year 1, James Rago signed an agreement to operate as a franchisee of Fast Foods, Inc. for an initial franchise fee of $60,000. Of this amount, $20,000 was paid when the agreement was signed and the balance is payable in four equal annual payments of $10,000 beginning July 1, year 2. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. Rago’s credit rating indicates that he can borrow money at 14% for a loan of this type. Information on present and future value factors is as follows:
Present value of $1 at 14% for four periods 0.59
Future amount of $1 at 14% for four periods 1.69
Present value of an ordinary annuity of $1 at 14% for four periods 2.91
Rago should record the acquisition cost of the franchise on July 1, year 1 at






2

On November 1, year 1, a company purchased a new machine that it does not have to pay for until November 1, year 3. The total payment on November 1, year 3, will include both principal and interest. Assuming interest at a 10% rate, the cost of the machine would be the total payment multiplied by what time value of money concept?






3

For which of the following transactions would the use of the present value of an annuity due concept be appropriate in calculating the present value of the asset obtained or liability owed at the date of incurrence?






4

Jole Co. lent $10,000 to a major supplier in exchange for a noninterest-bearing note due in three years and a contract to purchase a fixed amount of merchandise from the supplier at a 10% discount from prevailing market prices over the next three years. The market rate for a note of this type is 10%. On issuing the note, Jole should record
Discount on note receivable
Deferred charge






5

Leaf Co. purchased from Oak Co. a $20,000, 8%, five-year note that required five equal annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of $19,485. Leaf does not elect the fair value option for reporting its financial liabilities. What should be the total interest revenue earned by Leaf over the life of this note?






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