BUS 225 Section 1 Review Problems Solutions PDF

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Section #1-Recommended Review Problems_Solutions Chapter #1 PROBLEMS (p. 24-25) (Note: Some of these problems require the use of the Time Value of Money Tables in the Chapter 1 Appendix, pp. 40-43). 1. Using the rule of 72, approximate the following amounts. a. If the value of land in an area is increasing 6 percent a year, how long will it take for property values to double? About 12 years (72 / 6) b. If you earn 10 percent on your investments, how long will it take for your money to double? About 7.2 years (72 / 10) c. At an annual interest rate of 5 percent, how long will it take for your savings to double? About 14.4 years (72 / 5) 2. In 2013, selected automobiles had an average cost of $16,000. The average cost of those same automobiles is now $20,000. What was the rate of increase for these automobiles between the two time periods? ($20,000 - $16,000) / $16,000 = .25 (25 percent) 3. A family spends $46,000 a year for living expenses. If prices increase by 3 percent a year for the next three years, what amount will the family need for their living expenses after three years? $46,000 ¿ 1.033 = $50,265; (or using TVM Exhibit 1-A: $46,000 x 1.093 = $50,278) Note: slight rounding for different methods, quiz or exam problems will not be presented with such close margins. 4. Ben Collins plans to buy a house for $220,000. If that real estate is expected to increase in value by 2 percent each year, what will its approximate value be seven years from now? $220,000 ¿ 1.027 = $252,711; (or using TVM Exhibit 1-A: $220,000 x 1.149 = $252,780) Note: slight rounding for different methods, quiz or exam problems will not be presented with such close margins. 5. What would be the yearly earnings for a person with $8,000 in savings at an annual interest rate of 1.5 percent? $8,000 ¿ 0.015 = $120 (Note: since this is just for one year, the principal amount is multiplied by the interest rate) 6. Using time value of money tables (Exhibit 1-3 or Chapter Appendix tables-Pages 40-43), calculate the following: a. The future value of $550 six years from now at 7 percent. $550 ¿ 1.501 = $825.55 (TVM table page 40) b. The future value of $700 saved each year for 10 years at 8 percent. $700 ¿ 14.487 = $10,140.90 (TVM table page 41) c. The amount that a person would have to deposit today (present value) at a 5 percent interest rate in order to have $1,000 five years from now. $1,000 ¿ 0.784 = $784 (TVM table page 42) d. The amount that a person would have to deposit today in order to be able to take out $500 a year for 10 years from an account earning 8 percent. $500 ¿ 6.710 = $3,355 (TVM table page 43)

7. If you desire to have $10,000 for a down payment for a house in five years, what amount would you need to deposit today? Assume that your money will earn 4 percent. $10,000 x 0.822 (present value of single amount) = $8,220. (Exhibit 1-C) 8. Pete Morton is planning to go to graduate school in a program of study that will take three years. Pete wants to have $8,000 available each year for various school and living expenses. If he earns 3 percent on his money, how much must be deposit at the start of his studies to be able to withdraw $8,000 a year for three years? $8,000 x 2.829 (present value of a series) = $22,632. (Exhibit 1-D) 9. Carla Lopez deposits $3,000 a year into her retirement account. If these funds have an average earning of 7 percent over the 40 years until her retirement, what will be the value of her retirement account? $3,000 ¿ 199.640 (future value of a series) = $598,920 (Exhibit 1-B) 10. If a person spends $10 a week on coffee (assume $500 a year), what would be the future value of that amount over ten years if the funds were deposited in an account earning 3 percent? $500 x 11.464 (future value of a series) = $5,732. (Exhibit 1-B)

Chapter #2 PROBLEMS (p. 65-66) 1. Based on the following data, determine the amount of total assets, total liabilities, and net worth. Liquid assets, $3,870 Investment assets, $8,340 Current liabilities, $2,670 Household assets, $87,890 Long-term liabilities, $76,230 a.

Total assets

$ 100,100

b.

Total liabilities

$ 78,900

c.

