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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
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
15 Minutes, Medium
a.
d.
shown below:
PROBLEM B.3
TABLES
USE OF PRESENT VALUE
$15,000 x 7.360 (from Table PV-2) = $110,400 Present Value
There are several ways to approach this problem. Two alternatives are
Alternative 1:
15 Minutes, Medium
a.
22,620,000$
June 30 $ 56,267,400
3,732,600
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,
20 Minutes, Medium
a.
b.
Dec 1 34,536
Notes Payable 24,036
Dec 31 839
361
Cash 1,200
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
$24,036 when discounted at 1 1/2 % per month.
Notes Payable
Interest Payable
To record monthly payment on Colonial House
35 Minutes, Strong
a.
2018
(1)
Nov 1 42,150
Sales 42,150
1 33,520
Inventory 33,520
(2)
30 1,400
Interest Revenue 422
978
b.
2018
(1)
Nov
1 42,150
42,150
monthly interest charge.
Cost of Goods Sold
To record cost of truck sold under capital lease.
General Journal
Entries to record capital lease transactions in
Cash
Lease Payments Receivable
Lease Payments Receivable
Leased Equipment
Lease Payment Obligation
Entries to record capital lease transactions in
lessee's accounting records:
PROBLEM B.6
lessor's accounting records:
CUSTOM TRUCK BUILDERS
AND INTERSTATE VAN LINES
35 Minutes, Strong
2018
(2)
Nov 30 422
978
(3)
Dec 31 412
988
Cash 1,400
c.
42,150$
600
41,550$
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.
25 Minutes, Strong
a.
b.
Dec. 31 139,920
150,000
640,080
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
