1460T_c06.qxd12/2/0509:28 am Page294 EQA 294.Chapter 6 Accounting and the Time Value of Money Instructions How much should Andrew Kelly deposit today in an account earning 6%,compounded annually,so that he will have enough money on hand in 2 years to pay for the overhaul? (L0 10)E6-22 (Determine Interest Rate)Reba McEntire wishes to invest $19,000 on July 1,2007,and have it accumulate to $49,000 by July 1,2017. Instructions Use a financial calculator to determine at what exact annual rate of interest Reba must invest the $19,000. (L0 10)*E6-23 (Determine Interest Rate)On July 17,2006,Tim McGraw borrowed $42,000 from his grand- father to open a clothing store.Starting July 17,2007,Tim has to make ten equal annual payments of $6,500 each to repay the loan. Instructions Use a financial calculator to determine what interest rate Tim is paying. (L0 10)*E6-24 (Determine Interest Rate)As the purchaser of a new house,Patty Loveless has signed a mort- gage note to pay the Memphis National Bank and Trust Co.$14,000 every 6 months for 20 years,at the end of which time she will own the house.At the date the mortgage is signed the purchase price was $198,000,and a down payment of $20,000 was made.The first payment will be made 6 months after the date the mortgage is signed. Instructions Using a financial calculator,compute the exact rate of interest earned on the mortgage by the bank. See the book's website,www.wiley.com/college/kieso,for Additional Exercises. PROBLEMS ⊕ (Interest rates are per annum unless otherwise indicated.) (L05, P6-1 (Various Time Value Situations)Answer each of these unrelated questions. 6,7) (a)On January 1,2007,Aaron Brown Corporation sold a building that cost $250,000 and that had accu- mulated depreciation of $100,000 on the date of sale.Brown received as consideration a $275,000 noninterest-bearing note due on January 1,2010.There was no established exchange price for the building,and the note had no ready market.The prevailing rate of interest for a note of this type on January 1,2007,was 9%.At what amount should the gain from the sale of the building be reported? (b) On January 1,2007,Aaron Brown Corporation purchased 200 of the $1,000 face value,9%,10-year bonds of Walters Inc.The bonds mature on January 1,2017,and pay interest annually beginning January 1,2008.Brown purchased the bonds to yield 11%.How much did Brown pay for the bonds? (c)Aaron Brown Corporation bought a new machine and agreed to pay for it in equal annual in- stallments of $4,000 at the end of each of the next 10 years.Assuming that a prevailing interest rate of 8%applies to this contract,how much should Brown record as the cost of the machine? (d)Aaron Brown Corporation purchased a special tractor on December 31,2007.The purchase agree- ment stipulated that Brown should pay $20,000 at the time of purchase and $5,000 at the end of each of the next 8 years.The tractor should be recorded on December 31,2007,at what amount, assuming an appropriate interest rate of 12%? (e) Aaron Brown Corporation wants to withdraw $100,000(including principal)from an investment fund at the end of each year for 9 years.What should be the required initial investment at the be ginning of the first year if the fund earns 11%? (L05, P6-2 (Various Time Value Situations)Using the appropriate interest table,provide the solution to each 6,7) of the following four questions by computing the unknowns (a)What is the amount of the payments that Tom Brokaw must make at the end of each of 8 years to accumulate a fund of $70,000 by the end of the eighth year,if the fund earns 8%interest,com- pounded annually? (b)Anderson Cooper is 40 years old today and he wishes to accumulate $500,000 by his sixty-fifth birthday so he can retire to his summer place on Lake Hopatcong.He wishes to accumulate this amount by making equal deposits on his fortieth through his sixty-fourth birthdays.What annual deposit must Anderson make if the fund will earn 12%interest compounded annually?Instructions How much should Andrew Kelly deposit today in an account earning 6%, compounded annually, so that he will have enough money on hand in 2 years to pay for the overhaul? *E6-22 (Determine Interest Rate) Reba McEntire wishes to invest $19,000 on July 1, 2007, and have it accumulate to $49,000 by July 1, 2017. Instructions Use a financial calculator to determine at what exact annual rate of interest Reba must invest the $19,000. *E6-23 (Determine Interest Rate) On July 17, 2006, Tim McGraw borrowed $42,000 from his grand￾father to open a clothing store. Starting July 17, 2007, Tim has to make ten equal annual payments of $6,500 each to repay the loan. Instructions Use a financial calculator to determine what interest rate Tim is paying. *E6-24 (Determine Interest Rate) As the purchaser of a new house, Patty Loveless has signed a mort￾gage note to pay the Memphis National Bank and Trust Co. $14,000 every 6 months for 20 years, at the end of which time she will own the house. At the date the mortgage is signed the purchase price was $198,000, and a down payment of $20,000 was made. The first payment will be made 6 months after the date the mortgage is signed. Instructions Using a financial calculator, compute the exact rate of interest earned on the mortgage by the bank. PROBLEMS (Interest rates are per annum unless otherwise indicated.) P6-1 (Various Time Value Situations) Answer each of these unrelated questions. (a) On January 1, 2007, Aaron Brown Corporation sold a building that cost $250,000 and that had accu￾mulated depreciation of $100,000 on the date of sale. Brown received as consideration a $275,000 noninterest-bearing note due on January 1, 2010. There was no established exchange price for the building, and the note had no ready market. The prevailing rate of interest for a note of this type on January 1, 2007, was 9%. At what amount should the gain from the sale of the building be reported? (b) On January 1, 2007, Aaron Brown Corporation purchased 200 of the $1,000 face value, 9%, 10-year bonds of Walters Inc. The bonds mature on January 1, 2017, and pay interest annually beginning January 1, 2008. Brown purchased the bonds to yield 11%. How much did Brown pay for the bonds? (c) Aaron Brown Corporation bought a new machine and agreed to pay for it in equal annual in￾stallments of $4,000 at the end of each of the next 10 years. Assuming that a prevailing interest rate of 8% applies to this contract, how much should Brown record as the cost of the machine? (d) Aaron Brown Corporation purchased a special tractor on December 31, 2007. The purchase agree￾ment stipulated that Brown should pay $20,000 at the time of purchase and $5,000 at the end of each of the next 8 years. The tractor should be recorded on December 31, 2007, at what amount, assuming an appropriate interest rate of 12%? (e) Aaron Brown Corporation wants to withdraw $100,000 (including principal) from an investment fund at the end of each year for 9 years. What should be the required initial investment at the be￾ginning of the first year if the fund earns 11%? P6-2 (Various Time Value Situations) Using the appropriate interest table, provide the solution to each of the following four questions by computing the unknowns. (a) What is the amount of the payments that Tom Brokaw must make at the end of each of 8 years to accumulate a fund of $70,000 by the end of the eighth year, if the fund earns 8% interest, com￾pounded annually? (b) Anderson Cooper is 40 years old today and he wishes to accumulate $500,000 by his sixty-fifth birthday so he can retire to his summer place on Lake Hopatcong. He wishes to accumulate this amount by making equal deposits on his fortieth through his sixty-fourth birthdays. What annual deposit must Anderson make if the fund will earn 12% interest compounded annually? 294 • Chapter 6 Accounting and the Time Value of Money (L0 5, 6, 7) (L0 10) (L0 10) (L0 10) (L0 5, 6, 7) wi el moc. y c/ ollege/kieso See the book’s website, www.wiley.com/college/kieso, for Additional Exercises. 1460T_c06.qxd 12/2/05 09:28 am Page 294