5. How much must be invested now to receive s25,000 for ten years if the first $

Question

5. How much must be invested now to receive s25,000 for ten years if the first $25,000 is received today and the rate is 8%? 6. If$12,000 is deposited annually starting on January 1,20!7and it earns 9%, how much will accumulate by December 31, 2026 7. Bond discount amortization. On June 1, 2016, Everly Bottle Company sold $3,000,000 in long-term bonds for $2,631,300. The bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective-interest method. Instructions (a) Construct a bond amortization table for this problem to indicate the amount of interest expense and discount amortization at each May 31. Include only the first four years. Make sure all columns and rows are properly labeled. (Round to the nearest dollar.) (b) The sales price of $2,631,300 was determined from present value tables. Specifically explain how one would determine the price using present value tables. (c) Assuming that interest and discount amortization are recorded each May 31, prepare the adjusting entry to be made on December 31, 2018. (Round to the nearest dollar.)

Explanation / Answer

Solution 5:

Amount to be received every year for 10 years = $25,000

Rate of interest = 8%

Amount to be invested today = Present value of annuity to be received discounted at 8% for 10 years

= $25,000 * cumulative PV factor at 8% for 10 periods of annuity due

= $25,000 * 7.246888

= $181,172

Solution 6:

Annual deposit = $12,000

i = 9%

Period (n) = 10 years

Future value = $12,000 * Cumulative FV factor at 9% for 10 periods

= $12,000 * 16.56029 = $198,724

Solution 7a:

Solution 7b:

Solution 7c:

Schedule of bond discount amortization Date Cash paid Interest expense Discount amortized Carrying amount of bond 1-Jun-16 $2,631,300 31-May-17 $240,000 $263,130 $23,130 $2,654,430 31-May-18 $240,000 $265,443 $25,443 $2,679,873 31-May-19 $240,000 $267,987 $27,987 $2,707,860 31-May-20 $240,000 $270,786 $30,786 $2,738,646

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