CH 8
what is the net book value equation?
net book value= historical cost - accumulated depreciation
What are the types of long-lived assets?
tangible: property, plant, equipment, natural resources (e.g. mines, gravel pits, timber tracts)
intangible: patents, copyrights, franchises, trademarks
What is the journal entry when a lease is signed?
Dr. lease asset xx
Cr. lease liability xx
What is a contingent liability?
A potential liability that has arisen as the result of a past event. Examples of contingent liabilities are lawsuits and warranties.
When calculating the present value of a bond’s future cash flows, do investors use the coupon rate or market interest rate as the discount rate? Why?
Market interest rate. It reflects the return investors demand to invest in a security.
what is asset impairment?
when events or changes in circumstances cause the book value of long-lived assets to be higher than their related estimated future cash flows
Under which method(s) of depreciation is an asset’s net book value the depreciable base (the amount
to be depreciated)?
a. Straight-line method
b. Double Declining-balance method
c. Units-of-production method
d. All of the above
b. double declining-balance method
Find the PV of $1 AND annuity of $1:
i = 10%
n = 7
PV of $1= .82270
Annuity of $1= 3.54595
You purchased a new car and promised to pay the dealership five payments of $8,000 at the end of each of the next five years. The applicable annual interest rate is 8 percent. What is the present value of this annuity?
$31,942
Explain when a bond is sold at... (in terms of issue price)
1. discount
2. par
3. premium
1. discount= face value > market value
2. par= face value = market value
3. premium= face value < market value
Goopy followed the practice of depreciating its building on a straight-line basis. A building was purchased last year and had an estimated useful life of 35 years and a residual value of $25,000. The company’s depreciation expense for last year was $20,000 on the building. What was the original cost of the building?
$725,000
Goopy bought a factory building and was wondering if it's impaired:
book value= 58,000
future cash flows= 29,000
fair value= 27,000
Yes, it's impaired
Goopy rented a house and had the choice of...
1. paying $20,000 at the of the next 4 years with 25% interest
2. paying $45,000 immediately
Which option should he select?
Option 2
On November 1, Goopy had a $8,000 1-year loan with an interest of 6%. What is the adjusting entry on December 31st?
Dr. interest expense 80
Cr. interest payable 80
Goopy plans to issue bonds with a face value of $600,000 and a coupon rate of 6 percent. The bonds will mature in 5 years and pay interest semiannually every June 30 and December 31. All of the bonds are sold on Dec. 31 of this year. Determine the issuance price of the bonds assuming an annual market rate of interest of 8.5 percent. Round to nearest whole number.
$684,116
Shahia Company bought a building for $382,000 cash and the land on which it was located for $107,000 cash. The company paid transfer costs of $9,000 ($3,000 for the building and $6,000 for the land). Renovation costs on the building before it could be used were $21,000. Assume an estimated 10-year useful life and a $15,000 estimated residual value.
What would be the net book value of the property (land and building) at the end of Year 2?
$440,800
Goopy has a machine that originally cost $80,000. Depreciations has been recorded for 5 years using the straight-line method. Assume a $10,000 salvage value and a 20 year useful-life. After the 5 years, Goopy sells it at a cost of $60,000.
Is this a gain or loss? If so, by how much?
Loss by $2,500
An investment will pay $15,000 at the end of each year for eight years and a one-time payment of $150,000 at the end of the eighth year. Determine the present value of this investment using a 7 percent annual interest rate.
$176,872
Goopy pays $500 per month for 20 months and an additional $12,000 at the end of 20 months. The dealer is charging an annual interest rate of 24 percent. What is the present value of the car investment?
$16,251.36
Goopy is planning to issue bonds with a face value of $100,000 and a coupon rate of 8 percent. The bonds mature in seven years. Interest is paid annually on December 31. All of the bonds will be sold on January 1 of this year.
Compute the issue (sales) price on January 1 of this year and round to the nearest whole number: Market interest rate (annual): 6 percent
$111,165
Calculate the book value of a three-year-old machine that has a cost of $55,000, an estimated residual value of $5,000, and an estimated useful life of five years. The company uses double-declining-balance depreciation. Round to the nearest dollar
$11,880
Calculate the book value of a three-year-old machine that has a cost of $26,000, an estimated residual value of $1,000, and an estimated useful life of 50,000 machine hours. The company uses units-of-production depreciation and ran the machine 3,200 hours in Year 1; 7,050 hours in Year 2; and 7,500 hours in Year 3
$17,125
Goopy issued a $600,000, 15%, 4-year note on January 1, 2018. The terms include a quarterly-annual payment.
Find the amount of each quarterly-annual payment. Round to 1 decimal.
$100,760.7
Goopy is downsizing and must let some employees go. Employees volunteering to leave are being offered a severance package of $118,000 cash, another $129,000 to be paid in one year, and $27,500 to be paid each year for six years with the first payment coming at the end of this year. What is the present value of the total severance package, assuming an annual interest rate of 5 percent?
$380,438
On January 1 of this year, Goopy issued a bond with a face value of $100,000 and a coupon rate of 5 percent. The bond matures in three years and pays interest every December 31. When the bond was issued, the annual market rate of interest was 6 percent. Goopy uses the effective-interest amortization method.
Complete a bond amortization schedule to find the carrying value at the end of year 2
$99,057