Fundamentals of Financial Accounting, 5/e C-21
CPC-4 (continued)
(c)
C-22 Solutions Manual
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Education.
ANSWERS TO GROUP A PROBLEM
PAC–1
Option 1:
$1,000,000
=
$1,000,000
Option 2:
$60,000 9.81815
=
$589,089
Option 3:
First 10 years: $50,000 6.71008
=
$335,504
+ Next 10 years: $70,000 6.71008 0.46319*
=
217,563
Total
=
$553,067
* Computation involves calculating the present value of the annuity in years 11-20,
and then calculating the present value of that lump sum to year 1.
Conclusion: Option 1 is the best because it gives you the highest return. The time
value of money makes a dollar received today worth more than a dollar received
one year from now; therefore, option one is the best because you receive the
greatest value.
Fundamentals of Financial Accounting, 5/e C-23
PAC-2
Req. 1
$20,000 x 0.83962 = $16,792.40 ($16,792 rounded)
Req. 2
Equipment ……………………………………………………….
16,792
Notes Payable (long-term) ……………………………..
16,792
Req. 3
Interest = Principal x Rate x Time
= $16,792 x 6% x12/12
= $1,008
Interest Expense ………………………………………………..
1,008
Notes Payable (long-term)* …………………………....
1,008
*Technically, the note becomes a current liability at the end of the first year, but for
consistency, we will continue to use the Notes Payable (long-term) account.
PAC-2 (continued)
Req. 4
Interest = Principal x Rate x Time
= ($16,792 + $1,008) x 6% x12/12
= $1,068
Interest Expense ………………………………………………..
1,068
Notes Payable (long-term)* …………………………....
1,068
*Technically, the note becomes a current liability at the end of the first year, but for
consistency, we will continue to use the Notes Payable (long-term) account.
Req. 5
Interest = Principal x Rate x Time
= ($16,792 + $1,008 + $1,068) x 6% x12/12
= $1,132
Interest Expense ………………………………………………..
1,132
Notes Payable (long-term)* …………………………....
1,132
*Technically, the note becomes a current liability at the end of the first year, but for
consistency, we will continue to use the Notes Payable (long-term) account.
Req. 6
Notes Payable (long-term)* …………………………..…….
20,000
Cash ……………………………………………………………
20,000
*Technically, the note becomes a current liability at the end of the first year, but for
consistency, we will continue to use the Notes Payable (long-term) account.
PAC-3
Req. 1
$30,000 x 1.85941 = $55,782.30 ($55,782 rounded)
Req. 2
Equipment ……………………………………………………….
55,782
Notes Payable (long-term) ……………………………..
55,782
Req. 3
Note Payable (long-term)* …………………………………..
Cash ……………………………………………………………
30,000
PAC-3 (continued)
Req. 4
Interest = Principal x Rate x Time
= ($55,782 – $27,211) x 5% x12/12
PAC-4
(a)
Fundamentals of Financial Accounting, 5/e C-27
PAC-4 (continued)
(b)