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), the phrase time value of money indicates a relationship between time and money—that a dollar received today is worth more than a dollar promised at some time in the future. Why? Basic Time Value Concepts Basic Time Value Concepts Time Value of Money
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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 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
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Interest computed on the principal only. Basic Time Value Concepts Basic Time Value Concepts Simple Interest Illustration: KC borrows $20,000 for 3 years at a rate of 7% per year. Compute the total interest to be paid for the 3 years . Federal law requires the disclosure of 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 the principal 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 rate of 7% per year. Compute the total interest to be paid for the year ended Dec. 31, 2011. Interest = p x i x n = $20,000 x .07 x 9/12 = $1,050 Partial Year Partial Year
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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Value Concepts Compound Interest Computes interest on the principal and any interest earned that has not been paid or withdrawn.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 use compound 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 Illustration 6-1 Simple versus compound interest Basic Time Value Concepts
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- Future Value of 1 Table 2 - Present Value of 1 Table 3 - Future Value of an Ordinary Annuity of 1 Table 4 - Present Value of an Ordinary Annuity of 1 Table 5 - Present Value of an Annuity Due of 1 Compound Interest Tables Number of Periods = number of years x the number of compounding periods per year. Compounding Period Interest Rate
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This note was uploaded on 03/02/2011 for the course ACC 541 taught by Professor Billvabunker during the Winter '11 term at DePaul.

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

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