ACCT 3321-Intermediate Accounting I



The University of Texas at El Paso

College of Business Administration, Department of Accounting

ACCT 3321-Intermediate Accounting I

In-Class Exercise ICC6, Spring Semester 2005

Time Value of Money

1. On January 1, 2000 Spencer Company issued ten-year bonds with a face value of $600,000 and a stated interest rate of 8% payable semiannually on July 1, and January 1. The bonds were sold to yield 10%. Calculate the issue price of the bonds.

|Face amount of bonds |$  |  |

|PV, n= , i= % | |  |

|PV of principle | |$  |

|Face amount of bonds |$ |  |

|Stated interest rate | % |  |

|Annual interest |$ |  |

|Number of payments per year |  |  |

|Annuity (semi-annual interest payments) |$ |  |

|PVOA, n= , i= % |  |  |

|PV of annuity | |$  |

|Issue price of bonds |  | $ |

2. Spencer has decided to invest $100,000 in a certificate of deposit that pays 8% interest compounded annually to help fund his grandson’s college education. If his grandson starts college in eight years how much will be available to pay for tuition and books.

|Investment | $ |  |

|FV, n= , i= % |  |  |

|FV of Investment |  |$  |

3. Spencer wants to retire at the end of this year (December 31, 2003.) His life expectancy is 25 years from the retirement date. Spencer has come to you, his CPA, to learn how much he should deposit on December 31, 2003 to be able to withdraw $20,000 at the end of each year for the next 25 years, assuming the amount on deposit will earn 6% interest annually.

|Annuity | $ |  |

|PVOA, n= , i= % |  |  |

|PV of Annuity |  |$  |

4. Spencer Company purchased a piece of transportation equipment on January 1, 2003 by signing a noninterest bearing note for $200,000 due on January 1, 2006. The appropriate interest rate on a note of this nature would be 8% per annum. What is the purchase price of the equipment?

|Future payment | $ |  |

|PV, n= , i= % |  |  |

|PV of future payment |  |$  |

5. On April 1, 2002, Spencer Company loaned $100,000 to a major vendor. The terms of the loan stipulate that the vendor is to make five equal annual payments at 9% interest compounded annually. Assume that the first payment is to be made on March 31, 2003. What is the amount of each payment? (rounded to the nearest dollar)

|Present value of annual payments | $ |  |

|PVOA, n= , i= % |  |  |

|Annual payments |  |$  |

6. On January 1, 1990 Spencer made a $5,000 deposit into a savings account to supplement his retirement income. The savings account paid interest at the rate of 5% per annum. Each year through January 1, 1996 he made similar $5,000 deposits. On December 31, 1996 he transferred the balance in the savings account to a money market account that paid interest of 10% per annum. On December 31, 1997 and each year thereafter Spencer deposited $10,000 into the money market account. What is the balance in the money market account at January 1, 2000?

|Annuity | $ |  |

|FVOA, n= , i= % | |  |

|Times 1 plus i= % |  |  |

|FVAD, n= , i= % | |  |

|FV of Annuity (balance 12/31/96) |$ |  |

|FV n= , i= % |  |  |

|FV of Balance | |$  |

|Annuity |$ |  |

|FVOA, n= , i= % |  |  |

|FV of Annuity | |$  |

|Account Balance |  | $ |

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