(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.
(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.
(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%.
(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?
(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.
(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?
(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.
COMPARATIVE STATEMENT OF FINANCIAL POSITION
AS OF MAY 31
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 600,000 502,000
Less: Accumulated depreciation 150,000 125,000
Net plant assets 450,000 377,000
Total assets $782,250 $712,000
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
Bonds payable 70,000 100,000
Total liabilities 267,250 312,000
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
FOR THE YEAR ENDED MAY 31, 2010
Cost of merchandise sold 722,000
Gross profit 533,250
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.
(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
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