P6-1 (Various
Time Value Situations)
Answer each of
these unrelated questions.
a. On January 1,
2014, Fishbone Corporation sold a building that cost $250,000 and that had
accumulated depreciation of $100,000 on the date of sale. Fishbone received as
consideration a $240,000 non-interest-bearing note due on January 1, 2017.
There was no established exchange price for the building, and the note had no
ready market. The prevailing rate of interest for a note of this type on
January 1, 2014, was 9%. At what amount should the gain from the sale of the
building be reported?
b. On January 1,
2014, Fishbone Corporation purchased 300 of the $1,000 face value, 9%, 10-year
bonds of Walters Inc. The bonds mature on January 1, 2024, and pay interest
annually beginning January 1, 2015. Fishbone purchased the bonds to yield 11%.
How much did Fishbone pay for the bonds?
c. Fishbone
Corporation bought a new machine and agreed to pay for it in equal annual
installments of $4,000 at the end of each of the next 10 years. Assuming that a
prevailing interest rate of 8% applies to this contract, how much should
Fishbone record as the cost of the machine?
d. Fishbone Corporation purchased a special
tractor on December 31, 2014. The purchase agreement stipulated that Fishbone
should pay $20,000 at the time of purchase and $5,000 at the end of each of the
next 8 years. The tractor should be recorded on December 31, 2014, at what
amount, assuming an appropriate interest rate of 12%?
e. Fishbone
Corporation wants to withdraw $120,000 (including principal) from an investment
fund at the end of each year for 9 years. What should be the required initial
investment at the beginning of the first year if the fund earns 11%?
TUTORIAL PREVIEW
(a) Given no established value for the building, the fair market value of the note would be estimated to value the building.
Time diagram:
i = 9%
PV = ? FV = $240,000
1/1/12
|
1/1/13
|
1/1/14
|
1/1/15
| ||||
File name: P6-1 Fishbone Corporation.docx File type: . docx PRICE:$8
