Time Value of Money Intermediate Accounting

timer Asked: Apr 30th, 2015

Question description

Below you will find a series of independent questions involving present value concepts. Show all factors used in present value computations and indicate the table that was used (FV of $1, PV of $1, etc).  If you use a financial calculator, indicate the keystrokes you used to arrive at the answer( for example: n=, i/y=,pv=pmt =  cpt fv)

1. a.  Soriano  Corporation bought a new machine on January 1, 2015 and agreed to pay for it in 5 equal installments of $40,000 on December 31st, 2015 and December 31 of each of the next 4 years.  Assuming that the prevailing rate of 8% applies to this contract, how much should Soriano record as the cost of the machine? 

  b. Prepare the entry that Soriano would make to record the purchase of the machinery if the company signed a note where interest was included in the face amount of the note.

c. Prepare the amortization schedule for the first year of the note. Be sure to label your columns.  PLACE YOUR SCHEDULE AT THE END OF THE QUIZ.

d. Prepare the entry or entries required for the first payment.

e. How will Soriano’s note appear on the December 31st, 2015 balance sheet? Include the section of the balance sheet and the presentation, with numbers.

2. Refer to question 1.  Answer each question again, including preparation of an amortization schedule assuming that interest was not included in the face amount of the note.

a. Cost of the machine

b. Journal entry to record the purchase

c. Amortization schedule (attach to back of quiz)

d. Entry or entries required for the first payment.

e. Presentation of note on December 31, 2015 balance sheet.

3. a.  A bank lends you $150,000.  You are to repay the loan in equal semi-annual payments over 12 years at 10% compounded semi-annually.  What are the semi-annual payments?

b. Prepare an amortization schedule showing the breakdown of the payments between principal and interest for the loan. PLACE YOUR SCHEDULE AT THE BACK OF THE QUIZ.

c. Prepare the journal entry to record the first semiannual payment on the loan.

d. How much will you owe the bank after the second interest payment?

e. If you did not have access to a computer or financial calculator, how could you easily determine the amount of interest you would pay over the life of this loan?

f. Prove that your answer in e  is correct with an amortization schedule. PLACE SCHEDULE AT THE END OF QUIZ.

4.  Stech Co. is issuing $7.5 million 12% bonds in a private placement on July 1, 2015. Each $1,000 bond pays interest semi-annually on December 31 and June 30 of each year. The bonds mature in ten years. At the time of issuance, the market interest rate for similar types of bonds was 8%.

  a.   What is the expected selling price of the bonds?

   b. Explain how the answer you computed in part a passes the reasonableness test.

  c. Prepare the journal entry that Stech Co. will make when the bonds are issued.

  d. The bond indenture agreement requires that Stech Co. deposit money in a bond sinking fund semi annually beginning on the first interest payment date.  The controller estimates that the annual rate of interest earned on the investments in the sinking fund will be 8%.  What amount must be deposited annually in order to have enough money in the fund to pay off the bonds in 10 years?

e. Prepare an amortization schedule to prove that your answer in d is correct. Cut and paste the schedule below. PLACE YOUR AMORTIZATION SCHEDULE AT THE END OF THE QUIZ.

f. Prepare the entry that will be made each year to record the payment to the sinking fund.

g.  In what section of the classified balance sheet will the bond sinking fund appear?

5.  a.  How much must be invested on January 1, 2014  to receive $20,000 for ten years if the first payment is to be taken on January 1, 2024?  Assume an annual interest rate of 6%.

b. Design an amortization schedule to prove that your answer in part a is correct. PLACE YOUR SCHEDULE AT THE BACK OF THIS QUIZ.

6. On December 31st, 2014,  Abbey Co. performed environmental consulting services for Hardwick Co.  Hardwick was short of cash and Abbey Co. agreed to accept a $200,000 zero-interest bearing note, due December 31, 2016, as payment in full.  Hardwick is somewhat of a credit risk and typically borrows funds at a rate of 10%.  Abbey is much more creditworthy and  has various credit lines at 6%.

a. Prepare the journal entry to record the transaction of December 31, 2014 for Abbey Co.

b. Assuming Abbey Company’s fiscal year end is December 31st, prepare the journal entry for December 31st, 2015.

c. Assuming Abbey Company’s fiscal year end is December 31,  prepare the journal entry for December 31, 2016.

7. On April 1, 2014, Bradey Company sold a patent to Penn Company in exchange for a $100,000 zero interest bearing note due on April 1, 2016.  There was no established exchange price for the patent and the note had no ready market value.  The prevailing interest rate for a note of this type on April 1, 2014 was 12%. The patent had a carrying value of $40,000 on January 1, 2014 and the amortization for the year ended December 31, 2014 would have been $8000.  The collection of the note receivable from Penn Company was reasonably assured.

Required: Prepare all journal entries and adjusting entries that  Bradey company would make for 2014,  2015 and 2016 related to the sale of the patent. Bradey’s fiscal year ends on December 31st.


8. On January 1, 2015,  Nott Company sold goods costing $120,000 to Cox Company.  Cox signed a noninterest bearing note requiring payment of $40,000 annually for 8  years.  The first payment was made on January 1, 2015.  The prevailing rate of interest for this type of note at the date of issuance was 8%.  Prepare the entry to record the transaction on both Nott and Cox’s books.  Nott uses a perpetual inventory system.


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