Chapter 6: E6-4 (Computation of Future Values and Present Values) (a) What is the future value of 20 periodic payments

of $5,000 each made at the beginning of each period and compounded at 8%? The future value of 20 periodic payments of $5,000 a period at 8% is: $247,114.58 or $247,115 Interest = 8% Period = 20 $5,000 x 45.76196 = $228,809.80 $228,809.80 x 1.08= $247,114.58

(b) What is the present value of $2,500 to be received at the beginning of each of 30 periods, discounted at 10% compound interest? The present value of $2,500 for 30 periods at 10% is: $25,924 Interest = 10% Period = 30 $2,500 x 9.42691 = $23,567.28 $23,567.28 x 1.10= $25,924.008

(c) What is the future value of 15 deposits of $2,000 each made at the beginning of each period and compounded at 10%? (Future value as of the end of the fifteenth period.) The future value of 15 deposits of $2,000 a period at compounded 10% is: $69,899.46 or $69,900 Interest = 10% (compounded) Period = 15 $2,000 x 31.77248 = $63,544.96 $63,544.96 x 1.10= $69,899.46

(d) What is the present value of six receipts of $3,000 each received at the beginning of each period, discounted at 9% compounded interest? The present value of six receipts for $3,000 at 9% is: $14,668.96 or $14,669 Interest = 9% Period = 6 $3,000 x 4.48592 = $13,457.76 $13,457.76 x 1.09= $14,668.96

P6-6 (Purchase Price of a Business) Instructions Dick Button has offered to buy Stacys vineyard business by assuming the 40-year lease. On the basis of the current value of the business, what is the minimum price Stacy should accept?

The minimum Stacy should accept is $66,935.58 or $66,936 Using the formula PV OA = R (PVF OAn, i) we will calculate the PV OA of all the periods mentioned on the problem: (1- 5 years) PV OA = R (PVF OAn, i) PV OA = ($39,000) (PVF OAn5, 12%) PV OA = ($39,000) (3.60478) PV OA = ($140,586.42) (6- 10 years) PV OA = R (PVF OAn, i) PV OA = $18,000 (PVF OAn(10-5), 12%) PV OA = $18,000 (5.65022 - 3.60478) PV OA = $18,000 (2.04544) PV OA = $36,817.92 (11 - 30 years) PV OA = R (PVF OAn, i) PV OA = $68,000 (PVF OAn(30-10), 12%) PV OA = $68,000 (8.05518-5.65022) PV OA = $68,000 (2.40496) PV OA = $163,537.28 (31 - 40 years) PV OA = R (PVF OAn, i) PV OA = $38,000 (PVF OAn(40-30), 12%) PV OA = $38,000 (8.24378-8.05518) PV OA = $38,000 (.18860) PV OA = $7,166.80 PV OA= ($140,586.42) 36,817.92 163,537.28 7,166.80 $66,935.58 or $66,936

P6-10 (Analysis of Lease vs. Purchase) Instructions Which of the two approaches should Dunn Inc. follow? (Currently, the cost of funds for Dunn Inc. is 10 %.) Dunn Inc. should lease the building and related facilities instead of buying them. The net cost for leasing is $2,091,803 compared to the net costs of purchasing which is $2,151,396. Therefore, it would be to the best interest of Dunn Inc. to lease the facilities. Purchasing: Installments: PV OA = R (PVF OAn, i) PV OA = $350,000 (PVF OA5, 10%) PV OA = $350,000 (3.79079) PV OA = $1,326,776.50 Property taxes and other costs: PV OA = R (PVF OAn, i) PV OA = $56,000 (PVF OA12, 10%) PV OA = $56,000 (6.81369) PV OA = $381,566.64 Insurance: PV AD = R (PVF ADn, i) PV AD = $27,000 (PVF AD12, 10%) PV AD = $27,000 (7.49506) PV AD = $202,366.62 Salvage value: PV = FV (PVFn, i) PV = $500,000 (PVF12, 10%) PV = $500,000 (0.31863) PV = $159,315 Down payment Installments Property taxes and Other Insurance Total costs Less: Salvage value Net costs for purchasing $ 400,000 1,326,777 381,567 202,367 2,310,711 (159,315) 2,151,396

$ $

Leasing: Lease payments: PV AD = R (PVF ADn, i) PV AD = $270,000 (PVF AD12, 10%) PV AD = $270,000 (7.49506) PV AD = $2,023,666.20 Interest Lost: PV OA = R (PVF OAn, i) PV OA = $10,000 (PVF OA12, 10%) PV OA = $10,000 (6.81369) PV OA = $68,136.90
Lease Payments Interest Lost Net costs for leasing $ $ 2,023,666 68,137 2,091,803

Chapter 7: E7-2 (Determine Cash Balance) Instructions: For each individual situation, determine the amount that should be reported as cash. If the item(s) is not reported as cash, explain the rationale. 1. Checking account balance $925,000; certificate of deposit $1,400,000; cash advance to subsidiary of $980,000; utility deposit paid to gas company $180. Only $925,000 can be reported as cash. The other items should be reported as follows: $1,400,000 as temporary investment, $980,000 as receivable, and $180 as receivable. 2. Checking account balance $500,000; an overdraft in special checking account at same bank as normal checking account of $17,000; cash held in a bond sinking fund $200,000; petty cash fund $300; coins and currency on hand $1,350. A total of $484,650 should be reported as cash. This total includes the following amounts: $500,000 -17,000 + $300 + $1,350 = $484,650. The cash held on the bond sinking fund cannot be reported as cash since this is a restricted and should be reported as noncurrent. 3. Checking account balance $590,000; postdated check from a customer $11,000; cash restricted due to maintaining compensating balance requirement of $100,000; certified check from customer $9,800; postage stamps on hand $620. A total of $599,800 should be reported as cash. This total includes the following amounts: $590,000 + $9,800 = $599,800. The other items should be reported as follows: $11,000 as receivable and $620 as office supplies inventory.

