Time Value of Money Problems
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1. On January 1, 2007, Aaron Brown Corporation sold a building that cost $250,000 and that had accumulated depreciation of $100,000 on the date of sale. Brown received as consideration a $275,000 noninterest-bearing note due on January 1, 2010. 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, 2007, was 9%. At what amount should the gain from the sale of the building be reported? (Round answer to 2 decimal places.)
2. On January 1, 2007, Aaron Brown Corporation purchased 200 of the $1,000 face value, 9%, 10-year bonds of Walters Inc. The bonds mature on January 1, 2017, and pay interest annually beginning January 1, 2008. Brown purchased the bonds to yield 11%. How much did Brown pay for the bonds? (Round answer to 2 decimal places. Hint: Use tables in text.)
3. Aaron Brown 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 Brown record as the cost of the machine? (Round answer to 2 decimal places.)
4000 (PVF-OA10,8%)
4000 (6.71008) = 26,840.32
4. Aaron Brown Corporation purchased a special tractor on December 31, 2007. The purchase agreement stipulated that Brown 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, 2007, at what amount, assuming an appropriate interest rate of 12%? (Round answer to 2 decimal places.)
5000(PVF-OA5,12%)
5000 (3.60478) = 18,023.90 + 20,000 = 38,023.90
5. Aaron Brown Corporation wants to withdraw $100,000 (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%? (Round answer to 0 decimal places.)
100,000 (PVS-OA9,11%)
100,000 (5.53705) = 553,705
The "including principal" is stumping me.....
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Solution Summary
The solution has various time value of money problems of Aaron Brown relating to calculation of present value and future value of annuity and single sum.
Solution Preview
Please see the attached file. Let me know if you need any more clarification. PVF is to be used for lump sum that is there is only one cash flow. PVF-OA is to be used for annuity that is there are a series of cash flows.
1. On January 1, 2007, Aaron Brown Corporation sold a building that cost $250,000 and that had accumulated depreciation of $100,000 on the date of sale. Brown received as consideration a $275,000 noninterest-bearing note due on January 1, 2010. 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, 2007, was 9%. At what amount should the gain from the sale of the building be reported? (Round answer to 2 decimal places.)
The non interest bearing note will mature in 2010 and so we need to find the value of the note as on Jan 1, 2007. We need to find the present value. The note is a lump sum and so we use the PVF table which is meant for lump sum. For 3 years and 9% the ...
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