M I E 258F Engineer i ng Economics and Account ing

M idter m Examination Sol utions

M ar ks
1.
10
Instructor: M.W. Carter November 2, 2009
Approved non-programmable calculators only permitted
Casio 260, Sharp 520 or Texas Instruments 30
6:30 8:00
Exam is out of 50 and counts for 25% of final mark
Acme Company opened 2009 with the following trial balance information:
Cash $45,000
Accounts Receivable 75,000
Land 170,000
Accounts Payable - $60,000
Loan Payable - 40,000
Capital Stock - 60,000
Retained Earnings - 130,000
Dividends - -
Revenues - -
Salaries Expense - -
$290,000 $290,000
Januarys transactions, as of January 31
st
, are listed below:
1. Collected $10,000 on an open account receivable.
2. Purchased additional tract of land for $20,000 cash.
3. Provided services on account to a customer for $15,000.
4. Borrowed $12,000 on a term loan payable.
5. Paid salaries of $3,000.
6. The company paid shareholders a $2,500 dividend.
7. Paid $16,000 on the open accounts payable.
Prepare the t-accounts and the trial balance as of January 31
st
.
Solution
CASH ACCOUNTS RECEIVABLE LAND
ACCOUNTS PAYABLE LOAN PAYABLE CAPITAL STOCK
REVENUES
RETAINED EARNINGS DIVIDENDS
SALARIES EXPENSE
T-Accounts
45,000 20,000 2 75,000 10,000 1 170,000
1 10,000 3,000 5 3 15,000 2 20,000
4 12,000 2,500 6
16,000 7
67,000 41,500 90,000 10,000 190,000
25,500 80,000 190,000
7 16,000 60,000 40,000 60,000
12,000 4
0 60,000
16,000 60,000 0 52,000
44,000 52,000 15,000 3
15,000
130,000 6 2,500
5 3,000
3,000
130,000 2,500 0
Trial Balance
Cash $25,500
Accounts Receivable 80,000
Land 190,000
Accounts Payable 44,000
Loan Payable 52,000
Capital Stock 60,000
Retained Earnings 130,000
Dividends 2,500
Revenues 15,000
Salaries Expense 3,000
301,000 301,000
Dividends
Amounts paid from profits of a corporation to shareholders as a return on
their investment in the stock of the entity
Expenses
The costs incurred in producing revenues
Owners Equity
The residual of assets minus liabilities, representing the collective interest
or position of the entity's owners
ACME COMPANY
Trial Balance
January 31st, 20X9
Debits Credits
2.
6
Briefly define the following accounting terms:
Dividends
Expenses
Owners Equity

