Question 1 (20 minutes)
On January 1, 2020, Lender Corp. lent $1,000 to its Chief Executive Officer, interest-free (no interest charge). However, the loan is repayable in four instalments, each December 31, until paid. The market rate for similar loans (with similar credit risk) is 6%.
Required: (Amounts are low for exam purposes.)
Present Value of $ 1 |
||||
Period |
6% |
7% |
8% |
9% |
1 |
0.9434 |
0.9346 |
0.9259 |
0.9174 |
2 |
0.89 |
0.8734 |
0.8573 |
0.8417 |
3 |
0.8396 |
0.8163 |
0.7938 |
0.7722 |
4 |
0.7921 |
0.7629 |
0.735 |
0.7084 |
5 |
0.7473 |
0.713 |
0.6806 |
0.6499 |
Present Value of an Ordinary Annuity of $ 1 |
||||
Period |
6% |
7% |
8% |
9% |
1 |
0.9434 |
0.9346 |
0.9259 |
0.9174 |
2 |
1.8334 |
1.808 |
1.7832 |
1.7591 |
3 |
2.673 |
2.6243 |
2.577 |
2.5313 |
4 |
3.4651 |
3.3872 |
3.312 |
3.2397 |
5 |
4.2124 |
4.1002 |
3.9926 |
3.8896 |
Question 2 (20 minutes)
On May 1, 2020, NoCash Ltd. factored $200,000 of accounts receivable with Finance Corp. on a without recourse basis. Under the arrangement, NoCash was to handle disputes concerning service, and Finance was to make the collections, handle the sales discounts, and absorb the credit losses. Finance assessed a finance charge of 6% of the total accounts receivable factored and retained an amount equal to 3% of the total receivables to cover sales discounts. NoCash uses IFRS.
Required:
Journal entry may 1:
DR accounts receivable
CR
Question 3 (30 minutes)
Tommy Toys Company has been facing much more competition from its competitors. Sales have been declining. For the year ended December 31, 2020, the financial director has collected the following information related to its assembly-line equipment and operations: (Amounts are small for testing purposes.) The assembly line represents a cash-generating unit.
Machine X Machine Y Machine Z Total
Original cost $ 200 $80 $120 $400
Accumulated dep’n 50 30 20 $100
Fair value (less disposal costs) 147 n/a * n/a * $270
*n/a: Machines Y and Z do not have available fair value information. Total fair value for all 3 machines is estimated to be $270.
Assume disposal costs of $0.
Incremental cash flows from continuous use of machines:
2021 $ 81
2022 $ 81
2023 $ 81
2024 $ 81
2025 and future: $0 and discount rate: 7%
Required:
Question 1 (20 minutes) On January 1, 2020, Lender Corp. lent $1,000 to its Chief Executive...
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Exercise 16-20
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cessation
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