D since the note is noninterestbearing the only cash

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

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.

Ask a homework question - tutors are online