PV Value oF Annuity table

Question 3 Vaughn Design Inc. (VD) is a privately owned business that provides interior decorating options for consumers. Vo follows ASPE. The software that it purchased six years ago to present clients with designs that are unique to their offices is no longer state of the art, and VD has to make a decision on replacing its software. The company has two options: 1. Enter into a lease agreement with Precision Inc. whereby VD makes an upfront lease payment of $11,930 on January 1, 2021, and annual payments of $4,580 over the next five years on each December 31. At the end of the lease, VD has the option to buy the software for $5,015. The first annual lease payment is on December 31, 2021. 2. Enter into a lease agreement with Graphic Inc. on January 1, 2021, whereby VD makes five annual lease payments of $6,545, beginning on January 1, 2021. VD may purchase the software at the end of the lease penod for $188. This is considered a bargain price compared with the offer of $5,015 in the proposal from Precision Inc. Under both options, the software will require annual upgrades that are expected to cost $1,504 per year. These upgrade costs are in addition to the lease payments that are required under the two independent options. Because this additional cost is the same under both options, VD has decided to ignore it in making its choice. The Precision agreement requires a licensing fee of $1,006 to be renewed annually. If VD decides on the Precision option, the licensing fee will be included in the annual lease payment of $4,580. Both Precision Inc. and Graphic Inc. offer software programs of similar quality and ease of use, and both provide adequate support and training. The software under each offer is expected to be used for up to eight years, although this depends to some extent on technological advances in future years. Both offers are equivalent in terms of the product and service. It is now early October 2020, and VD hopes to have the software in place by its fiscal year end of December 31, 2020. VD is currently working on preparing its third-quarter financial statements, which its bank is particularly interested in seeing in order to ensure that VD is respecting its debt to equity ratio covenant in its loan agreement with the bank. The interest rate on the bank loan, which is VD's only source of external financing, is 10% per year. VD would have preferred to be able to buy rather than lease the software, but the expected purchase price of $29,963 exceeds the limits that the bank set for VD's borrowing Click here to view the factor table PRESENT VALUE OF AN ANNUITY DUE Using tables, a financial calculator, or Excel functions, calculate the PV of the future minimum lease payments under each option. (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to o decimal places, e.g. 5,275.) Present Value Option 1 - Precision Inc. 23,590 X Option 2 - Graphic Inc. Determine the nature of the lease arrangement under each of the two lease options offered to VD and the corresponding accounting treatment that should be applied. The accounting treatment of the lease Option 1 - Precision Inc. A Capital Lease Option 2 - Graphic Inc. An Operating Lease Prepare all necessary journal entries and adjusting journal entries for VD under the Preasion Inc. option, from lease inception on January 1, 2021, through to December 31, 2021, excluding the $1,504 annual upgrade. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and entero for the amounts.) Date Account Titles and Explanation Debit Credit Jan. 1, 2021 TRent Expense 11930 Cash 11930 Dec 31, 2027 Rent Expense 3076 x Legal Expense 1504 4580 Cash (To record payment of rent and operating expenses.) Dec 31, 202. Rent Expense 2386 2386 Prepaid Expenses (To record expired rent.) Prepare an amortization schedule using Excel that would be suitable for the lease term in the Graphic Inc. option. (Round answers to o decimal places, e.g. 5,275.) Annual Lease Payment Vaughn Design Inc. Lease Amortization Schedule with Graphic Inc. Interest Reduction on Unpaid of Lease Obligation Obligation Balance of Lease Obligation Date 1/1/21 27,409 1/1/21 6545 6545 20864 1/11/22 6545 2086 4459 16405 1/1/23 6545 1641 4904 11501 1/1/24 6545 1150 53951 6106 1/1/25 6545 611 5934 172 1/1/26 188 17 171 32913 5505 T 27408 SHOW LIST OF ACCOUNTS Prepare all necessary journal entries and adjusting journal entries for VD under Graphic's option, from lease inception on January 1, 2021, through to January 1, 2022, excluding the $1,504 annual upgrade (Round answers to O decimal places, c.9. