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Chapter 6: Q10Q (page 301)
Question: Kehoe, Inc. owes $40,000 to Ritter Company. How much would Kehoe have to pay each year if the debt is retired through four equal payments (made at the end of the year), given an interest rate on the debt of 12%? (Round to two decimal places.)
The amount paid each year is$13169
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Nerwin, Inc. is a furniture manufacturing company with 50 employees. Recently, after a long negotiation with the local labor union, the company decided to initiate a pension plan as a part of its compensation plan. The plan will start on January 1, 2017. Each employee covered by the plan is entitled to a pension payment each year after retirement. As required by accounting standards, the controller of the company needs to report the pension obligation (liability). On the basis of a discussion with the supervisor of the Personnel Department and an actuary from an insurance company, the controller develops the following information related to the pension plan. Average length of time to retirement 15 years Expected life duration after retirement 10 years Total pension payment expected each year after retirement for all employees. Payment made at the end of the year. $700,000 per year The interest rate to be used is 8%.
Instructions On the basis of the information above, determine the present value of the pension obligation (liability).
Sosa Excavating Inc. is purchasing a bulldozer. The equipment has a price of \(100,000. The manufacturer has offered a payment plan that would allow Sosa to make 10 equal annual payments of \)16,274.53, with the first payment due one year after the purchase. Instructions (a) How much total interest will Sosa pay on this payment plan? (b) Sosa could borrow $100,000 from its bank to finance the purchase at an annual rate of 9%. Should Sosa borrow from the bank or use the manufacturer鈥檚 payment plan to pay for the equipment?
Murphy Mining Company recently purchased a quartz mine that it intends to work for the next 10 years. According to state environmental laws, Murphy must restore the mine site to its original natural prairie state after it ceases mining operations at the site. To properly account for the mine, Murphy must estimate the fair value of this asset retirement obligation. This amount will be recorded as a liability and added to the value of the mine on Murphy鈥檚 books. (You will learn more about these asset retirement obligations in Chapters 10 and 13.) There is no active market for retirement obligations such as these, but Murphy has developed the following cash flow estimates based on its prior experience in mining-site restoration. It will take 3 years to restore the mine site when mining operations cease in 10 years. Each estimated cash outflow reflects an annual payment at the end of each year of the 3-year restoration period.
Restoration Estimated Probability Cash Outflow Assessment $15,000 10% 22,000 30% 25,000 50% 30,000 10%
Instructions (a) What is the estimated fair value of Murphy鈥檚 asset retirement obligation? Murphy determines that the appropriate discount rate for this estimation is 5%. Round calculations to the nearest dollar. (b) Is the estimate developed for part (a) a Level 1 or Level 3 fair value estimate? Explain.
Andrew Bogut just received a signing bonus of \(1,000,000. His plan is to invest this payment in a fund that will earn 8%, compounded annually. Instructions (a) If Bogut plans to establish the AB Foundation once the fund grows to \)1,999,000, how many years until he can establish the foundation? (b) Instead of investing the entire \(1,000,000, Bogut invests \)300,000 today and plans to make 9 equal annual investments into the fund beginning one year from today. What amount should the payments be if Bogut plans to establish the $1,999,000 foundation at the end of 9 years?
For each of the following, determine the expected cash flows. Cash Flow Probability Estimate Assessment (a) \( 4,800 20% 6,300 50% 7,500 30% (b) \) 5,400 30% 7,200 50% 8,400 20% (c) $(1,000) 10% 3,000 80% 5,000 10%
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