Acct 209 Ch 8-10 + TVM

Compute the interest accrued on each of the following notes receivable held by Kirkland, Inc., on December 31: (Round to the nearest dollar.) Principal x Interest Rate x (Days between Date of Note and Final Date)/360

$42,000 x 0.12 x 40/360 = 560 for November 21 $32,000 x 0.09 x 18/360=$144 for December 13 $25,000 x 0.06 x 12/360=$50 for December 19

Select the correct answer to each of the following statements. A. Increase B. Decrease C. Remain Constant 1. The amount of interest expense will _______ each payment period for a bond issued at a discount. 2. When a bond is issued at a discount, the cash interest payment will _________ over the life of the bond. 3. When a bond is issued at a premium, the carrying value of the bond will _______ over the life of the bond.

1 = Increase 2 = remain constant 3 = decrease

Bond Interest ExpenseEvans & Sons, Inc., sold $100,000 face value, six percent coupon rate, four-year bonds, for an aggregate issue price of $95,000. Calculate the total interest expense to be recorded by the company over the four-year life of the bonds.

100,000 x 0.06 x 4 = 24,000 24,000 + 5,000 = 29,000

If Maggie has $5,000 to invest and wants to have $10,000 at the end of 9 years, what interest rate must she earn on her money, assuming annual compounding?

10000 = 5000(1+r/1)^(1x9) 2^(1/9) = 1 + r r = 1.08 - 1 r = 0.08 or 8%

Blackstone Company purchased a new software system costing $35,000. To finance the purchase, Blackstone signed a contract agreeing to pay the cost over the next 8 years, with a payment due every six months; the first payment will be made six months from the date of purchase. Blackstone's usual interest rate is 10%. What is the amount of the payment required (rounded to the nearest dollar)?

16 total payments = 8 x 2 0.05 = 0.10 / 2 (1 - (1.05)^-16)/0.05 = 10.838 35,000 / 10.838 = 3,229

Stafford Co. Issued $200,000 face value, 6%, 10-year bonds on January 1, 2017 for $172,740. The market rate of interest was 8%. Interest is payable semi-annually on June 30 and December 31. Staffer uses the effective interest method to amortize bond premium or discount. (a) Determine the amount of interest expense to be recorded with the first cash interest payment. (b) Determine the carrying value of the bonds on December 31, 2017, after the interest payment has been made. (c) How much interest expense would be recorded on the 2017 Income Statement?

172,740 x .08 x 6/12 = 6910 6910 (172,420 + 910) x .08 x 6/12 = 6945 172420 + 910 + 945 = 174,596 174,596 6910 + 6945 = 13,856 13,856

Credit Losses Based on Credit Sales Smith & Sons uses the allowance method of handling its credit losses. It estimates credit losses at two percent of credit sales, which were $1,900,000 during the year. On December 31, the Accounts Receivable balance was $300,000, and the Allowance for Doubtful Accounts had a credit balance of $21,400 before adjustment. Show how Accounts Receivable and the Allowance for Doubtful Accounts would appear in the December 31 balance sheet.

21,400 + (1,900,000 * 0.02) = 59400 300,000 - 59,400 = 240,600

Use the following information to answer the next two questions: On January 1, 2018, Jimbo Enterprises purchased new equipment for its training center. The equipment cost $220,000. Jimbo paid $25,000 down and is required to pay the rest in semiannual installments for the next 8 years. Jimbo's cost of borrowing is 4%. What is the amount of the semiannual payment Jimbo will make every six months? What is the total amount of interest expense Jimbo will pay over the life of the loan?

220,000 - 25,000 = 195,000 Semi Annual Payment = 14,362 14,362 x 16 = 229,778 229,778 - 195,000 = 34,798

You have just purchased a new car! You made a down payment of $5,000 and financed the balance. According to the purchase agreement, you must pay $600/month for four years, beginning one month from today. The credit agreement is based on an annual interest rate of 12%. What was the cost of the car?

