ISB FADM 2021

Practice Set 8: Liabilities – Part 1

QUESTION 1

SOLUTION

To comply with the sinking fund provision, Ozona must have $125 million in the sinking fund
in 10 years. The annual sinking fund payment required is $9,938,072. Excel formula: =
PMT(5%,10,0,125000000,0).
QUESTION 2

SOLUTION

a. The annual mortgage payment is $530,671. Excel formula: = PMT(5.5%,10,4000000,0)

b.
Interest Annual Principal Balance
Year at 5.5% Payment Reduction Owing

0 4,000,000
1 220,000 530,671 310,671 3,689,329
2 202,913 530,671 327,758 3,361,571
3 184,886 530,671 345,785 3,015,787
4 165,868 530,671 364,803 2,650,984
5 145,804 530,671 384,867 2,266,117
6 124,636 530,671 406,035 1,860,082
7 102,305 530,671 428,366 1,431,716
8 78,744 530,671 451,927 979,789
9 53,888 530,671 476,783 503,007
10 27,665 530,671 503,006 0

c. At the end of year 1, the balance sheet will show $ 327,758 as the current portion of long-
term debt, which is the amount of the principal reduction in year 2 (from the amortization
table).
 QUESTION 3

SOLUTION

a. The annual mortgage payment is $1,415,894. Excel formula: = PMT(7%,20,15000000,0)

b.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
Cash 15,000,000
LTD 15,000,000

Cash
15,000,000
Record 15,000,000
mortgage 15,000,000 = Long-term – =
proceeds debt
LTD
15,000,000

c.
IE 1,050,000
LTD 365,894
Cash 1,415,894

IE
1,050,000
Pay 1st year -365,894 -1,050,000 +1,050,000
LTD mortgage -1,415,894 = Long-term Retained – Interest = -1,050,000
365,894 payment debt Earnings expense

Cash
1, 4 15 , 8 9 4

IE 1,024,387
LTD 391,507
Cash 1,415,894

IE
1,0 2 4 ,3 8 7
Pay 2nd year -391,507 -1,024,387 +1,024,387
LTD mortgage -1,415,894 = Long-term Retained – Interest = -1,024,387
3 9 1,5 0 7 payment debt Earnings expense

Cash
1, 4 15 , 8 9 4