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Financial Accounting: A Critical Approach 3e _ Chapter 6 Answers

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Department
Accounting
Course Code
ACC 110
Professor
Else Grech

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CHAPTER 6
Cash, Receivables, and the Time Value of Money
EXERCISES
E6-1.
a.This item should be included in cash and cash equivalents because cash in the safe
is readily available for use.
b. This item should be included in cash and cash equivalents because it can be
converted quickly and easily into a known amount of cash.
c.This item could be categorized as a cash equivalent as it appears to represent a
source of funds the company uses to help manage its cash. Only the amount
borrowed is included. The unborrowed portion of the line isn’t included in cash
and cash equivalents.
d. Receivables aren’t included in cash and cash equivalents, whether they are current
or non-current.
e.Because the GIC matures in 18 months it shouldn’t be classified as cash and cash
equivalents. The GIC might be convertible to cash at any time but the amount of
cash it would realize would very depending on the time.
f. This item shouldn’t be included in cash and cash equivalents as it’s being held by
a foreign government. It’s not available for the entity to use.
g. This item should be included in cash and cash equivalents as it’s cash in the
entity’s bank account.
h. The post-dated cheques should be included in cash and cash equivalents as they
will be realized in cash within three months. There is risk the cheques won’t be
honoured but if the risk is small classification as cash and cash equivalents is
reasonable.
i.This item shouldn’t be included in cash and cash equivalents. Since the cash is
held by the lawyer for a specific purpose, it’s restricted. Restricted cash isn’t
readily available for use. The restricted cash would be disclosed separately on the
financial statements.
j. This item should be included in cash and cash equivalents. While the pounds can’t
be converted into a known amount of Canadian cash, they can be converted
Copyright © 2010 McGraw-Hill Ryerson Ltd. 1
www.notesolution.com
quickly and easily and are readily available for use. Also, if the pounds are used
to pay obligations denominated in pounds, exchange isn’t an issue.
k. These items shouldn’t be included in cash and cash equivalents because the value
of publicly traded shares fluctuates daily. It’s uncertain how much cash would be
received for the shares until they were sold.
E6-3.
a.$100,000(1.02)18 = $142,825
b. $60,000(1.07)3 = $73,503
c.$10,000(1.05)15 = $20,789
d. $25,000(1.005)20 = $27,622
E6-5.
a.PV = 20,000/(1.12)5 = $11,349
You would prefer $20,000 in five years because the present value is of $20,000 to
be received in five years is greater than $10,000
b. PV = $32,000/(1.05)4 = $26,326 of revenue should be recognized. Revenue
should be the present value of the amount that will be paid.
c.PV = $20,000/(1.18)2 = $14,363.69
PV = $30,000/(1.18)4 = 15,473.67
PV = $50,000/(1.18)6 = 18,521 .58
Total = $48,358.94
The maximum that should be paid for this stream of cash flows is $48,358.94.
d. PV=$10,000/(1.08)15 = $3,152. You would pay a maximum of $3,152 for the zero
coupon bond.
e.PV = $30,000/(1.20)1 = $25,000
PV = $50,000/(1.20)2 = 34,722
PV = $70,000/(1.20)3 = 40,509
Total = $100,231
Yes, you would accept this investment because $100,000 is less than the present
value of the cash flows.
f. $1,610.51=$1,000 (1+x)5
x= 10%
E6-7.
a. Present value: $250,000 / (1.1)5 = $155,230 of revenue should be recognized.
Copyright © 2010 McGraw-Hill Ryerson Ltd. 2
www.notesolution.com
b. Present value of an annuity:
1\.10*[1 – 1\(1 + .10)20] $250,000 = $2,128,391
c.Future value: $10,000*(1.1)8 = $21,436
d. Present value and present value of an annuity
i) $35,000/(1.1)5 = $21,732
ii) $2,000/(1.1)1 + $4,000/(1.1)2 + $6,000/(1.1)3 +$8,000/(1.1)4 +$10,000/(1.1)5 =
= $1,818 + 3,306 + 4,508 + 5,464 + 6,209
= $21,305
iii) 1/.10 [1 – 1/(1 + .10)5] $6,000 = $22,745
The investor should choose option 3 because it has the highest present value.
e.Future value: $10,000 (1.05)20 = $26,533
f. Present value of an annuity :
1/.1 [1 – 1/(1 + .1)25] x $5,000 = $45,385
$45,385 is the most the investor should pay.
g. Present value: $1,500/(1.1)3 = $1,127
$1,500 in three years would be the preferred alternative because the present value
is greater (present of the $1,000 payment now is $1,000).
E6-9.
a.Dr. Cash 2,500
Dr. Accounts receivable7,000
Cr. Sales9,500
b. Dr. Allowance for bad debts 7,000
Cr. Accounts receivable7,000
c.Dr. Accounts receivable7,000
Cr. Allowance for bad debts 7,000
Dr. Cash 7,000
Cr. Accounts receivable7,000
E6-11
a.
$7,000,000 + $6,000,000 (1.14)-1 + $6,000,000 (1.14)-2 + $6,000,000 (1.14)-3
= $7,000,000 + 13,929,792
Copyright © 2010 McGraw-Hill Ryerson Ltd. 3
www.notesolution.com