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry for the account titles and enter for the amounts.) Date Account Titles and Explanation Debit Credit Jan, 1, 2021 Lease Liability 2741 obligations under Lease 3804 6545 Cash (to record inception of lease and first lease payment.) Jan. 1, 2021 Interest Expense 2086 2086 Interest Payable (To record interest.) Depreciation Expense 3426 3426 I Accumulated Deprecat (To record deprecation expense.) Prepaid Expenses 65451 6545 (To record lease payment.) Activate Windos Solo Summarize and contrast the effects on VD's financial statements for the year ending December 31, 2021, using the entries prepared in parts (b) and (d) above. Include in your summary the total differential cash outflows that would be made by VD during 2021 under each option(If the cash flow is negative, please enter negative amounts using either a negative sign preceding the number c.g. -45 or parentheses e.g. (45).) Income statement effects Option No. 1 Operating Lease Option No. 2 Capital Lease TRent Espete 3076 SL TOperating Egente 1504 2086 Tocation Epe 3426 Tenses 4580 233 5512 Asset and liability balances Dec. 31, 2021 Current Assets [ Prepaid Rent Non-Current Assets SPD Software under Lease 27,409 Less Accumulated Depreciation (3426) 23983 Current Liabilities Interest Payable 2086 Non-Current Liabilities 3 Obligations under Lease 20864 Less Current portion of Ob_gations under Lease (4459) 16405 Total Liabilities 18491 Total cash inflows / (outflows) during 2021 2086 Table 4.5 PRESENT VALUE OF AN ANNUITY DUE OF 1 1 1- PVF-AD. = 1+ i (n) periods 2% 242% 3% 4% 5% 6% 8% 9% 10% 11% 12% 15% 1 2 3 4 5 1.00000 1.98039 2.94156 3.88388 4.80773 1.00000 1.00000 1.00000 1.97561 1.97087 1.96154 2.92742 2.91347 2.88609 3.85602 3.82861 3.77509 4.76197 4.71710 4.62990 1.00000 1.95238 2.85941 3.72325 4.54595 1.00000 1.94340 2.83339 3,67301 4.46511 1.00000 1.92593 2.78326 3.57710 4.31213 1.00000 1.91743 2.75911 3.53130 4.23972 1.00000 1.00000 1.00000 1.00000 1.90909 1.90090 1.89286 1.86957 2.73554 2.71252 2.69005 2.62571 3.48685 3,44371 3.40183 3.28323 4.16986 4.10245 4.03735 3.85498 6 5.71346 5.64583 5.57971 7 6.60143 6.50813 6.41719 8 7.471997.34939 723028 9 8.32548 8.17014 8.01969 109.16224 8.97087 8.78611 5.45182 6.24214 7.00205 7.73274 8.43533 5.32948 6.07569 6.78637 7.46321 8.10782 5,21236 5,91732 6.58238 7.20979 7.80169 4.99271 5.62288 6,20637 6.74664 7.24689 4,88965 5.48592 6.03295 6.53482 6.99525 4.79079 4.69590 4.60478 4.35216 5.35526 5.23054 5.11141 4.78448 5.86842 5.71220 5.56376 5.16042 6.33493 6.14612 5.96764 5.48732 6.75902 6.53705 6.32825 5.77158 11 12 13 14 15 9.98259 9.75206 9.53020 9.11090 8.72173 8.36009 7.71008 10.78685 10.51421 10.25262 9.76048 9.30641 8.88687 8.13896 11.57534 11.25776 10.95400 10.38507 9.86325 9.38384 8.53608 12.34837 11.98319 11.63496 10.98565 10.39357 9.85268 8.90378 13.10625 12.69091 12.29607 11.56312 10.89864 10.29498 9.24424 7.41766 7.14457 6.88923 6.65022 6.01877 7.80519 7.49506 7.20652 6.93770 6.23371 8.16073 7.81369 7.49236 7.19437 6.42062 8.48690 8.10336 7.74987 7.42355 6.58315 8.78615 9.366697.98187 7.62817.6.72448 16 17 1B 19 20 13.84926 13.38138 12.93794 12.11839 11.37966 10.71225 9.55948 9.06069 8.60608 8.190877.81086. 6.84737 14.57771 14.05500 13.56110 12.65230 11 83777 11.105909.85137 9.31256 8.82371 8.37916 7.97399 6.95424 15.29187 14.71220 14.16612 13 16567 12.27407 11.47726 10.12164 9.54363 9.02155 8.54879 8.11963 7.04716 15.99203 15.35336 14.75351 13 65930 12.68959 11.82760 10.37189 9.75553 9.20141 8.70162 8.24967 7.12797 16.67846 15.97889 15.32380 14.13394 13.08532 12.15812 10.60360 9.95012 9.35492 8.83929 8.36578 7.19823 1735143 16.58916 15.87747 14.59033 13.46221 12.46992 10,81815 10.12855 10.12855 9.51356 8.96333 8.46944 7.25933 18.01121 17.18455 16.41502 15.02916 13.82115 12.76408 11.01680 10.29224 9.64869 9.07507 8.56200731246 18.65805 17.76541 16.93692 15 45112 14 16300 13.01158 11.20074 10,44243 9.77156 9.17574 8.64465 735866 19.29220 18.33211 17.44361 15.85684 14.48857 13.30338 11.37106 10.58021 9.88322 9.266438.71843 7:39884 19.91393 18.89499 17.93554 16 24696 1479864 13.55036 11.52876 10.70661 9.98474 9.34814 8.78432 7.43377 Activate Windows 21. 