Week 4

Practice Question Solutions

EXERCISE 6-4 (1520 minutes)

(a)

Future value of an ordinary

annuity of $4,000 a period

$183,047.84 ($4,000 X 45.76196)

for 20 periods at 8%
Factor (1 + .08)

1.08

Future value of an annuity

due of $4,000 a period at 8% $197,692

Future value of an ordinary annuity

= R (FVF-OAn,i)
= R (FVF-OA20,8)*
=4000 * 45.76196=$183,047.84

Note: (FVF-OA20,8)* = [(1+0.08)^20 1]/0.08 = 45.76196

Future value of an annuity = Future value of an ordinary annuity * (1+0.08)= $197,692

(b)

Present value of an ordinary

annuity of $2,500 for 30

$23,567 ($2,500 X 9.42691)

periods at 10%
Factor (1 + .10)

1.10

Present value of annuity

due of $2,500 for 30 periods
at 10%

(Or see Table 6-5 which

$25,924 gives $25,924.03)

sdfsdfdfsdfsfsdsdfs
Note: Present value of an
ordinary annuity of 1 (PVFOAn,i=[1-1/(i+1)^n]/i
ff
(c)

Future value of an ordinary

annuity of $2,000 a period
for 15 periods at 10%

(d)

$63,544.96 ($2,000 X 31.77248)

Factor (1 + 10)

1.10

Future value of an annuity

due of $2,000 a period
for 15 periods at 10%

$69,899

Present value of an ordinary

annuity of $1,000 for 6
periods at 9%

$4,485.92 ($1,000 X 4.48592)

Factor (1 + .09)

1.09

Present value of an annuity

date of $1,000 for 6 periods
at 9%

$4,890

(Or see Table 6-5)

Copyright 2013 John Wiley & Sons, Inc.

Time diagram:
i = 12%
PV OA = ?
R=
($39,000)
($39,000) $18,000 $18,000 $68,000 $68,000
$68,000 $68,000 $38,000 $38,000 $38,000

Kieso, Intermediate Accounting, 15/e, Solutions Manual

(For Instructor Use Only)

6-49

31

0
1
39 40

10 11

12

29 30

n=5

n=5

n = 20

(0 $30,000 $9,000)

($60,000 $30,000
$12,000)

($110,000 $30,000
$12,000)

n=

($80,000
$12,

Formulas:

PV OA = R (PVF OAn, i)

PV OA = R (PVF OAn, i)

PV OA = R (PVF OAn, i)

PV OA =R (PVF

PV OA = ($39,000)(PVF OA5, 12%)PV OA = $18,000 (PVF OA10-5, 12%) PV OA = $68,000 (PVF OA3010, 12%) PV OA = $38,00
PV OA = ($39,000)(3.60478)

PV OA = $18,000 (5.65022 3.60478) PV OA = $68,000 (8.05518 5.65022) PV OA = $38,00

PV OA = ($140,586)

PV OA = $18,000 (2.04544)

PV OA = $68,000 (2.40496)

PV OA = $38,00

PV OA = $36,818

PV OA = $163,537

PV OA = $7,167

Present value of future net cash inflows:

$(140,586)
36,818
163,537
7,167
$ 66,936

Stacy McGill

should accept no less than $66,936 for her vineyard business.

PROBLEM 6-10

1.

Purchase.

Time diagrams:

Installments

i = 10%
PV OA = ?
R=
$350,000

$350,000

$350,000

$350,000

$350,000

n=5

Property taxes and other costs

i = 10%
PV OA = ?
R=
$56,000 $56,000

$56,000

$56,000 $56,000 $56,000

n = 12

10

11

12

PROBLEM 6-10 (Continued)

Insurance

i = 10%
PV AD = ?
R=
$27,000 $27,000 $27,000

$27,000 $27,000 $27,000

10

11

12

n = 12

Salvage Value
i = 10%

PV = ?

FV = $500,000

n = 12

10

11

12

Formula for installments:

PV OA = R (PVF OAn, i)
PV OA = $350,000 (PVF OA5, 10%)
PV OA = $350,000 (3.79079)
PV OA = $1,326,777

PROBLEM 6-10 (Continued)

Formula for 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 = $381,567
Formula for insurance:

PV AD = R (PVF ADn, i)
PV AD = $27,000 (PVF AD12, 10%)
PV AD = $27,000 (7.49506)
PV AD = $202,367
Formula for salvage value:

PV = FV (PVFn, i)
PV = $500,000 (PVF12, 10%)

PV = $500,000 (0.31863)
PV = $159,315

PROBLEM 6-10 (Continued)

Present value of net purchase costs:

2.

Down payment ........................................................

$ 400,000

Installments ............................................................

1,326,777

Property taxes and other costs .............................

381,567

Insurance ................................................................

202,367

Total costs ..............................................................

$2,310,711

Less: Salvage value ..............................................

159,315

Net costs .................................................................

$2,151,396

Lease.

