10 - SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 10...

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SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 10 EXERCISE 10-1A a. Year 1 Option 1 - annual interest only: $50,000 x 9% = $4,500 Option 2 - annual interest and $5,000 on principal: $50,000 x 9% = $4,500 Note:  The amount of interest paid in year 1 is the same under both options  because no payment was made on the principal until the end of the year  under option two. b. Year 2 Option 1 - annual interest only: $50,000 x 9% = $4,500 Option 2 - annual interest and $5,000 on principal: Original principal: $50,000 Less: payment at end of year one    (5,000     )   Balance of principal for year two $45,000 $45,000 x 9% = $4,050 Note:  Under option two, less interest will be paid in year two and in future  years because the amount subject to interest is less. 10-8
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c.  Under option one, only annual interest is paid.  This is a desirable  option if a company expects cash flow problems in the early years.  More interest will be paid, but less cash is required in the short term.  Option two is more advantageous if the business has enough cash to  pay both principal and interest each year.  This option is less costly. 10-9
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EXERCISE 10-2A Mooney Co. Amortization Schedule $60,000, 4-Yr. Term Note, 6% Interest Rate Year Prin. Bal.  on Jan 1 Cash Pay.  Dec. 31 Applied to  Interest Applied to Principal Prin. Bal.  End of Period 2004 $60,000 $17,315 $3,600 $13,715 $46,285 2005 46,285 17,315 2,777 14,538 31,747 2006 31,747 17,315 1,905 15,410 16,337 2007 16,337 17,315 978* 16,337 -0- *Adjusted due to rounding. 10-10
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EXERCISE 10-3A The first four years are provided for the use of the instructor: Felix Company Amortization Schedule $80,000, 10-Yr. Term Note, 7% Interest Rate Year Prin. Bal.  on Jan 1 Cash Pay.  Dec. 31 Applied to  Interest Applied to Principal Prin Bal.  End of Period 2004 $80,000 $11,390 $5,600 $5,790 $74,210 2005 74,210 11,390 5,195 6,195 68,015 2006 68,015 11,390 4,761 6,629 61,386 2007 61,386 11,390 4,297 7,093 54,293 a. (1) $5,600 (2) $5,790 b. $74,210 c. (1) $5,195 (2) $6,195 10-11
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EXERCISE 10-4A a. $10,800  ÷  $120,000 = .09 or 9% b. Effect of Transactions on Financial Statements Balance Sheet Income Statement Statement of No. Assets = Liab. + S. Equity Rev. - Exp. = Net Inc. Cash Flows 1. 120,000 = 120,000 + NA NA - NA = NA 120,000  FA 2. (30,851) = (21,856) + (8,995) NA - 8,995 = (8,995) (21,856) FA (8,995) OA c. (1) Revenue $90,000 Expenses Operating Expenses $50,000 Interest Expense 10,800 Total Expenses (60,800) Net Income $  29,200  (2) Cash Flows From Operating Activities: Inflow from Customers $90,000 Outflow for Expenses (60,800) Net Cash Flow from Operating Activities $29,200  (3) Cash Flows From Financing Activities: Inflow from Issue of Note $120,000 10-12
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10 - SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 10...

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