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Chapter 6: Question 6E (page 302)

Presented below are three unrelated situations.

(a) Dwayne Wade Company recently signed a lease for a new office building, for a lease period of 10 years. Under the lease agreement, a security deposit of \(12,000 is made, with the deposit to be returned at the expiration of the lease, with interest compounded at 5% per year. What amount will the company receive at the time the lease expires?

(b) Serena Williams Corporation, having recently issued a \)20 million, 15-year bond issue, is committed to make annual sinking fund deposits of \(600,000. The deposits are made on the last day of each year and yield a return of 10%. Will the fund at the end of 15 years be sufficient to retire the bonds? If not, what will the deficiency be?

(c) Under the terms of his salary agreement, president Rex Walters has an option of receiving either an immediate bonus of \)55,000, or a deferred bonus of $70,000 payable in 10 years. Ignoring tax considerations and assuming a relevant interest rate of 4%, which form of settlement should Walters accept?

Short Answer

Expert verified

The company will receive the $19,547 at expiration, the deficiency will be $936,512, and Rex should opt for the immediate bonus of amount $55,000.

Step by step solution

01

Computation amount received

AmountReceived=Amount脳FV=12,000脳1.62889=$19,547

02

Calculation of the deficiency

FVofordinaryannuity=Amount脳FVfactor=600,000脳31.77248=19,063,488

Deficiency=Issuepriceofbond-amountcalculated=20,000,000-19,063,488=$936,512

03

Calculation of present value of the deferred bonus

PVofdeferredbonus=Bonusamount脳PVfactor=70,000脳0.67556=$47,289

He should opt for the immediate bonus of $55,000.

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Most popular questions from this chapter

During the past year, Stacy McGill planted a new vineyard on 150 acres of land that she leases for \(30,000 a year. She has asked you, as her accountant, to assist her in determining the value of her vineyard operation.

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