APPENDIX B: PROBLEM MATERIAL 1)
Explain what is meant by the "time value of money." Provide examples.
2)
Explain how compound interest applies to the time value of money.
3) Required: Use Table PV–1 and Table FA–1 to determine the answers to the following. (A) How much must be invested now for 5 periods at 6% to amount to $15,000? (B) How much is $3,000 invested now at 8% in 8 periods worth? (C) How much is $25,000 compounded semi-annually at 12% for 4 years?
4) Joan is 60 years old and wishes to retire. She needs to have $48,000 a year plus her social security to live in the style she is accustomed to. She would like to have enough money in her retirement account, which earns 5% compounded annually, to support her for the next 20 years. Required: How much must be in the fund if she takes the first payment at year-end?
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5) Powers Company wishes to issue $2,000,000 of 8%, 10-year bonds that pay interest semi-annually. The current market rate is 12%. Required: What amount should the bonds sell for?
6) Sam Rivers has $3,000 to invest. He must decide whether to invest this money for five years at 10% compounded semi-annually or at 12% compounded annually. Required: Which option should he select?
7) Barbara wants to purchase a car. Required: How long will it take Barbara to accumulate $23,265 to buy a car if she invests $15,000 at 5%?
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8) On January 1, Year 1, Paul Corporation purchases equipment. As full payment for this equipment, Paul issues a $90,000 installment note payable, due in three annual installments of $30,000, beginning on December 31, Year 1. This note makes no mention of interest charges. Assume that a realistic interest annual rate for financing equipment over a three-year period currently is 10%. Required: (A) Compute the present value of the installment note. (B) Complete the amortization table shown below to allocate the amount of each installment payment between interest expense and reduction in the principal amount of this obligation. (Round your calculations to whole numbers.) Payment Date
Annual Payment
Interest Expense
Reduction in Unpaid Balance
Unpaid Balance
Issuance December 31, Year 1 December 31, Year 2 December 31, Year 3
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9) On January 1, Year 1, Assembly Line Manufacturing uses a capital/Type A lease to finance the transfer of a large piece of machinery to Sansa Company. The terms of the lease calls for Sansa to make six annual payments of $100,000 beginning December 31, Year 1. The lease payments include an interest charge of 10% per year. At the end of the 6-year lease, title to the machinery will pass to Sansa at no additional cost. Required: (A) Compute the present value of the lease payments. (B) What is the amount of the sales revenue that will be recognized by Assembly Line Manufacturing on January 1, Year 1? (C) What is the amount of interest revenue that will be recognized by Assembly Line Manufacturing on December 31, Year 1? (D) What is the cost of the building that is recorded by Sansa Company on January 1, Year 1? (E) What is the amount of the liability that will be recorded by Sansa Company on January 1, Year 1? (F) What is the amount of interest expense that will be recognized by Sansa Company on December 31, Year 1?
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Answer Key Test name: Appendix B - Problem material
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Student name:__________ 1) If you invested $21,000 at 5% on your 20th birthday how much would you have on your 40th birthday? A) $55,713.00 B) $64,131.90 C) $69,438.50 D) $53,065.95
2) If you invested $10,000 at 6% on your 20 th birthday how much would you have on your 40 th birthday? A) $32,070.00 B) $31,180.00 C) $36,785.59 D) $12,158.12
3) If I invest $42,000 today for 8 years and it grows to $90,048, what rate of interest have I received? A) 8% B) 16% C) 10% D) 20%
4) If I invest $50,000 today for 5 years and it grows to $80,550, what rate of interest have I received?
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A) 5% B) 6% C) 10% D) 12%
5) How much must I invest today in order to have $18,000 in 2 years assuming 15% interest compounded annually? A) $13,608.00 B) $2,400.00 C) $21,226.42 D) $15,264.00
6) How much must I invest today in order to have $25,000 in 5 years assuming 12% interest compounded annually? A) $14,175.00 B) $15,888.00 C) $18,681.50 D) $17.624.00
7) Your wealthy aunt wishes to give you a trip to Paris when you graduate from college in two years. She estimates the trip will cost $3,100. How much must she invest now at 5.0% to accumulate enough for you to take this trip? A) $3,417.80 B) $2,811.80 C) $5,623.60 D) $3,100.00
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8) Your wealthy aunt wishes to give you a trip to Paris when you graduate from college in three years. She estimates the trip will cost $4,000. How much must she invest now at 5% to accumulate enough for you to take this trip? A) $3,287.72 B) $3,456.00 C) $4,499.44 D) $3,161.24
9) A scholarship fund has $75,000 to invest now to provide scholarships to high school students. They want to have at least $150,000 in 9 years. What rate of interest must they invest this money at to reach their goal? A) 7% B) 8% C) 10% D) 11%
10) If I invest $525 at the end of each year for five years at 15%, how much will I have at the end of the five years? A) $1,079.40 B) $3,539.55 C) $5,397.00 D) $1,721.57
11) If I invest $100 at the end of each year for four years at 6% how much will I have at the end of the fourth year?
