Week 2 - Ch 6-7

# Week 2 - Ch 6-7 - CHAPTER 6 ACCOUNTING AND THE ACCOUNTING...

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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

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In accounting (and finance), thephrase time value of money indicates a relationship between time and money—that a dollar received today is worth more than a dollar promised at sometimein the future. Why? Basic Time Value Concepts Basic Time Value Concepts Time Value of Money
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

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Payment for theuseof money. Excess cash received or repaid over theamount borrowed (principal). Variables involved in financing transaction: 1. Principal - Amount borrowed or invested. 2. Interest Rate - A percentage. 3. Time - Thenumber of years or portion of a year that the principal is outstanding. Nature of Interest Basic Time Value Concepts Basic Time Value Concepts
Interest computed on theprincipal only. Basic Time Value Concepts Basic Time Value Concepts Simple Interest Illustration: KC borrows \$20,000 for 3 years at a rateof 7% per year. Computethetotal interest to bepaid for the 3 years . Federal law requires thedisclosureof interest rates on an annual basis in all contracts. Interest = p x i x n = \$20,000 x .07 x 3 = \$4,200 Total Interest Total Interest

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Interest computed on theprincipal only. Basic Time Value Concepts Basic Time Value Concepts Simple Interest Illustration: On March 31, 2011 , KC borrows \$20,000 for 3 years at a rateof 7% per year. Computethetotal interest to bepaid for theyear ended Dec. 31, 2011. Interest = p x i x n = \$20,000 x .07 x 9/12 = \$1,050 Partial Year Partial Year
Basic Time Value Concepts Basic Time Value Concepts Compound Interest Computes interest on the principal and any interest earned that has not been paid or withdrawn. Most business situations usecompound interest.

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Illustration: 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, Vasquez will not withdraw any interest until 3 years from the date of deposit. Year 1 \$10,000.00 x 9% \$ 900.00 \$ 10,900.00 Year 2 \$10,900.00 x 9% \$ 981.00 \$ 11,881.00 Year 3 \$11,881.00 x 9% \$1,069.29 \$ 12,950.29 Illustration 6-1 Simple versus compound interest Basic Time Value Concepts
Table 1 - FutureValueof 1 Table 2 - Present Valueof 1 Table 3 - FutureValueof an Ordinary Annuity of 1 Table 4 - Present Valueof an Ordinary Annuity of 1 Table 5 - Present Valueof an Annuity Dueof 1 Compound Interest Tables Number 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.

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