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2008 and 2007 are presented below. PAT METHENY COMPANY COMPARATIVE

BALANCE SHEET AS OF DECEMBER 31, 2008 AND 2007 2008 2007 Cash $1,800

$1,150 Receivables 1,750 1,300 Inventory 1,600 1,900 Plant assets 1,900 1,700

Accumulated depreciation (1,200) (1,170) Long-term investments (Held-to-maturity)

1,300 1,420 $7,150 $6,300 Accounts payable $1,200 $ 900 Accrued liabilities 200 250

Bonds payable 1,400 1,550 Capital stock 1,900 1,700 Retained earnings 2,450 1,900

$7,150 $6,300 PAT METHENY COMPANY INCOME STATEMENT FOR THE YEAR

ENDED DECEMBER 31, 2008 Sales $6,900 Cost of goods sold 4,700 Gross margin

2,200 Selling and administrative expense 930 Income from operations 1,270 Other

revenues and gains Gain on sale of investments 80 Income before tax 1,350 Income tax

expense 540 Net income 810 Cash dividends 260 Income retained in business $ 550

Additional information: During the year, $70 of common stock was issued in exchange

for plant assets. No plant assets were sold in 2008. Instructions Prepare a statement of

cash flows using the indirect method.

Pat Metheny Company

STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2008

(Indirect Method)

Cash flows from operating activities

Net income

Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation expense ($1,200 $1,170)

Gain on sale of investments

Decrease in inventory

Increase in accounts payable

Increase in receivables

Decrease in accrued liabilities

Net cash provided by operating activities

Cash flows from investing activities

Sale of held-to-maturity investments

[($1,420 $1,300) + $80]

Purchase of plant assets [($1,900 $1,700) $70]

Net cash provided by investing activities

Cash flows from financing activities

Issuance of capital stock [($1,900 $1,700) $70]

$ 810

$ 30

(80)

300

300

(450)

(50)

50

860

200

(130)

70

130

Payment of cash dividends

Net cash used by financing activities

(150)

(260)

(280)

Cash, January 1, 2008

Cash, December 31, 2008

650

1,150

$1,800

Issuance of common stock for plant assets

70

E23-12 (SCFDirect Method) Data for Pat Metheny Company are presented in E23-11.

Instructions Prepare a statement of cash flows using the direct method. (Do not prepare a

reconciliation schedule.)

Pat Metheny Company

STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2008

(Direct Method)

Cash flows from operating activities

Cash collections from customers

Less: Cash paid for merchandise

Cash paid for selling/administrative

expenses

Cash paid for income taxes

Net cash provided by operating activities

Cash flows from investing activities

Sale of held-to-maturity investments

[($1,420 $1,300) + $80]

Purchase of plant assets [($1,900 $1,700) $70]

Net cash provided by investing activities

Cash flows from financing activities

Issuance of capital stock [($1,900 $1,700) $70]

Retirement of bonds payable

Payment of cash dividends

Net cash used by financing activities

$6,450*

$4,100**

950***

540

5,590

860

200

(130)

70

130

(150)

(260)

(280)

Cash, January 1, 2008

Cash, December 31, 2008

650

1,150

$1,800

Issuance of common stock for plant assets

**$1,600 + $4,700 $1,900 + $900 $1,200

***$250 + ($930 $30) $200

E6-5 (Computation of Present Value) Using the appropriate interest table, compute the

present values of the following periodic amounts due at the end of the designated periods.

(a) $30,000 receivable at the end of each period for 8 periods compounded at 12%. (b)

$30,000 payments to be made at the end of each period for 16 periods at 9%. (c) $30,000

payable at the end of the seventh, eighth, ninth, and tenth periods at 12%.

(a)

(b)

(c)

or (5.65022 4.11141) X $30,000 = $46,164.30 (difference of $.08 due to rounding).

E6-10 (Unknown Periods and Unknown Interest Rate) Consider the following

independent situations. (a) Mike Finley wishes to become a millionaire. His money

market fund has a balance of $92,296 and has a guaranteed interest rate of 10%. How

many years must Mike leave that balance in the fund in order to get his desired

$1,000,000? (b) Assume that Serena Williams desires to accumulate $1 million in 15

years using her money market fund balance of $182,696. At what interest rate must

Serenas investment compound annually?

