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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Installment Sale

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 Gas’s perspective.

2. Determine the present value of the payments.

3. Indicate what entry Cincinnati Gas should make at January 1, 2020.

To determine

(a)

Introduction:

Compound interest considers the time value of money. Present value of Cashflow means the amount that should be invested to earn a specific amount on a specific date.

To prepare:

Cash Flow for investments.

Explanation

Investment Date = January 1, 2020

Cashflow = $775,000

Interest = 9% p.a.

No...

To determine

(b)

Introduction:

Compound interest considers the time value of money. Present value of Cashflow means the amount that should be invested to earn a specific amount on a specific date.

To calculate:

The present value of investment.

To determine

(c)

Introduction:

Compound interest considers the time value of money. Present value of Cashflow means the amount that should be invested to earn a specific amount on a specific date.

To record:

The journal entry in the books of C.G. on January 1, 2020.

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