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($2,500 0.79719 from Table 4 in Appendix A)
Present value of periodic interest payments (i = 12%, n = 2)
($200 1.69005 from Table 5 in Appendix A)
Total present value $ 2,143.35 $ 356.65
2,500.00 $ 2,066.13 $ 347.11
2,413.24 $ 1,992.98 $ 338.01
2,330.99 b. The effective interest rate is the interest rate that equates the undiscounted future cash flows with the
present value of the future cash flows. In this case, the undiscounted future cash flows are (1) the $2,500
face value due in two years and (2) the interest payments of $200 due at the end of each year for two
years, while the present value of the note is the proceeds of $2,413. From part (a), a discount rate of 10%
equates the future cash flows and the proceeds. Therefore, the effective interest rate is 10%. c. If Wilmes Floral Supplies originally borrowed $2,500, the $2,500 would be the present value of the future
cash flows. From part (a), a discount rate of 8% equates the future cash flows with $2,500. The effective
interest rate would, therefore, be 8%. Anytime the proceeds equal the face value, the effective interest rate
equals the stated interest rate. E11–8
a. The building should be capitalized at the cash value of the transaction. In this particular case, the cash
value of the transaction would be assumed to equal the building's appraised value. Therefore, the building
should be recorded at $550,125. E11–8
b. Concluded The total present value of a note equals the sum of the present value of the note's face value and the
present value of the periodic interest payments specified in the note. Since the note signed by Morrow
Enterprises is noninterestbearing, there are no periodic interest payments, and the present value of the
note would equal just the present value of the note's face value.
(1 ) Discount Rate
Present Value =
=
=
= 6%
($693,000 Present Value Factor for i = 6% and n = 3)
$693,000 0.83962 from Table 4 in Appendix A)
$581,856.66 (2 ) Discount Rate
Present Value =
=
=
= 8%
($693,000 Present value factor fo...
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 Fall '08
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 Accounting

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