1. Scott Bennett is preparing his balance sheet and income and expense statement for the year ending June 30, 2016. He is having difficulty classifying six items and asks for your help. Which, if any, of the following transactions are assets, liabilities, income, or expense items?

1. Scott Bennett is preparing his balance sheet and income and expense statement for the year ending June 30, 2016. He is having difficulty classifying six items and asks for your help. Which, if any, of the following transactions are assets, liabilities, income, or expense items?

a.Scott rents a house for $1,350 a month. 


b.On June 21, 2016, Scott bought diamond earrings for his wife and charged them using 
his MasterCard. The earrings cost $900, but he hasn’t yet received the bill. 


c. Scott borrowed $3,500 from his parents last fall, but so far, he has made no payments to 
them. 


d.Scott makes monthly payments of $225 on an installment loan; about half of it is interest, 
and the balance is repayment of principal. He has 20 payments left, totaling $4,500. 


e. Scott paid $3,800 in taxes during the year and is due a tax refund of $650, which he 
hasn’t yet received. 


f. Scott invested $2,300 in some common stock. 


2. Stan and Elizabeth Carpenter are preparing their 2016 cash budget. Help the Carpenters reconcile the following differences, giving reasons to support your answers.

a.Their only source of income is Stan’s salary, which amounts to $5,000 a month before 
taxes. Elizabeth wants to show the $5,000 as their monthly income, whereas Stan argues 
that his take-home pay of $3,917 is the correct value to show. 


b.Elizabeth wants to make a provision for fun money, an idea that Stan cannot understand. 
He asks, “Why do we need fun money when everything is provided for in the budget?” 


3. Use future or present value techniques to solve the following problems.

a.If you inherited $45,000 today and invested all of it in a security that paid a 7 percent rate 
of return, how much would you have in 25 years? 


b.If the average new home costs $275,000 today, how much will it cost in 10 years if the 
price increases by 5 percent each year? 


c. You think that in 15 years, it will cost $214,000 to provide your child with a 4-year college 
education. Will you have enough if you take $75,000 today and invest it for the next 
15 years at 4 percent? 


d.If you can earn 4 percent, how much will you have to save each year if you want to retire 
in 35 years with $1 million? 


4. Greg Fredericks wishes to have $800,000 in a retirement fund 20 years from now. He can create the retirement fund by making a single lump-sum deposit today.

a.If upon retirement in 20 years, Greg plans to invest $800,000 in a fund that earns 4 per- 
cent, what is the maximum annual withdrawal he can make over the following 15 years? 


b.How much would Greg need to have on deposit at retirement in order to withdraw 
$35,000 annually over the 15 years if the retirement fund earns 4 percent? 


c. To achieve his annual withdrawal goal of $35,000 calculated in part b, how much more 
than the amount calculated in part a must Greg deposit today in an investment earning 4 percent annual interest?