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# Estimating the current value of given assets

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P6-25 Bond valuation-Semiannual interest. Calculate the value of each of the bonds shown in the following table, all of which pay interest semiannually.

Bond Par Value Coupon interest rate Year to maturity Required annual return
A \$1,000 10% 12 8%
B 1,000 12 20 12
C 500 12 5 14
D 1,000 14 10 10
E 100 6 4 14

P6-16 Bond valuation-Annual Interest. Calculate the value of each of the bonds shown in the following table, all of which pay interest annually.

Bond Par Value Coupon Interest Rate Year to Maturity Required Return
A \$1,000 14% 20 12%
B 1,000 8 16 8
C 100 10 8 13
D 500 16 13 18
E 1,000 12 10 10

P6-20 Yield to maturity. State whether the price of the bond will be a premium to par, at par, or at a discount to par.
Bond Coupon interest rate Yield to maturity Price
A 6% 10%
B 8 8
C 9 7
D 7 9
E 10 10

P6-13 Valuation of assets. Using the information provided in the following table, find the value of each assets.
Cash Flow
Asset End of Year Amount Appropriate required return Value
A 1 \$5,000 18%
2 5,000
3 5,000
B 1 thru ..... \$300 15%
C 1 \$0 16%
2 \$0
3 \$0
4 \$0
5 35,000
Total
D 1 thru 5 \$1,500 12%
6 8,500
E 1 \$2,000 14%
2 3,000
3 5,000
4 7,000
5 4,000
6 1,000

#### Solution Preview

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P6-25

Bond A
Par Value=P=\$1000
Semiannual interest=C=1000*10%/2=\$50
Number of coupon payments=n=12*2=24
Required rate of return=r=8%/2=4% per half year
Value of bond= C/r*(1-1/(1+r)^n)+P/(1+r)^n=50/4%*(1-1/(1+4%)^24)+1000/(1+4%)^24=\$1152.47

Bond B
Par Value=P=\$1000
Semiannual interest=C=1000*12%/2=\$60
Number of coupon payments=n=20*2=40
Required rate of return=r=12%/2=6% per half year
Value of bond= C/r*(1-1/(1+r)^n)+P/(1+r)^n=60/6%*(1-1/(1+6%)^40)+1000/(1+6%)^40=\$1000

Bond C
Par Value=P=\$500
Semiannual interest=C=500*12%/2=\$30
Number of coupon payments=n=5*2=10
Required rate of return=r=14%/2=7% per half year
Value of bond= C/r*(1-1/(1+r)^n)+P/(1+r)^n=30/7%*(1-1/(1+7%)^10)+500/(1+7%)^10=\$464.88

Bond D
Par Value=P=\$1000
Semiannual ...

#### Solution Summary

Solution describes the steps to find out the current value of given securities/assets.

\$2.19

## Equipment was purchased for \$100,000 and has a book value of \$44,000 and a depreciable cost of \$76,000. The estimated salvage value is

I need the correct answers for the practice exam to check my answers. This will help me study for the exam next week. See attachment for the practice exam.

MULTIPLE CHOICE

1. Equipment was purchased for \$100,000 and has a book value of \$44,000 and a depreciable cost of \$76,000. The estimated salvage value is
a. \$44,000.
b. \$56,000.
c. \$32,000.
d. \$24,000.

2. The purchase of office equipment for \$15,000 cash
a. is a cash outflow from financing activities.
b. is a cash outflow from operating activities.
c. is a cash outflow from investing activities.
d. does not affect cash flows.

3. Notes or accounts receivables that result from sales transactions are often called
a. sales receivables.
d. merchandise receivables.

4. When the allowance method is used to account for uncollectible accounts, Bad Debts Expense is debited when
b. an account becomes bad and is written off.
c. management estimates the amount of uncollectibles.
d. a customer's account becomes past-due.

5. When an account becomes uncollectible and must be written off,
a. Allowance for Doubtful Accounts should be credited.
b. Accounts Receivable should be credited.
c. Bad Debts Expense should be credited.
d. Sales should be debited.

6. Allowance for Doubtful Accounts on the balance sheet
a. is offset against total current assets.
b. increases the cash realizable value of accounts receivable.
c. appears under the heading "Other Assets."
d. is offset against accounts receivable.

7. Two bases for estimating uncollectible accounts are:
a. percentage of assets and percentage of sales.
b. percentage of receivables and percentage of total revenue.
c. percentage of current assets and percentage of sales.
d. percentage of receivables and percentage of sales.

8. A company purchased land for \$80,000 cash. Real estate brokers' commission was \$5,000 and \$7,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the cost principle, the cost of land would be recorded at
a. \$87,000.
b. \$80,000.
c. \$85,000.
d. \$92,000.

9. The balance in the Accumulated Depreciation account represents the
a. cash fund to be used to replace plant assets.
b. amount to be deducted from the cost of the plant asset to arrive at its fair market value.
c. amount charged to expense in the current period.
d. amount charged to expense since the acquisition of the plant asset.

10. The book value of an asset is equal to the
a. asset's market value less its historical cost.
b. blue book value relied on by secondary markets.
c. replacement cost of the asset.
d. asset's cost less accumulated depreciation.

11. On October 1, 2003, Nance Company places a new asset into service. The cost of the asset is \$20,000 with an estimated 5-year life and \$5,000 salvage value at the end of its useful life. What is the depreciation expense for 2003 if Nance Company uses the straight-line method of depreciation?
a. \$750.
b. \$4,000.
c. \$1,000.
d. \$2,000.

12. A company sells a plant asset that originally cost \$180,000 for \$60,000 on December 31, 2003. The accumulated depreciation account had a balance of \$72,000 after the current year's depreciation of \$18,000 had been recorded. The company should recognize a
a. \$120,000 loss on disposal.
b. \$48,000 gain on disposal.
c. \$48,000 loss on disposal.
d. \$30,000 loss on disposal.

13. A current liability is a debt that can reasonably expected to be paid
a. within one year.
b. between 6 months and 18 months.
c. out of currently recognized revenues.
d. out of cash currently on hand.

14. From a liquidity standpoint, it is most desirable for a company to have current
a. assets equal current liabilities.
b. liabilities exceed current assets.
c. assets exceed current liabilities.
d. liabilities exceed long-term liabilities.

15. A retail store credited the Sales account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales account amounted to \$168,000, what is the amount of the sales taxes owed to the taxing agency?
a. \$160,000.
b. \$168,000.
c. \$8,400.
d. \$8,000.

16. Sales taxes collected by a retailer are reported as
a. contingent liabilities.
b. revenues.
c. expenses.
d. current liabilities.

17. Santo Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 30,000 subscriptions in January at \$15 each. What entry is made in January to record the sale of the subscriptions?
a. Subscriptions Receivable 450,000
Subscription Revenue 450,000
b. Cash 450,000
Unearned Subscription Revenue 450,000
c. Subscriptions Receivable 75,000
Unearned Subscription Revenue 75,000
d. Prepaid Subscriptions 450,000
Cash 450,000

18. Stockholders of a corporation directly elect
a. the president of the corporation.
b. the board of directors.
c. the treasurer of the corporation.
d. all of the employees of the corporation.

19. Bob Rice has invested \$400,000 in a privately held family corporation. The corporation does not do well and must declare bankruptcy. What amount does Rice stand to lose?
a. Up to his total investment of \$400,000.
b. Zero.
c. The \$400,000 plus any personal assets the creditors demand.
d. \$200,000.

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