Solutions Manual for Financial Accounting Tools for Business Decision Making 7th Edition by Kimmel Weygandt and Kieso

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1 Solutions Manual for Financial Accounting Tools for Business Decision Making 7th Edition by Kimmel Weygandt and Kieso Link full download of Solution Manual: Link full download of Test Bank: Learning Objectives APPENDIX D Time Value of Money 1. Distinguish between simple and compound interest. 2. Solve for future value of a single amount. 3. Solve for future value of an annuity. 4. Identify the variables fundamental to solving present value problems. 5. Solve for present value of a single amount. 6. Solve for present value of an annuity. 7. Compute the present value of notes and bonds. 8. Use a financial calculator to solve time value of money problems. Summary of Questions by Learning Objectives and Bloom s Taxonomy Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT Brief Exercises 1. 2 AP 8. 5, 6 AP 14. 5, 6, AP AP AP 2. 2, 3 C 9. 5 AP , 7 AP AP 3. 2 AP AP 15. 5, 6, AP AN AP 4. 3 AP AP AN AP 5. 2, 3 AP AP 16. 5, 6, AP AN 6. 2 AP 13. 5, 6, AP AN 7. 5, 6 C , 7 AP AP

2 SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE D-1 (a) Interest = p X i X n I = $8,000 X.05 X 12 years I = $4,800 Accumulated amount = $8,000 + $4,800 = $12,800 (b) Future value factor for 12 periods at 5% is (from Table 1) Accumulated amount = $8,000 X = $14, BRIEF EXERCISE D-2 (a) (b) (a) (b) (1) A 6% 3 periods (2) A 5% 8 periods B 4% 8 periods B 3% 12 periods BRIEF EXERCISE D-3 FV = p X FV of 1 factor = $9,200 X = $14, BRIEF EXERCISE D-4 FV of an annuity of 1 = p X FV of an annuity factor = $78,000 X = $981, D-2 Copyright 2013 John Wiley & Sons, Inc. Kimmel, Financial Accounting,7/e, Solutions Manual (For Instructor Use Only)

3 BRIEF EXERCISE D-5 FV = p X FV of 1 factor + (p X FV of an annuity factor) = ($6,000 X ) + ($1,000 X ) = $12, $25, = $37, BRIEF EXERCISE D-6 FV = p X FV of 1 factor = $34,000 X = $52, BRIEF EXERCISE D-7 (a) (b) (1) A 12% 6 periods B 10% 11 periods C 3% 18 periods (2) A 12% 20 periods B 10% 5 periods C 4% 8 periods BRIEF EXERCISE D-8 (a) i = 10%? $28, Discount rate from Table 3 is (9 periods at 10%). Present value of $28,000 to be received in 9 years discounted at 10% is therefore $11, ($28,000 X.42410).

4 BRIEF EXERCISE D-8 (Continued) (b) i = 9%? $28,000 $28,000 $28,000 $28,000 $28,000 $28, Discount rate from Table 4 is (6 periods at 9%). Present value of 6 payments of $28,000 each discounted at 9% is therefore $125, ($28,000 X ). BRIEF EXERCISE D-9 i = 9%? $750, Discount rate from Table 3 is (5 periods at 9%). Present value of $750,000 to be received in 5 years discounted at 9% is therefore $487, ($750,000 X.64993). Elmdale Company should therefore invest $487, to have $750,000 in five years. BRIEF EXERCISE D-10 i = 10%? $480, Discount rate from Table 3 is (8 periods at 10%). Present value of $480,000 to be received in 8 years discounted at 10% is therefore $223, ($480,000 X.46651). Orear Company should invest $223, to have $480,000 in eight years. D-4 Copyright 2013 John Wiley & Sons, Inc. Kimmel, Financial Accounting,7/e, Solutions Manual (For Instructor Use Only)

5 BRIEF EXERCISE D-11 i = 5%? $45,000 $45,000 $45,000 $45,000 $45,000 $45, Discount rate from Table 4 is Present value of 15 payments of $45,000 each discounted at 5% is therefore $467, ($45,000 X ). Dayton Company should pay $467, for this annuity contract. BRIEF EXERCISE D-12 i = 8%? $90,000 $90,000 $90,000 $90,000 $90,000 $90, Discount rate from Table 4 is Present value of 6 payments of $90,000 each discounted at 8% is therefore $416, ($90,000 X ). Nolasko Enterprises invested $416, to earn $90,000 per year for six years.

6 BRIEF EXERCISE D-13 Diagram for Principal i = 4%? $300, i = 4% Diagram for Interest? $13,500 $13,500 $13,500 $13,500 $13,500 $13, Present value of principal to be received at maturity: $300,000 X (PV of $1 due in 20 periods at 4% from Table 3)... $136, Present value of interest to be received periodically over the term of the bonds: $13,500 X (PV of $1 due each period for 20 periods at 4% from Table 4) , Present value of bonds... $320, BRIEF EXERCISE D-14 The bonds will sell at a discount (for less than $300,000). This may be proven as follows: Present value of principal to be received at maturity: $300,000 X (PV of $1 due in 20 periods at 5% from Table 3)... $113, Present value of interest to be received periodically over the term of the bonds: $13,500 X (PV of $1 due each period for 20 periods at 5% from Table 4) , Present value of bonds... $281, D-6 Copyright 2013 John Wiley & Sons, Inc. Kimmel, Financial Accounting,7/e, Solutions Manual (For Instructor Use Only)