(a)

The number of interest periods is calculated by first dividing the future value

of $1,000,000 by $92,296, which is 10.83471the value $1.00 would

accumulate to at 10% for the unknown number of interest periods. The

factor 10.83471 or its approximate is then located in the Future value of 1

Table by reading down the 10% column to the 25-period line; thus, 25 is the

unknown number of years Jerry must wait to become a millionaire.

(b)

The unknown interest rate is calculated by first dividing the future value of

$1,000,000 by the present investment of $182,696, which is 5.47357the

70

The factor or its approximate is then located in the Future value of 1 Table

by reading across the 15-period line to the 12% column; thus, 12% is the

interest rate Russell Maryland must earn on his investment to become a

millionaire.

P6-7 (Time Value Concepts Applied to Solve Business Problems) Answer the following

questions related to Derek Lee Inc. (a) Derek Lee Inc. has $572,000 to invest. The

company is trying to decide between two alternative uses of the funds. One alternative

provides $80,000 at the end of each year for 12 years, and the other is to receive a single

lump sum payment of $1,900,000 at the end of the 12 years. Which alternate should Lee

select? Assume the interest rate is constant over the entire investment. (b) Derek Lee Inc.

has completed the purchase of new Dell computers. The fair market value of the

equipment is $824,150. The purchase agreement specifies an immediate down payment

of $200,000 and semiannual payments of $76,952 beginning at the end of 6 months for 5

years. What is the interest rate, to the nearest percent, used in discounting this purchase

transaction? (c) Derek Lee Inc. loans money to John Kruk Corporation in the amount of

$600,000. Lee accepts an 8% note due in 7 years with interest payable semiannually.

After 2 years (and receipt of interest for 2 years), Lee needs money and therefore sells the

note to Chicago National Bank, which demands interest on the note of 10% compounded

semiannually. What is the amount Lee will receive on the sale of the note? (d) Derek Lee

Inc. wishes to accumulate $1,300,000 by December 31, 2017, to retire bonds outstanding.

The company deposits $300,000 on December 31, 2007, which will earn interest at 10%

compounded quarterly, to help in the retirement of this debt. In addition, the company

wants to know how much should be deposited at the end of each quarter for 10 years to

ensure that $1,300,000 is available at the end of 2017. (The quarterly deposits will also

earn at a rate of 10%, compounded quarterly.) (Round to even dollars.)

(a) Time diagram (alternative one):

Formulas:

PVOA = R (PVFOAn, i)

$572,000 = $80,000 (PVFOA12, i)

PVFOA12, i = $572,000 $80,000

PVFOA12, i = 7.15

9%.

FV = PV (FVFn, i)

PV = FV (PVFn, i)

or

FVF12, i

= $1,900,000 $572,000

PVF12, i

= $572,000 $1,900,000

FVF12, i

= 3.32168

PVF12, i

= .30105

invested at between 10% and

11% for 12 years.

discounted at between 10%

and 11% for 12 years.

Derek Lee, Inc. should choose alternative two since it provides a higher rate

of return.

b)

Formulas:

PVOA = R (PVFOAn, i)

$624,150 = $76,952 (PVFOA10, i)

PVOA10, i = $624,150 $76,952

PVOA10, i = 8.11090

The interest rate is 4% semiannually, or 8% annually.

c)

Formulas:

PVOA = R (PVFOAn, i)

PV = FV (PVFn, i)

PV = $600,000 (.61391)

PVOA = $185,321.52

PV = $368,346

$185,321.52 + $368,346 = $553,667.52

d)

Formula:

FV = PV (FVFn, i)

FV = $300,000 (FVF40, 2%)

FV = $300,000 (2.68506)

FV = $805,518

$1,300,000 $805,518 = $494,482.

Formulas:

FVOA = R (FVFOAn, i)

$494,482 = R (FVFOA40, 2%i)

$494,482 = R (67.40255)

R = $494,482 67.40255

R = $7,336.25

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