1. Pacific Northern Corp. needs new manufacturing equipment. Two companies can provide similar equipment but under different payment plans:
a. Henderson Manufacturing offers to let Pacific Northern pay $60,000 each year for five years. The payments include interest at 12% per year. What is the present value of the payments?
b. Southern Corp. will let Pacific Northern make a single payment of $400,000 at the end of five years. This payment includes both principal and interest at 12%. What is the present value of this payment?
c. Pacific Northern will purchase the equipment that costs the least, as measured by present value. Which equipment should Pacific Northern select? Why?
Annuity Annuity of $1 at 12% for 5 years (Exhibit 12A-7)” Present Value
Present Value of $1 at 12% for 5 years (Exhibit 12A-6) Present Value
2 Lex Rolf is considering two plans for building an education fund for his children.
Plan A—Invest $2,000 each year to earn 10% annually for six years.
Plan B—Invest $10,000 now, to earn 8% annually for six years.
Before making any calculations, which plan would you expect to provide the larger future amount? Calculate the future value of each plan. Which plan provides the larger amount at the end of six years?
“Future Value of Annuity of $1 at 10% for 6 years (Exhibit 12A-4)” Future Value
“Future Value of $1 at 8% for 6 years (Exhibit 12A-2)” Future Value
3 Orbit Corp. issued a $400,000, 10%, 15-year mortgage on January 1, 2007, to purchase warehouses.
Semiannual Interest Period Cash Payment Interest Expense Decrease in Principal Principal Balance
(10% x 6/12)
January 1, 2007 $400,00
June 30, 2007 $26,021 $20,000 $6,021 393,979
December 31, 2007 $26,021 $19,699 $6,322 387,657
June 30, 2008
December 31, 2008
June 30, 2009
Date Accounts and Explanations Post Ref. Debit Credit
1. Complete the amortization schedule for Orbit Corp., assuming payments are made semiannually.
2. Record the journal entries for (a) issuance of mortgage on January 1, 2007, and (b) the first interest cash payment on June 30, 2007.
4 Family Food Industries reported the following at September 30:
Convertible bonds payable $400,000
Less: Discount on bonds payable (12,000) $388,000
1. Record retirement of half of the bonds on October 1 at the call price of 101.
2. Imagine that the bonds had not been retired. What would cause the bondholders to convert their bonds into stock?
Date Accounts and Explanations Post Ref. Debit Credit
Maturity value of bonds being retired
Less: Discount on bonds payable
Carrying value of bonds payable
Less: Market price
Loss on retirement of bonds payable
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