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ID: 2520149 • Letter: D
Question
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Answer each of the following unrelated questions:
On January 1, 2007, Sandstone Corporation sold a building that cost $250,000 and had accumulated depreciation of $100,000 on the date of sale. A $300,000 non-interest-bearing note due on January 1, 2013 was received as consideration. The prevailing rate of interest for a note of this type on January 1, 2007 was 11%. At what amount should the gain from the sale of the building be reported?
On January 1, 2001, Sandstone Corporation purchased $200,000 face value, 9%, 10-year bonds of Walters Inc. The bonds mature on January 1, 2011, and pay interest annually beginning January 1, 2002. The market rate of interest is 11%. How much did Sandstone pay for the bonds?
Sandstone Corporation brought 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. Assume an 11% market rate of interest applies to this contract, how much was recorded as the cost of the machine?
Sandstone Corporation purchased a special tractor on December 31, 2013. The purchase agreement stipulated that Sandstone 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, 2013, at what amount, assuming the market rate of interest was 11%?
Sandstone Corporation wants to withdraw $100,000 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%?
11% Interest Table Factors
Period
Present Value of $1
(Table 6-2)
Present Value of an Ordinary Annuity of $1 (Table 6-4)
6
.53464
4.23054
7
.48166
4.71220
8
.43393
5.14612
9
.39092
5.53705
10
.35218
5.88923
Period
Present Value of $1
(Table 6-2)
Present Value of an Ordinary Annuity of $1 (Table 6-4)
6
.53464
4.23054
7
.48166
4.71220
8
.43393
5.14612
9
.39092
5.53705
10
.35218
5.88923
Explanation / Answer
At what amount should the gain from the sale of the building be reported?
Gain on sale of Building = Present Value of the Note minus the book value of the building = 300000/(1+11%)6 -(250000-100000) = 160392.3 - 150000 = 10392.25
How much did Sandstone pay for the bonds?
Sandstone needs to pay = Present Value of face value + Present Value of all interest payments
We can calculate with the help of financial calculator:
PMT = 18,000
N = 10yrs
FV = 200000
I/Y = 11%
CPT -> PV = $290,638.72
Sandstone needs to pay = $290,638.72
How much was recorded as the cost of the machine?
Cost of the machine = Present Value of all the installments of 4000
Using financial calculator:
PMT = 4000
N = 10
FV = 0
I/Y = 11%
CPT PV = $33,200
Cost of the machine = $33,200
The tractor should be recorded on December 31, 2013, at what amount?
Price of the Tractor = down payment + PV of 8 instalments = 20000 + PV of 8 emi of 5000
Using financial calculator we can calculate pV of the instalments
PMT = 5000
FV = 0
N = 8
I/Y = 11%
CPT PV = 34312.76
Cost of Tractor = $20,000+$34,312.76 = $54,312.76
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