Computes interest on
principal and
interest earned that has not been paid or withdrawn.
Typical interest computation applied in business situations.
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PREVIEW OF CHAPTERIntermediate AccountingIFRS 2nd EditionKieso, Weygandt, and Warfield 6Identify accounting topics where the time value of money is relevant.Distinguish between simple and compound interest.Use appropriate compound interest tables.Identify variables fundamental to solving interest problems.Solve future and present value of 1 problems.Solve future value of ordinary and annuity due problems.Solve present value of ordinary and annuity due problems.Solve present value problems related to deferred annuities and bonds.Apply expected cash flows to present value measurement.After studying this chapter, you should be able to:Accounting and the Time Value of Money 6LEARNING OBJECTIVESBASIC TIME VALUE CONCEPTSA relationship between time and money.A dollar received today is worth more than a dollar promised at some time in the future. Time Value of MoneyWhen deciding among investment or borrowing alternatives, it is essential to be able to compare today’s dollar and tomorrow’s dollar on the same footing—to “compare apples to apples.”LO 1Notes Leases Pensions and Other Postretirement Benefits Long-Term AssetsApplications of Time Value Concepts:Shared-Based CompensationBusiness CombinationsDisclosuresEnvironmental LiabilitiesBASIC TIME VALUE CONCEPTSLO 1Payment for the use of money. Excess cash received or repaid over the amount lent or borrowed (principal).The Nature of InterestBASIC TIME VALUE CONCEPTSLO 1Identify accounting topics where the time value of money is relevant.Distinguish between simple and compound interest.Use appropriate compound interest tables.Identify variables fundamental to solving interest problems.Solve future and present value of 1 problems.Solve future value of ordinary and annuity due problems.Solve present value of ordinary and annuity due problems.Solve present value problems related to deferred annuities and bonds.Apply expected cash flows to present value measurement.After studying this chapter, you should be able to:Accounting and the Time Value of Money 6LEARNING OBJECTIVESInterest computed on the principal only. Simple InterestIllustration: Barstow Electric Inc. borrows $10,000 for 3 years at a simple interest rate of 8% per year. Compute the total interest to be paid for 1 year.Interest = p x i x n = $10,000 x .08 x 1= $800Annual InterestBASIC TIME VALUE CONCEPTSLO 2Interest computed on the principal only. Simple InterestIllustration: Barstow Electric Inc. borrows $10,000 for 3 years at a simple interest rate of 8% per year. Compute the total interest to be paid for 3 years.Interest = p x i x n = $10,000 x .08 x 3= $2,400Total InterestBASIC TIME VALUE CONCEPTSLO 2Simple InterestInterest = p x i x n = $10,000 x .08 x 3/12= $200Interest computed on the principal only. Illustration: If Barstow borrows $10,000 for 3 months at a 8% per year, the interest is computed as follows.Partial YearBASIC TIME VALUE CONCEPTSLO 2Identify accounting topics where the time value of money is relevant.Distinguish between simple and compound interest.Use appropriate compound interest tables.Identify variables fundamental to solving interest problems.Solve future and present value of 1 problems.Solve future value of ordinary and annuity due problems.Solve present value of ordinary and annuity due problems.Solve present value problems related to deferred annuities and bonds.Apply expected cash flows to present value measurement.After studying this chapter, you should be able to:Accounting and the Time Value of Money 6LEARNING OBJECTIVESCompound InterestComputes interest onprincipal andinterest earned that has not been paid or withdrawn.Typical interest computation applied in business situations.BASIC TIME VALUE CONCEPTSLO 3Illustration: Tomalczyk Company deposits $10,000 in the Last National Bank, where it will earn simple interest of 9% per year. It deposits another $10,000 in the First State Bank, where it will earn compound interest of 9% per year compounded annually. In both cases, Tomalczyk will not withdraw any interest until 3 years from the date of