Question

On January 1, 2017, Windsor Corporation sold a building that cost $254,700 and that had accumulated depreciation of $105,950 on the date of sale. Windsor received as consideration a $244,700 non-interest-bearing note due on January 1, 2020. 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, 2017, was 9%. At what amount should the gain from the sale of the building be reported? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

On January 1, 2017, Windsor Corporation purchased 350 of the $1,000 face value, 9%, 10-year bonds of Walters Inc. The bonds mature on January 1, 2027, and pay interest annually beginning January 1, 2018. Windsor purchased the bonds to yield 11%. How much did Windsorpay for the bonds? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Windsor Corporation bought a new machine and agreed to pay for it in equal annual installments of $5,280 at the end of each of the next 10 years. Assuming that a prevailing interest rate of 6% applies to this contract, how much should Windsorrecord as the cost of the machine? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Windsor Corporation purchased a special tractor on December 31, 2017. The purchase agreement stipulated that Windsor should pay $19,010 at the time of purchase and $4,500 at the end of each of the next 8 years. The tractor should be recorded on December 31, 2017, at what amount, assuming an appropriate interest rate of 12%? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Windsor Corporation wants to withdraw $119,850 (including principal) from an investment fund at the end of each year for 9 years. What should be the required initial investment at the beginning of the first year if the fund earns 11%? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Answer 1

I am going to use PV fators in this question i.e. for example rate is 5% then PV factor for year one is 100/105

for second year is (100/105)² and so on.

(in $)

Ok, so here we have 5 parts to this question, i will solve every part in same order as yours.

1. The value of the asset sold = cost - depriciation = 254700-105950 = 148750 ...........(A)

now we have non interest bearing note of 244700, (maturing after 3 years)

and the interest rate in similar note is 9% p.a. so the actual present value of the note so recieved will be as follows -

244700x PV factor of 3rd year (at rate of 9%)i.e. 0.77218 = 188952   ..............(B)

or you can find it by formula FV (1+i)^-n

So the gain arise will be (A-B) i.e. 188952-148750= $ 40202.

2. Now here the interest rate on the bonds is 9% and windsor wants to yeild 11% return. so calculation is below-

Interest @ 9% = 350,000*9% = 31500

PV of interest which we will recieve during this period is 31500x sum of PV factors of 10 years @ 11% i.e. 5.88923.

= 188,511

and PV of Principle which wil recieve at last year = 350,000x Pv of last Year i.e. 0.35218

=123,263

So windsor must invest 188511+123263 = $ 311,774

3. The equal annual instalment is of 5280. and it is payable at year end and interest rate is 6% so, cost of machine will be PV of sum of all installments. So it is, [ PV factor i found is by (1+i)^-n ]

= (5280/0.94339)+(5280/0.89000)+(5280/0.83962) upto tenth year i.e. (5280/0.55840)

or you can just add all factors and then multiply it i.e. 5280*7.36008

= $ 38861. is the value to be recorded in the books.

4. It is just same as previous one you just have to add the Present Value of installments and sum it up with downpayment i.e.

= (4500/0.89286)+(4500/0.79719) upto eight year i.e.(4500/0.40388)

or 4500*4.96764

= $ 22354

and adding downpayment to it i.e. 19010+22354 = $ 41,364 is the value to be recorded in the books.

Note - the initial payment of 19010 is already at its present value.

5. If they wants to withdraw 119850 every year for next 9 years then they have to invest PV of all 9 installments at once. so to get return @ 11% they have to invest -

= 119850 * (0.90090+0.81162+0.73120+0.65873+0.59345+0.53464+0.48166+0.43393+0.39092)

= 119850*5.53705

= $ 663,615