ac101_ch13

# ac101_ch13 - ACC101 CHAPTER 13 Bonds Payable and...

This preview shows pages 1–4. Sign up to view the full content.

ACC101 – CHAPTER 13 Bonds Payable and Investments in Bonds 1

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

View Full Document
The Concept of Present Value 1. Present Value of a Lump Sum a lump sum is expected to be received or paid in the future what is that amount worth in today’s dollars? to solve, you must know the following: 9 number of interest compounding periods 9 interest rate per compounding period Use the Present Value of \$1 Table on pages A2 and A3 of the text Example #1 If the current rate of interest is 10% and interest is compounded semiannually, what is the present value of receiving \$10,000 at the end of 7 years? There are 14 interest compounding periods (7 years x 2) The interest rate per compounding period is 5% (10%/2) Rate from the PV of \$1 Table = .50507 Present Value = 10,000 * .50507 = \$5,050.70 2. Present Value of an Annuity a series of equal payments or receipts will occur at equal intervals what is this series of payments or receipts worth in today’s dollars? to solve, you must know the following: 9 number of interest compounding periods 9 interest rate per compounding period Use the Present Value of an Annuity Table on pages A4 and A5 Example #2 If the current interest rate is 12% and interest is compounded semiannually, what is the present value of receiving \$5,000 each year for 10 years? There are 20 compounding periods (10 years x 2) The interest rate per compounding period is 6% (12%/2) Rate from the PV of Annuity Table = 11.46992 Present Value = 5,000 * 11.46992 = \$57,349.6 Practice Problem #1 a. Alpha Company is considering prepaying their rent for the next 4 years to avoid a price increase. Currently they pay \$8,000 per year. Calculate the present value of the rent payments to determine what amount Alpha should pay today if current interest rates are 12% and interest is compounded annually. b. Omega, Inc. won a lawsuit and will be receiving \$400,000 at the end of 5 years. Calculate the present value of this award if interest is compounded semiannually and the current interest rate is 1) 18% and 2) 10%. c. Bonnie has just received news of her inheritance. She will be receiving \$10,000 per year for the next 20 years and a lump sum payout after 20 years of \$200,000. Calculate the present value of her inheritance if the current interest rate is 9% and it is compounded annually. 2
Accounting for Bonds Payable Calculating the Selling Price of a Bond Companies issue bonds as a means of raising capital. Companies usually pay interest to the bondholder semiannually and repay the face value of the bond at maturity. The series of interest payments represents an annuity. The repayment of face value at maturity represents a lump sum payout The selling price of a bond is calculated as: 9 The present value of the face value (lump sum) PLUS 9 The present value of the interest payments (annuity) 9 The interest rate used to calculate the present value is the current market rate Example #3 Beta Company issued \$4,000,000 of 10-year, 11% bonds on January 4.

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 06/01/2011 for the course ACCOUNTING 101 taught by Professor All during the Spring '11 term at Harper.

### Page1 / 14

ac101_ch13 - ACC101 CHAPTER 13 Bonds Payable and...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online