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Description
CHAPTER 6 Cash, Receivables, and the Time Value of Money EXERCISES E6-1. a. This item should be included in cash and cash equivalents because cash in the safe is readily available for use. b. This item should be included in cash and cash equivalents because it can be converted quickly and easily into a known amount of cash. c. This item could be categorized as a cash equivalent as it appears to represent a source of funds the company uses to help manage its cash. Only the amount borrowed is included. The unborrowed portion of the line isnt included in cash and cash equivalents. d. Receivables arent included in cash and cash equivalents, whether they are current or non-current. e. Because the GIC matures in 18 months it shouldnt be classified as cash and cash equivalents. The GIC might be convertible to cash at any time but the amount of cash it would realize would very depending on the time. f. This item shouldnt be included in cash and cash equivalents as its being held by a foreign government. Its not available for the entity to use. g. This item should be included in cash and cash equivalents as its cash in the entitys bank account. h. The post-dated cheques should be included in cash and cash equivalents as they will be realized in cash within three months. There is risk the cheques wont be honoured but if the risk is small classification as cash and cash equivalents is reasonable. i. This item shouldnt be included in cash and cash equivalents. Since the cash is held by the lawyer for a specific purpose, its restricted. Restricted cash isnt readily available for use. The restricted cash would be disclosed separately on the financial statements. j. This item should be included in cash and cash equivalents. While the pounds cant be converted into a known amount of Canadian cash, they can be converted Copyright 2010 McGraw-Hill Ryerson Ltd. 1 www.notesolution.com quickly and easily and are readily available for use. Also, if the pounds are used to pay obligations denominated in pounds, exchange isnt an issue. k. These items shouldnt be included in cash and cash equivalents because the value of publicly traded shares fluctuates daily. Its uncertain how much cash would be received for the shares until they were sold. E6-3. a. $100,000(1.02) = $142,825 3 b. $60,000(1.07) =1573,503 c. $10,000(1.05) = $20,789 d. $25,000(1.005) = $27,622 E6-5. a. PV = 20,000/(1.12) = $11,349 You would prefer $20,000 in five years because the present value is of $20,000 to be received in five years is greater than $10,000 b. PV = $32,000/(1.05) = $26,326 of revenue should be recognized. Revenue should be the present value of the amount that will be paid. c. PV = $20,000/(1.18) = $14,363.69 4 PV = $30,000/(1.18) = 15,473.67 PV = $50,000/(1.18) = 6 18,521.58 Total = $48,358.94 The maximum that should be paid for this stream of cash flows is $48,358.94. 15 d. PV=$10,000/(1.08) = $3,152. You would pay a maximum of $3,152 for the zero coupon bond. 1 e. PV = $30,000/(1.20) = $25,000 PV = $50,000/(1.20) = 2 34,722 PV = $70,000/(1.20) = 3 40,509 Total = $100,231 Yes, you would accept this investment because $100,000 is less than the present value of the cash flows. f. $1,610.51=$1,000 (1+x) 5 x= 10% E6-7. 5 a. Present value: $250,000 / (1.1) = $155,230 of revenue should be recognized. Copyright 2010 McGraw-Hill Ryerson Ltd. 2 www.notesolution.com b. Present value of an annuity: 20 1\.10*[1 1\(1 + .10) ] $250,000 = $2,128,391 8 c. Future value: $10,000*(1.1) = $21,436 d. Present value and present value of an annuity 5 i) $35,000/(1.1) 1 $21,732 2 3 4 5 ii) $2,000/(1.1) + $4,000/(1.1) + $6,000/(1.1) +$8,000/(1.1) +$10,000/(1.1) = = $1,818 + 3,306 + 4,508 + 5,464 + 6,209 = $21,305 iii) 1/.10 [1 1/(1 + .10) ] $6,000 = $22,745 The investor should choose option 3 because it has the highest present value. e. Future value: $10,000 (1.05) = $26,533 f. Present value of an annuity : 25 1/.1 [1 1/(1 + .1) ] x $5,000 = $45,385 $45,385 is the most the investor should pay. 3 g. Present value: $1,500/(1.1) = $1,127 $1,500 in three years would be the preferred alternative because the present value is greater (present of the $1,000 payment now is $1,000). E6-9. a. Dr. Cash 2,500 Dr. Accounts receivable 7,000 Cr. Sales 9,500 b. Dr. Allowance for bad debts 7,000 Cr. Accounts receivable 7,000 c. Dr. Accounts receivable 7,000 Cr. Allowance for bad debts 7,000 Dr. Cash 7,000 Cr. Accounts receivable 7,000 E6-11 a. $7,000,000 + $6,000,000 (1.14) + $6,000,000 (1.14) + $6,000,000 (1.14) -3 = $7,000,000 + 13,929,792 Copyright 2010 McGraw-Hill Ryerson Ltd. 3 www.notesolution.com = $20,929,792 . Cash 7,000,000 Accounts receivable 5,263,158 Long-term receivable 8,666,634 Revenue 20,929,792 The long-term portion is due on May 31, 2017 and 2018. The current portion is due on May 31, 2016. The amount shown is the present value of $6,000,000 discounted one year at 14%. b. Namaka Ltd. Accounts receivable and long-term receivable schedule Beginning Beginning balance Reduction in Ending End balance in in long-term Cash Interest long-term balance in in accounts payment revenue accounts re receivable receivable account receivable receivable 2015 $5,263,158 2016 $5,263,158 $8,666,634 $6,000,000 $1,950,171 $4,049,829 5,263,158 2017 5,263,158 4,616,805 6,000,000 1,383,195 4,616,805 5,263,158 2018 5,263,158 5,263,158 6,000,000 736,842 5,263,158 0 Note: the receivable must be split between current and non-current. On May 31, 2015, 2016, and 2017 the current portion would be $5,263,158, the present value of $6,000,000 discounted for one year. *Balances dont add exactly because of rounding errors. 2016 Cash 6,000,000 Long-term receivable 4,049,829 Interest revenue 1,950,171 2017 Cash 6,000,000 Long-term receivable 4,616,805 Interest revenue 1,383,195 2018 Cash 6,000,000 Long-term receivable 5,263,158 Interest revenue 736,842 Copyright 2010 McGraw-Hill Ryerson Ltd. 4 www.notesolution.com
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