Time diagrams:

Lease payments
i = 10%
PV AD = ?
R=
$270,000 $270,000 $270,000

$270,000 $270,000

10

11

12

n = 12

Interest lost on the deposit

i = 10%
PV OA = ?
R=
$10,000 $10,000

$10,000 $10,000 $10,000

10

n = 12

11

12

PROBLEM 6-10 (Continued)

Formula for 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
Formula for interest lost on the deposit:

Interest lost on the deposit per year = $100,000 (10%) = $10,000

PV OA = R (PVF OAn, i)
PV OA = $10,000 (PVF OA12, 10%)
PV OA = $10,000 (6.81369)
PV OA = $68,137*
Cost for leasing the facilities = $2,023,666 + $68,137 = $2,091,803

Dunn Inc. should lease the facilities because the present value
of the costs for leasing the facilities, $2,091,803, is less than the
present value of the costs for purchasing the facilities,
$2,151,396.

*OR: $100,000 ($100,000 X .31863 [PV12, 10%]) = $68,137

EXERCISE 7-12 (1520 minutes)

7/1 Accounts ReceivableHarding Co. ...............................

7,840
Sales Revenue ($8,000 X 98%)...............................

7,840

7/5 Cash [$9,000 X (1 .09)] ..................................................

8,190
Loss on Sale of Receivables...........................................810
Accounts Receivable ($9,000 X 98%) ....................

8,820

Sales Discounts Forfeited......................................

180

(Note: It is possible that the company already recorded the Sales

Discounts Forfeited. In this case, the credit to Accounts
Receivable would be for $9,000. The same point applies to the
next entry as well.)

EXERCISE 7-12 (Continued)

7/9

Accounts Receivable ......................................................

180
Sales Discounts Forfeited
($9,000 X 2%) ......................................................

180

Cash .................................................................................
5,640
Interest Expense ($6,000 X 6%) ......................................
360
Notes Payable ........................................................

7/11

6,000

Account ReceivableHarding Co..................................

160
Sales Discounts Forfeited .....................................

160

($8,000 X 2%)

This entry may be made at the next time financial statements are
prepared. Also, it may occur on 12/29 when Harding Companys
receivable is adjusted.

12/29 Allowance for Doubtful Accounts ..................................

7,200
Accounts ReceivableHarding Co. .........................
[$7,840 + $160 = $8,000;
$8,000 (10% X $8,000) = $7,200]

7,200

*EXERCISE 7-24 (1520 minutes)

(a)

Angela Lansbury Company

Bank Reconciliation
July 31

Balance per bank statement, July 31

$8,650
2,350a

Add: Deposits in transit

Deduct: Outstanding checks
Correct cash balance, July 31

(1,100)b
$9,900

Balance per books, July 31

$9,250

Add: Collection of note

1,000

Less: Bank service charge

$ 15

NSF check

335

Correct cash balance, July 31

$9,900

Computation of deposits in transit

Deposits per books

$5,810

Deposits per bank in July

$5,000

Less deposits in transit (June)

(1,540)

Deposits mailed and received in

July
Deposits in transit, July 31

(350)

(3,460)
$2,350

Computation of outstanding checks

Checks written per books

$3,100

Checks cleared by bank in July

$4,000

Less outstanding checks

(June)*

(2,000)

Checks written and cleared in

July
Outstanding checks, July 31

*Assumed to clear bank in July

(2,000)
$1,100

*EXERCISE 7-24 (Continued)

(b) Cash ..................................................................................

650

Office Expensesbank service charges .......................

15

Accounts Receivable .......................................................

335

Notes Receivable ....................................................

1,000

PROBLEM 7-4

(a)

FORTNER CORPORATION
Analysis of Changes in the
Allowance for Doubtful Accounts
For the Year Ended December 31, 2014

Balance at January 1, 2014 ...............................................

$130,000

Provision for doubtful accounts ($9,000,000 X 2%) ........

180,000

Recovery in 2014 of bad debts written off previously .....

15,000
325,000

Deduct write-offs for 2014 ($90,000 + $60,000) ................

Balance at December 31, 2014 before change
in accounting estimate ..................................................
Increase due to change in accounting estimate
during 2014 ($263,600 $175,000) ................................

150,000
175,000

Balance at December 31, 2014 adjusted (Schedule 1) ....

$263,600

Schedule 1

88,600

Computation of Allowance for Doubtful Accounts

at December 31, 2014
Aging
Category

Balance

Doubtful
Accounts

$1,080,000

$ 21,600

JulyOct.

650,000

10

65,000

Jan.June

420,000

25

105,000

80

72,000

Nov.Dec. 2014

Prior to 1/1/14

90,000(a)

$263,600
(a) $150,000 $60,000
(b) The journal entry to record this transaction is as follows:

Bad Debt Expense ........................................

Allowance for Doubtful Accounts ............
(To increase the allowance for
doubtful accounts at December 31,
2014, resulting from a change
in accounting estimate)

$88,600
$88,600