7 17, BRIEF EXERCISE D-15 Diagram for Principal i = 8%? $64, i = 8% Diagram for Interest? $3,840 $3,840 $3,840 $3,840 $3,840 $3, Present value of principal to be received at maturity: $64,000 X (PV of $1 due in 6 periods at 8% from Table 3)... $40, Present value of interest to be received annually over the term of the note: $3,840 X (PV of $1 due each period for 6 periods at 8% from Table 4)... Present value of note received... $58,082.74

8 BRIEF EXERCISE D-16 Diagram for Principal i = 5%? $2,600, i = 5% Diagram for Interest? $117,000 $117,000 $117,000 $117,000 $117,000 $117,000 $117, Present value of principal to be received at maturity: $2,600,000 X (PV of $1 due in 16 periods at 5% from Table 3)... $1,191,086 Present value of interest to be received periodically over the term of the bonds: $117,000 X (PV of $1 due each period for 16 periods at 5% from Table 4)... 1,268,019 Present value of bonds and cash proceeds... $2,459,105 BRIEF EXERCISE D-17 i = 10%? $3,300 $3,300 $3,300 $3,300 $3,300 $3,300 $3,300 $3, Discount rate from Table 4 is Present value of 8 payments of $3,300 each discounted at 10% is therefore $17, ($3,300 X ). Phil Emley should not purchase the tire retreading machine because the present value of the future cash flows is less than the $18,000 purchase price of the retreading machine. D-8 Copyright 2013 John Wiley & Sons, Inc. Kimmel, Financial Accounting,7/e, Solutions Manual (For Instructor Use Only)

9 BRIEF EXERCISE D-18 i = 4%? $46,850 $46,850 $46,850 $46,850 $46,850 $46, Discount rate from Table 4 is Present value of 10 payments of $46,850 each discounted at 4% is therefore $379, ($46,850 X ). Jamison Company should receive $379, from the issuance of the note. BRIEF EXERCISE D-19 i = 10%? $38,000 $40,000 $50, To determine the present value of the future cash flows, discount the future cash flows at 10%, using Table 3. Year 1 ($38,000 X.90909) = $ 34, Year 2 ($40,000 X.82645) = 33, Year 3 ($50,000 X.75132) = 37, Present value of future cash flows $105, To achieve a minimum rate of return of 10%, Pendley Company should pay no more than $105, If Pendley pays less than $105,169.42, its rate of return will be greater than 10%.

10 BRIEF EXERCISE D-20 i =? $4, $10, Present value = Future value X Present value of 1 factor $4, = $10,000 X Present value of 1 factor Present value of 1 factor= $4, $10,000 = The for 15 periods is found in the 6% column. Barbara Oxford will receive a 6% return. BRIEF EXERCISE D-21 i = 10% $25,490 $80,000 n =? Present value = Future value X Present value of 1 factor $25,490 = $80,000 X Present value of 1 factor Present value of 1 factor = $25,490 $80,000 = The at 10% is found in the 12 years row. Blake Mohr therefore must wait 12 years to receive $80,000. D-10 Copyright 2013 John Wiley & Sons, Inc. Kimmel, Financial Accounting,7/e, Solutions Manual (For Instructor Use Only)

11 BRIEF EXERCISE D-22 i =?? $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1, $9, Present value = Annuity amount X Present value of an annuity factor $9, = $1,000 X Present value of an annuity factor Present value of an annuity factor = $9, $1,000 = The for 20 periods is found in the 9% column. Amanda Tevis will therefore earn a rate of return of 9%. BRIEF EXERCISE D-23 i = 11% $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $ 5, n =? Present value = Annuity amount X Present value of an annuity factor $5, = $1,000 X Present value of an annuity factor Present value of an annuity factor = $5, $1,000 = The at an interest rate of 11% is shown in the 8-year row. Therefore, Kelly will receive 8 payments.

12 BRIEF EXERCISE D-24 10? 18, ,000 N I/YR. PV PMT FV 10.76% BRIEF EXERCISE D-25 10? 60,000 8,860 0 N I/YR. PV PMT FV 7.80% BRIEF EXERCISE D-26 40? 178,000 8,400 0 N I/YR. PV PMT FV 3.55% (semiannual) D-12 Copyright 2013 John Wiley & Sons, Inc. Kimmel, Financial Accounting,7/e, Solutions Manual (For Instructor Use Only)

13 BRIEF EXERCISE D-27 (a) Inputs: 7 6.9? 16,000 0 N I PV PMT FV Answer: 86, (b) Inputs: ? 14, ,000 N I PV PMT FV Answer: 178,491.52

14 BRIEF EXERCISE D-28 (a) Note set payments at 12 per year. Inputs: ,000? 0 N I PV PMT FV Answer: (b) Note set payments to 1 per year. Inputs: ,000? 0 N I PV PMT FV Answer: 1, D-14 Copyright 2013 John Wiley & Sons, Inc. Kimmel, Financial Accounting,7/e, Solutions Manual (For Instructor Use Only)