deposit.Year 1 $10,000.00 x 9%$ 900.00$ 10,900.00Year 2 $10,900.00 x 9%$ 981.00$ 11,881.00Year 3 $11,881.00 x 9%$1,069.29$ 12,950.29ILLUSTRATION 6-1 Simple vs. Compound InterestCompound InterestLO 3The continuing debate by governments as to how to provideretirement benefits to their citizens serves as a great context to illustrate the power of compounding. One proposed idea is for the government to give $1,000 to every citizen at birth. This gift would be deposited in an account that would earn interest tax-free until the citizen retires. Assuming the account earns a 5% annual return until retirement at age 65, the $1,000 would grow to $23,839. With monthly compounding, the $1,000 deposited at birth would grow to $25,617.WHAT’S YOUR PRINCIPLEA PRETTY GOOD STARTWhy start so early? If the government waited until age 18 to deposit the money, it would grow to only $9,906 with annual compounding. That is, reducing the time invested by a third results in more than a 50% reduction in retirement money. This example illustrates the importance of startingearly when the power of compounding is involved.LO 3Table 6-1 - Future Value of 1Table 6-2 - Present Value of 1Table 6-3 - Future Value of an Ordinary Annuity of 1Table 6-4 - Present Value of an Ordinary Annuity of 1Table 6-5 - Present Value of an Annuity Due of 1Compound Interest TablesNumber of Periods = number of years x the number of compounding periods per year.Compounding Period Interest Rate = annual rate divided by the number of compounding periods per year.BASIC TIME VALUE CONCEPTSLO 3How much principal plus interest a dollar accumulates to at the end of each of five periods, at three different rates of compound interest.ILLUSTRATION 6-2Excerpt from Table 6-1Compound Interest TablesFUTURE VALUE OF 1 AT COMPOUND INTEREST(Excerpt From Table 6-1)BASIC TIME VALUE CONCEPTSLO 3Formula to determine the future value factor (FVF) for 1: Where: Compound Interest TablesFVFn,i = future value factor for n periods at i interest n = number of periods i = rate of interest for a single periodBASIC TIME VALUE CONCEPTSLO 3To illustrate the use of interest tables to calculate compound amounts, Illustration 6-3 shows the future value to which 1 accumulates assuming an interest rate of 9%.ILLUSTRATION 6-3Accumulation of Compound AmountsCompound Interest TablesBASIC TIME VALUE CONCEPTSLO 3Number of years X number of compounding periods per year =Number of periodsILLUSTRATION 6-4Frequency of CompoundingCompound Interest TablesBASIC TIME VALUE CONCEPTSLO 3A 9% annual interest compounded daily provides a 9.42% yield.Effective Yield for a $10,000 investment.ILLUSTRATION 6-5Comparison of Different Compounding PeriodsCompound Interest TablesBASIC TIME VALUE CONCEPTSLO 3Identify accounting topics where the time value of money is relevant.Distinguish between simple and compound interest.Use appropriate compound interest tables.Identify variables fundamental to solving interest problems.Solve future and present value of 1 problems.Solve future value of ordinary and annuity due problems.Solve present value of ordinary and annuity due problems.Solve present value problems related to deferred annuities and bonds.Apply expected cash flows to present value measurement.After studying this chapter, you should be able to:Accounting and the Time Value of Money 6LEARNING OBJECTIVESRate of InterestNumber of Time PeriodsFundamental VariablesILLUSTRATION 6-6Basic Time DiagramFuture ValuePresent ValueBASIC TIME VALUE CONCEPTSLO 4Identify accounting topics where the time value of money is relevant.Distinguish between simple and compound interest.Use appropriate compound interest tables.Identify variables fundamental to solving interest problems.Solve future and present value of 1 problems.Solve future value of ordinary and annuity due problems.Solve present value of ordinary and annuity due problems.Solve present value problems related to deferred annuities and bonds.Apply expected cash flows to present value measurement.After studying this chapter, you should be able to:Accounting and the Time Value of Money 6LEARNING OBJECTIVESSINGLE-SUM PROBLEMSUnknown Future ValueTwo CategoriesILLUSTRATION 6-6Basic Time DiagramUnknown Present ValueLO 5Value at a future date of a given amount invested, assuming compound interest.FV = future valuePV = present value (principal or single sum) = future value factor for n periods at i interestFVFn,iWhere:Future Value of a Single SumSINGLE-SUM PROBLEMSLO 5Future Value of a Single SumIllustration: Bruegger Co. wants to determine the future value of €50,000 invested for 5 years compounded annually at an interest rate of 11%.