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**Unformatted text preview: **Chapter 6-1 C H A P T E R C H A P T E R 6 6 ACCOUNTING AND THE ACCOUNTING AND THE TIME VALUE OF MONEY TIME VALUE OF MONEY Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 6-2 In accounting (and finance), the term indicates that a dollar received today is worth more than a dollar promised at some time in the future. Basic Time Value Concepts Basic Time Value Concepts Time Value of Money LO 1 Identify accounting topics where the time value of money is relevant. LO 1 Identify accounting topics where the time value of money is relevant. Chapter 6-3 1. Notes 2. Leases 3. Pensions and Other Postretirement Benefits 4. Long-Term Assets Applications to Accounting Topics: Basic Time Value Concepts Basic Time Value Concepts 1. Sinking Funds 2. Business Combinations 3. Disclosures 4. Installment Contracts LO 1 Identify accounting topics where the time value of money is relevant. LO 1 Identify accounting topics where the time value of money is relevant. Chapter 6-4 Payment for the use of money. Excess cash received or repaid over the amount borrowed (principal). Variables involved in financing transaction: 1. Principal - Amount borrowed or invested. 2. Interest Rate- A percentage. 3. Time- The number of years or portion of a year that the principal is outstanding. Nature of Interest Basic Time Value Concepts Basic Time Value Concepts LO 1 Identify accounting topics where the time value of money is relevant. LO 1 Identify accounting topics where the time value of money is relevant. Chapter 6-5 Interest computed on the principal only. LO 2 Distinguish between simple and compound interest. LO 2 Distinguish between simple and compound interest. Simple Interest Simple Interest ILLUSTRATION: On January 2, 2007, Tomalczyk borrows $20,000 for 3 years at a rate of 7% per year. Calculate the annual interest cost. Principal $20,000 Interest rate x 7% Annual interest $ 1,400 Federal law requires the disclosure of interest rates on an annual basis in all contracts. FULL YEAR FULL YEAR Chapter 6-6 Computes interest on the principal and on interest earned to date (assuming interest is left on deposit). Compound interest is the typical interest computation applied in business situations. LO 2 Distinguish between simple and compound interest. LO 2 Distinguish between simple and compound interest. Compound Interest Compound Interest Chapter 6-7 LO 2 Distinguish between simple and compound interest. LO 2 Distinguish between simple and compound interest. ILLUSTRATION: On January 2, 2007, Tomalczyk borrows $20,000 for 3 years at a rate of 7% per year. Calculate the total interest cost for all three years, assuming interest is compounded annually. Compound Interest Compound Interest Compound Interest Accumulated Date Calculation Interest Balance Jan. 2007 20,000 $ 2007 $20,000 x 7% 1,400 $ 21,400 2008 $21,400 x 7% 1,498 22,898 2009 $22,898 x 7% 1,603 24,501 4,501 $ Chapter 6-8 LO 4 Identify variables fundamental to solving interest problems....

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