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# ch06 student - Chapter 6 Accounting and the Time Value of...

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Chapter 6: Accounting and the Time Value of Money

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u A relationship between time and money . u A dollar received today is worth more than a dollar promised at some time in the future. Basic Time Value Concepts Time Value of Money LO 1 Identify accounting topics where the time value of money is relevant.
1. Notes 2. Leases 3. Pensions and Other Postretirement Benefits 4. Long-Term Assets Applications to Time Value Concepts: Basic Time Value Concepts 5. Shared-Based Compensation 6. Business Combinations 7. Disclosures 8. Environmental Liabilities LO 1 Identify accounting topics where the time value of money is relevant.

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u Payment for the use of money. u Excess cash received or repaid over the amount borrowed (principal). The Nature of Interest Basic Time Value Concepts LO 1 Identify accounting topics where the time value of money is relevant.
u Interest computed on the principal only. LO 2 Distinguish between simple and compound interest. Basic Time Value Concepts Simple Interest Illustration: Barstow Electric Inc. borrows \$10,000 for 3 years at a rate of 8% per year. Compute the total interest to be paid for the 1 year . Federal law requires the disclosure of interest rates on an annual basis . Interest = p x i x n = \$10,000 x .08 x 1 = \$800 Annual Interest

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u Interest computed on the principal only. LO 2 Distinguish between simple and compound interest. Basic Time Value Concepts Simple Interest Illustration: Barstow Electric Inc. borrows \$10,000 for 3 years at a rate of 8% 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 . Interest = p x i x n = \$10,000 x .08 x 3 = \$2,400 Total Interest
LO 2 Distinguish between simple and compound interest. Basic Time Value Concepts Simple Interest Illustration: On October 1, 2012 , Barstow Electric Inc. borrows \$10,000 for 3 months at a rate of 7% per year. Compute the total interest to be paid for the year ended Dec. 31, 2012. Interest = p x i x n = \$10,000 x .08 x 3/12 = \$200 Partial Year u Interest computed on the principal only.

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LO 2 Distinguish between simple and compound interest. Basic Time Value Concepts Compound Interest u Computes interest on principal and interest earned that has not been paid or withdrawn. u Most business situations use compound interest.
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, Tomalczyk 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 vs. Compound Interest LO 2 Distinguish between simple and compound interest. Basic Time Value Concepts

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ch06 student - Chapter 6 Accounting and the Time Value of...

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