Determine the present value of $120,000 to be received at the end of each of 4 years,

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Question:

Determine the present value of $120,000 to be received at the end of each of 4 years, using an interest rate of 5.5%, compounded annually, as follows:

a. By successive computations, using the present value of $1 table in Exhibit 5. Round to the nearest whole dollar.

Year	Present Value
First year	$fill in the blank 1
Second Year	fill in the blank 2
Third Year	fill in the blank 3
Fourth Year	fill in the blank 4
Total present value	$fill in the blank 5

b. By using the present value of an annuity of $1 table in Exhibit 7. Round to the nearest whole dollar. fill in the blank 1 of 1

c. Why is the present value of the four $120,000 cash receipts less than the $480,000 to be received in the future? The present value is less due to

deflationinflationthe compounding of interest

over the 4 years.

On January 1, you win $3,700,000 in the state lottery. The $3,700,000 prize will be paid in equal installments of $370,000 over 10 years. The payments will be made on December 31 of each year, beginning on December 31 of this year. If the current interest rate is 7%, determine the present value of your winnings. Use the present value tables in Exhibit 7. Round to the nearest whole dollar. fill in the blank 1 of 1$

Amortize discount by interest method

On the first day of its fiscal year, Ebert Company issued $19,000,000 of 5-year, 8% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 10%, resulting in Ebert receiving cash of $17,532,812. The company uses the interest method.

a. Journalize the entries to record the following:

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1. Sale of the bonds. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

blank	Account	Debit	Credit
blank	Accounts PayableBonds PayableCashInterest PayablePremium on Bonds Payable
	Accounts PayableBonds PayableDiscount on Bonds PayableInterest PayablePremium on Bonds Payable
	Accounts PayableBonds PayableDiscount on Bonds PayableInterest PayablePremium on Bonds Payable

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2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

blank	Account	Debit	Credit
blank	Accounts PayableBonds PayableInterest ExpenseInterest PayablePremium on Bonds Payable
	Bonds PayableDiscount on Bonds PayableInterest ExpenseInterest PayablePremium on Bonds Payable
	Accounts PayableBonds PayableCashInterest ExpensePremium on Bonds Payable

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3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

blank	Account	Debit	Credit
blank	Bonds PayableDiscount on Bonds PayableInterest ExpenseInterest PayablePremium on Bonds Payable
	Bonds PayableDiscount on Bonds PayableInterest ExpenseInterest PayablePremium on Bonds Payable
	Bonds PayableCashInterest ExpenseInterest PayablePremium on Bonds Payable

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b. Compute the amount of the bond interest expense for the first year. Round to the nearest dollar.

Line Item Description	Bond Interest Expense
Annual interest paid	fill in the blank 1 of 3$
Discount amortized	fill in the blank 2 of 3
Interest expense for first year	fill in the blank 3 of 3$

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c. Explain why the company was able to issue the bonds for only $17,532,812 rather than for the face amount of $19,000,000. The bonds sell for less than their face amount because the market rate of interest is fill in the blank 1 of 2

greater thansmaller thanthe same as

the contract rate of interest. Investors fill in the blank 2 of 2

areare not

willing to pay the full face amount for bonds that pay a lower contract rate of interest than the rate they could earn on similar bonds (market rate).