FINANCIAL ACCOUNTING (LL)
FINANCIAL ACCOUNTING (LL)
10th Edition
ISBN: 9781266449512
Author: Libby
Publisher: MCG
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Chapter 11, Problem 1CCOMP

1.

To determine

Compute the issue (sale) price on January 1 when the annual market interest rate is 5%.

1.

Expert Solution
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Answer to Problem 1CCOMP

ParticularsAmount in $
Present value (2)613,910
Present value of annuity (3)386,087
Issue price999,997

(Table 1)

Therefore, the issue price on January 1when annual market interest rate is 5% is $999,997.

Explanation of Solution

Present value:

Present value is the current value of an amount that is to be paid or received in future. Present value is determined by using the formula:

Present Value = 1(1+i)n×Amount

Annuity:

An annuity is referred as a sequence of payment of fixed amount of cash flows that occurs over the equal intervals of time.

Working Notes:

Compute the issue (sale) price on January 1 when the annual market interest rate is 5%:

Interest payment =Issue price × interest rate=$1,000,000×5%=$50,000 (1)

Present Value = 1(1+i)n×Amount=1(1+0.05)10×1,000,000=0.61391×1,000,000=$613,910 (2)

Present Value of  Annuity= 1(1+i)ni×Amount=1(1+0.05)105%×$50,000(1)=7.72173×$50,000=$386,087 (3)

2.

To determine

Compute the issue (sale) price on January 1 when the annual market interest rate is 4%.

2.

Expert Solution
Check Mark

Answer to Problem 1CCOMP

ParticularsAmount in $
Present value (4)675,560
Present value of annuity (5)405,545
Issue price1,081,105

(Table 2)

Therefore, the issue price on January 11when annual market interest rate is 4% is $1,081,105.

Explanation of Solution

Present value:

Present value is the current value of an amount that is to be paid or received in future. Present value is determined by using the formula:

Present Value = 1(1+i)n×Amount

Annuity:

An annuity is referred as a sequence of payment of fixed amount of cash flows that occurs over the equal intervals of time.

Working Notes:

Compute the issue (sale) price on January 1 when the annual market interest rate is 4%:

Present Value = 1(1+i)n×Amount=1(1+0.04)10×1,000,000=0.67556×1,000,000=$675,560 (4)

Present Value of  Annuity= 1(1+i)ni×Amount=1(1+0.04)104%×$50,000(1)=8.11090×$50,000=$405,545 (5)

3.

To determine

Compute the issue (sale) price on January 1 when the annual market interest rate is 6%.

3.

Expert Solution
Check Mark

Answer to Problem 1CCOMP

ParticularsAmount in $
Present value (6)558,390
Present value of annuity (7)368,005
Issue price926,395

(Table 3)

Therefore, the issue price on January 11when annual market interest rate is 6% is $926,395.

Explanation of Solution

Present value:

Present value is the current value of an amount that is to be paid or received in future. Present value is determined by using the formula:

Present Value = 1(1+i)n×Amount

Annuity:

An annuity is referred as a sequence of payment of fixed amount of cash flows that occurs over the equal intervals of time.

Working Notes:

Compute the issue (sale) price on January 1 when the annual market interest rate is 6%:

Present Value = 1(1+i)n×Amount=1(1+0.06)10×1,000,000=0.55839×1,000,000=$558,390 (6)

Present Value of  Annuity= 1(1+i)ni×Amount=1(1+0.06)106%×$50,000(1)=7.36009×$50,000=$368,005 (7)

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Chapter 11 Solutions

FINANCIAL ACCOUNTING (LL)

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