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A) $421.24 B) $437.50 C) $563.71 D) $432.95
12) The difference between the present value and the future value of a sum of money depends upon: A) The rate of interest. B) The length of time. C) The rate of interest and the length of time. D) Neither the rate of interest nor the length of time.
13)
The future value of an annuity is: A) Always more than the present value. B) Always less than the present value. C) Equal to the present value. D) Double the present value.
14)
The present value of an investment is:
A) The amount an investor would pay today to receive a certain amount in the future. B) The amount an investor would pay today plus the interest the investor would expect to receive a certain amount in the future. C) The amount an investor would pay today less the interest the investor requires. D) 90% of the future value of an investment.
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15) Judy Bright has just won the lottery. She can elect to receive her winnings in equal payments of $200,000 a year for the next ten years on December 31 or to receive $2,000,000 immediately. If the current interest rate is 6%, which choice will provide the highest amount? A) Receiving $2,000,000 immediately. B) Taking equal payments for 10 years. C) It does not matter since either choice provides the same amount. D) Refusing to accept the winnings since it is not enough.
16) To determine the present value of a single amount to be received or paid at a future time you need to know all of the following except: A) The interest rate or discount rate. B) The number of periods. C) The future value. D) The time between periods.
17) To determine the amount to be deposited in a bank today to grow to $5,000 three years from now at 7%, which table should be used? A) Present value of $1. B) Future value of $1. C) Present value of an annuity of $1. D) No table is required; just multiply $5,000 by 1.07 (or 1 + 7%).
18) Anthony Driver wants to buy a new car in 4 years. He knows that he can earn 10% interest compounded semi-annually. How much must he deposit now in order to have $26,000 at the end of 4 years?
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9) Computation of assets, liabilities, and owners' equity after a series of transactions. On April 30, Year 1, the balance sheet of China Collectibles showed total assets of $700,000, total liabilities of $400,000, and owners' equity of $300,000. The following transactions occurred in May of Year 1: (1) Capital stock was issued in exchange for $165,000 cash. (2) The business purchased equipment for $360,000, paying $160,000 cash and issuing a note payable for $200,000. (3) The business paid $70,000 of its accounts payable. (4) The business collected $54,000 of its accounts receivable. Compute the following as of May 31, Year 1: A. Total assets B. Total liabilities C. Owners' equity
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10) Computation of assets, liabilities, and owners' equity after a series of transactions. The December 31, Year 1 balance sheet of Charles Realty reported total assets of $900,000, total liabilities of $350,000, and owners' equity of $550,000. The following transactions occurred in January of Year 2: (1) The business purchased land for $250,000, paying $100,000 cash and issuing a note payable for the balance. (2) The business collected accounts receivable totaling $45,000. (3) The business sold land costing $50,000 for $60,000 cash. (4) The business paid $50,000 of the note payable.
Compute the following at January 31, Year 1: A. Total assets B. Total liabilities C. Owners' equity
11) Prepare the balance sheet as of December 31, Year 1, for Gamma Company, from the following list of items, arranged in random order. You must compute the amount for accounts payable to complete the balance sheet. Accounts payable Office equipment Buildings Capital stock
12)
$ ? $ 41,600 $ 533,000 $ 494,000
Land Notes payable Accounts receivable Cash
$ 260,000 $ 377,000 $ 97,500 $ 19,760
The balance sheet was as follows for Custom Ceramics on February 1, Year 1:
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Cash
Custom Ceramics Balance Sheet February 1, Year 1 Liabilities & Owners' Equity $ 7,000 Liabilities:
Accounts receivable Office Equipment
5,200 30,000
Notes Payable Accounts Payable
$ 40,000 6,000
Buildings Land
50,000 80,000
Total Liabilities Owners' equity:
46,000
Capital Stock
100,000
Retained earnings
26,200
Total owners’ equity
126,200
Total Liabilities and Owners' Equity
$ 172,200
Assets
Total Assets
$ 172,200
During the first week of February, the following transactions occurred: (1) The business used cash to pay off $5,000 of its accounts payable. (No payment was made on the notes payable.) (2) Additional capital stock was issued to Joan Custom for $15,000 cash. (3) Equipment was purchased on credit for $1,800. (4) The business collected $4,000 cash from accounts receivable. Prepare a balance sheet for Custom Ceramics as of February 8, Year 1.
13) Use the following information to complete the balance sheet of Adelphi Construction as of December 31, Year 1.(1) The company was organized on January 1, Year 1.(2) Earnings were $275,000 and dividends of $70,000 were paid to stockholders during the year.(3) Cash and accounts receivable together amount to one and one-half times the amount of notes payable. Adelphi Construction Balance Sheet
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Assets Cash Accounts receivable Equipment Building Land
December 31, Year 1 Liabilities & Owners' Equity ? Liabilities: 85,000 96,000 250,000 184,000
Notes Payable Accounts Payable Income taxes payable Total liabilities
? ? 40,000 $ 215,000
Owners' equity:
Total Assets
?
