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CHAPTER 6
Accounting and the Time Value of Money
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LECTURE OUTLINE
This chapter can be covered in two to three class sessions.
Most students have had
previous exposure to single sum problems and ordinary annuities, but annuities due
and deferred annuities will be new material for most students.
The first class session
can be used for lecture on the chapter concepts, and for discussing
Illustration 65.
TEACHING TIP
Illustration 65
can be distributed to students as a selfcontained 6page handout.
It
uses 10 sample problems to demonstrate a 5step solution method that can be used
to solve any of the problems discussed in the chapter.
Some students with prior background in math or finance courses may prefer to use
exponential formulas rather than interest tables to find interest factors.
Other students
with sophisticated calculators may prefer to "let the calculator do the work."
Remind
students that whether they use interest tables, exponential formulas, or internal
calculator routines, they cannot solve problems correctly unless they can correctly
identify the type of problem, the number of periods, and the interest rate involved.
Students often have no difficulty with problems that are worded.
"At 6%, what is the
present value of an annuity due of 20 payments of $10,000 each?" but they may not
know how to proceed if the same problem is worded:
"What amount must be deposited
now in an account paying 12% if it is desired to make 20 semiannual withdrawals of
$10,000 each beginning today?"
Emphasize to students the importance of properly
setting up the problem.
The second and third class sessions can be used for determining solutions to more
complex problems, including deferred annuities, bond valuation and other accounting
applications.
Some of the journal entries for the accounting applications can be
discussed briefly.
The following lecture outline is appropriate for this chapter.
A. Introduction.
1.
Discuss the importance of the
time value of money.
2.
Describe
accounting
applications of time value concepts:
bonds, pensions,
leases, longterm notes.
3.
Describe
personal
applications of time value concepts:
purchasing a home,
planning for retirement, evaluating alternative investments.
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B. Nature of Interest.
1.
Interest
is payment for the use of money.
It is the excess cash received or
repaid over and above the
principal
(amount lent or borrowed).
2.
Interest rates are generally stated on an
annual
basis unless indicated
otherwise.
3.
Choosing an appropriate interest rate:
a.
is not always obvious.
b.
three components of interest:
(1) pure rate of interest (2%–4%).
(2) credit risk rate of interest (0%–5%).
(3) expected inflation rate of interest (0%–?%).
C. Simple Interest.
TEACHING TIP
Illustration 61
can be used to distinguish between simple interest and compound
interest.
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This note was uploaded on 07/26/2011 for the course ECON 101 taught by Professor Dohan during the Spring '08 term at CUNY Queens.
 Spring '08
 Dohan
 Microeconomics

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