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# chpt%2006%20ppt%20slides - CHAPTER 6 ACCOUNTING AND THE...

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Unformatted text preview: CHAPTER 6 ACCOUNTING AND THE ACCOUNTING TIME VALUE OF MONEY TIME Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 6 -1 Basic Time Value Concepts Applications to Accounting Topics: 1. Note s 2. Le s ase 3. Pe nsions and Othe r 1. S inking Funds 2. Busine C binations ss om 3. Disclosure s 4. I nstallm nt C e ontracts Postre m nt Be fits tire e ne 4. Long-Te Asse rm ts Chapter 6 -2 Basic Time Value Concepts Compound Interest Tables Table 1 - FutureValueof 1 Table 2 - Pre nt Valueof 1 se Table 3 - FutureValueof an Ordinary Annuity of 1 Table 4 - Pre nt Valueof an Ordinary Annuity of 1 se Table 5 - Pre nt Valueof an Annuity Dueof 1 se Number of Periods = num r of ye x thenum r of com be ars be pounding pe riods pe ye r ar. Compounding Period Interest Rate = annual ratedivide by the d num r of com be pounding pe riods pe ye r ar. Chapter 6 -3 Basic Time Value Concepts Fundamental Variables to Compound Interest Rateof I nte st re Num r of Tim Pe be e riods Pre nt Valueof futurecash flows se Futurecash flows Illustration 6-6 Chapter 6 -4 Annuities Annuity requires: (1) (2) (3) Pe riodic paym nts or re ipts (calle re of thesam am e ce d nts) e ount, S e ngth inte be e such re and am -le rval twe n nts, C pounding of inte st oncee inte om re ach rval. Two Types Chapter 6 -5 Ordinary annuity - re occur at thee of e pe nts nd ach riod. Annuity Due - re occur at thebe nts ginning of e pe ach riod. Annuities Present Value of an Ordinary Annuity Present value of a series of equal amounts to be withdrawn or received at equal intervals. Periodic rents occur at the end of the period. Present Value \$100,000 100,000 100,000 100,000 ..... 100,000 100,000 0 Chapter 6 -6 1 2 3 4 19 20 Present Value of an Ordinary Annuity Present Illustration: Assum that \$1 is to bere ive at thee of e of 5 e ce d nd ach pe riods, as se parateam ounts, and e 12%inte st com arns re pounde annually. d Illustration 6-28 Chapter 6 -7 Notes Receivable Example Note issued at Par: Note Stated Rate = Market Rate = 10% Stated PV of Note = 100,000 * PV1(3 yr, 10% mkt) + 10,000 * PVOA(3 yr, 10% mkt) Chapter 6 -8 Notes Receivable Example PV of Principal Chapter 6 -9 Notes Receivable Example PV of Inte st re Chapter 6-10 Notes Receivable Example Note issued at Par: Note Stated Rate = Market Rate = 10% Stated 0.75132 PV of Note = 100,000 * PV1(3 yr, 10% mkt) + 10,000 * PVOA(3 yr, 10% mkt) 100,000 2.48685 When the note is issued at par: Present Value of Note = Face Value of Note Chapter 6-11 Notes Receivable Example Journal entry for issuance of note: N/R Cash 100,000 Face Value 100,000 Face 100,000 Present Value 100,000 Present Chapter 6-12 Notes Receivable Example Note issued at a Premium: Note Stated Rate = 12% Market Rate = 10% Stated 0.75132 PV of Note = 100,000 * PV1(3 yr, 10% mkt) + 12,000 * PVOA(3 yr, 10% mkt) 104,973 2.48685 When the note is issued at a premium: Present Value of Note > Face Value of Note Chapter 6-13 Notes Receivable Example Journal entry for issuance of note: N/R 100,000 Face Value 100,000 Face Prem. on N/R 4,973 Cash 104,973 Present Value 104,973 Present Chapter 6-14 Notes Receivable Example Note issued at a Discount: Note Stated Rate = 8% Market Rate = 10% Stated 0.75132 PV of Note = 100,000 * PV1(3 yr, 10% mkt) + 8,000 * PVOA(3 yr, 10% mkt) 95,027 2.48685 When the note is issued at a discount: Present Value of Note < Face Value of Note Chapter 6-15 Notes Receivable Example Journal entry for issuance of note: N/R 100,000 Face Value 100,000 Face Disc. on N/R 4,973 Cash 95,027 Present Value Present Chapter 6-16 Notes Receivable Example Effective Interest Amortization Method: Interest Rev = (N/R – Disc.) * Mkt Rate Year 1: Int Rev = (100,000 – 4,973) * 10% mkt = 9,503 Cash Disc. on N/R Int. Rev Chapter 6-17 8,000 1,503 9,503 Notes Receivable Example Year 2: Int Rev = (100,000 – 3,470) * 10% mkt = 9,653 Cash Disc. on N/R Int. Rev 8,000 1,653 9,653 Chapter 6-18 Notes Receivable Example Year 3: Int Rev = (100,000 – 1,817) * 10% mkt = 9,817 Cash Disc. on N/R Int. Rev Cash N/R Chapter 6-19 8,000 1,817 9,817 100,000 100,000 Amortization Table Illustration 7-14 Chapter 6-20 Annuities Present Value of an Annuity Due Present value of a series of equal amounts to be withdrawn or received at equal intervals. Periodic rents occur at the beginning of the period. Present Value \$100,000 100,000 100,000 100,000 100,000 100,000 ..... 0 Chapter 6-21 1 2 3 4 19 20 Present Value of an Annuity Due Comparison of Ordinary Annuity with an Annuity Due Illustration 6-31 Chapter 6-22 ...
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## This note was uploaded on 10/02/2010 for the course ACCT 5457 taught by Professor Polm during the Fall '10 term at Rensselaer Polytechnic Institute.

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