Capital stock
?
Retained earnings
?
Total Liabilities and Owners' Equity
$ 620,000
14) Use the following information to complete the December 31, Year 1 balance sheet of Copper Supplies Company. (1) Owners' equity as of January 1, Year 1, totaled $175,000, which included capital stock of $150,000. (2) Additional capital stock was issued during Year 1 in exchange for $40,000 cash. (3) Net income for Year 1 amounted to $200,000; no dividends were paid during Year 1. (4) Cash and accounts receivable together amount to 3 times as much as accounts payable.
Assets Cash
Copper Supplies Company Balance Sheet December 31, Year 1 Liabilities & Owners' Equity $ 30,000 Liabilities:
Accounts receivable
?
Accounts Payable
Equipment
?
Notes payable
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$ 40,000 ?
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Building Land
Total Assets
300,000 215,000
$835,000
Total liabilities Owners' equity:
?
Capital stock
?
Retained earnings
?
Total owners’ equity
?
Total Liabilities and Owners' Equity
?
15) Show the effect of each of the seven listed transactions on the balance sheet items of Distinctive Draperies. Indicate the new balances after the transaction of May 2 and each subsequent transaction. The effects of the May 1 transaction are already filled in to provide you with an example.
May 1 Issued capital stock for $75,000. May 2 Purchased a small office building at a price of $58,000 for the land and $65,000 for the building. Paid $43,000 cash and signed a
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note payable for the balance. May 8 Borrowed $15,000 from the bank. Signed a 60-day note payable for this amount. May 16 Purchased copying machines, computers , and other office equipment for $19,000. Paid $9,000 cash and signed a note payable for the balance. May 28 Sold an item of office equipment (computer ) to a stockhold er at its cost of $2,800. The stockhold
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er paid $800 cash and promised to pay the balance within 30 days. May 30 Paid $5,000 on the liability for the office equipment . May 31 Collected $500 from the stockhold er who had bought the computer. Assets
= Liabilite + Owners s ' Equity
Cash
May 1
+ Account + Lan + Buldin + Office = Notes + Capita Receivabl d g Equipmen Payable l e t Stock +$ 75,000 +$ 75,000
May 2 Balanc e May 8 Balanc e May 16
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Balanc e May 28 Balanc e May 30 Balanc e May 31 Balanc e
16) Show the effect of each of the six listed transactions on the balance sheet items of Renaissance Investment Services, Incorporated. Indicate the new balances after the transaction of November 2 and each subsequent transaction. The effects of the November 1 transaction are already filled in to provide you with an example. November Issued 1 capital stock for $200,000. November Purchased 2 a small office building at a price of $86,000 for the land and $74,000 for the building. Made a cash
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November 7
November 12
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payment of 20% of the total price and signed a note payable for the balance. Purchased telephone s, computers , and other office equipment for $58,000. Paid $23,000 cash and signed a note payable for the balance. Sold one of the computers to a stockhold er at its cost of $3,500. The stockhold er paid $500 cash and agreed to pay the balance within 10
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November 22
November 30
days. Received $3,000 due from the stockhold er who had purchased the computer. Paid $17,500 on the note payable for the office equipment . Assets Cash
Novembe r 1 Novembe r 2 Balance
= Liabilit + Owners' es Equity
+ Account + Lan + Buldin + Office = Notes + Capital Receivab d g Equipme Payable Stock le nt +$200,0 00
Novembe r 7 Balance Novembe r 12 Balance Novembe r 22 Balance
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Novembe r 30 Balance
17) An inexperienced accounting intern at Tasso Company prepared the following income statement for the month of July Year 1: Tasso Company Income Statement Month of July Year 1 Revenues: Services provided to customers
$ 25,000
Capital stock
12,500
Loan from bank Expenses:
37,500
Payments to long-term creditors Expenses required to provide services to customers Purchase of equipment Net income
$ 75,000
$ 20,000 18,750 10,000
48,750 $ 26,250
Prepare a revised income statement in accordance with generally accepted accounting principles.
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18) From the following accounts and amounts prepare a balance sheet for the Swell Company for December 31, Year 1. (Hint: You must compute the amount for retained earnings to complete the balance sheet.). Accounts Payable Accounts Receivable Building Capital Stock Cash Equipment Insurance Expense Land Notes Payable Sales Revenue Salaries Expense
$ 61,250 $ 70,500 $ 50,000 $ 50,000 $ 64,000 $ 30,000 $ 5,000 $ 125,000 $ 175,000 $ 25,000 $ 20,000
19) State and describe the three most common forms of business organizations in the United States.
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