1. Which of the following transactions would require the use of the present valu
ID: 2599676 • Letter: 1
Question
1. Which of the following transactions would require the use of the present value of an annuity due concept in order to calculate the present value of the asset obtained or liability owed at the date of incurrence? 2, Determine the market price of a $1,000,000, ten-year, 10% (stated rate) bond issue sold to yield an effective rate of 12%. How much should Allison debit land if she purchases the land on January 1, 2014 by issuing a 5-year, zero interest-bearing promissory note for $567,885? The present value of this note discounted at 11% is $337,012. Two years ago, Mark, a competitor of Allison's, made an offer of $250,000 to buy this land from the previous owne a. $567,885 b. S337,012 c. $250,000 d. S148,363 e. $125,000Explanation / Answer
1) A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement.
2) The market price of the bond is present value of interest payment and maturity amount discounted.
Market Price = $100,000 * PVAF (12%, 10) + $ 1,000,000* PVIF (12%, 10)
= $100,000*17.54874 + $ 1,000,000* 0.32197
For PVAF and PVIF value refer PVaf and Pvif Tables
= $ 886,990
3) b. $337,012
Since the market price of bond is discounted value of zero coupon bond par value. So the price $337,012 that was given as a zero coupon bond should be debited as the Fair value of land purchased, as the bond is consideration for purchase of land.
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