Chapter 6: Question 11BE (page 302)
Leon Tyler’s VISA balance is \(793.15. He may pay it off in 12 equal end-of-month payments of \)75 each. What interest rate is Leon paying?
The interest rate that Leon should be paying will be 2%.
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Question:Identify three situations in which accounting measures are based on present values. Do these present value applications involve single sums or annuities, or both single sums and annuities? Explain.
Sally Medavoy will invest $8,000 a year for 20 years in a fund that will earn 6% annual interest. If the first payment into the fund occurs today, what amount will be in the fund in 20 years? If the first payment occurs at year-end, what amount will be in the fund in 20 years?
Alan Jackson invests $20,000 at 8% annual interest, leaving the money invested without withdrawing any of the interest for 8 years. At the end of the 8 years, Alan withdraws the accumulated amount of money. Instructions (a) Compute the amount Alan would withdraw assuming the investment earns simple interest. (b) Compute the amount Alan would withdraw assuming the investment earns interest compounded annually. (c) Compute the amount Alan would withdraw assuming the investment earns interest compounded semiannually
Answer each of these unrelated questions.
(a) On January 1, 2017, Fishbone Corporation sold a building that cost \(250,000 and that had accumulated depreciation of \)100,000 on the date of sale. Fishbone received as consideration a \(240,000 non-interest-bearing note due on January 1, 2020. There was no established exchange price for the building, and the note had no ready market. The prevailing rate of interest for a note of this type on January 1, 2017, was 9%. At what amount should the gain from the sale of the building be reported?
(b) On January 1, 2017, Fishbone Corporation purchased 300 of the \)1,000 face value, 9%, 10-year bonds of Walters Inc. The bonds mature on January 1, 2027, and pay interest annually beginning January 1, 2018. Fishbone purchased the bonds to yield 11%. How much did Fishbone pay for the bonds?
(c) Fishbone Corporation bought a new machine and agreed to pay for it in equal annual installments of \(4,000 at the end of each of the next 10 years. Assuming that a prevailing interest rate of 8% applies to this contract, how much should Fishbone record as the cost of the machine?
(d) Fishbone Corporation purchased a special tractor on December 31, 2017. The purchase agreement stipulated that Fishbone should pay \)20,000 at the time of purchase and \(5,000 at the end of each of the next 8 years. The tractor should be recorded on December 31, 2017, at what amount, assuming an appropriate interest rate of 12%?
(e) Fishbone Corporation wants to withdraw \)120,000 (including principal) from an investment fund at the end of each year for 9 years. What should be the required initial investment at the beginning of the first year if the fund earns 11%?
Killroy Company owns a trade name that was purchased in an acquisition of McClellan Company. The trade name has a book value of \(3,500,000, but according to GAAP, it is assessed for impairment on an annual basis. To perform this impairment test, Killroy must estimate the fair value of the trade name. (You will learn more about intangible asset impairments in Chapter 12.) It has developed the following cash flow estimates related to the trade name based on internal information. Each cash flow estimate reflects Killroy’s estimate of annual cash flows over the next 8 years. The trade name is assumed to have no salvage value after the 8 years. (Assume the cash flows occur at the end of each year.) Probability Cash Flow Estimate Assessment \)380,000 20% 630,000 50% 750,000 30% Instructions (a) What is the estimated fair value of the trade name? Killroy determines that the appropriate discount rate for this estimation is 8%. (b) Is the estimate developed for part (a) a Level 1 or Level 3 fair value estimate? Explain.
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