= €84,253ILLUSTRATION 6-7Future Value TimeDiagram (n = 5, i = 11%)LO 5What table do we use?Future Value of a Single SumIllustration: Bruegger Co. wants to determine the future value of €50,000 invested for 5 years compounded annually at an interest rate of 11%.Alternate CalculationILLUSTRATION 6-7Future Value TimeDiagram (n = 5, i = 11%)LO 5What factor do we use?€50,000Present ValueFactorFuture Valuex 1.68506= €84,253i=11%n=5Future Value of a Single SumAlternate CalculationLO 5Illustration: Shanghai Electric Power (CHN) deposited¥250 million in an escrow account with Industrial and Commercial Bank of China (CHN) at the beginning of 2015 as a commitment toward a power plant to be completed December 31, 2018. How much will the company have on deposit at the end of 4 years if interest is 10%, compounded semiannually?What table do we use?Future Value of a Single SumILLUSTRATION 6-8Future Value TimeDiagram (n = 8, i = 5%)LO 5Present ValueFactorFuture Value¥250,000,000x 1.47746 = ¥369,365,000i=5%n=8Future Value of a Single SumLO 5Present Value of a Single SumSINGLE-SUM PROBLEMSAmount needed to invest now, to produce a known future value.Formula to determine the present value factor for 1: Where: PVFn,i = present value factor for n periods at i interest n = number of periods i = rate of interest for a single periodLO 5Assuming an interest rate of 9%, the present value of 1 discounted for three different periods is as shown in Illustration 6-10.ILLUSTRATION 6-10Present Value of 1 Discounted at 9% for Three PeriodsPresent Value of a Single SumLO 5ILLUSTRATION 6-9Excerpt from Table 6-2Illustration 6-9 shows the “present value of 1 table” for five different periods at three different rates of interest.Present Value of a Single SumLO 5Amount needed to invest now, to produce a known future value.Where:FV = future valuePV = present value = present value factor for n periods at i interestPVFn,iLO 5Present Value of a Single SumIllustration: What is the present value of €84,253 to be received or paid in 5 years discounted at 11% compounded annually?Present Value of a Single Sum= €50,000ILLUSTRATION 6-11Present Value TimeDiagram (n = 5, i = 11%)LO 5What table do we use?Present Value of a Single SumIllustration: What is the present value of €84,253 to be received or paid in 5 years discounted at 11% compounded annually?Alternate CalculationILLUSTRATION 6-11Present Value TimeDiagram (n = 5, i = 11%)LO 5€84,253Future ValueFactorPresent Valuex .59345= €50,000What factor?i=11%n=5Present Value of a Single SumLO 5Illustration: Assume that your rich uncle decides to give you $2,000 for a vacation when you graduate from college 3 years from now. He proposes to finance the trip by investing a sum of money now at 8% compound interest that will provide you with $2,000 upon your graduation. The only conditions are that you graduate and that you tell him how much to invest now.What table do we use?ILLUSTRATION 6-12Present Value TimeDiagram (n = 3, i = 8%)Present Value of a Single SumLO 5$2,000Future ValueFactorPresent Valuex .79383= $1,587.66What factor?i=8%n=3Present Value of a Single SumLO 5Solving for Other UnknownsExample—Computation of the Number of PeriodsThe Village of Somonauk wants to accumulate $70,000 for the construction of a veterans monument in the town square. At the beginning of the current year, the Village deposited $47,811 in a memorial fund that earns 10% interest compounded annually. How many years will it take to accumulate $70,000 in the memorial fund?ILLUSTRATION 6-13SINGLE-SUM PROBLEMSLO 5Example—Computation of the Number of PeriodsILLUSTRATION 6-14Using the future value factor of 1.46410, refer to Table 6-1 and read down the 10% column to find that factor in the 4-period row.Solving for Other UnknownsLO 5Example—Computation of the Number of PeriodsILLUSTRATION 6-14Using the present value factor