B.1 15 Eas
y
LO
B.2 20 Medium
LO
B-3, B-
4
B.3 15 Medium
LO
B.4 15 Medium
LO
B.5 20 Medium
LO
B.6 35 Strong
LO
B.7 25 Strong
LO
B-5, B-
6
B-1,
B-2, B-4
B-1,
B-2, B-5
B-3,
B-5, B-6
B-3,
B-5, B-6
B-3,
B-5, B-6
Use of Future Amount Tables
A company sells land in exchange for a long-term note bearing an
unrealistically low interest rate, but the accountant records the transaction at
the face amount of the note. Student is asked to discount the note at a
realistic rate of interest, record the transaction properly, and explain the
effects of the accountant’s error upon the company’s net income.
Entries to record a capital lease of equipment in the accounting records of
both the lessor and the lessee. Emphasizes allocation of monthly payments
between interest and principal. Also, computation of carrying value of
leased equipment and lease payment obligation.
Determine the present value of an installment note payable that includes an
interest charge in the face amount. Prepare journal entries to record
issuance of the note and the first monthly payment, using the effective
interest method to determine interest expense.
Short exercises in the use of present value tables to determine the present
value of future amounts, annuities, and annuities with a “balloon” payment.
Richland Farms
Custom Truck Builders and Interstate Van Lines
Short exercises in the use of future amount tables to determine the
future amounts of initial investments, annuities, and a combination of
an initial investment and an annuity.
Tilman Company
Use of future value tables to determine the amount of the annual payment
for a sinking fund. The student also is required to prepare a journal entry to
redeem the related bonds.
Use of Present Value Tables
Showcase Interiors
Rural Gas & Electric Co.
Use present value techniques to compute the issuance price of bonds
that sell at a market interest rate above the contract rate. Also, prepare
a journal entry to record issuance of the bonds.
APPENDIX B
Problems
THE TIME VALUE OF MONEY:
FUTURE AMOUNTS AND PRESENT VALUE
S
Below are brief descriptions of each problem. These descriptions are accompanied by the estimated
time (in minutes) required for completion and by difficulty rating. The time estimates assume use of
the partially filled-in working papers.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1.
2.
4.
5. a. The longer the time until the future cash flow will occur, the smaller its present value. In
essence, a longer time period allows more time for the present value to “grow” and thereby
6.
8. Assuming no change in expected cash flows, present values change with changes in (a) current
Financial instruments include cash, equity investments in other businesses, and contracts calling
7. Short-term accounts receivable and accounts payable are contracts calling for cash receipts or cash
payments and, therefore, are financial instruments. These items usually are shown in the balance
The phrase time value of money recognizes that the value of money varies depending upon when it
is received. Money received today is more valuable than money received in the future. This is
because money received today may be invested and will accumulate to a larger amount in the
future.
The present value of a future amount is the amount that a knowledgeable investor would pay today
The three basic investment applications of the time-value of money include:
15 Minutes, Easy
$ 132
,
644
SOLUTIONS TO PROBLEMS
PROBLEM B.1
USE OF FUTURE AMOUNT TABLE
S
a. $50,000 x 1.791 (from Table FA-1) = $89,550 future value
,
,
20 Minutes, Medium
a.
$
10
,
926
$500
,
000 ÷ 45.762
(
from Table FA-2
)
TILMAN COMPAN
Y
PROBLEM B.2
Annual payment:
$
,
,
,
15 Minutes, Medium
a.
b.
PROBLEM B.3
Present value of $300
p
resent value
$9,200
(
an amount received or
p
aid toda
y
is alread
y
stated at its
TABLES
USE OF PRESENT VALUE
$15,000 x 7.360 (from Table PV-2) = $110,400 Present Value
p
p
15 Minutes, Medium
a.
PROBLEM B.4
Present value of future
p
rinci
p
al
p
a
y
ment:
RURAL GAS & ELECTRIC CO.
$60
,
000
,
000 due after 20 semiannual
p
eriods
,
,
20 Minutes, Medium
a.
PROBLEM B.5
each
,
discounted at 1 1/2%
p
er month: $1
,
200 x
SHOWCASE INTERIORS
Present value of 24 monthl
y
p
a
y
ments of $1
,
200
35 Minutes, Strong
a.
p
General Journal
Entries to record ca
p
ital lease transactions in
PROBLEM B.6
CUSTOM TRUCK BUILDERS
A
ND INTERSTATE VAN LINE
S
35 Minutes, Strong
2015
(
)
p
p
y
g
(
,
p
(
4
)
31 600
600
,
$
d.
42
,
150
$
$
PROBLEM B.6
CUSTOM TRUCK BUILDERS AND
INTERSTATE VAN LINES (CONCLUDED
)
General Journal
p
rinci
p
al:
Com
p
utation of lease
p
a
y
ment obli
g
ation of
V
an Lines at Dec. 31
,
2015:
Less: Portions of monthl
y
p
a
y
ments a
pp
lied to
Lease
p
a
y
ment obli
g
ation
,
Nov. 1
,
2015
Accumulated De
p
reciation: Leased E
q
ui
p
.
To record two months’ de
p
reciation on leased
lease
p
a
y
ment obli
g
ation
(
$42
,
150 – $978
)
x 1% =
$412.
De
p
reciation Ex
p
ense: Leased E
q
ui
p
ment
e
q
ui
p
ment
[(
$42
,
150 – $6
,
150
)
x 2/120 = $600
(
)
25 Minutes, Strong
a.
PROBLEM B.7
Present value of Sk
y
line note:
RICHLAND FARM
S
Present value of $900
,
000 due in five
y
ears
,