Assume that you are going to receive $50,000 in 10 years. The current market rate of interest is 4%.

 

  

a. Using the present value of $1 table in -->, determine the present value of this amount compounded annually. Round to the nearest whole dollar.
$_____

b. Why is the present value less than the $50,000 to be received in the future?
The present value is less due to (deflation, inflation, and compounding interest) over the 10 years.

Present Value of an Annuity

On January 1 you win $50,000,000 in the state lottery. The $50,000,000 prize will be paid in equal installments of $6,250,000 over eight years. The payments will be made on December 31 of each year, beginning on December 31 of this year. If the current interest rate is 5%, determine the present value of your winnings. Use the present value tables in Exhibit 7. Round to the nearest whole dollar.
$______

Shunda Corporation wholesales parts to appliance manufacturers. On January 1, Shunda issued $22,000,000 of five-year, 9% bonds at a market (effective) interest rate of 7%, receiving cash of $23,829,684. Interest is payable semiannually. Shunda’s fiscal year begins on January 1. The company uses the interest method.

Required:

a. Journalize the entries to record the following transactions. Refer to the Chart of Accounts for exact wording of account titles.

1.	Sale of the bonds.
2.	First semiannual interest payment, including amortization of premium. Round to the nearest dollar.
3.	Second semiannual interest payment, including amortization of premium. Round to the nearest dollar.

b. Determine the bond interest expense for the first year.

c. Explain why the company was able to issue the bonds for $23,829,684 rather than for the face amount of $22,000,000

Campbell Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell issued $25,000,000 of 10-year, 10% bonds at a market (effective) interest rate of 9%, receiving cash of $26,625,925. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Required:

1.

Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1.*

2.

Journalize the entries to record the following:*

a.	The first semiannual interest payment on December 31, Year 1, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)
b.	The interest payment on June 30, Year 2, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)

3.

Determine the total interest expense for Year 1.

4.

Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest?

5.

Compute the price of $26,625,925 received for the bonds by using the present value tables. (Round to the nearest dollar.)

*Refer to the Chart of Accounts for exact wording of account titles.

.

The following transactions were completed by Winklevoss Inc., whose fiscal year is the calendar year:

Year 1
July	1	Issued $74,000,000 of 20-year, 11% callable bonds dated July 1, Year 1, at a market (effective) rate of 13%, receiving cash of $63,532,267. Interest is payable semiannually on December 31 and June 30.
Dec.	31	Paid the semiannual interest on the bonds. The bond discount amortization of $261,693 is combined with the semiannual interest payment.
	31	Closed the interest expense account.

Year 2
June	30	Paid the semiannual interest on the bonds. The bond discount amortization of $261,693 is combined with the semiannual interest payment.
Dec.	31	Paid the semiannual interest on the bonds. The bond discount amortization of $261,693 is combined with the semiannual interest payment.
	31	Closed the interest expense account.
Year 3
June	30	Recorded the redemption of the bonds, which were called at 98. The balance in the bond discount account is $9,420,961 after payment of interest and amortization of discount have been recorded. (Record the redemption only.)

Required:

1.	Journalize the entries to record the transactions. Round all amounts to the nearest dollar. Be sure to include the year in the date for the entries. Refer to the Chart of Accounts for exact wording of account titles.
2.	Indicate the amount of the interest expense in (a) Year 1 and (b) Year 2.
3.	Determine the carrying amount of the bonds as of December 31, Year 2.

Transcribed Image Text:

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