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# Present Value, Purchases, Interest Rate and Journal Entries

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Help with solving these review questions that are similar to the final exam. Need to show steps please so that I can familiarize myself. Thanks!!!

1a
Johnson Company is contemplating the purchase of a machine that provides it with net after-tax cash savings of \$80,000 per year for 5 years. Interest is 8%. Assume the cash savings occur at the end of each year.
Required: Calculate the present value of the cash savings.

1b
Brown Contractors is considering buying equipment at a cost of \$75,000. The equipment is expected to generate cash flows of \$15,000 per year for eight years and can be sold at the end of eight years for \$5,000. Interest is at 12%. Assume the equipment would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations.
Required: Determine if Brown should purchase the machine. Show why or why not.

1c
Orange Resources, a natural energy supplier, borrowed \$80 million cash on November 1, 2006, to fund a geological survey. The loan was made by Blue Banque under a short-term credit line. Orange Resources issued a 9-month, 12% promissory note with interest payable at maturity. Orange Resources' fiscal period is the calendar year.
Required:
(1.) Prepare the journal entry for the issuance of the note by Orange Resources.
(2.) Prepare the appropriate adjusting entry for the note by Orange Resources on December 31, 2006. Show calculations.
(3.) Prepare the journal entry for the payment of the note at maturity. Show calculations.

PROBLEM #2 There are 3 parts a,b,c

2a
A \$90,000, 6-month, noninterest-bearing note is discounted at the bank at a 10% discount rate.
Required:
(1.) Prepare the appropriate journal entry to record the issuance of the note.
(2.) Determine the effective interest rate.

2b
The following selected transactions relate to liabilities of Mass Corporation (Chicago) for 2006. Chicago's fiscal year ends on December 31.
(1.) On January 15, Chicago received \$7,000 from Hide Construction toward the purchase of \$66,000 of plate glass to be delivered on February 6.
(2.) On February 3, Chicago received \$6,700 of refundable deposits relating to containers used to transport glass components.
(3.) On February 6, Chicago delivered the plate glass to Hide Construction and received the balance of the purchase price.
(4.) First quarter credit sales totaled \$700,000. The state sales tax rate is 4% and the local sales tax rate is 2%.
Required:
Prepare journal entries for the above transactions.

2c
On January 1, 2006, Bird Ltd. purchased 12% bonds dated January 1, 2006, with a face amount of \$20 million. The bonds mature in 2015 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.
Required:
(1.) Determine the price of the bonds at January 1, 2006.
(2.) Prepare the journal entry to record the bond purchase by Rare Birds on January 1, 2006.
(3.) Prepare the journal entry to record interest on June 30, 2006, using the effective interest method.
(4.) Prepare the journal entry to record interest on December 31, 2006, using the effective interest method.

PROBLEM # 3 There are two parts, a and b.

3a
Mild Company contracted with Stew Corporation to construct custom-made equipment. The equipment was completed and ready for use on January 1, 2006. Mild paid for the machine by issuing a \$200,000, 3-year note that bears interest at the rate of 4%, payable annually on December 31 each year. Since the machine was custom-built, the cash price was unknown. However, when compared to similar contracts, 10% was deemed to be a reasonable rate of interest.
Required:
(1.) Prepare the journal entry by Mild to record the purchase.
(2.) Prepare journal entries to record interest for each of the first 2 years.

3b
On January 1, 2006, Half Company leased a building under a 3-year operating lease. The annual rental payments are \$68,000 on January 1, 2006, the inception of the lease, and \$50,000 January 1 of 2007 and 2008. Half made structural modifications to the building costing \$90,000 before occupying the building. The useful life of the building and the modifications is 30 years with no expected residual value.
Required:
Prepare the appropriate journal entries for Half Company for 2006. Holbrook's fiscal year is the calendar year, and the company uses straight-line depreciation.

#### Solution Summary

This solution shows step-by-step calculations and explanations on the concepts of present value, purchases, interest rate and journal entries for company statements.

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## (Debt Securities) Presented below is an amortization schedule related to Kathy Baker Company's 5-year, \$100,000 bond with a 7% interest rate and a 5% yield, purchased on December 31, 2004, for \$108,660

Debt Securities - Presented below is an amortization schedule related to Kathy Baker Company's 5-year, \$100,000 bond with a 7% interest rate and a 5% yield, purchased on December 31, 2004, for \$108,660

Date Cash Received Interest Revenue Bond Premium Amortization Carrying Amount of Bonds
12/31/2004 \$108,660
12/31/2005 \$7,000 \$5,433 \$1,567 107,093
12/31/2006 7,000 5,354 1,646 105,447
12/31/2007 7,000 5,272 1,728 103,719
12/31/2008 7,000 5,186 1,814 101,905
12/31/2009 7,000 5,095 1,905 100,000

The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.

12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009
Amortized cost \$107,093 \$105,447 \$103,719 \$101,905 \$100,000
Fair value \$106,500 \$107,500 \$105,650 \$103,000 \$100,000

Instructions

(a) Prepare the journal entry to record the purchase of these bonds on December 31, 2004, assuming the bonds are classified as held-to-maturity securities. (b) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2005. (c) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2007. (d) Prepare the journal entry(ies) to record the purchase of these bonds, assuming they are classified as available-for-sale.
(e) Prepare the journal entry(ies) related to the available-for-sale bonds for 2005. (f) Prepare the journal entry(ies) related to the available-for-sale bonds for 2007.

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