22 23 24 25 Question 3 Vaughn Design Inc. (VD) is a privately owned business that provides interior decorating options for consumers. Vo follows ASPE. The software that it purchased six years ago to present clients with designs that are unique to their offices is no longer state of the art, and VD has to make a decision on replacing its software. The company has two options: 1. Enter into a lease agreement with Precision Inc. whereby VD makes an upfront lease payment of $11,930 on January 1, 2021, and annual payments of $4,580 over the next five years on each December 31. At the end of the lease, VD has the option to buy the software for $5,015. The first annual lease payment is on December 31, 2021. 2. Enter into a lease agreement with Graphic Inc. on January 1, 2021, whereby VD makes five annual lease payments of $6,545, beginning on January 1, 2021. VD may purchase the software at the end of the lease penod for $188. This is considered a bargain price compared with the offer of $5,015 in the proposal from Precision Inc. Under both options, the software will require annual upgrades that are expected to cost $1,504 per year. These upgrade costs are in addition to the lease payments that are required under the two independent options. Because this additional cost is the same under both options, VD has decided to ignore it in making its choice. The Precision agreement requires a licensing fee of $1,006 to be renewed annually. If VD decides on the Precision option, the licensing fee will be included in the annual lease payment of $4,580. Both Precision Inc. and Graphic Inc. offer software programs of similar quality and ease of use, and both provide adequate support and training. The software under each offer is expected to be used for up to eight years, although this depends to some extent on technological advances in future years. Both offers are equivalent in terms of the product and service. It is now early October 2020, and VD hopes to have the software in place by its fiscal year end of December 31, 2020. VD is currently working on preparing its third-quarter financial statements, which its bank is particularly interested in seeing in order to ensure that VD is respecting its debt to equity ratio covenant in its loan agreement with the bank. The interest rate on the bank loan, which is VD's only source of external financing, is 10% per year. VD would have preferred to be able to buy rather than lease the software, but the expected purchase price of $29,963 exceeds the limits that the bank set for VD's borrowing Click here to view the factor table PRESENT VALUE OF AN ANNUITY DUE Using tables, a financial calculator, or Excel functions, calculate the PV of the future minimum lease payments under each option. (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to o decimal places, e.g. 5,275.) Present Value Option 1 - Precision Inc. 23,590 X Option 2 - Graphic Inc. Determine the nature of the lease arrangement under each of the two lease options offered to VD and the corresponding accounting treatment that should be applied. The accounting treatment of the lease Option 1 - Precision Inc. A Capital Lease Option 2 - Graphic Inc. An Operating Lease Prepare all necessary journal entries and adjusting journal entries for VD under the Preasion Inc. option, from lease inception on January 1, 2021, through to December 31, 2021, excluding the $1,504 annual upgrade. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and entero for the amounts.) Date Account Titles and Explanation Debit Credit Jan. 1, 2021 TRent Expense 11930 Cash 11930 Dec 31, 2027 Rent Expense 3076 x Legal Expense 1504 4580 Cash (To record payment of rent and operating expenses.) Dec 31, 202. Rent Expense 2386 2386 Prepaid Expenses (To record expired rent.) Prepare an amortization schedule using Excel that would be suitable for the lease term in the Graphic Inc. option. (Round answers to o decimal places, e.g. 5,275.) Annual Lease Payment Vaughn Design Inc. Lease Amortization Schedule with Graphic Inc. Interest Reduction on Unpaid of Lease Obligation Obligation Balance of Lease Obligation Date 1/1/21 27,409 1/1/21 6545 6545 20864 1/11/22 6545 2086 4459 16405 1/1/23 6545 1641 4904 11501 1/1/24 6545 1150 53951 6106 1/1/25 6545 611 5934 172 1/1/26 188 17 171 32913 5505 T 27408 SHOW LIST OF ACCOUNTS Prepare all necessary journal entries and adjusting journal entries for VD under Graphic's option, from lease inception on January 1, 2021, through to January 1, 2022, excluding the $1,504 annual upgrade (Round answers to O decimal places, c.9. