E23-11 (SCF—Indirect Method) Condensed financial data of ...



E23-11 (SCF—Indirect Method) Condensed financial data of Pat Metheny Company for 2008 and 2007 are presented below. PAT METHENY COMPANY COMPARATIVE BALANCE SHEET AS OF DECEMBER 31, 2008 AND 2007 2008 2007 Cash $1,800 $1,150 Receivables 1,750 1,300 Inventory 1,600 1,900 Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments (Held-to-maturity) 1,300 1,420 $7,150 $6,300 Accounts payable $1,200 $ 900 Accrued liabilities 200 250 Bonds payable 1,400 1,550 Capital stock 1,900 1,700 Retained earnings 2,450 1,900 $7,150 $6,300 PAT METHENY COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2008 Sales $6,900 Cost of goods sold 4,700 Gross margin 2,200 Selling and administrative expense 930 Income from operations 1,270 Other revenues and gains Gain on sale of investments 80 Income before tax 1,350 Income tax expense 540 Net income 810 Cash dividends 260 Income retained in business $ 550 Additional information: During the year, $70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2008. Instructions Prepare a statement of cash flows using the indirect method.

|Pat Metheny Company |

|STATEMENT OF CASH FLOWS |

|For the Year Ended December 31, 2008 |

|(Indirect Method) |

|Cash flows from operating activities | | |

| Net income | |$ 810 |

| Adjustments to reconcile net income to net cash | | |

| provided by operating activities: | | |

| Depreciation expense ($1,200 – $1,170) |$ 30 | |

| Gain on sale of investments | (80) | |

| Decrease in inventory |300 | |

| Increase in accounts payable |300 | |

| Increase in receivables |(450) | |

| Decrease in accrued liabilities | (50) | 50 |

| Net cash provided by operating activities | |860 |

| | | |

|Cash flows from investing activities | | |

| Sale of held-to-maturity investments |  200 | |

|[($1,420 – $1,300) + $80] | | |

| Purchase of plant assets [($1,900 – $1,700) – $70] | (130) | |

| Net cash provided by investing activities | |70 |

|Cash flows from financing activities | | |

| Issuance of capital stock [($1,900 – $1,700) – $70] |130 | |

| Retirement of bonds payable |(150) | |

| Payment of cash dividends | (260) | |

| Net cash used by financing activities | | (280) |

| | | |

|Net increase in cash | |650 |

|Cash, January 1, 2008 | | 1,150 |

|Cash, December 31, 2008 | |$1,800 |

| | | |

|Noncash investing and financing activities | | |

| Issuance of common stock for plant assets | |$ 70 |

E23-12 (SCF—Direct Method) Data for Pat Metheny Company are presented in E23-11. Instructions Prepare a statement of cash flows using the direct method. (Do not prepare a reconciliation schedule.)

|Pat Metheny Company |

|STATEMENT OF CASH FLOWS |

|For the Year Ended December 31, 2008 |

|(Direct Method) |

|Cash flows from operating activities | | |

| Cash collections from customers | |$6,450* |

| Less: Cash paid for merchandise |$4,100** | |

| Cash paid for selling/administrative | | |

|expenses |950*** | |

| Cash paid for income taxes | 540 | 5,590 |

| Net cash provided by operating activities | |860 |

| | | |

|Cash flows from investing activities | | |

| Sale of held-to-maturity investments | | |

|[($1,420 – $1,300) + $80] |200 | |

| Purchase of plant assets [($1,900 – $1,700) – $70] | (130) | |

| Net cash provided by investing activities | |70 |

| | | |

|Cash flows from financing activities | | |

| Issuance of capital stock [($1,900 – $1,700) – $70] |130 | |

| Retirement of bonds payable |(150) | |

| Payment of cash dividends | (260) | |

| Net cash used by financing activities | | (280) |

| | | |

|Net increase in cash | |650 |

|Cash, January 1, 2008 | | 1,150 |

|Cash, December 31, 2008 | |$1,800 |

| | | |

|Noncash investing and financing activities | | |

| Issuance of common stock for plant assets | |$ 70 |

| | | |

| *$1,300 + $6,900 – $1,750 | | |

| **$1,600 + $4,700 – $1,900 + $900 – $1,200 | | |

|***$250 + ($930 – $30) – $200 | | |

E6-5 (Computation of Present Value) Using the appropriate interest table, compute the present values of the following periodic amounts due at the end of the designated periods. (a) $30,000 receivable at the end of each period for 8 periods compounded at 12%. (b) $30,000 payments to be made at the end of each period for 16 periods at 9%. (c) $30,000 payable at the end of the seventh, eighth, ninth, and tenth periods at 12%.

|(a) |$30,000 X 4.96764 = $149,029.20. |

|(b) |$30,000 X 8.31256 = $249,376.80. |

|(c) |($30,000 X 3.03735 X .50663 = $46,164.38. |

| |or (5.65022 – 4.11141) X $30,000 = $46,164.30 (difference of $.08 due to rounding). |

E6-10 (Unknown Periods and Unknown Interest Rate) Consider the following independent situations. (a) Mike Finley wishes to become a millionaire. His money market fund has a balance of $92,296 and has a guaranteed interest rate of 10%. How many years must Mike leave that balance in the fund in order to get his desired $1,000,000? (b) Assume that Serena Williams desires to accumulate $1 million in 15 years using her money market fund balance of $182,696. At what interest rate must Serena’s investment compound annually?