of .68301, refer to Table 6-2 and read down the 10% column to find that factor in the 4-period row.Solving for Other UnknownsLO 5ILLUSTRATION 6-15Advanced Design, Inc. needs €1,409,870 for basic research 5 years from now. The company currently has €800,000 to invest for that purpose. At what rate of interest must it invest the €800,000 to fund basic research projects of €1,409,870, 5 years from now?Example—Computation of the Interest RateSolving for Other UnknownsLO 5ILLUSTRATION 6-16Using the future value factor of 1.76234, refer to Table 6-1 and read across the 5-period row to find the factor.Example—Computation of the Interest RateSolving for Other UnknownsLO 5Using the present value factor of .56743, refer to Table 6-2 and read across the 5-period row to find the factor.Example—Computation of the Interest RateSolving for Other UnknownsILLUSTRATION 6-16LO 5Identify accounting topics where the time value of money is relevant.Distinguish between simple and compound interest.Use appropriate compound interest tables.Identify variables fundamental to solving interest problems.Solve future and present value of 1 problems.Solve future value of ordinary and annuity due problems.Solve present value of ordinary and annuity due problems.Solve present value problems related to deferred annuities and bonds.Apply expected cash flows to present value measurement.After studying this chapter, you should be able to:Accounting and the Time Value of Money 6LEARNING OBJECTIVESPeriodic payments or receipts (called rents) of the same amount, Same-length interval between such rents, and Compounding of interest once each interval.Annuity requires:Ordinary Annuity - rents occur at the end of each period. Annuity Due - rents occur at the beginning of each period.Two TypesANNUITIESLO 6Future Value of an Ordinary AnnuityRents occur at the end of each period.No interest during 1st period.01Present Value2345678$20,00020,00020,00020,00020,00020,00020,00020,000Future ValueANNUITIESLO 6Illustration: Assume that $1 is deposited at the end of each of 5 years (an ordinary annuity) and earns 12% interest compounded annually. Illustration 6-17 shows the computation of the future value, using the “future value of 1” table (Table 6-1) for each of the five $1 rents.ILLUSTRATION 6-17Future Value of an Ordinary AnnuityLO 6Illustration 6-18 provides an excerpt from the “future value of an ordinary annuity of 1” table.ILLUSTRATION 6-18Future Value of an Ordinary AnnuityLO 6*Note that this annuity table factor is the same as the sum of the future values of 1 factors shown in Illustration 6-17. R = periodic rent FVF-OA = future value factor of an ordinary annuity i = rate of interest per period n = number of compounding periodsA formula provides a more efficient way of expressing the future value of an ordinary annuity of 1. Where:n,iFuture Value of an Ordinary AnnuityLO 6Illustration: What is the future value of five $5,000 deposits made at the end of each of the next 5 years, earning interest of 12%? = $31,764.25ILLUSTRATION 6-19Time Diagram for FutureValue of OrdinaryAnnuity (n = 5, i = 12%)Future Value of an Ordinary AnnuityLO 6Illustration: What is the future value of five $5,000 deposits made at the end of each of the next 5 years, earning interest of 12%?What table do we use?Future Value of an Ordinary AnnuityAlternate CalculationILLUSTRATION 6-19LO 6$5,000DepositsFactorFuture Valuex 6.35285= $31,764What factor?i=12%n=5Future Value of an Ordinary AnnuityLO 6Illustration: Gomez Inc. will deposit $30,000 in a 12% fund at the end of each year for 8 years beginning December 31, 2014. What amount will be in the fund immediately after the last deposit?01Present ValueWhat table do we use?2345678$30,00030,00030,00030,00030,00030,00030,00030,000Future ValueFuture Value of an Ordinary AnnuityLO 6DepositFactorFuture Value$30,000x 12.29969= $368,991i=12%n=8Future Value of an Ordinary AnnuityLO 6Future Value of an Annuity DueRents occur at the beginning of each period.Interest will accumulate during 1st period.Annuity due has one more interest period than ordinary annuity.Factor = multiply future value of an ordinary annuity factor by 1 plus the interest rate.01234567820,00020,00020,00020,00020,00020,00020,000$20,000Future