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry for the account titles and enter for the amounts.) Date Account Titles and Explanation Debit Credit Jan, 1, 2021 Lease Liability 2741 obligations under Lease 3804 6545 Cash (to record inception of lease and first lease payment.) Jan. 1, 2021 Interest Expense 2086 2086 Interest Payable (To record interest.) Depreciation Expense 3426 3426 I Accumulated Deprecat (To record deprecation expense.) Prepaid Expenses 65451 6545 (To record lease payment.) Activate Windos Solo Summarize and contrast the effects on VD's financial statements for the year ending December 31, 2021, using the entries prepared in parts (b) and (d) above. Include in your summary the total differential cash outflows that would be made by VD during 2021 under each option(If the cash flow is negative, please enter negative amounts using either a negative sign preceding the number c.g. -45 or parentheses e.g. (45).) Income statement effects Option No. 1 Operating Lease Option No. 2 Capital Lease TRent Espete 3076 SL TOperating Egente 1504 2086 Tocation Epe 3426 Tenses 4580 233 5512 Asset and liability balances Dec. 31, 2021 Current Assets [ Prepaid Rent Non-Current Assets SPD Software under Lease 27,409 Less Accumulated Depreciation (3426) 23983 Current Liabilities Interest Payable 2086 Non-Current Liabilities 3 Obligations under Lease 20864 Less Current portion of Ob_gations under Lease (4459) 16405 Total Liabilities 18491 Total cash inflows / (outflows) during 2021 2086 Table 4.5 PRESENT VALUE OF AN ANNUITY DUE OF 1 1 1- PVF-AD. = 1+ i (n) periods 2% 242% 3% 4% 5% 6% 8% 9% 10% 11% 12% 15% 1 2 3 4 5 1.00000 1.98039 2.94156 3.88388 4.80773 1.00000 1.00000 1.00000 1.97561 1.97087 1.96154 2.92742 2.91347 2.88609 3.85602 3.82861 3.77509 4.76197 4.71710 4.62990 1.00000 1.95238 2.85941 3.72325 4.54595 1.00000 1.94340 2.83339 3,67301 4.46511 1.00000 1.92593 2.78326 3.57710 4.31213 1.00000 1.91743 2.75911 3.53130 4.23972 1.00000 1.00000 1.00000 1.00000 1.90909 1.90090 1.89286 1.86957 2.73554 2.71252 2.69005 2.62571 3.48685 3,44371 3.40183 3.28323 4.16986 4.10245 4.03735 3.85498 6 5.71346 5.64583 5.57971 7 6.60143 6.50813 6.41719 8 7.471997.34939 723028 9 8.32548 8.17014 8.01969 109.16224 8.97087 8.78611 5.45182 6.24214 7.00205 7.73274 8.43533 5.32948 6.07569 6.78637 7.46321 8.10782 5,21236 5,91732 6.58238 7.20979 7.80169 4.99271 5.62288 6,20637 6.74664 7.24689 4,88965 5.48592 6.03295 6.53482 6.99525 4.79079 4.69590 4.60478 4.35216 5.35526 5.23054 5.11141 4.78448 5.86842 5.71220 5.56376 5.16042 6.33493 6.14612 5.96764 5.48732 6.75902 6.53705 6.32825 5.77158 11 12 13 14 15 9.98259 9.75206 9.53020 9.11090 8.72173 8.36009 7.71008 10.78685 10.51421 10.25262 9.76048 9.30641 8.88687 8.13896 11.57534 11.25776 10.95400 10.38507 9.86325 9.38384 8.53608 12.34837 11.98319 11.63496 10.98565 10.39357 9.85268 8.90378 13.10625 12.69091 12.29607 11.56312 10.89864 10.29498 9.24424 7.41766 7.14457 6.88923 6.65022 6.01877 7.80519 7.49506 7.20652 6.93770 6.23371 8.16073 7.81369 7.49236 7.19437 6.42062 8.48690 8.10336 7.74987 7.42355 6.58315 8.78615 9.366697.98187 7.62817.6.72448 16 17 1B 19 20 13.84926 13.38138 12.93794 12.11839 11.37966 10.71225 9.55948 9.06069 8.60608 8.190877.81086. 6.84737 14.57771 14.05500 13.56110 12.65230 11 83777 11.105909.85137 9.31256 8.82371 8.37916 7.97399 6.95424 15.29187 14.71220 14.16612 13 16567 12.27407 11.47726 10.12164 9.54363 9.02155 8.54879 8.11963 7.04716 15.99203 15.35336 14.75351 13 65930 12.68959 11.82760 10.37189 9.75553 9.20141 8.70162 8.24967 7.12797 16.67846 15.97889 15.32380 14.13394 13.08532 12.15812 10.60360 9.95012 9.35492 8.83929 8.36578 7.19823 1735143 16.58916 15.87747 14.59033 13.46221 12.46992 10,81815 10.12855 10.12855 9.51356 8.96333 8.46944 7.25933 18.01121 17.18455 16.41502 15.02916 13.82115 12.76408 11.01680 10.29224 9.64869 9.07507 8.56200731246 18.65805 17.76541 16.93692 15 45112 14 16300 13.01158 11.20074 10,44243 9.77156 9.17574 8.64465 735866 19.29220 18.33211 17.44361 15.85684 14.48857 13.30338 11.37106 10.58021 9.88322 9.266438.71843 7:39884 19.91393 18.89499 17.93554 16 24696 1479864 13.55036 11.52876 10.70661 9.98474 9.34814 8.78432 7.43377 Activate Windows 21. 22 23 24 25