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E23-11 (SCFIndirect Method) Condensed financial data of Pat Metheny Company for

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

Retirement of bonds payable


Payment of cash dividends
Net cash used by financing activities

(150)
(260)
(280)

Net increase in cash


Cash, January 1, 2008
Cash, December 31, 2008

650
1,150
$1,800

Noncash investing and financing activities


Issuance of common stock for plant assets

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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)

Net increase in cash


Cash, January 1, 2008
Cash, December 31, 2008

650
1,150
$1,800

Noncash investing and financing activities


Issuance of common stock for plant assets

*$1,300 + $6,900 $1,750


**$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)

$30,000 X 4.96764 = $149,029.20.

(b)

$30,000 X 8.31256 = $249,376.80.

(c)

($30,000 X 3.03735 X .50663 = $46,164.38.


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

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amount $1.00 would accumulate to in 15 years at an unknown interest rate.


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

7.15 is present value of an annuity of $1 for 12 years discounted at approximately


9%.

Future value approach

Present value approach

FV = PV (FVFn, i)

PV = FV (PVFn, i)
or

$1,900,000 = $572,000 (FVF12, i)

$572,000 = $1,900,000 (PVF12, i)

FVF12, i

= $1,900,000 $572,000

PVF12, i

= $572,000 $1,900,000

FVF12, i

= 3.32168

PVF12, i

= .30105

3.32 is the future value of $1


invested at between 10% and
11% for 12 years.

.301 is the present value of $1


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

8.11090 is the present value of a 10-period annuity of $1 discounted at 4%.


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

c)
Formulas:
PVOA = R (PVFOAn, i)

PV = FV (PVFn, i)

PVOA = $24,000 (PVFOA10, 5%)

PV = $600,000 (PVF10, 5%)

PVOA = $24,000 (7.72173)

PV = $600,000 (.61391)

PVOA = $185,321.52

PV = $368,346

Combined present value (amount received on sale of note):


$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

Amount to which quarterly deposits must grow:


$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