A3-14

Portman Corporation engaged in the following transactions during 2020:

1. On January 1, 2020, Portman deposited $12,000 in a certificate of deposit paying 6% interest compounded semiannually (3% per 6-month period). The certificate will mature on December 31, 2023.

2. On January 1, 2020, Portman established an account with Lee County Bank. Portman will make quarterly payments of $2,500 to Lee beginning on March 31, 2020, and ending on December 31, 2021. Lee guarantees an interest rate of 8% compounded quarterly (2% per 3-month period).

Required:

1. Prepare the cash flow diagram for each of these two investments.

2. Calculate the amount to which each of these investments will accumulate at maturity. (Note: Round answers to two decimal places.)

Exercise A3-17Present Values

Objective 2Use future value and present value tables to apply compound interest to accounting transactions.

Refer to the appropriate tables.

Required:

Note: Round answers to two decimal places. Determine the:

1. present value of a single $14,000 cash flow in 7 years if the interest (discount) rate is 8% per year.

2. number of periods for which $5,820 must be invested at an annual interest (discount) rate of 7% to produce an investment balance of $10,000.

3. size of the annual cash flow for a 25-year annuity with a present value of $49,113 and an annual interest rate of 9%. One payment is made at the end of each year.

4. annual interest rate at which an investment of $2,542 will provide for a single $4,000 cash flow in 4 years.

5. annual interest rate earned by an annuity that costs $17,119 and provides 15 payments of $2,000 each, one at the end of each of the next 15 years.

Exercise A3-23Installment Sale

Objective 2Use future value and present value tables to apply compound interest to accounting transactions.

Cornerstone A3.5Computing Present Value of an Annuity

Wilke Properties owns land on which natural gas wells are located. Cincinnati Gas Company signs a note to buy this land from Wilke on January 1, 2020. The note requires Cincinnati to pay Wilke $775,000 per year for 25 years. The first payment is to be made on December 31, 2020. The appropriate interest rate is 9% compounded annually.

Required:

Note: Round answers to two decimal places.

1. Prepare a diagram of the appropriate cash flows from Cincinnati Gass perspective.

2. Determine the present value of the payments.

3. Indicate what entry Cincinnati Gas should make at January 1, 2020.(there is no future value or tables provided)