ValueANNUITIESLO 6ILLUSTRATION 6-21Comparison of Ordinary Annuity with an Annuity DueFuture Value of an Annuity DueLO 6Illustration: Assume that you plan to accumulate CHF14,000 for a down payment on a condominium apartment 5 years from now. For the next 5 years, you earn an annual return of 8% compounded semiannually. How much should you deposit at the end of each 6-month period? R = CHF1,166.07ILLUSTRATION 6-24Computation of RentFuture Value of an Annuity DueLO 6Computation of RentILLUSTRATION 6-24CHF14,000= CHF1,166.0712.00611Future Value of an Annuity DueAlternate CalculationLO 6Illustration: Suppose that a company’s goal is to accumulate $117,332 by making periodic deposits of $20,000 at the end of each year, which will earn 8% compounded annually while accumulating. How many deposits must it make?ILLUSTRATION 6-25Computation of Number of Periodic Rents5.86660Future Value of an Annuity DueLO 6Illustration: Mr. Goodwrench deposits $2,500 today in a savings account that earns 9% interest. He plans to deposit $2,500 every year for a total of 30 years. How much cash will Mr. Goodwrench accumulate in his retirement savings account, when he retires in 30 years?ILLUSTRATION 6-27Computation of Future ValueFuture Value of an Annuity DueLO 6Illustration: Bayou Inc. will deposit $20,000 in a 12% fund at the beginning of each year for 8 years beginning January 1, Year 1. What amount will be in the fund at the end of Year 8?01Present ValueWhat table do we use?2345678$20,00020,00020,00020,00020,00020,00020,00020,000Future ValueFuture Value of an Annuity DueLO 6DepositFactorFuture Value12.29969 x 1.12 = 13.775652i=12%n=8$20,000x 13.775652= $275,513Future Value of an Annuity DueLO 6Identify accounting topics where the time value of money is relevant.Distinguish between simple and compound interest.Use appropriate compound interest tables.Identify variables fundamental to solving interest problems.Solve future and present value of 1 problems.Solve future value of ordinary and annuity due problems.Solve present value of ordinary and annuity due problems.Solve present value problems related to deferred annuities and bonds.Apply expected cash flows to present value measurement.After studying this chapter, you should be able to:Accounting and the Time Value of Money 6LEARNING OBJECTIVESPresent Value of an Ordinary AnnuityPresent value of a series of equal amounts to be withdrawn or received at equal intervals.Periodic rents occur at the end of the period.01Present Value2341920$100,000100,000100,000100,000100,000. . . . .100,000ANNUITIESLO 7Illustration: Assume that $1 is to be received at the end of each of 5 periods, as separate amounts, and earns 12% interest compounded annually. Present Value of an Ordinary AnnuityILLUSTRATION 6-28Solving for the PresentValue of an Ordinary AnnuityLO 7A formula provides a more efficient way of expressing the present value of an ordinary annuity of 1. Where:Present Value of an Ordinary AnnuityLO 7Illustration: What is the present value of rental receipts of $6,000 each, to be received at the end of each of the next 5 years when discounted at 12%?ILLUSTRATION 6-30Present Value of an Ordinary AnnuityLO 7Illustration: Jaime Yuen wins $2,000,000 in the state lottery. She will be paid $100,000 at the end of each year for the next 20 years. How much has she actually won? Assume an appropriate interest rate of 8%. 01Present ValueWhat table do we use?2341920$100,000100,000100,000100,000100,000. . . . .100,000Present Value of an Ordinary AnnuityLO 7$100,000ReceiptsFactorPresent Valuex 9.81815= $981,815i=8%n=20Present Value of an Ordinary AnnuityLO 7Time value of money concepts also can be relevant to public policy debates. For example, many governments must evaluate the financial cost-benefit of selling to a private operator the future cash flows associated with government-run services, such as toll roads and bridges. In these cases, the policymaker must estimate the present value of the future cash flows in determining the price for selling the rights. In another example, some governmental entities had to determine how to receive the payments from tobacco companies as settlement for a national lawsuit against the companies for the healthcare costs of