(a) The number of interest periods is calculated by first dividing the future value of $1,000,000 by $92,296, which is 10.83471—the value $1.00 would accumulate to at 10% for the unknown number of interest periods. The factor 10.83471 or its approximate is then located in the Future value of 1 Table by reading down the 10% column to the 25-period line; thus, 25 is the unknown number of years Jerry must wait to become a millionaire.

(b) The unknown interest rate is calculated by first dividing the future value of $1,000,000 by the present investment of $182,696, which is 5.47357—the amount $1.00 would accumulate to in 15 years at an unknown interest rate. The factor or its approximate is then located in the Future value of 1 Table by reading across the 15-period line to the 12% column; thus, 12% is the interest rate Russell Maryland must earn on his investment to become a millionaire.

P6-7 (Time Value Concepts Applied to Solve Business Problems) Answer the following questions related to Derek Lee Inc. (a) Derek Lee Inc. has $572,000 to invest. The company is trying to decide between two alternative uses of the funds. One alternative provides $80,000 at the end of each year for 12 years, and the other is to receive a single lump sum payment of $1,900,000 at the end of the 12 years. Which alternate should Lee select? Assume the interest rate is constant over the entire investment. (b) Derek Lee Inc. has completed the purchase of new Dell computers. The fair market value of the equipment is $824,150. The purchase agreement specifies an immediate down payment of $200,000 and semiannual payments of $76,952 beginning at the end of 6 months for 5 years. What is the interest rate, to the nearest percent, used in discounting this purchase transaction? (c) Derek Lee Inc. loans money to John Kruk Corporation in the amount of $600,000. Lee accepts an 8% note due in 7 years with interest payable semiannually. After 2 years (and receipt of interest for 2 years), Lee needs money and therefore sells the note to Chicago National Bank, which demands interest on the note of 10% compounded semiannually. What is the amount Lee will receive on the sale of the note? (d) Derek Lee Inc. wishes to accumulate $1,300,000 by December 31, 2017, to retire bonds outstanding. The company deposits $300,000 on December 31, 2007, which will earn interest at 10% compounded quarterly, to help in the retirement of this debt. In addition, the company wants to know how much should be deposited at the end of each quarter for 10 years to ensure that $1,300,000 is available at the end of 2017. (The quarterly deposits will also earn at a rate of 10%, compounded quarterly.) (Round to even dollars.)

a) Time diagram (alternative one):

Formulas: PV–OA = R (PVF–OAn, i)

$572,000 = $80,000 (PVF–OA12, i)

PVF–OA12, i = $572,000 ( $80,000

PVF–OA12, i = 7.15

7.15 is present value of an annuity of $1 for 12 years discounted at approximately 9%.

| |Future value approach | |Present value approach |

| | | | |

| |FV = PV (FVFn, i) | |PV = FV (PVFn, i) |

| | |or | |

| |$1,900,000 = $572,000 (FVF12, i) | |$572,000 = $1,900,000 (PVF12, i) |

| | | | |

| |FVF12, i |= $1,900,000 ( $572,000 | |PVF12, i |= $572,000 ( $1,900,000 |

| | | | | | |

| |FVF12, i |= 3.32168 | |PVF12, i |= .30105 |

| | | | |

| |3.32 is the future value of $1 | |.301 is the present value of $1 |

| |invested at between 10% and | |discounted at between 10% |

| |11% for 12 years. | |and 11% for 12 years. |

Derek Lee, Inc. should choose alternative two since it provides a higher rate of return.

b)

Formulas: PV–OA = R (PVF–OAn, i)

$624,150 = $76,952 (PVF–OA10, i)

PV–OA10, i = $624,150 ( $76,952

PV–OA10, i = 8.11090

8.11090 is the present value of a 10-period annuity of $1 discounted at 4%. The interest rate is 4% semiannually, or 8% annually.

c)

Formulas:

PV–OA = R (PVF–OAn, i) PV = FV (PVFn, i)

PV–OA = $24,000 (PVF–OA10, 5%) PV = $600,000 (PVF10, 5%)

PV–OA = $24,000 (7.72173) PV = $600,000 (.61391)

PV–OA = $185,321.52 PV = $368,346

Combined present value (amount received on sale of note):

$185,321.52 + $368,346 = $553,667.52

d)

Formula: FV = PV (FVFn, i)

FV = $300,000 (FVF40, 2½%)

FV = $300,000 (2.68506)

FV = $805,518

Amount to which quarterly deposits must grow:

$1,300,000 – $805,518 = $494,482.

Formulas: FV–OA = R (FVF–OAn, i)

$494,482 = R (FVF–OA40, 2½%i)

$494,482 = R (67.40255)

R = $494,482 ( 67.40255

R = $7,336.25

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download