Financial Accounting and Reporting

1) Which of the following transactions would require the use of the present value of an annuity due concept in order to calculate the present value of the asset obtained or liability owed at the date of incurrence?

2) White Airlines sold a used jet aircraft to Brown Company for $800,000, accepting a 5-year 6% note for the entire amount. Brown's incremental borrowing rate was 14%. The annual payment of principal and interest on the note was to be $189,930. The aircraft could have been sold at an established cash price of $651,460. The present value of an ordinary annuity of $1 at 8% for five periods is 3.99. The aircraft should be capitalized on Brown's books at

3) On December 27, 1997, Holden Company sold a building, receiving as consideration a $400,000 noninterest bearing note due in 3 years. The building cost $380,000 and the accumulated depreciation was $160,000 at the date of sale. The prevailing rate of interest for a note of this type was 12%. The present value of $1 for three periods at 12% is 0.71. In its 1997 income statement, how much gain or loss should Holden report on the sale?

4) On January 1, 1996, Mill Co. exchanged equipment for a $200,000 noninterest-bearing note due on January 1, 1999. The prevailing rate of interest for a note of this type at January 1, 1996, was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of interest revenue should be included in Mill's 1997 income statement?

5) On October 1, 1997, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note's market rate of interest was 11%. Fleur recorded the purchase at the note's face amount. All of the merchandise was sold by December 1, 1997. Fleur's 1997 financial statements reported interest payable and interest expense on the note for 3 months at 16%. All amounts due on the note were paid February 1, 1998. Fleur's 1997 cost of goods sold for the holiday merchandise was

6) On January 1, 1996, the Carpet Company lent $100,000 to its supplier, Loom Corporation, evidenced by a note, payable in 5 years. Interest at 5% is payable annually with the first payment due on December 31, 1997. The going rate of interest for this type of loan is 10%. The parties agreed that Carpet's inventory needs for the loan period will be met by Loom at favorable prices. Assume that the present value (at the going rate of interest) of the $100,000 note is $81,000 at January 1, 1997. What amount of interest income, if any, should be included in Carpet's 1997 income statement?

7) On January 1, 1997, Dorr Company borrowed $200,000 from its major customer, Pine Corporation, evidenced by a note payable in 3 years. The promissory note did not bear interest. Dorr agreed to supply Pine's inventory needs for the loan period at favorable prices. The going rate of interest for this type of loan is 14%. Assume that the present value (at the going rate of interest) of the $200,000 note is $135,000 at January 1, 1997. What amount of interest expense should be included in Dorr's 1997 income statement?

8) On December 1, 1995, Money Co. gave Home Co. a $200,000, 11% loan. Money paid proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,310, beginning January 1, 1996. The repayments yield an effective interest rate of 11% at a present value of $200,000 and 12.4% at a present value of $194,000. What amount of income from this loan should Money report in its 1995 income statement?

9) Esmond Bank approves a 10-year loan to Matt Schweitzer. In doing so, Esmond Bank incurs $2,000 of loan origination costs (attorney fees, title insurance, wages of employees' direct work on loan origination). The loan origination fees shall be

10) A loan is granted in the amount of $500,000 with a stated interest rate of 10%. The lender incurs direct loan origination costs of $10,000 and charges the borrower a 3-point nonrefundable fee. The effective interest rate to the lender will be