Question

Assume the company uses straight-line depreciation for the equipment. At the beginning of the second year, we determine that the equipment has only two more years of remaining useful life. Compute the equipment’s book value at the end of its first year. 1(b). Assume the company uses straight-line depreciation for the equipment. At the beginning of the second year, we determine that the equipment has only two more years of remaining useful life. Compute the depreciation for the second year given the revised useful life estimate. 2. At the end of the equipment’s useful life, the company plans to sell it. Record the sale of equipment at the end of its useful life for (a) $12,000 cash and (b) $6,000 cash.

Answer 1

The present value of a two-year bond is calculated by discounting the future cash flows at the current discount rate. For an 8% coupon bond with a principal of $3,000, the value changes when the discount rate shifts from 8% to 11%, requiring recalculation to reflect the higher discount rate.

Step-by-step explanation:

Calculating the present value of a two-year bond requires discounting future cash flows (interest and principal repayments) by the current applicable discount rate. For a bond issued at $3,000 with an 8% coupon rate, the year-one interest payment is $240. In year two, the investor receives the same $240 in interest plus the $3,000 principal. To calculate present value with an 8% discount rate:

• FV of interest payments: $240 / (1 + 0.08) + $240 / (1 + 0.08)^2
• FV of principal: $3,000 / (1 + 0.08)^2
• Add the two present values together for the bond's current value.

If the discount rate changes to 11%, we would recalculate the above using the new discount rate:

• FV of interest payments: $240 / (1 + 0.11) + $240 / (1 + 0.11)^2
• FV of principal: $3,000 / (1 + 0.11)^2
• The sum is the new present value of the bond.

Answer 2

1(a) Book Value at the End of the First Year: Cost of Equipment - Depreciation for First Year = $7,500. 1(b) Depreciation for the Second Year Given Revised Estimate: $3,750. 2(a) Sale for $12,000 Cash: Gain or Loss on Sale = $12,000 - (Book Value at the time of Sale - Accumulated Depreciation). 2(b) Sale for $6,000 Cash: Gain or Loss on Sale = $6,000 (Book Value at the time of Sale - Accumulated Depreciation).

Equipment Depreciation:

1(a) Book Value at the End of the First Year:

Assuming straight-line depreciation, the annual depreciation is calculated by dividing the cost of the equipment by its useful life. If the equipment has a useful life of 4 years, then the annual depreciation is $10,000 ÷ 4 = $2,500.

Book value at the end of the first year is calculated as follows:

Book Value at the End of First Year = Cost of Equipment - Depreciation for First Year

Book Value at the End of First Year = $10,000 - $2,500 = $7,500.
1(b) Depreciation for the Second Year Given Revised Estimate:

Since the company determines that the equipment has only two more years of remaining useful life at the beginning of the second year, the revised annual depreciation would be $7,500 ÷ 2 = $3,750.

Equipment Sale:

2(a) Sale for $12,000 Cash:

If the equipment is sold for $12,000 cash, you would record the sale as follows:

Cash = $12,000

Accumulated Depreciation = Total Depreciation taken so far

Gain or Loss on Sale = Cash received - (Book Value at the time of Sale - Accumulated Depreciation)

Book Value at the time of Sale = Cost of Equipment - Total Depreciation taken so far

Gain or Loss on Sale = $12,000 - (Book Value at the time of Sale - Accumulated Depreciation)
2(b) Sale for $6,000 Cash:

Similarly, for a sale of $6,000 cash, use the same formula:

Cash = $6,000

Accumulated Depreciation = Total Depreciation taken so far

Gain or Loss on Sale = Cash received - (Book Value at the time of Sale - Accumulated Depreciation)

Book Value at the time of Sale = Cost of Equipment - Total Depreciation taken so far

Gain or Loss on Sale = $6,000 - (Book Value at the time of Sale - Accumulated Depreciation)