a. On January 1, 2017, Buffalo Corporation purchased 333 of the $1,000 face valu

Question

a. On January 1, 2017, Buffalo Corporation purchased 333 of the $1,000 face value, 9%, 10-year bonds of Walters Inc. The bonds mature on January 1, 2027, and pay interest annually beginning January 1, 2018. Buffalo purchased the bonds to yield 11%. How much did Buffalo pay for the bonds?
Buffalo must pay for the bonds = ?

b. Buffalo Corporation purchased a special tractor on December 31, 2017. The purchase agreement stipulated that Buffalo should pay $20,180 at the time of purchase and $5,020 at the end of each of the next 8 years. The tractor should be recorded on December 31, 2017, at what amount, assuming an appropriate interest rate of 12%? Cost of tractor to be recorded = ?

Explanation / Answer

a) The amount that Buffalo must pay for the bonds will be equal to sum of present value of interest payments and present value of matuarity value of bonds.

Par value of bonds = 333*$1,000 = $333,000

Annual Interest on bonds = $333,000*9% = $29,970

Present value of annual interest = $29,970*PVAF(11%, 10 yrs)

= $29,970*5.88923 = $176,500

Present value of matuarity value = $333,000*PVF(11%, 10 yrs)

= $333,000*0.35218 = $117,276

Buffalo must pay for bonds = PV of Annual Interest+PV of matuarity value

= $176,500+$117,276 = $293,776

b) The cost of tractor to be recorded will be equal to sum of amount paid at the time of purchase and present value of payments made at the end of next 8 years.

Cost of Tractor = Amount paid at the time of purchase+PV of $5,020 at the end of next 8 yrs

= $20,180+[$5,020*PVAF(12%, 8 yrs)]

= $20,180+($5,020*4.96764)

= $20,180+$24,938 = $45,118

Cost of tractor to be recorded = $45,118

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