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

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
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.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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.
Background image of page 2
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.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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).
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

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.

Page1 / 14

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

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online