4. Checking account balance at bank $42,000; money market balance at mutual fund (has checking privileges) $48,000; NSF check received from customer $800. A total of $90,000 should be reported as cash. This total includes the following amounts: $42,000 + $48,000 = $90,000. The $800 NFS check should be reported as receivable. 5. Checking account balance $700,000; cash restricted for future plant expansion $500,000; short-term Treasury bills $180,000; cash advance received from customer $900 (not included in checking account balance); cash advance of $7,000 to company executive, payable on demand; refundable deposit of $26,000 paid to federal government to guarantee performance on construction contract. A total of $700,900 should be reported as cash. This total includes the following amounts: $700,000 + $900 = $700,900. The other items should be reported as follows: $500,000 as noncurrent asset, $180,000 as temporary investment, $7,000 as receivable, and $26,000 as receivable. E7-5 (Record Sales Gross and Net) Instructions: (a) Prepare journal entries on the Bolton Company books to record all the events noted above under each of the following bases. (1) Sales and receivables are entered at gross selling price. 3-Jun Accounts Receivable Sales Cash Sales Discounts 2/10 Accounts Receivable 2,000 2,000 1,960 40 2,000

12-Jun

(2) Sales and receivables are entered at net of cash discounts. 3-Jun Accounts Receivable Sales Cash Accounts Receivable 1,960 1,960 1,960 1,960

12-Jun

(b) Prepare the journal entry under basis 2, assuming that Arquette Company did not remit payment until July 29. 29-Jul Cash Accounts Receivable Sales Discounts Forfeited 2,000 1,960 40

E7-7 (Recording Bad Debts) Instructions: Prepare the journal entry to record bad debt expense assuming Sandel Company estimates bad debts at (a) 1% of net sales: ($800,000 50,000) x .01 = $7,500 Bad Debt Expense Allowance for Doubtful Accounts 7,500 7,500

(b) 5% of accounts receivable: $160,000 x .05 = $8,000 - $2,000 = $6,000 Bad Debt Expense Allowance for Doubtful Accounts 6,000 6,000

E7-12 (Journalizing Various Receivable Transactions) Instructions: Prepare all necessary entries in general journal form for Sanford Corp. 1-Jul Accounts Receivable Sales Cash Loss on sale of receivables Accounts Receivables Sales Discounts Forfeited ($12,000 x 2%) Cash Interest Expense ($6,000 x 6%) Notes Payable Accounts Receivables Sales Discounts Forfeited ($9,000 x 2%) Accounts Receivables Sales Discounts Forfeited ($10,000 x 2%) Allowance for Doubtful Accounts Accounts Receivables ($10,000 x 90%) 9,800 9,800 10,920 1,080 11,760 240 5,640 360 6,000 180 180 200 200 9,000 9,000

5-Jul

9-Jul

9-Jul

11-Jul

29-Dec

E7-24 (Bank Reconciliation and Adjusting Entries) Instructions (a) Prepare a bank reconciliation going from balance per bank and balance per book to correct cash balance. Kippling Company Bank Reconciliation July 31, 2012 Balance per bank statement, July 31 Add: Deposit in transit ($5810 - ($4500-1540)) Deduct: Outstanding checks ($3100 - ($4000-2000)) Correct Cash Balance Balance per books, July 31 Add: July note collected Deduct: Bank Service fee NSF Check Correct Cash Balance 8,650 2,850 (1,100) 10,400 9,250 1,500 (350) 10,400

$ $

15 335 $

(b) Prepare the general journal entry or entries to correct the Cash account. Cash Office Expense for bank service fee Account Receivable Notes Receivable 1,150 15 335 1,500

P7-4 (Bad-Debt Reporting) Instructions (a) Prepare a schedule analyzing the changes in Allowance for Doubtful Accounts for the year ended December 31, 2012. Show supporting computations in good form. (Hint: In computing the 12/31/12 allowance, subtract the $60,000 write-off).

Schedule 1 Computation of Allowance for Doubtful Accounts December 31, 2012 Category Nov - Dec 2012 July - Oct Jan - June Prior to 1/1/12 Balance 1,080,000 650,000 420,000 90,000 Percentage 2% 10% 25% 80% Doubtful Accounts 21,600 65,000 105,000 72,000 263,600

$ $ $ $

$ $ $ $ $

(b) Prepare the journal entry for the year-end adjustment to the Allowance for Doubtful Accounts balance as of December 31, 2012. (AICPA adapted) Bad Debt Expense Allowance for Doubtful Accounts $ 88,600 $ 88,600