4 years = 48 months 0.12 x (1 / 12) = 1% per month 600 x (1 - (1 + 1%)^-48) / 1% = 22,784 22,784 + 5,000 = 27,784

Barrett Enterprises issues bonds with a face value of $900,000 on their issue date. The bonds mature in 5 years and pay 6% annual interest in semiannual payments. On the issue date, the market rate of interest (annual) is 8%. Compute the price of the bonds on their issue date.

900,000 x 0.06 x 6/12 = 27,000 n = 5 x 2 = 10 i = 0.08 x 2 = 0.04

Acquisition Cost of Long-Lived Asset The following data relate to a firm's purchase of a machine used in the manufacture of its product:

Acquisition cost of machine = Invoice value + Sales tax - Cash discount + Freight + Insurance in transit + Installation + Testing cost

Amortization ExpenseSmith & Sons obtained a patent for a new optical scanning device. The fees incurred to file for the patent and to defend the patent in court against several companies which challenged the patent amounted to $45,000. Smith & Sons concluded that the expected economic life of the patent was 12 years. Calculate the amortization expense that should be recorded by Smith & Sons in the second year. $Answer

Amortization expense = $45,000 / 12 = $3,750

Aggie Company is going to trade-in an old piece of equipment for new equipment. The following is information concerning the purchase: List Price: $65,000 Down Payment: $6,000 Term: 5 years Interest Rate: 8% Payments: Quarterly Trade-in value $10,000 Determine the amount of the quarterly payment.

Amount Financed = List Price- Down Payment- Trade in value = 65000-6000-10000= 49000 Calculation of quarterly payment Step-1 Rate= 8/100= 0.08 Step -2 Divide the rate by number of payments to be made in a year= 0.08/4 =0.02 Step-3 Amount Financed= 0.02* 49000= 980 Step 4 Total Number of quarters= 20 (1+0.02)20 =1.486 Step 5 1.486/1= 0.67 Step 6 1-0.67= 0.33 Amount of quarterly payment=2970

On January 1 2017, George Company purchased a new building. George paid $25,000 as a down payment and issued a long-term note to finance the balance. The note, which carries an interest rate of 4%, requires George to make annual payments of $55,000 for six years, with the first payment due on December 31, 2017. What amount should George record as the cost of the new building (rounded to the nearest whole dollar)?

Annual payments to be made 55000 X PV factor of $1 annuity 5.2421 = (1-(1.04)^-6)/0.04 Present value of payments 288316 Cash down payment 25000 Add: Present value of payments 288316 Cost of the new building313316

What would be the Net Realizable Value of Harris Company's Accounts Receivable at year end, after the adjusting entry for bad debts has been recorded?

Bad debt expense = 2700000*1.5% = 40500 allowance for doubtful accounts = 30600+40500 = 71100 Net account receivable = 475000-71100 = 403900 So answer is a) $403900

Use the following information to answer the next two questions: Lewis Company uses the allowance method for recording its expected credit losses. It estimates bad debts at 2% of credit sales, which were $900,000 during the year. On December 31, the Accounts Receivable balance was $150,000, and the Allowance for Doubtful Accounts had a balance of $12,200 before adjustments. What is the amount of bad debt expense Lewis Company will report on their Income Statement this year? At what amount will accounts receivable be reported on Lewis's December 31 Balance Sheet (i.e., what is the Net Realizable Value of its accounts receivables)?

