Unformatted text preview: r i = 8% and n = 3)
$693,000 0.79383 from Table 4 in Appendix A)
$550,124.19 (3 ) Discount Rate
Present Value =
=
=
= 10%
($693,000 Present value factor for i = 10% and n = 3)
$693,000 0.75131 from Table 4 in Appendix A)
$520,657.83 c. The effective interest rate is the rate that equates the undiscounted future cash flows with the present
value of the future cash flows. In this case, the undiscounted future cash flow is the $693,000 face value
due in three years, and the present value of the note is the value of the building, or $550,125. From part
(b), a discount rate of 8% equates the future cash flows and the proceeds. Therefore, the effective interest
rate is 8%. d. Since the note is noninterestbearing, the only cash flow is the face value of $693,000. Dividing the
present value of $550,125 by the face value of $693,000 yields a present value factor of .79383. Looking
across the n = 3 row of the present value of $1 table (i.e., Table 4) in Appendix A reveals that the annual
effective interest rate on this note is 8%. E11–9
a. Interest Expense $16,400
Effective Interest Rate
b. = Effective Rate Book Value of Debt at Beginning of the Period
= Effective Rate ($200,000 – $14,400)
= 8.8% (rounded)
Interest Expense (E, –SE) Payable (+L) Incurred and paid interest.
* $2,400 = Change in the balance of Discount on Notes Payable 16,400
Discount on Notes
2,400*
Cash (–A)
14,000 E11–10
a. The tenyear notes call for annual interest of $25.025 million (stated rate of 6.5% X face value of $385
million) and the repayment of $385 million in principal. The proceeds of the notes were $380 million. If the
present value of the contract is $380 million and the future values are represented in the interest (ordinary
annuity) and the principal (single sum), then the effective interest rate is the rate that discounts the future
values to the present value of $380 million. The effective interest rate is approximately 6.7%. (The general
present value formula of 1/[(1 + r) to the nth] was used in this calculation.)
b. The inter...
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This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.
 Fall '08
 staff
 Accounting

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