Chapter 8 - Part 2

# Chapter 8 - Part 2 - Chapter 8: Liabilities Part 2 Present...

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Dr. Ron Lazer Chapter 8, Page 1 Chapter 8: Liabilities Part 2 – Present Value Concepts – Appendix C Dr. Ron Lazer Class case In order to develop his business, Dan decided on 1/1/09 to apply for a loan from Best Bank. Reviewing the business plan prepared by Dan, the loan officer estimates that Dan will be able to make annual payments of \$50,000 (principal + interest) each year for next three years (12/31/09, 10, 11). The usual return/interest asked by the bank for similar loans is 8%. 1. What is the amount of loan the bank will give Dan? 2. What is the liability amount in Dan’s B/S? Ron Lazer, Ph.D.

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Dr. Ron Lazer Chapter 8, Page 2 Appendix C Objectives s Time Value of Money: b Compound Interest b Future Value b Present Value b Present Value of Annuity Ron Lazer, Ph.D. Present Value Concepts s Two components determine the “time value” of money: b interest (discount) rate b number of periods of discounting s For financial reporting, we are concerned primarily with present value concepts. s What is better: b \$10,000 today or \$11,100 in one year? Ron Lazer, Ph.D.
Dr. Ron Lazer Chapter 8, Page 3 Compound Interest, Future Value, and Present Value s When money is borrowed, the amount borrowed is known as the loan principal . b For the borrower, interest is the cost of using the principal. s Investing money is the same as making a loan. b The interest received is the return on the investment. Ron Lazer, Ph.D. Compound Interest, Future Value, and Present Value s Calculating the amount of interest depends on the interest rate and the interest period. s Types of interest: b Simple interest - the interest rate multiplied by an unchanging principal amount b Compound interest - the interest rate multiplied by a changing principal amount s The unpaid interest is added to the principal balance and becomes part of the new principal balance for the next interest period. Ron Lazer, Ph.D.

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Dr. Ron Lazer Chapter 8, Page 4 Future Value s Future value - the amount accumulated over time, including principal and interest s For example, if a person lets \$10,000 sit in a bank account that pays 10% interest per year for 3 years, the future value of the \$10,000 (compounded annually) is \$13,310 and is determined as follows: Year 1: \$10,000 x 1.10 = \$11,000 Year 2: Year 3: Or FV = Future Value s Interest can be compounded in periods shorter than one year (Ex: semi-annual).
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## This note was uploaded on 01/09/2010 for the course ACCT 2331 taught by Professor Staff during the Fall '08 term at University of Houston.

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Chapter 8 - Part 2 - Chapter 8: Liabilities Part 2 Present...

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