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Chapter 6: Q5Q (page 301)

Question:The following are a number of values taken from compound interest tables involving the same number of periods and the same rate of interest. Indicate what each of these four values represents. (a) 6.71008. (c) .46319. (b) 2.15892. (d) 14.48656.

Short Answer

Expert verified

6.71008 shows the present value, 0.46319 shows the future value, 2.15892 shows the present value, and 14.48656 shows the future value of the ordinary annuity.

Step by step solution

01

Step-by-Step solution Step 1 Definition of the ordinary annuity

Ordinary annuityrefers to a series of frequent or regular payments made at the end of each period.Periods can be monthly, quarterly, half-yearly, and yearly.

02

Values representation

The four values mentioned in the question indicates the following:

6.71008 shows the present value of an ordinary annuity at an 8% interest rate for 10 periods (Table 6-4)

0.46319 represents thefuture valueof 1 at 8% for 10 periods.

2.15892 indicates the present value of 1 at 8% for 10 periods

14.48656 represents the future value of the ordinary annuity at 8% for 10 periods

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Most popular questions from this chapter

Johnson Co. accepts a note receivable from a customer in exchange for some damaged inventory. The note requires the customer make semiannual installments of \(50,000 each for 10 years. The first installment begins six months from the date the customer takes delivery of the damaged inventory. Johnson’s management estimates that the fair value of the damaged inventory is \)679,517.

Accounting

(a) What interest rate is Johnson implicitly charging the customer? Express the rate as an annual rate but assume semiannual compounding.

(b) At what dollar amount do you think Johnson should record the note receivable on the day the customer takes delivery of the damaged inventory?

Analysis

Assume the note receivable for damaged inventory makes up a significant portion of Johnson’s assets. If interest rates increase, what happens to the fair value of the receivable? Briefly explain why.

Principles

The Financial Accounting Standards Board has issued an accounting standard that allows companies to report assets such as notes receivable at fair value. Discuss how fair value versus historical cost potentially involves a trade-off of one desired quality of accounting information against another.

Question:What are the primary characteristics of an annuity? Differentiate between an “ordinary annuity” and an “annuity due.”

At the end of 2017, Sawyer Company is conducting an impairment test and needs to develop a fair value estimate for machinery used in its manufacturing operations. Given the nature of Sawyer’s production process, the equipment is for special use. (No secondhand market values are available.) The equipment will be obsolete in 2 years, and Sawyer’s accountants have developed the following cash flow information for the equipment.

Net Cash Flow Probability Year Estimate Assessment 2018 \(6,000 40% 9,000 60% 2019 \) (500) 20% 2,000 60% 4,000 20% Scrap Value 2019 $ 500 50% 900 50%

Instructions Using expected cash flow and present value techniques, determine the fair value of the machinery at the end of 2017. Use a 6% discount rate. Assume all cash flows occur at the end of the year.

What would you pay for a \(100,000 debenture bond that matures in 15 years and pays \)5,000 a year in interest if you wanted to earn a yield of: (a) 4%? (b) 5%? (c) 6%?

Assume that Sonic Foundry Corporation has a contractual debt outstanding. Sonic has available two means of settlement. It can either make immediate payment of \(2,600,000, or it can make annual payments of \)300,000 for 15 years, each payment due on the last day of the year. Instructions Which method of payment do you recommend, assuming an expected effective interest rate of 8% during the future period?
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