Financial Accounting, 8th Edition
Financial Accounting, 8th Edition
8th Edition
ISBN: 9780078025556
Author: Robert Libby, Patricia Libby, Daniel Short
Publisher: McGraw-Hill Education
Question
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Chapter 11, Problem 1CCOMP

1.

To determine

Compute the issue (sale) price on January 1, 2014 when the market (yield) rate is 5%.

1.

Expert Solution
Check Mark

Answer to Problem 1CCOMP

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

(Table 1)

The issue price on January 1, 2014 when market (yield) 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:

Calculate the amount of interest payment.

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

Calculate the present value of bond.

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

Calculate the present value of annuity (interest).

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, 2014 when the market (yield) 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)

The issue price on January 1, 20141when market (yield) 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:

Calculate the present value of bond.

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

Calculate the present value of annuity (interest).

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, 2014 when the market (yield) rateis 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)

The issue price on January 1, 20141when market (yield) 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:

Calculate the present value of bond.

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

Calculate the present value of annuity (interest).

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, 8th Edition

Ch. 11 - What are the two basic requirements to support the...Ch. 11 - Prob. 12QCh. 11 - Prob. 13QCh. 11 - Prob. 14QCh. 11 - Prob. 15QCh. 11 - Prob. 16QCh. 11 - Prob. 1MCQCh. 11 - Prob. 2MCQCh. 11 - Prob. 3MCQCh. 11 - Prob. 4MCQCh. 11 - Prob. 5MCQCh. 11 - Prob. 6MCQCh. 11 - Prob. 7MCQCh. 11 - Which statement regarding dividends is false? a....Ch. 11 - Prob. 9MCQCh. 11 - Prob. 10MCQCh. 11 - Prob. 1MECh. 11 - Prob. 2MECh. 11 - Prob. 3MECh. 11 - Prob. 4MECh. 11 - Determining the Effects of Treasury Stock...Ch. 11 - Determining the Amount of a Dividend Cole Company...Ch. 11 - Prob. 7MECh. 11 - Prob. 8MECh. 11 - Prob. 9MECh. 11 - Prob. 10MECh. 11 - Prob. 1ECh. 11 - Prob. 2ECh. 11 - Prob. 3ECh. 11 - Prob. 4ECh. 11 - Prob. 5ECh. 11 - Prob. 6ECh. 11 - Prob. 7ECh. 11 - Prob. 8ECh. 11 - Prob. 9ECh. 11 - Prob. 10ECh. 11 - Prob. 11ECh. 11 - Prob. 12ECh. 11 - Prob. 13ECh. 11 - Prob. 14ECh. 11 - Prob. 15ECh. 11 - Prob. 16ECh. 11 - Prob. 17ECh. 11 - Prob. 18ECh. 11 - Prob. 19ECh. 11 - Prob. 20ECh. 11 - Prob. 21ECh. 11 - Prob. 22ECh. 11 - Prob. 23ECh. 11 - Prob. 24ECh. 11 - Prob. 25ECh. 11 - Prob. 1PCh. 11 - Prob. 2PCh. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Prob. 5PCh. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Prob. 9PCh. 11 - Prob. 10PCh. 11 - Prob. 11PCh. 11 - Prob. 12PCh. 11 - Prob. 1APCh. 11 - Prob. 2APCh. 11 - Prob. 3APCh. 11 - Prob. 4APCh. 11 - Prob. 1ACOMPCh. 11 - Prob. 1BCOMPCh. 11 - Prob. 1CCOMPCh. 11 - Prob. 1DCOMPCh. 11 - Prob. 1CPCh. 11 - Prob. 2CPCh. 11 - Prob. 3CPCh. 11 - Prob. 4CPCh. 11 - Prob. 5CPCh. 11 - Prob. 6CPCh. 11 - Prob. 1CC
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