133) MBI Company’s largest computer has a cash selling price of $200,000. A customer wishes
to buy the computer on a lease purchase plan over five years, with the first payment to be made
at the inception of the lease. Interest is at 10%.
Required:
a. Compute the amount of the annual lease payment and the gross amount due (total payments)
under the lease.
b. Compute the amount of interest income earned by MBI for the first year of the lease.
134) Taylor’s tractor-trailer rigs sell for $150,000. A customer wishes to buy a rig on a lease
purchase plan over seven years, with the first payment to be made at the inception of the lease.
Interest is at 12%.
Required:
a. Compute the amount of the annual lease payment and the gross amount (total payments)
due under the lease.
b. Compute the amount of interest income earned by Taylor’s for the first year of the lease.
135) Titan Corporation has a defined benefit pension plan. One of its employees has vested
benefits under the plan, which will pay her $30,000 annually for life starting with the first
$30,000 payment on the day she retires at the age of 65. The employee has just reached the age
of 45. Titan consulted standard mortality tables to come up with a life expectancy of 80 for this
employee. The implicit interest rate under the plan is 9%.
Required:
a. What will be the present value of the pension obligation at the time of the employee‘s
retirement?
b. What is the present value of the pension obligation at the current time?
136) King Corporation has a defined benefit pension plan. One of its employees has vested
benefits under the plan, which will pay him $40,000 annually for life starting with the first
payment of $40,000 on the day he retires at the age of 65. The employee has just reached the age
of 50. King consulted standard mortality tables to come up with a life expectancy of 80 for this
employee. The implicit interest rate under the plan is 9%.
Required:
a. What will be the present value of the pension obligation at the time of the employee’s
retirement?
b. What is the present value of the pension obligation at the current time?
137) On September 30, 2018, Truckee Garbage leased equipment from a supplier and agreed to
pay $125,000 annually for 15 years beginning September 30, 2019. Generally accepted
accounting principles require that a liability be recorded for this lease agreement for the present
value of scheduled payments. Accordingly, at inception of the lease, Truckee recorded a
$1,214,031 lease liability
Required:
Determine the interest rate implicit in the lease agreement.
138) On June 30, 2018, Gunderson Electronics issued 8% stated rate bonds with a face amount
of $300 million. The bonds mature on June 30, 2038 (20 years). The market rate of interest for
similar bond issues was 10% (5% semiannual rate). Interest is paid semiannually (4%) on June
30 and December 31, beginning on December 31, 2018.
Required:
a. Determine the price of the bonds on June 30, 2018.
b. Calculate the interest expense Gunderson reports in 2018 for these bonds.
139) Determine the price of a $200,000 bond issue under each of the following independent
assumptions:
Maturity Interest Paid Stated Rate Effective Rate
1. 10 years annually 10% 12%
2. 10 years semiannually 10% 12%
3. 20 years semiannually 12% 12%
140) Determine the price of a $500,000 bond issue under each of the following independent
assumptions:
Maturity Interest Paid Stated Rate Effective Rate
1. 10 years annually 10% 12%
2. 10 years semiannually 10% 12%
3. 20 years semiannually 12% 10%
141) On January 1, 2018, Bishop Company issued 10% bonds dated January 1, 2018, with a face
amount of $20 million. The bonds mature in 2027 (10 years). For bonds of similar risk and
maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.
Required: Determine the price of the bonds at January 1, 2018.
142) On January 1, 2018, Mania Enterprises issued 12% bonds dated January 1, 2018, with a
face amount of $20 million. The bonds mature in 2027 (10 years). For bonds of similar risk and
maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.
Required: Determine the price of the bonds at January 1, 2018.
143) On January 1, 2018, Shirley Corporation purchased 10% bonds dated January 1, 2018, with
a face amount of $10 million. The bonds mature in 2027 (10 years). For bonds of similar risk and
maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.
Required: Determine the price of the bonds at January 1, 2018.
144) On January 1, 2018, Rare Bird Ltd. purchased 12% bonds dated January 1, 2018, with a
face amount of $20 million. The bonds mature in 2027 (10 years). For bonds of similar risk and
maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.
Required: Determine the price of the bonds at January 1, 2018.
145) Pockets lent $20,000 to Lego Construction on January 1, 2018. Lego signed a three-year,
5% installment note to be paid in three equal payments at the end of each year.
Required: Calculate the amount of one installment payment.
146) Adam Baum Company borrowed $48,000 from B. A. Ware on January 1, 2018, and signed
a three-year, 6% installment note to be paid in three equal payments at the end of each year. The
present value of an ordinary annuity of $1 for 3 periods at 6% is 2.67301.
Required: Calculate the amount of one installment payment.
147) Each of the independent situations below describes a finance lease in which annual lease
payments are payable at the beginning of each year. The lessee is aware of the lessor’s implicit
interest rate.
Situation
1 2
Lease term 10 yrs 20 yrs
Lessor’s desired
rate of return 10% 12%
Lessee’s incremental
borrowing rate 12% 10%
Fair value of asset $600,000 $400,000
For convenience, here are some table values:
Periods; int. rate PV, ordinary annuity PV, annuity due
10 periods, 10% 6.1446 6.7590
10 periods, 12% 5.6502 6.3283
20 periods, 10% 8.5136 9.3649
20 periods, 12% 7.4694 8.3658
Required: For each situation determine the amount of the annual lease payment, as calculated
by the lessor.
148) Diablo Company leased a machine from Juniper Corporation on January 1, 2018. The
machine has a fair value of $20,000,000. The lease agreement calls for four equal payments at
the end of each year. The useful life of the machine was expected to be four years with no
residual value. The appropriate interest rate for this lease is 10%.
Other information:
PV of an ordinary annuity @10% for 4 periods: 3.16987
PV of an annuity due @ 10% for 4 periods: 3.48685
Required: Determine the amount of each lease payment.
149) Each of the independent situations below describes a finance lease in which annual lease
payments are payable at the beginning of each year. The lessee is aware of the lessor’s implicit
interest rate.
Situation 1 Situation 2
Lease term 10 yrs 20 yrs
Lessor’s desired rate of return 10% 12%
For convenience, here are some table values:
Periods; int. rate PV, ordinary annuity PV, annuity due
10 periods, 10% 6.1446 6.7590
10 periods, 12% 5.6502 6.3283
20 periods, 10% 8.5136 9.3649
20 periods, 12% 7.4694 8.3658
Required: For each situation determine the amount recorded as a liability by the lessee at the
beginning of the lease.
150) Briefly describe the difference between simple interest and compound interest.
151) Explain how you would compute the imputed interest on cash borrowed at 0% interest
when the market rate of interest is 8%.
152) Two banks each have annual CD rates of 12%. Bank A compounds quarterly and Bank B
compounds semiannually. Explain which bank offers the better CD.
153) Briefly describe the differences between an ordinary annuity, an annuity due, and a deferred
annuity.
154) Prepare a time diagram for the future value of an ordinary annuity with three payments of
$300. Be sure to indicate the periods in which interest is added.
155) Prepare a time diagram for the future value of an annuity due with three payments of $400.
Be sure to indicate the periods in which interest is added.
156) Briefly explain how you would arrive at the monthly payment for a 48-month loan where
the first payment is due one month from the loan date. In your explanation, include the use of
present or future value tables.
157) Provide two examples of the use of present value techniques in accounting.