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3.
You have a choice of two investment accounts. Investment A is a 15-year annuity that features end-of-month \$1,200 payments and has an interest rate of 8.5 percent compounded monthly. Investment B is an 8 percent continuously compounded lump sum investment, also good for 15 years. How much money would you need to invest in B today for it to be worth as much as investment A 15 years from now?

4.
A local finance company quotes a 16 percent interest rate on one-year loans. So, if you borrow \$25,000 the interest for the year will be \$4,000. Because you must repay a total of \$29,000 in one year, the finance company requires you to pay \$29,000/12, or \$2,416.67, per month over the next 12 months. Is this a 16 percent loan? What rate would legally have to be quoted? What is the effective annual rate?

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#### Solution Preview

3. In order to find the amount to invest in B, we first need to know the future value of investment A since that is the amount that investment B should grow to in 15 years.
Investment A is an annuity and so we need to calculate the FV of annuity. The time period is 15 X 12 = 180 months, interest rate is 8.5%/12 = 0.71% and ...

#### Solution Summary

What is the effective annual rate?

\$2.19

## Net Cash Provided by Operating Activities

(See attached file for full problem description)

---
EXERCISE 13-6 Net Cash Provided by Operating Activities (Indirect Method) (LO5)
Changes in various accounts and gains and loses on sales of assets during the year for Weston Company, an industrial air conditioning sales and installation company, are given below:

Item Amount
Accounting Receivable..............
Accrued Interest receivables.......
Inventory.............................
Prepaid Expenses...................
Accounts Payable ..................
Accrued Liabilities..................
Deferred Income taxes Liability....
Sales of equipment..................
Sale of long-term investments......
\$70, 000 decrease
\$6,000 increase
\$110,000 increase
\$3,000 decrease
\$40,000 Decrease
\$9,000 increase
\$15,000 increase
\$8,000 gain
\$12,000 loss
Required:
For each item, place an X in the Add or Deduct column to indicate whether the dollar amount should be added to or deducted from net income under the indirect method when computing the cash provided by operating activities for the year. Use the following column headings in preparing your answers:

Item Amount Add Deduct

EXERCISE 13-9 Prepare a statement of Cash Flows (Indirect Method0 (LO2,LO3)
The following changes took place last year in Herald Company's balance sheet accounts:

Debit Balance Accounts Credit Balance Accounts
Cash ........................... \$20 I
Accounts Recieveable....... \$10 D
Inventory....................... \$30 I
Prepaid Expenses............ \$5 D
Long-Term Investments. ....\$30 D
Plant and Equipment...........150 I
Land ..................... .....30 D Accumulated Depreciation .....\$40 I
Accounts Payable ...............\$20 I
Accrued Liabilities...............\$10D
Taxes Payable ..................\$10 I
Bonds Payable ..................\$20 D
Deferred Income taxes ......... \$5 I
Common Stock ................\$40 I
Retained Earnings...............\$40 I
Long-Term investments that had cost the company \$50 were sold during the year for \$45, and land that had cost \$30 was sold for \$70. In addition, the company declared and paid \$35 in cash dividends during the year. No sales or retirements of plant and equipment took place during the year.
The company's income for the last year follows:

Sales .............................................................. \$600
Less cost of goods sold ......................................... 250
Gross margin .................................................... 350
Les operating expenses ......................................... 280
Net operating income ........................................... 70
Nonoperating items:
Loss on sale of investments ..................................... \$(5)
Gain on sale of land ............................................. 40 35
Income before taxes ............................................. 105
Less income taxes ............................................... 30
Net income ...................................................... \$ 75

The company's cash balance at the beginning of the year ws \$100, and its balance at the end of the year was \$120.
Required
1. Use the indirect method to determine the cash provided by operating activities for the year.
2. Prepare a statement of cash flows for the year.

EXERCISE 13-10 (Appendix 13A) Adjust Net income to a Cash Basis (Direct Method) (LO4)
Refer to the data for Herald Company in Exercise 13-9.

Required:
Use the direct method to convert the company's income statement to a cash basis.

PROBLEM 13-16 Prepare and Interpret a Statement of Cash Flows (Indirect Method) (LO2, LO3)
Marisa Thalmer, president of Becker Products, considers \$14,000 to be the minimum cash balance for operating purposes. As can be seen from the statements below, only \$3,000 in cash was available at the end of Year 2. Since the company reported a large net income for the year, and also issued both bonds and common stock, the sharp decline in cash is puzzling to Ms. Thalmer.

BECKER PRODUCTS
Comparative Balance Sheet
December 31, Year 2 and Year 1
Year 2 Year 1
Assets
Current assets:
Cash ...............................................
Accounts receivable ..............................
Inventory ..........................................
Prepaid expenses .................................
Total Current assets...............................
Long-term investments ...........................
Plant and equipment...............................
Less accumulated depreciation...................
Net plant and equipment .........................
Total assets .......................................

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................
Accrued liabilities.................................
Total current liabilities.............................
Bonds payable ....................................
Deferred income taxes............................

Stockholders'equity:
Preferred stock....................................
Common stock....................................
Retained earnings..................................
Total stockholders'equity ........................
Total liabilities and stockholders's equity........

\$ 3,000
120,000
108,000
5,000
236,000
54,000
436,000
60,000
376,000
\$666,000

\$ 72,000
19,000
91,000
130,000
12,000

82,000
265,000
86,000
433,000
\$666,000

\$ 22,000
82,000
85,000
8,000
197,000
74,000
280,000
50,000
230,000
\$501,000

\$ 60,000
18,000
78,000

10,000

95,000
238,000
80,000
413,000
\$501,000

BECKER PRODUCTS
Income Statement
For the Year Ended December 31, Year 2
Sales....................................
Less Cost of goods sold...............
Gross Margin...........................
Less operating expenses...............
Net operating income..................
Nonoperating income:
Gain on sale of investments..........
Gain on sale equipment ..............
Income before taxes ..................
Less income taxes.....................
Net income ............................

\$10,000
3,000 \$502,000
310,000
192,000
156,000
36,000

13,000
49,000
18,000
\$ 31,000

The following additional information is available for Year 2.
a. Dividends totaling \$25,000 were declared and paid in cash.
b. Equipment was sold during the year for \$10,000. the equipment had originally cost \$25,000 and had accumulated depreciation of \$18,000.
c. The decrease in the Preferred Stock account is the result of a conversation of preferred stock into an equal dollar amount of common stock into an equal dollar amount of common stock.
d. Long-term investments that had cost \$20,000 were sold during the year for \$30,000.

Required:
1. Using the direct method, compute the cash provided by operating activities for Year 2.
2. Using the data from (1) above, and other data from the problem as needed, prepare a statement of cash flows for Year 2.
3. Explain to the president the major reasons fro the decline in the company's cash position.

PROBLEM 13-17 (Appendix 13A) Prepare and Interpret Statement of Cash Flows (Direct Method) (LO2, LO4)
Refer to the financial statements for Becker Products in Problem 13-16. Since the Cash account decreased so dramatically during Year 2, the company's executive committee is anxious to see how the income statement would appear on a cash basis.

Required:
1. Using the direct method, adjust the company's income statement for Year 2 to a cash basis.
2. Using the data from (1) above, and other data from the problem as needed, prepare a statement of cash flows for Year 2.
3. PREPARE a brief explanation for the executive committee setting forth the major reasons for the sharp decline in cash during the year.

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