Net worth

$ 21,200

Total assets = $100,100 ($3,870 + 8,340 + 87,890) Total liabilities = $78,900 ($2,670 + $76,230) Net worth = $21,200 ($100,100 - $78,900) 2. Using the following balance sheet items and amounts, calculate the total liquid assets and total current liabilities: Money market account $2,600 Mortgage $158,000 Retirement account $87,400 a. Total liquid assets $3,380 ($2,600 + $780) b, Total current liabilities $751 ($262 +$489)

Medical bills $262 Checking account $780 Credit card balance $489

3. Use the following items to determine the total assets, total liabilities, net worth, total cash inflows, and total cash outflows. Rent for the month, $650 Spending for food, $345 Savings account balance, $1,890 Current value of automobile, $8,800 Credit card balance, $235 Auto insurance, $230 Video equipment, $2,350 Lunches/parking at work, $180 Personal computer, $1,200 Clothing purchase, $110

Monthly take-home salary, $2,185 Cash in checking account, $450 Balance of educational loan, $2,160 Telephone bill paid for month, $65 Loan payment, $80 Household possessions, $3,400 Payment for electricity, $90 Donations, $160 Value of stock investment, $860 Restaurant spending, $130

a. Total assets = $18,950 ($450 + 1,890 + 8,800 + 2,350 + 1,200 + 3,400 + 860) b. Total liabilities = $2,395 ($235 + $2,160) c. Net worth = $16,555 ($18,950 - $2,395) d. Total cash inflows = $2,235 e. Total cash outflows = $2,040 ($650 + 345 + 230 + 180 + 110 + 65 + 80 + 90 + 160 + 130)

4. For each of the following situations, compute the missing amount. a. Assets $65,000; liabilities $18,000; net worth $47,000 b. Assets $86,500; liabilities $67,800 net worth $18,700. c. Assets $34,280; liabilities $12,965; net worth $21,315 d. Assets $90,999 ; liabilities $38,345; net worth $52,654 5. Based on this financial data, calculate the ratios requested: (Page 51) Liabilities $7,800 Liquid assets $4,600 Monthly credit payments $640 Monthly savings $130

Net worth $58,000 Current liabilities $1,300 Take-home pay $2,575 Gross income $2,850

a. Debt ratio 7,800/58,000 = 0.134

b. Current ratio 4,600/1,300 = 3.54

c. Debt-payments ratio 640/2,575 = 0.2485

d. Savings ratio 130/2,850 = 0.046

10. Fran Powers created the following budget and reported the actual spending listed. Calculate the variance for each of these categories, and indicate whether it was a deficit or a surplus. Item Budgeted Food $360 Transportation 320 Housing 950 Clothing 110 Personal 275

Actual $298 334 982 134 231

Variance $62 $14 $32 $24 $44

Deficit/Surplus surplus deficit deficit deficit surplus

Note: A deficit in one category means that another category will have to make up the difference.

Chapter #3 PROBLEMS (p.100-101) 2. If Samantha Jones had the following itemized deductions, should she use Schedule A or the standard deduction? The standard deduction for her tax situation is $6,350. Donations to church and other charities, $3,050 Medical and dental expenses exceeding 10 percent of adjusted gross income, $450 State income tax, $920 Job-related expenses exceeding 2 percent of adjusted gross income, $1,450 The standard deduction of $6,350 is better than itemizing deductions which totaled $5,870 ($3,050 + $450 + $920 + $1,450). 3. What would be the average tax rate for a person who paid taxes of $6,435 on a taxable income of $40,780? 15.78 percent ($6,435/$40,780) 5. If $4,323 was withheld during the year and taxes owed were $4,122, would the person owe an additional amount or receive a refund? What is the amount? $4,323 - $4,122 = $201 refund 9. Using the tax table in Exhibit 3–5, determine the amount of taxes for the following situations: a. A head of household with taxable income of $62,525. b. A single person with taxable income of $62,001. c. A married person filing a separate return with taxable income of $62,365. a. A head of household with taxable income of $62,525 ($9,929). b. A single person with taxable income of $62,001 ($11,278). c. A married person filing a separate return with taxable income of $62,365 ($11,365). 10. Wendy Brooks prepares her own income tax return each year. A tax preparer would charge her $75 for this service. Over a period of 10 years, how much does Wendy gain from preparing her own tax return? Assume she can earn 3 percent on her savings. (LO 3.3) $859.80 = $75 x 11.464 (future value of annuity for 10 years, 3 percent) 11. Julia Sims has $30,000 of adjusted gross income and $5,000 of medical expenses. She will be itemizing her tax deductions this year. The most recent tax year has a medical expenses floor of 10%. How much of a tax deduction will Julia be able to deduct? $30,000 * 10% = $3,000. $5,000 (medical expenses) - $3,000 (10% floor) = $2,000 (deductible medical expenses). ***Tax Law Change: Medical and Dental expenses that can be itemized have changed over the years from 7.5% to 10%, back to 7.5% You will be told in all problems whether to use 7.5% or 10% for your calculations.

14. On December 30, you decide to make a $3,000 charitable donation. (LO 3.4) a. If you are in the 28 percent tax bracket, how much will you save in taxes for the current year? $840 tax savings ($3,000 X 0.28) b. If you deposit that tax savings in a savings account for the next five years at 8 percent, what will be the future value of that account? $840 ¿ 1.469 = $1,234...