TASK 1 :
Complete the following questions:
1. How much needs to be invested today if your goal is to have $100,000 five years from today? The return on the investment is expected to be 10% and will be compounded semi-annually.
2. How much needs to be invested today if your goal is to be able to withdraw $5,000 for each of the next ten years beginning one year from today? The return on the investment is expected to be 12%.
3. If $20,000 is invested for 10 years, at 6 percent interest, compounded annually, what is the value of the investment at the end of 10 years?
4. What is the value of the investment If $50,000 is invested initially, plus $5,000 is invested annually at the end of each of the next three years, at 12 percent interest, compounded annually?
5. Long Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Long's incremental borrowing rate is 10%. At what amount would the land be reported at on the balance sheet?
Task 2:
On March 1, 2010, Hall Corporation, issued $500,000 of 8%, five-year bonds at par. The bonds were dated March 1, 2010, and the first annual interest payment will be on February 28, 2011. The accounting period ends December 31. Assuming no adjusting entries have been made during the year.
Complete the journal entry grid for each of the following dates (round to the nearest dollar):
Accounts March 1, 2010 December 31, 2010 February 28, 2011
Debit Credit Debit Credit Debit Credit
Cash
Bonds payable
Interest payable
Interest expense
Task 3:
Newton Corporation issued its $1,000,000, 7%, ten-year bonds to the public on January 1, 2010. The bonds pay interest annually, beginning on December 31, 2010. Newton Corporation received $1,153,420 in cash at the issuance of the bonds. The market rate of interest when the bonds were issued was 5%. Newton Corporation has a December 31 year-end. Assume that no adjusting journal entries have been made during the year.
1. Compute the amount of the premium that Newton Corporation should amortize on December 31, 2010, assuming the "effective-interest" method is used.
2. Compute the amount of the premium that Newton Corporation should amortize on December 31, 2010, assuming the "straight-line" method is used.
3. Which method above do you believe is the better to use for amortizing a bond premium?