P3-10 P3-4 You have a trust fund that will pay you $1 million exactly ten years

Question

P3-10

P3-4 You have a trust fund that will pay you $1 million exactly ten years from today. You want cash now, so you are considering an opportunity to sell the right to the trust fund to an investor.

a. What is the least you will sell your claim for if you could earn the following rates of return on similar risk investments during the ten-year period?

1. 6%

2. 9%

3. 12$

b. Rework part (a) under the assumption that the $1 million payment will be received in 15 rather than 10 years.

c. Based on your findings in part (a) and (b), discuss the effect of both the size of the rate of return and the time until receipt of payment on the present value of a future sum.

Don Lieberman and Associates, a CPA firm, uses job order costing to capture the costs of its audit jobs. There were no audit jobs in process at the beginning of November. Overhead costs are applied to jobs on the basis of auditor hours, and the predetermined overhead rate is $52 per auditor hour. The Lynn job is the only incomplete job at the end of November. Actual overhead for the month was $13,830. (a) Determine the cost of each job. (b) Indicate the balance of the Service Contracts in Process account at the end of November. (c) Calculate the ending balance of the Operating Overhead account for November. P3-4 You have a trust fund that will pay you $1 million exactly ten years from today. You want cash now, so you are considering an opportunity to sell the right to the trust fund to an investor. a. What is the least you will sell your claim for if you could earn the following rates of return on similar risk investments during the ten-year period? 1. 6% 2. 9% 3. 12$ b. Rework part (a) under the assumption that the $1 million payment will be received in 15 rather than 10 years. c. Based on your findings in part (a) and (b), discuss the effect of both the size of the rate of return and the time until receipt of payment on the present value of a future sum.

Explanation / Answer

(a) Determine the cost of each job.

Solution-

(b)  Indicate the balance of the service contract in Process account at the end of November.

Solution-

The Lynn job is the only incomplete job, therefore, $10,664

(c)  Calculate the ending balance of the Operating Overhead account for November.

Solution-

Actual overhead=$13,830 (Debit)

Applied overhead=$10,976 (Credit)

Balance=$2,845 (Debit)

a. What is the least you will sell your claim for if you could earn the following rates of return on similar-risk investments during the ten-year period?

Solution-

At 6%

PV   =   $1,000,000*(1.06)-10

PV   =   $1,000,000*(.558395)

PV   =   $558,395

At 9%

PV     =    $1,000,000*(1.09)-10

PV    =     $1,000,000*(.422411)

PV    =     $422,411

At 12%

PV = $1,000,000*(1.12)-10

PV = $1,000,000*(.321973)

PV = $321,973

b. Rework part (a) under the assumption that the $1 million payment will be received in 15 rather than 10 years.

Solution-

At 6%

PV = $1,000,000*(1.06)-15

PV = $1,000,000*(.417265)

PV = $417,265

At 9%

PV = $1,000,000*(1.09)-15

PV = $1,000,000*(.274538)

PV = $274,538

At 12%

PV = $1,000,000*(1.12)-15

PV = $1,000,000*(.182696)

PV = $182,696

c. Based on your findings in part (a) and (b), discuss the effect of both the size of the rate of return and the time until receipt of payment on the present value of a future sum.

Solution-

The increases in rate of return the present value becomes low this decrease come from the higher opportunity cost with the higher rate. Large rate of return and the long time period until the money is received than the smaller will be the present value of a future payment.

  

Lynn Brian Mike Direct materials $660 $480 $290 Auditor labor costs 6,000 7,400 3,720 Applied overhead 4,004 4,372 2,600 Total cost $10,664 $12,252 $6,610

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