Time Value of Money - Intermediate Financial Accounting II - Quiz 1 | ACCT 414, Quizzes of Accounting

Download Time Value of Money - Intermediate Financial Accounting II - Quiz 1 | ACCT 414 and more Quizzes Accounting in PDF only on Docsity! Time value of money quiz – Fall 2008 – Acct 414 1. Assume that you are working for a leasing company. The boss asks you to compute the annual lease payment that the company should charge to earn a 12% return on the following lease: Fair market value of leased asset is $100,000. The first payment on the lease will be made immediately. The lease term is 5 years. The property should be worth $25,000 at the end of the lease but the lessee can buy it for $10,000. 2. TLC has a customer who is unable to pay her debt. The carrying value of the debt is now $44,000. The original interest rate was 10%. TLC has restructured the note. The new interest rate is 5% on a balance of $30,000 to be repaid at the end of six years. In other words, the cash flows are $1,500 per year for 5 years with a final payment of $31,500 at the end of the 6th year. What loss should TLC recognize? (Hint: compare the present value of the future cash flows to the carrying value). SOLUTIONS: 1. FV=$10,000 (the bargain purchase option); PV= (100,000); N=5,i=6%, annuity due, solve for pmt= $23,363.28 2. FV=$30,000; pmt=$1,500, n=6, i=10% (always the original interest rate), solve for PV = $23,467.11. Subtract from $44,000 carrying value. Loss = $20,532.90