M ar ks
2
4
4
3. On September 1, 2004, Mr. Bruce Wayne took out a loan to finance
remodeling his house. The total cost of building a cave under his house is
$100,000. Mr. Wayne decides to finance the whole amount to save up for a
high-powered car. The loan is to be paid back in quarterly payments over 10
years. The interest rate is 8% compounded quarterly, and his first payment is
due in 3 months. You may use the compound interest tables provided at the
back.
a) What are his quarterly payments?
b) Gotham City Bank has developed a flexible rate loan that allows Mr. Wayne to
make quarterly payments of $3400 every quarter for 10 years. What is the
interest rate that he is paying?
c) Mr. Waynes loan terms turn out to be quarterly payments of $3500 with 8%
interest compounded quarterly. He pays off his loan diligently for 5 years. After
his 20
th
payment on September 1, 2009, he got into an accident with an enormous
penguin. Due to injuries resulting from this accident, he is unable to make the
next two payments. If he still wants to pay off his loan by September 1, 2014,
what are his new quarterly payments?
(A/P, 2%, 40) * 100,000 = 0.0366 * 100,000 = $3660
Alternatively
(A/P, %, 40) * 100,000 = 3400
Linear interpolation
For = 1.75%, the factor is 0.035
For = 1.5%, the factor is 0.0334
So This is compounded quarterly, so the
nominal annual rate is 1.59375% * 4 = 6.375%
a) What are his quarterly payments? (3 minutes)
b) Gotham City Bank has developed a flexible rate loan that allows Mr.
Wayne to make quarterly payments of $3400 every quarter for 10
years. What is the interest rate that he is paying? (5-10 minutes)
i
i
i
c) Mr. Waynes loan terms turn out to be quarterly payments of $3500
with 8% interest compounded quarterly. He pays off his loan
diligently for 5 years. After his 20
th
payment on September 1, 2009,
he got into an accident with an enormous penguin. Due to injuries
resulting from this accident, he is unable to make the next 2
payments.
If he still wants to pay off his loan by September 1, 2014, what are his
new quarterly payments? (10 minutes)
PV of loan at time 20
(F/P, 2%, 20) * 100,000 = 1.486 * 100,000 = 148,600
PV of payments already made up to time 20 at time 20
(F/A, 2%, 20) * 3500 = 24.295 * 3500 = 85,032.70
Amount left on loan at time 20
148,600 85032.70 = 63,567.30
(Or, if you use equations)
148,594.74-85,040.79 = 63,553.95
Amount due on loan at time 22 (after missing the 22
nd
payment)
(F/P, 2%, 2) * 63,567.30 = 1.040 * 63,567.3 = 66,109.99
(Or, if you use equations)
New quarterly payment
(A/P, 2%, 18) * 66,109.99 = 0.0667 * 66,109.99 = 4409.54
4. General Electric issued 1000 bonds 3 years ago with a face value of 5000
each and a bond interest rate of 8% per year payable semi-annually. The
bonds have a maturity date of 20 years from the date they were first issued. If
the market interest rate is 10% per year compounded semi annually, what is
the price you are willing to pay to buy one of these bonds today?
PW = 5000(P/F,5%,34)+5000*4%(P/A,5%,34) = 4,190.35
5. Consider the following payoff matrix (in thousands of dollars):
Actions
a
1
a
2
a
3
a
4
a
5
a
6
States
?
1
?
2
?
3
?
4
a
4
a
2
Regr et matr ix
Actions
a
1
a
2
a
3
a
4
a
5
a
6
States
?
1
?
2
?
3
?
4
M ax
Regr et
a
3
6
6
2 6 4 4 5 7
8 2 5 2 4 2
0 5 2 4 3 3
3 5 2 5 3 2
a. Are any of the alternatives dominated?
Alternative is dominated by alternative .
b. What is the optimal decision using the Minimax Regret criteria?
5 1 3 3 2 0
0 6 3 6 4 6
5 0 3 1 2 2
2 0 3 0 2 3
5 6 3 6 4 6
Minimum regret is
M ar ks
5
6. Suppose that your MIE 258 midterm is tomorrow morning. It will consist of a
single question worth 10 marks, and you only have two hours to study for it. I
have told you that the question will either be on Game Theory (G) or on
Decision Trees (D). If you spend the full two hours studying one topic, you will
probably get 10 out of 10. If you spend one hour on a topic, you expect to get
6 out of 10. If you do not study the correct topic at all, you will likely only get 2
out of 10. So, an example of one strategy would be: if you spend two hours
studying decision trees, you will earn 10 if the question is D, and 2 if the
question is G. By taking a quick check of previous midterms, you discover
that I used D 6 times in the past 10 years, and G 4 times.
a. Use a decision tree to determine your best study strategy. How many hours
should you spend on each topic and what is your expected mark?
Optimal decision is to study Decision trees for 2 hours with an expected grade of
6.8 out of 10.
6.8
G .4
G .4
G .4
D .6
D .6
D .6
2 hours G
2 hours D
1 D & 1 G
10
10
2
6
6
2
6
6.8
5.2
b. Your friend Steve claims that he has inside information that he will sell you
for $5. Steves hot tips have not been very accurate in the past although he
has come through for you sometimes and you estimate the probability of his
information being correct as follows:
You decide that you need the marks, so you pay him the $5, and he tells you
that it will be a game theory question. How does this influence your study
strategy and what is your new expected mark?
Flipping the probability tree:
From the data: Result (graphical Bayes Rule):
, Steve says:
: Actual
question is:
.8 .2
.3 .7
D ,8
G ,2
G ,7
D ,3
G ,4
Given:
D ,6
G ,7
G ,2
D ,8
D ,3
Steve says
D ,6
G ,4
Path Prob.
Path Prob.
.48
Steve says:
.12
.12
.28
.28
Given:
.12
.12
.48
Then
Given
D G
D
G
7
Now, suppose that we decide to pay Steve the $5, and he tells us it will be a Game
Theory question; we only need to draw that portion of the decision tree. In this case, we
choose to spend 2 hours studying Game Theory with an expected grade of 7.6 out of 10.
6
4.4
1 D & 1 G
7.6
G .7
G .7
G .7
D .3
D .3
D .3
2 hours G
2 hours D
10
10
2
6
6
2
7.6
$5
Says G
Pay Steve
Selected F ormula:
years of end at the Book value
year in on Depreciati
on depreciati for allocated is that book value period beginning of fraction the
. rate interest at or to equivalent series entire the periods,
for continuing seriens uniform a in nt disburseme or receipt cash period - of - end An
. rate interest at to equivalent is at present th the from
periods interest amount, an is sume future The money. of sum future A
money of sum present A
periods interest of Number
year. per subperiods g compoundin of number The
interest of rate annual nominal The
interest of rate annual effective The
period per rate Interest
) 1 ( : on Depreciati Balance Declining
) , , / ( ) , , / ( EUAC : Cost Recovery Capital
: g compoundin Continuous
1 1 : year per rate interest Effective
) 1 (
1 ) 1 (
) , , / ( given find To : rth Present Wo Series
1 ) 1 (
) 1 (
) , , / ( given find To : Recovery Capital
1 ) 1 (
) , , / ( given find To : Fund Sinking
1 ) 1 (
) , , / ( given find To : Amount Compound Series
) 1 ( ) , , / ( given find To : rth Present Wo
) 1 ( ) , , / ( given find To : Amount Compound
1 1
n BV
n d
D
i F P n
A
i P
n F F
P
n
m
r
i
i
BV D BV BV D d
n i F A S n i P A P
Fe P Pe F
m
r
i
i i
i
A P n i A P A P
i
i i
P A n i P A P A
i
i
F A n i F A F A
i
i
A F n i A F A F
i F P n i F P F P
i P F n i P F P F
n
n
a
n n n n
r n r n
m
a
n
n
n
n
n
n
n
n

,
_

+
1
]
1

+
+

1
]
1

+
+

1
]
1

1
]
1

+
+