Answered

On June 30, 2021, 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, 2022. 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

Answer :

Johnstone should value the equipment at $125,096.

What are installments?

  • Simply put, an installment payment is a quantity of money that is paid over a specific period of time in smaller installments.
  • A recurring payment called an installment payment plan enables clients to make larger purchases without having to pay the full amount up front.

What is the interest rate?

  • The amount of interest due each period expressed as a percentage of the amount lent, deposited, or borrowed is known as an interest rate.
  • The total interest on a loaned or borrowed sum is determined by the principal amount, the interest rate, the frequency of compounding, and the period of time the loan, deposit, or borrowing took place.

Solution -

PV = $28,000 + $5,000 (3.79079) = $125,096

Equipment Present value of an ordinary = $125,096

Therefore, Johnstone should value the equipment at $125,096.

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