smoking. In one situation, a governmental entity was due to collect 25 years of payments totaling $5.6 billion. The government could wait to collect the payments, or it could sell the payments to an investment bank (a process called securitization). If it were to sell the payments, it would receive a lump-sum payment today of $1.26 billion. Is this a good deal for this governmental entity? Assuming a discount rate of 8% and that the payments will be received inWHAT’S YOUR PRINCIPLEUP IN SMOKEequal amounts (e.g., an annuity), the present value of the tobacco payment is:$5.6 billion ÷ 25 = $224 million$224 million X 10.67478* = $2.39 billion*PV-OA (i = 8%, n = 25)Why would the government be willing to take just $1.26 billion today for an annuity whose present value is almost twice that amount? One reason is that the governmental entity was facing a hole in its budget that could be plugged in part by the lump-sum payment. Also, some believed that the risk of not getting paid by the tobacco companies in the future makes it prudent to get the money earlier. If this latter reason has merit, then the present value computation above should have been based on a higher interest rate. Assuming a discount rate of 15%, the present value of the annuity is $1.448 billion ($5.6 billion ÷ 25 = $224 million; $224 million x 6.46415), which is much closer to the lump-sum payment offered to the governmental entity.LO 7Present Value of an Annuity DuePresent value of a series of equal amounts to be withdrawn or received at equal intervals.Periodic rents occur at the beginning of the period.01Present Value2341920$100,000100,000100,000100,000100,000. . . . .100,000ANNUITIESLO 7ILLUSTRATION 6-31Comparison of Ordinary Annuity with an Annuity DuePresent Value of an Annuity DueLO 7Illustration: Space Odyssey, Inc., rents a communications satellite for 4 years with annual rental payments of $4.8 million to be made at the beginning of each year. If the relevant annual interest rate is 11%, what is the present value of the rental obligations?ILLUSTRATION 6-33Computation of PresentValue of an Annuity DuePresent Value of an Annuity DueLO 701Present ValueWhat table do we use?2341920$100,000100,000100,000100,000100,000. . . . .100,000Present Value of Annuity ProblemsIllustration: Jaime Yuen wins $2,000,000 in the state lottery. She will be paid $100,000 at the beginning of each year for the next 20 years. How much has she actually won? Assume an appropriate interest rate of 8%. LO 7$100,000ReceiptsFactorPresent Valuex 10.60360= $1,060,360i=8%n=20Present Value of Annuity ProblemsLO 7Illustration: Assume you receive a statement from MasterCard with a balance due of €528.77. You may pay it off in 12 equal monthly payments of €50 each, with the first payment due one month from now. What rate of interest would you be paying?Computation of the Interest RateReferring to Table 6-4 and reading across the 12-period row, you find 10.57534 in the 2% column. Since 2% is a monthly rate, the nominal annual rate of interest is 24% (12 x 2%). The effective annual rate is 26.82413% [(1 + .02) - 1]. 12 Present Value of Annuity ProblemsLO 7Illustration: Juan and Marcia Perez have saved $36,000 to finance their daughter Maria’s college education. They deposited the money in the Santos Bank, where it earns 4% interest compounded semiannually. What equal amounts can their daughter withdraw at the end of every 6 months during her 4 college years, without exhausting the fund?Computation of a Periodic Rent 12 Present Value of Annuity ProblemsLO 7Identify accounting topics where the time value of money is relevant.Distinguish between simple and compound interest.Use appropriate compound interest tables.Identify variables fundamental to solving interest problems.Solve future and present value of 1 problems.Solve future value of ordinary and annuity due problems.Solve present value of ordinary and annuity due problems.Solve present value problems related to deferred annuities and bonds.Apply expected cash flows to present value measurement.After studying this chapter, you should be able to:Accounting and the Time Value of Money 6LEARNING OBJECTIVESRents begin after a specified number of periods.Future Value of a Deferred Annuity - Calculation same as the future value of an annuity not deferred.Present Value of a Deferred Annuity - Must recognize the interest that accrues during the deferral period.012341920100,000100,000100,000. . . . .Future ValuePresent ValueDeferred AnnuitiesMORE COMPLEX SITUATIONSLO 8Future Value of Deferred AnnuityMORE COMPLEX SITUATIONSIllustration: Sutton Corporation plans to purchase a land site in 6 years for the construction of its new corporate headquarters. Sutton budgets deposits of $80,000 on which it expects to earn 5% annually, only at the end of the fourth, fifth, and sixth periods. What future value will Sutton have accumulated at the end of the sixth year?ILLUSTRATION 6-37LO 8Present Value of Deferred AnnuityMORE COMPLEX SITUATIONSIllustration: Bob Bender has developed and copyrighted tutorial software for students in advanced accounting. He agrees to sell the copyright to Campus Micro Systems for 6 annual payments of $5,000 each. The payments will begin 5 years from today. Given an annual interest rate of 8%, what is the present value of the 6 payments?Two options are available to solve this problem.LO 8Present Value of Deferred AnnuityILLUSTRATION 6-38ILLUSTRATION 6-39Use Table 6-4LO 8Present Value of Deferred AnnuityUse Table 6-2 and 6-4LO 8Two Cash Flows:Periodic interest payments (annuity). Principal paid at maturity (single-sum).01234910140,000140,000140,000$140,000. . . . .140,000140,0002,000,000Valuation of Long-Term BondsMORE COMPLEX SITUATIONSLO 8BE6-15: Wong Inc. issues HK$2,000,000 of 7% bonds due in 10 years with interest payable at year-end. The current market rate of interest for bonds of similar risk is 8%. What amount will Wong receive when it issues the bonds?01Present Value234910140,000140,000140,000HK$140,000. . . . .140,0002,140,000Valuation of Long-Term BondsLO 8 HK$140,000 x 6.71008 = HK$939,411Interest PaymentFactorPresent ValuePV of Interesti=8%n=10Valuation of Long-Term BondsLO 8 HK$2,000,000 x .46319 = HK$926,380PrincipalFactorPresent ValuePV of PrincipalValuation of Long-Term Bondsi=8%n=10LO 8BE6-15: Wong Inc. issues HK$2,000,000 of 7% bonds due in 10 years with interest payable at year-end. Present value of Interest HK$ 939,411Present value of Principal 926,380 Bond current market value HK$1,865,791 Valuation of Long-Term BondsLO 8BE6-15:Valuation of Long-Term BondsLO 8Identify accounting topics where the time value of money is relevant.Distinguish between simple and compound interest.Use appropriate compound interest tables.Identify variables fundamental to solving interest problems.Solve future and present value of 1 problems.Solve future value of ordinary and annuity due problems.Solve present value of ordinary and annuity due problems.Solve present value problems related to deferred annuities and bonds.Apply expected cash flows to present value measurement.After studying this chapter, you should be able to:Accounting and the Time Value of Money 6LEARNING OBJECTIVESIFRS 13 explains the expected cash flow approach that uses a range of cash flows and incorporates the probabilities of those cash flows. Choosing an Appropriate Interest RateThree Components of Interest:Pure RateExpected Inflation RateCredit Risk RateRisk-free rate of return. IASB states a company should discount expected cash flows by the risk-free rate of return.PRESENT VALUE MEASUREMENTLO 9E6-21: Angela Contreras is trying to determine the amountto set aside so that she will have enough money on hand in 2 years to overhaul the engine on her vintage used car. While there is some uncertainty about the cost of engine overhauls in 2 years, by conducting some research online, Angela has developed the following estimates.Instructions: How much should Angela Contreras deposit today in an account earning 6%, compounded annually, so that she will have enough money on hand in 2 years to pay for the overhaul?PRESENT VALUE MEASUREMENTLO 9Instructions: How much should Angela Contreras deposit today in an account earning 6%, compounded annually, so that she will have enough money on hand in 2 years to pay for the overhaul?PRESENT VALUE MEASUREMENTLO 9Copyright © 2014 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.COPYRIGHT
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