Time Value of Money

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ACFI 340 – TAKE HOME QUIZ - FALL, 2011

Below you will find a series of independent questions involving present value concepts. Show all factors used in present value computations and indicate the table that was used (FV of $1, PV of $1, etc). If you use a financial calculator, show the key strokes you used to compute the answer: N, i/y, PV, FV and PMT

Please download a copy of this quiz and type your answers after each question. Each student should design his/her own spreadsheets. Where amortization schedules are required, they should be labeled as exhibits and attached at the end of your quiz. On mortgage amortization schedules, attach only the first and last page of the schedule.

No “canned program” spreadsheets should be used. While you may discuss the quiz with one another, you are expected to prepare your own solutions independently of other students. Obviously identical spreadsheets will result in a penalty of 30 points on your total score.

a.Sacks Corporation bought a new machine and agreed to pay for it in 5 equal installments of $40,000 at the end of each of the next 5 years. Assuming that the prevailing rate of 6% applies to this contract, how much should Sacks record as the cost of the machine?

b.Design amortization schedules showing the payments under the assumption:

1.Interest is included in the face amount of the note.
2.The note is an interest bearing note.

c.Prepare the entry to record the purchase of the machine and the first payment under each of the 2 assumptions in b. This answer requires four entries!

d.Aliant Corporation sold $100,000,000 face value 6% bonds. The bonds mature in 20 years and pay interest semiannually. The going market rate of interest on bonds of similar risk is 8%. How much will Aliant receive upon the sale of the bonds?

e.Explain why your answer in part d passes the reasonableness test.

f.How much must be invested on January 1, 2011 to receive $40,000 for ten years if the first payment is to be taken on January 1, 2026? Assume an annual interest rate of 8%.

g.Design an amortization schedule to prove your answer in part f.

h.On December 31, 2011, Green Company finished consultation services and accepted in exchange a promissory note with a face value of $600,000, a due date of December 31, 2014, and a stated rate of 5%, with interest receivable at the end of each year. The fair market value of the services is not readily determinable and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%.

1.Determine the present value of the note.

2.Prepare a schedule of note discount amortization for Green Company under the effective interest method.

3.Prepare all entries needed beginning on December 31, 2011 and ending on December 31, 2014.

i.Lynn Company purchased a piece of machinery that cost $500,000. Lynn will make seminannual payments for 10 years. Assuming that the annual interest rate for such transactions is 8%, what is the amount of each payment?

1.Assume that you did not have access to a computer. Show how you would compute the total interest paid over the life of the loan.

2.Now design an amortization schedule with your spreadsheet program showing the breakdown between principal and interest on the loan in part h. Prove that the answer you computed in part I was correct. Interest is not included in the face amount of the note.

3.Prepare the journal entry for the first payment for the loan.

j.Sylvester Corporation sold land having a fair market value of $1,400,000 in exchange for a 10 year non-interest bearing promissory note in the face amount of $3,022,488. Sylvester purchased the land for $800,000 ten years ago. The customer purchasing the land from Sylvester would normally be required to pay 9% interest.

1.Record...
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