1. Calculate the present value of each of the following amounts at the given criteria and then answer the questions that follow:
Future Cash Flow Interest Rate Number of Periods Present Value
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$400,000 4% 7 years
$400,000 6% 7 years
$400,000 4% 12 years
$400,000 6% 12 years
a. Does the present value increase or decrease when the interest rate increases?
b. Does the present value increase or decrease as the time period increases?
2. On 1/1/X6 Fred Corporation purchases a patent from Barney Company for $10,000,000, payable at the end of three years. The patent itself has an expected life of ten years. No interest rate is stated, but Fred could borrow that amount from a bank at 6 percent interest.
a. Record the journal entry to record the patent on 1/1/X6.
b. Record the journal entries to record interest expense and amortization expense on 12/31/X6, 12/31/X7, and 12/31/X8.
c. Record the journal entry to show that Fred pays off the note payable on 12/31/X8.