Present Value Concepts and Measurement DONALD E.KIESO JERRY J.WEYGANDI TERRY D.WARFIELD Intermediate Chapter 6 Accounting Intermediate Accounting 12th Edition Kieso,Weygandt,and Warfield wwn Chapter 6-1
Chapter 6-1 Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield
Learning Objectives 1.Identify accounting topics where the time value of money is relevant. 2.Distinguish between simple and compound interest. 3.Use appropriate compound interest tables. 4.Identify variables fundamental to solving interest problems. 5.Solve future and present value of 1 problems. 6.Solve future value of ordinary and annuity due problems. 7.Solve present value of ordinary and annuity due problems. 8.Solve present value problems related to deferred annuities and bonds. 9.Apply expected cash flows to present value measurement. Chapter 6-2
Chapter 6-2
Accounting and the Time Value of Money Basic Time More Value Single-Sum Present Value Annuities Complex Problems Measurement Concepts Situations Applications Future value 0 Future value 0 Deferred Expected The nature of of a single of ordinary annuities cash flow interest sum annuity Valuation of illustration Simple 0 Present value o Future value long-term of a single of annuity due interest bonds sum 0 Examples of Compound 0 Effective- interest 0 Solving for FV of annuity interest Present value Fundamental other method of unknowns of ordinary bond variables annuity discount/ Present value premium of annuity due amortization Chapter Examples of 6-3 PV of annuity
Chapter 6-3
Basic Time Value Concepts Time Value of Money In accounting (and finance),the term indicates that a dollar received today is worth more than a dollar promised at some time in the future. Chapter 6-4 LO 1 Identify accounting topics where the time value of money is relevant
Chapter 6-4 In accounting (and finance), the term indicates that a dollar received today is worth more than a dollar promised at some time in the future. Time Value of Money
Basic Time Value Concepts Applications to Accounting Topics: 1.Notes 5.Sinking Funds 2.Leases 6.Business Combinations 3.Pensions and Other 7.Disclosures Postretirement 8.Installment Contracts Benefits 4.Long-Term Assets Chapter 6-5 LO 1 Identify accounting topics where the time value of money is relevant
Chapter 6-5 1. Notes 2. Leases 3. Pensions and Other Postretirement Benefits 4. Long-Term Assets Applications to Accounting Topics: 5. Sinking Funds 6. Business Combinations 7. Disclosures 8. Installment Contracts
Basic Time Value Concepts Nature of Interest 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. Chapter 6-6 LO 1 Identify accounting topics where the time value of money is relevant
Chapter 6-6 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
Simple Interest Interest computed on the principal only. ILLUSTRATION: On January 2,2007,Tomalczyk borrows $20,000 for 3 years at a rate of 7%per year.Calculate the annual interest cost. Principal $20,000 FULL YEAR Interest rate Annual interest X 7% $1,400 Federal law requires the disclosure of interest rates on an annual basis in all contracts. Chapter 6-7 LO 2 Distinguish between simple and compound interest
Chapter 6-7 Interest computed on the principal only. ILLUSTRATION: On January 2, 2007, Tomalczyk borrows $20,000 for 3 years at a rate of 7% per year. Calculate the annual interest cost. Principal $20,000 Interest rate Annual interest x 7% $ 1,400 Federal law requires the disclosure of interest rates on an annual basis in all contracts
Simple Interest ILLUSTRATION continued: On March 31,2007,Tomalczyk borrows $20,000 for 3 years at a rate of 7%per year.Calculate the interest cost for the year ending December 31,2007. Principal PARTIAL Interest rate $20,000 YEAR Annual interest X 7% Partial year $1,400 Interest for9 months× 9/12 $1,050 Chapter 6-8 LO 2 Distinguish between simple and compound interest
Chapter 6-8 ILLUSTRATION continued: On March 31, 2007, Tomalczyk borrows $20,000 for 3 years at a rate of 7% per year. Calculate the interest cost for the year ending December 31, 2007. Principal Interest rate $20,000 Annual interest x 7% Partial year $ 1,400 Interest for 9 months x 9/12 $ 1,050
Compound Interest Computes interest on >the principal and > on interest earned to date (assuming interest is left on deposit). Compound interest is the typical interest computation applied in business situations. Chapter 6-9 LO 2 Distinguish between simple and compound interest
Chapter 6-9 Computes interest on Ø the principal and Ø on interest earned to date (assuming interest is left on deposit). Compound interest is the typical interest computation applied in business situations
Compound Interest ILLUSTRATION: On January 2,2007,Tomalczyk borrows $20,000 for 3 years at a rate of 7%per year.Calculate the total interest cost for all three years,assuming interest is compounded annually. Compound Interest Accumulated Date Calculation Interest Balance Jan.2007 $ 20,000 2007 $20,000X7% $ 1,400 21,400 2008 $21,400X7% 1,498 22,898 2009 $22,898X7% 1,603 24,501 $ 4,501 Chapter 6-10 LO 2 Distinguish between simple and compound interest
Chapter 6-10 ILLUSTRATION: On January 2, 2007, Tomalczyk borrows $20,000 for 3 years at a rate of 7% per year. Calculate the total interest cost for all three years, assuming interest is compounded annually. Compound Interest Accumulated Date Calculation Interest Balance Jan. 2007 $ 20,000 2007 $20,000 x 7% $ 1,400 21,400 2008 $21,400 x 7% 1,498 22,898 2009 $22,898 x 7% 1,603 24,501 $ 4,501