Bad debt expenses =$900,000*2% =$18,000 150,000 - 12,200 - 18,000

Use the following information to answer the next two questions: Harris Company uses the allowance method of handling its credit losses. It estimates credit losses at 1.5% of credit sales, which were $2,700,000 during the year. On December 31, the Accounts Receivable balance was $475,000, and the Allowance for Doubtful Accounts had a balance of $30,600 before adjustment. Indicate the effect (increase / decrease) that recording the bad debt expense for the year will have on the company's assets, liabilities, and equity, respectively. Assets = Liabilities + Equity

Decrease, No Change, Decrease

Depreciation Methods A delivery truck costing $19,000 is expected to have a $1,500 salvage value at the end of its useful life of four years or 125,000 miles. Assume that the truck was purchased on January 2. Calculate the depreciation expense for the second year using each of the following depreciation methods: (a) straight-line, (b) double-declining balance, and (c) units-of-production. (Assume that the truck was driven 28,000 miles in the second year.) Round all answers to the nearest dollar.

Depreciation expenses 2nd year ($17,500*25%) = 4,375 for Straight line Depreciation for 2nd year ($19000-9500)*50% for Double Decline = 4,750 Deprecation = (17,500*28,000/125,000) = 3,920 for Units of Production

Sale of Plant Asset Raine Company has a machine that originally cost $58,000. Depreciation has been recorded for four years using the straight-line method, with a $5,000 estimated salvage value at the end of an expected ten-year life. After recording depreciation at the end of four years, Raine sells the machine. Determine the gain or loss in each scenario if the machine sold for:

Depreciation per year = (Cost - Salvage value) /Useful life = (58,000-5000)/10 = 5300 per year Book value after 4 years = 58,000 - (5300*4) = 36,800

On January 2, 2015, Roth, Inc. purchased a laser cutting machine to be used in the fabrication of a part for one of its key products. The machine cost $100,000, and its estimated useful life was four years or 950,000 cuttings, after which it could be sold for $5,000. Required a. Calculate each year's depreciation expense for the machine's useful life under each of the following depreciation methods (round all answers to the nearest dollar):1. Straight-line.2. Double-declining balance.3. Units-of-production. (Assume annual production in cuttings of 220,000; 370,000; 300,000; and 60,000.)

Double declining balance Depreciation for Year 2019 = ($100,000 - $50,000 - $25,000 - $12,500 - $6,250) X 50% = $3,125 Units of production Depreciation per unit = ($100,000 - $5,000) / 950,000 = $0.10 per units Depreciation expense = Units produced X Depreciation per unit $22,000 (220,000 X $0.10) $37,000 (370,000 X $0.10) $30,000 ($300,000 X $0.10) $60,000 ($60,000 X $0.10)

True or False. Under the allowance method, when a company records bad debt expense at the end of the year, it causes the Net Realizable Value of their accounts receivable to increase.

False

Calculating Interest on Promissory Notes ReceivableHouston Company receives a six-month note from a customer. The note has a face amount of $8,000 and an interest rate of nine percent. What is the total amount of interest income to be received?

Interest amount ($8,000*9%*6/12) = $360

Allocation of Package Purchase Price Tamock Company purchased a plant from one of its suppliers. The $985,000 purchase price included the land, a building, and factory machinery. Tamock also paid $5,000 in legal fees to negotiate the purchase of the plant. An appraisal showed the following values for the items purchased: Land = 126,000 Building = 486,000 Machinery = 288,000 Total = 900,000

Land = 138600 = 990000/900000*126000 Building = 534600 = 990000/900000*486000 Machinery = 316800 = 990000/900000*288000 Total = 990,000

Calculating Accrued Interest Income on Promissory Notes ReceivablePickett Company received a 90 day, six percent note receivable for $20,000 on November 1. How much interest income should be accrued on December 31?

Notes receivable =$ 20,000 Rate = 6 % number of days from November 1 to December 31 = 60 days Assume number of days in a year= 360 days $20,000 x .06 x 60/360 = $200

Pineapple Enterprises has an outstanding liability that will require them to pay Apple Co. $50,000 in 5 years. How much cash would Pineapple need to deposit today into an account, earning 8% interest, compounded quarterly, in order to have the amount needed in 5 years?

i = .08/4 = .02 n = 5x4 = 20 (1+.02)^-20 = 0.673 50,000 x 0.673 = 33,650