ACC1002X Financial Accounting

Semester 2 of Academic Year 2015-2016

SOLUTIONS to Optional Questions
CHAPTER 9: 9-50, 9-51, 9-64, 9-75

9-50
1.

From Table 9A-3:

You have $500,000, the present value of your contemplated annuity. You must find the
annuity that will just exhaust the invested principal in 5 years:
a.

b.

2.

@ 8%:

@ 10%:

PVA
$500,000
Annual Withdrawal
$500,000
Annual withdrawal

= Annual withdrawal F
=
=
=
=
=
=

Annual withdrawal 3.9927

($500,000 3.9927)
$125,229
Annual withdrawal 3.7908
($500,000 3.7908)
$131,898

From Table 9A-2: Mining is preferable; its present value exceeds farming by $38,516.

Year
1.
2.
3.
4.
5.

Present Value @ 16% from

Table 9A-2
.8621
.7432
.6407
.5523
.4761

Present Value
of Mining

$ 86,210
59,456
38,442
22,092
9,522
$215,722
Note that the nearer dollars are more valuable than the distant dollars.

Present Value
of Farming
$ 17,242
29,728
38,442
44,184
47,610
$177,206

9-51
1.

Future amount = ($40,000 2.4364)

= $97,456

2.

$40,000 = Future amount .4104

Future amount = ($40,000 .4104)
= $97,466
This differs from the answer in requirement 1 only due to a rounding error.

3.

$40,000 = Future annual amounts 3.2743

Future annual amounts = ($40,000 3.2743)
= $12,216
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9-64
1.

Analysis of Bond Transactions

(In Thousands of Dollars)
A

Cash

L
Bonds
Payable

a. Issuance
+11,359 = +10,000
b. First semi-annual interest
500* =

+
Premium
on Bonds
Payable
+1,359
46

SE
Retained
Earnings

454** (Increase
Interest Expense)

c. Maturity value
10,000 = 10,000
Bond related totals***
8,641 =
0
0
8,641
* ($10,000,000 10% )
** ($11,359,000 8% )
*** Bond related totals represent 20 semi-annual payments of $500 less repayment of
$1,359 less than the proceeds at issue.

2.

Journal Entries
(In Thousands of Dollars)
11,359

a.

Dr. Cash
Cr. Bonds payable
10,000
Cr. Premium on bonds payable
1,359
To record proceeds upon issuance of 10% bonds maturing on December 31,
20X0.

b.

Dr. Interest expense

454
Dr. Premium on bonds payable
46
Cr. Cash
500
To record amortization of premium and payment of interest.

c.

Dr. Bonds payable

10,000
Cr. Cash
10,000
To record payment of maturity value of bonds and their retirement.

3.When presented on balance sheets, unamortized premiums are added to the face value of the
related bonds (in thousands):

Bonds payable, 10% due December 31, 20X0

Add: Premium on bonds payable
Net liability

December 31, 20X0

$10,000
1,359
$11,359

June 30, 20X1

$10,000
1,313*
$11,313

* (1,359 46) = 1,313

Page 2 of 3

9-75 Amounts are in millions.

1.

Each quarterly payment is $135 4 = $33.75

First quarter:
Total
$33.75
Interest is .02 $501
10.02
Principal
23.73
Second quarter:
Total
$33.75
Interest is .02 ($501 $23.73)
9.55
Principal
24.20

2.

First Quarter
10.02
23.73
33.75

Dr. Interest expense

Dr. Lease liability
Cr. Cash

Second Quarter
9.55
24.20
33.75

3.
This is a 15-year annuity at 8%. From Table 9A-3 the factor is 8.5595. The present
value of these commitments is 8.5595 $1,000 million = $8,559.5 million, which is a 56%
increase in long-term debt and capital leases.
Delta acquires far more of its aircraft and other leased assets under operating leases than
under capital leases. Under reasonable assumptions that would make these leases capital leases,
Deltas debt level and assets could each be more than $8.5 billion higher.

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