B.1 15 Easy
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 VALUES
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.
3.
4.
5. a.
The longer the time until the future cash flow will occur, the smaller its present value. In
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
The phrase time value of money recognizes that the value of money varies depending upon when it
The present value of a future amount is the amount that a knowledgeable investor would pay today
The two factors that determine the difference between the present value and the future amount of
The three basic investment applications of the time-value of money include:
15 Minutes, Easy
SOLUTIONS TO PROBLEMS
PROBLEM B.1
USE OF FUTURE AMOUNT TABLES
a. $60,000 x 1.791 (from Table FA-1) = $107,460 future value
$ 132,644
c. 20,000 x 14.487 (from Table FA-2) = $289,740 future value
at future value.)
20 Minutes, Medium
a. $ 10,926
c. 500,000
$500,000 ÷ 45.762 (from Table FA-2)
TILMAN COMPANY
PROBLEM B.2
Annual payment:
General Journal
Bond Payable
20 years)
$500,000 – $218,520 ($10,926 annual payment x
Interest earned:
15 Minutes, Medium
a.
d.
Total
Total
Alternative 2:
Add:
Present value of $25,000 received annually for three years, discounted
at 8%: $25,000 x 2.577 (from Table PV-2)
Present value of $15,000 received annually for five years, discounted at
8%: $15,000 x 3.993 (from Table PV-2)
Add: Present value of additional $10,000 received annually during first
three years, discounted at 8%: $10,000 x 2.577 (from Table PV-2)
shown below:
PROBLEM B.3
TABLES
USE OF PRESENT VALUE
$15,000 x 7.360 (from Table PV-2) = $110,400 Present Value
There are several ways to approach this problem. Two alternatives are
Alternative 1:
b.
per month: $300 x 27.661 (from Table PV-2)
Present value of $300 paid monthly for 36 months, discounted at 1 1/2%
present value
Present value of $12,000 due in 36 months, discounted at 1 1/2%
per month: $12,000 x .585 (from Table PV-1)
Total
15 Minutes, Medium
a.
22,620,000$
June 30 $ 56,267,400
3,732,600
Bonds Payable 60,000,000$
Issued $60,000,000 face value, 9%, 10 year bonds at
(approx. 10% annual rate).
c.
The bonds sold at a discount because the coupon rate of interest, 9%, was less than the
General Journal
Discount on Bonds Payable
Cash
b.
PROBLEM B.4
(from Table PV-1)
discounted at 5% per period: $60,000,000 x .377
Present value of future principal payment:
RURAL GAS & ELECTRIC CO.
$60,000,000 due after 20 semiannual periods,
33,647,400
Issuance price resulting in an effective semiannual
interest rate of 5%
($2,700,000 x 12.462 (from Table PV-2)
x 1/2) for 20 periods, discounted at 5% per period:
Present value of future interest payments:
$2,700,000 interest payments ($60,000,000 x 9%
20 Minutes, Medium
a.
b.
Dec 1 34,536
Notes Payable 24,036
installment note payable with a present value of
To record the merchandise of merchandise from
House, paying $10,500 cash and issuing a 24-month
Dec 31 839
361
Cash 1,200
c.
Notes payable (1) 23,197$
(1) $24,036 – $839 = $23,197
note and to recognize the first month’s interest
expense (carrying value of note, $24,036 x 1 1/2 %
= $361).
Current liabilities:
PROBLEM B.5
each, discounted at 1 1/2% per month: $1,200 x
SHOWCASE INTERIORS
Inventory
Present value of 24 monthly payments of $1,200
$24,036 when discounted at 1 1/2 % per month.
Notes Payable
Interest Payable
To record monthly payment on Colonial House
24,036$
20.030 (from Table PV-2).
35 Minutes, Strong
a.
2018
(1)
Nov 1 42,150
Sales 42,150
1 33,520
Inventory 33,520
(2)
30 1,400
Interest Revenue 422
978
(3)
Dec 31 1,400
Interest Revenue 412
988
Interstate Van Lines and to recognize finance
charges earned in month [($42,150 – $978) x 1% =
Lease Payments Receivable
Cash
To record receipt of first monthly payment from
To record receipt of second monthly payment from
Interstate Van Lines and to recognize finance
charges earned in month ($42,150 x 1% = $422).
b.
2018
(1)
Nov
1 42,150
42,150
To record acquisition of truck from Custom Truck
Builders on capital lease.
monthly interest charge.
Cost of Goods Sold
To record cost of truck sold under capital lease.
General Journal
Entries to record capital lease transactions in
Cash
Lease Payments Receivable
Lease Payments Receivable
Leased Equipment
Lease Payment Obligation
Entries to record capital lease transactions in
lessee’s accounting records:
PROBLEM B.6
lessor’s accounting records:
CUSTOM TRUCK BUILDERS
AND INTERSTATE VAN LINES
a capital lease. Lease calls for 36 monthly
payments of $1,400 each, which included a 1%
Financed sale of truck to Interstate Van Lines using
35 Minutes, Strong
2018
(2)
Nov 30 422
978
(3)
Dec 31 412
988
Cash 1,400
(4)
31 600
Accumulated Depreciation: Leased Equip.
To record two months’ depreciation on leased
Depreciation Expense: Leased Equipment
equipment [($42,150 – $6,150) x 2/120 = $600
c.
42,150$
600
41,550$
d.
42,150$
40,184$
principal:
December payment
November payment
Computation of lease payment obligation of
Van Lines at Dec. 31, 2018:
Less: Portions of monthly payments applied to
Lease payment obligation, Nov. 1, 2018
PROBLEM B.6
CUSTOM TRUCK BUILDERS AND
INTERSTATE VAN LINES (CONCLUDED)
General Journal
Computation of net carrying value of leased
by Interstate Van Lines at Dec. 31, 2018:
Leased equipment
Less: Accumulated depreciation: leased equipment
Net carrying value, Dec. 31, 2018
Interest Expense
lease payment obligation ($42,150 x 1% = $422)
Lease Payment Obligation
To record second monthly payment to
Custom Truck Builders and to recognize one
Interest Expense
Lease Payment Obligation
month’s interest charge on unpaid balance of
lease payment obligation ($42,150 – $978) x 1% =
$412.
Cash 1,400
month’s interest charge on unpaid balance of
To record first monthly payment to
Custom Truck Builders and to recognize one
25 Minutes, Strong
a.
b.
Dec. 31 139,920
150,000
640,080
640,080
exchange for a $150,000 cash and a five-year, 4%
note receivable with a present value of $640,080
To record sale of land to Skyline Developers in
when discounted at a realistic interest rate (12%).
c. Effects of the accountant’s error upon net income:
PROBLEM B.7
Present value of Skyline note:
RICHLAND FARMS
Loss on Sale of Land (1)
Cash
Notes Receivable
At the date this note is received, its present value is only $640,080; $259,920 of the face
amount of the note represents interest revenue applicable to future periods. By recording
Present value of $900,000 due in five years,
discounted at 12%: $900,000 x .567 (from Table
*$900,000 x 4% = $36,000
years, discounted at 12%: $36,000 x 3.605 (from
Table PV-2).
Present value of note
Present value of $36,000* received annually for five
PV-1 )