Compute the amount of net income assuming that it is based on the amounts (a) before adjusting entries and (b) after adjusting entries. Which net income amount is correct

Question Completion:

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Ramirez Company

                                 Unadjusted   Adjusted

1. Net income               $8,930        $3,240

2. The net income after the adjusting entries is correct.

Explanation:

a) Data and Calculations:

                            Unadjusted   Adjusted

Service revenue    $64,400      $66,220

Salary expense        55,470         55,470

Depreciation expense                   6,000

Insurance expense                            130

Income tax expense                       1,380

Accounts receivable accrued $1,820

Income Statements

                            Unadjusted   Adjusted

Service revenue    $64,400      $66,220

Salary expense        55,470         55,470

Depreciation expense                   6,000

Insurance expense                            130

Income tax expense                       1,380

Total expenses     $55,470      $62,980

Net income             $8,930         $3,240

The investor should be willing to pay $927.68 for the bond today.

We in need to compute the price at which the investor can sell the bond in year 10 (Y10).

The price of the bond in year 10 will be the present value of the coupons over the remaining life of the bond and the maturity value of the bond after 20 years.

We have

Coupon  Value (C )                     $50.00

No. of coupons remaining (n)           20

Expected YTM in year 10                 0.08

Expected semi annual  YTM in year 10      

Face (Maturity) Value of the bond (MV)    $1,000.00

The bond price in year 10 will be

Substituting the values we get,

Hence the investor can expect to sell the bond in year 10  at $1,135.90.

Now, we'll calculate the price the investor is willing to pay for the bond. The investor can expected to pay the Present Value of the coupons she'll receive over 10 years and the selling price of the bond 10 years from now. We discount the cash flows at the rate of return the investor expects.

We have

Coupon  Value (C )                     $50.00

No. of coupons remaining (n)           20

Expected rate of return                          0.12

Expected semi annual  rate of return          

Selling Price of the bond (SP)                $1,135.90

Substituting the values we get,