Question

On January 1 of this year, Shannon Company completed the following transactions (assume a 8% annual interest rate): (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.) Bought a delivery truck and agreed to pay $62,000 at the end of three years. Rented an office building and was given the option of paying $12,000 at the end of each of the next three years or paying $35,000 immediately. Established a savings account by depositing a single amount that will increase to $94,000 at the end of seven years. Decided to deposit a single sum in the bank that will provide 8 equal annual year-end payments of $42,000 to a retired employee (payments starting December 31 of this year). Required: a. What is the cost of the truck that should be recorded at the time of purchase

Answer 1

The cost of the truck that Shannon Company should record on January 1 this year is $49,228.

Data and Calculations:

Future value of the truck = $62,000

Maturity period for payment = 3 years

Discount rate = 8% annually

Discount factor of 8% for 3 years = 0.794

Present value of the truck = $49,228 ($62,000 x 0.794)

Thus, the cost of the truck to record at the time of purchase is $49,228, which represents the present value of $62,000 at 8% annual interest for 3 years.

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