Solved by verified expert :Exercise E6-2
(2)(5) E6-2 (Simple and Compound Interest Computations)Lyle
O’Keefe invests $30,000 at 8% annual interest, leaving the money invested
without withdrawing any of the interest for 8 years. At the end of the 8 years,
Lyle withdrew the accumulated amount of money.
Instructions
(a)Compute the amount Lyle would withdraw assuming
the investment earns simple interest.
(b)Compute the amount Lyle would withdraw assuming
the investment earns interest compounded annually.
(c)Compute the amount Lyle would withdraw assuming
the investment earns interest compounded semiannually.
Exercise E6-5
(6)(7) E6-5 (Computation of Present Value)Using the
appropriate interest table, compute the present values of the following
periodic amounts due at the end of the designated periods.
(a)$50,000 receivable at the end of each period for
8 periods compounded at 12%.
(b)$50,000 payments to be made at the end of each
period for 16 periods at 9%.
(c)$50,000 Payable at the end of the seventh,
eighth, ninth, and tenth periods at 12%.
Exercise E6-6
(5)(6)(7) E6-6 (Future Value and Present Value Problems)Presented
below are three unrelated situations.
(a)Ron Stein Company recently signed a lease for a
new office building, for a lease period of 10 years.
Under the lease agreement, a security deposit of $12,000 is
made, with the deposit to be returned at the expiration of the lease, with
interest compounded at 10% per year. What amount will the company receive at the
time the lease expires?
(b)Kate
Greenway Corporation, having recently issued a $20 million, 15-year bond issue,
is committed to make annual sinking fund deposits of $620,000. The deposits are
made on the last day of each year and yield a return of 10%. Will the fund at
the end of 15 years be sufficient to retire the bonds? If not, what will the
deficiency be?
(c)Under the
terms of his salary agreement, President Juan Rivera has an option of receiving
either an immediate bonus of $40,000, or a deferred bonus of $75,000 payable in
10 years. Ignoring tax considerations, and assuming a relevant interest rate of
8%, which form of settlement should Rivera accept?
Exercise E6-8
(8) E6-8 (Computations for a Retirement Fund)Stephen
Bosworth, a super salesman contemplating retirement on his fifty-fifth
birthday, decides to create a fund on an 8% basis that will enable him to withdraw
$25,000 per year on June 30, beginning in 2014 and continuing through 2017. To
develop this fund, Stephen intends to make equal contributions on June 30 of
each of the years 2010–2013.
Instructions
(a)How much must the balance of the fund equal on
June 30, 2013, in order for Stephen Bosworth to satisfy his objective?
(b)What is
each of Stephen’s contributions to the fund?
Exercise E6-10
(5) E6-10 (Unknown Periods and Unknown Interest Rate)Consider
the following independent situations.
(a)Mark Yoders wishes to become a millionaire. His
money market fund has a balance of $148,644 and has a guaranteed interest rate
of 10%. How many years must Mark leave that balance in the fund in order to get
his desired $1,000,000?
(b)Assume that Elvira Lehman desires to accumulate
$1 million in 15 years using her money market fund balance of $239,392. At what
interest rate must Elvira’s investment compound annually?
Learning Team
Assignments
P6-7 (Time Value
Concepts Applied to Solve Business Problems)Answer the following questions
related to Dubois Inc.
(a)Dubois Inc. has $600,000 to invest. The company
is trying to decide between two alternative uses of the funds. One alternative
provides $80,000 at the end of each year for 12 years, and the other is to
receive a single lump sum payment of $1,900,000 at the end of the 12 years.
Which alternative should Dubois select? Assume the interest rate is constant
over the entire investment.
(b)Dubois Inc. has completed the purchase of new
Dell computers. The fair market value of the equipment is $824,150. The
purchase agreement specifies an immediate down payment of $200,000 and semiannual
payments of $76,952 beginning at the end of 6 months for 5 years. What is the
interest rate, to the nearest percent, used in discounting this purchase
transaction?
(c)Dubois Inc. loans money to John Kruk Corporation
in the amount of $800,000. Dubois accepts an 8% note due in 7 years with
interest payable semiannually. After 2 years (and receipt of interest for 2
years), Dubois needs money and therefore sells the note to Chicago National
Bank, which demands interest on the note of 10% compounded semiannually. What
is the amount Dubois will receive on the sale of the note?
P23-7 (SCF—Direct and Indirect Methods from Comparative
Financial Statements)Chapman Company, a major retailer of bicycles and
accessories, operates several stores and is a publicly traded company. The
comparative statement of financial position and income statement for Chapman as
of May 31, 2010, are shown on the next page. The company is preparing its
statement of cash flows.
CHAPMAN COMPANY
COMPARATIVE
STATEMENT OF FINANCIAL POSITION
AS OF MAY 31
2010 2009
Current assets
Cash $
28,250 $
20,000
Accounts receivable 75,000 58,000
Merchandise inventory 220,000 250,000
Prepaid expenses 9,000 7,000
Total current assets 332,250 335,000
Plant assets
Plant assets 600,000 502,000
Less: Accumulated depreciation 150,000
125,000
Net plant assets 450,000 377,000
Total assets
$782,250 $712,000
Current liabilities
Accounts payable
$123,000 $115,000
Salaries payable 47,250 72,000
Interest payable 27,000
25,000
Total current liabilities 197,250 212,000
Long-term debt
Bonds payable 70,000
100,000
Total liabilities 267,250 312,000
Shareholders’ equity
Common stock, $10 par 370,000 280,000
Retained earnings 145,000 120,000
Total shareholders’ equity 515,000 400,000
Total liabilities and shareholders’ equity $782,250
$712,000
CHAPMAN COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED
MAY 31, 2010
Sales $1,255,250
Cost of merchandise sold 722,000
Gross profit 533,250
Expenses
Salary expense 252,100
Interest expense 75,000
Other expenses 8,150
Depreciation expense 25,000
Total expenses 360,250
Operating income
173,000
Income tax expense 43,000
Net income $ 130,000
The following is additional information concerning Chapman’s
transactions during the year ended
May 31, 2010.
1.All sales during the year were made on account.
2.All merchandise was purchased on account,
comprising the total accounts payable account.
3.Plant assets costing $98,000 were purchased by
paying $28,000 in cash and issuing 7,000 shares of stock.
4.The “other expenses” are related to prepaid items.
5.All income taxes incurred during the year were
paid during the year.
6.In order to supplement its cash, Chapman issued
2,000 shares of common stock at par value.
7.There were no penalties assessed for the
retirement of bonds.
8.Cash dividends of $105,000 were declared and paid
at the end of the fiscal year.
Instructions
(a)Compare and contrast the direct method and the
indirect method for reporting cash flows from operating activities.
GAAP
required using direct and indirect method to prepare the statement of cash
flows report but under FASB proposed of financial statement would utilization
of the direct method rather than the indirect method for calculating cash
flows.
(b)Prepare a statement of cash flows for Chapman
Company for the year ended May 31, 2010, using the direct method. Be sure to
support the statement with appropriate calculations. (A reconciliation of net
income to net cash provided is not required.)
(c)Using the indirect method, calculate only the net
cash
