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Chapter 6: Question 11E (page 304)

Sosa Excavating Inc. is purchasing a bulldozer. The equipment has a price of \(100,000. The manufacturer has offered a payment plan that would allow Sosa to make 10 equal annual payments of \)16,274.53, with the first payment due one year after the purchase. Instructions (a) How much total interest will Sosa pay on this payment plan? (b) Sosa could borrow $100,000 from its bank to finance the purchase at an annual rate of 9%. Should Sosa borrow from the bank or use the manufacturer’s payment plan to pay for the equipment?

Short Answer

Expert verified

The total interest is $62,745.3, and they should borrow from the bank to pay for the bulldozer.

Step by step solution

01

Calculation of total interest

TotalInterest=Totalpayment-Equipmentprice=(16,274.53×10)-100,000=$62,745.3

02

Choosing between bank or manufacturer’s plan

Presentvaluefactor=EquipmentpriceAnnualpayments=100,00016,274.53=6.14457

The present value of the factor of 6.14457 for 10 years shows the interest rate of 10% per the table.

They should choose to borrow from the bank as the interest rate is lower.

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Most popular questions from this chapter

Clarence Weatherspoon, a super salesman contemplating retirement on his fifty-fifth birthday, decides to create a fund on an 8% basis that will enable him to withdraw $20,000 per year on June 30, beginning in 2021 and continuing through 2024. To develop this fund, Clarence intends to make equal contributions on June 30 of each of the years 2017–2020. Instructions

(a) How much must the balance of the fund equal on June 30, 2020, in order for Clarence to satisfy his objective?

(b) What are each of Clarence’s contributions to the fund?

Using the appropriate interest table, answer each of the following questions. (Each case is independent of the others.) (a) What is the future value of \(7,000 at the end of 5 periods at 8% compounded interest? (b) What is the present value of \)7,000 due 8 periods hence, discounted at 6%? (c) What is the future value of 15 periodic payments of \(7,000 each made at the end of each period and compounded at 10%? (d) What is the present value of \)7,000 to be received at the end of each of 20 periods, discounted at 5% compound interest?


Question: At a recent meeting of the accounting staff in your company, the controller raised the issue of using present value techniques to conduct impairment tests for some of the company’s fixed assets. Some of the more senior members of the staff admitted having little knowledge of present value concepts in this context, but they had heard about a FASB Concepts Statement that may be relevant. As the junior staff in the department, you have been asked to conduct some research of the authoritative literature on this topic and report back at the staff meeting next week. Instructions If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and access the FASB Statements of Financial Accounting Concepts. When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following items. (Provide paragraph citations.) (a) Identify the concept statement that addresses present value measurement in accounting. (b) What are some of the contexts in which present value concepts are applied in accounting measurement? (c) Provide definitions for the following terms: (1) Best estimate. (2) Estimated cash flow (contrasted to expected cash flow). (3) Fresh-start measurement. (4) Interest methods of allocation

Question: Explain how the future value of an ordinary annuity interest table is converted to the future value of an annuity due interest table.

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