43

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Chapter 6-1

## 6

Intermediate Accounting 12th Edition

Kieso, Weygandt, and Warfield

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1.

1. Identify accounting topics where the time value of money Identify accounting topics where the time value of money is relevant.

is relevant.

2.

2. Distinguish between simple and compound interest.Distinguish between simple and compound interest.

3.

3. Use appropriate compound interest tables.Use appropriate compound interest tables.

4.

4. Identify variables fundamental to solving interest Identify variables fundamental to solving interest problems.

problems.

5.

5. Solve future and present value of 1 problems.Solve future and present value of 1 problems.

6.

6. Solve future value of ordinary and annuity due problems.Solve future value of ordinary and annuity due problems.

7.

7. Solve present value of ordinary and annuity due problems.Solve present value of ordinary and annuity due problems.

8.

8. Solve present value problems related to deferred annuities Solve present value problems related to deferred annuities and bonds.

and bonds.

9.

9. Apply expected cash flows to present value measurement.Apply expected cash flows to present value measurement.

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Chapter 6-3

### Money

Future value Future value of a single of a single sum

sum

Present value Present value of a single of a single sum

sum

Solving for Solving for other

other unknowns unknowns Basic Time

Basic Time

Value

Problems AnnuitiesAnnuities

More

Present Value

Present Value

Measurement

Future value of

Future value of

ordinary

ordinary

annuity

annuity

Future value of

Future value of

annuity due

annuity due

Examples of

Examples of

FV of annuity

FV of annuity

Present value

Present value

of ordinary

of ordinary

annuity

annuity

Present value

Present value

of annuity due

of annuity due

Examples of

Examples of

PV of annuity

PV of annuity

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Chapter

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Chapter 6-5

### Installment Contracts

LO 1 Identify accounting topics where the time value of money is

LO 1 Identify accounting topics where the time value of money is

relevant.

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Chapter

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Chapter 6-7

### Interest computed on the principal only.

LO 2 Distinguish between simple and compound interest.

LO 2 Distinguish between simple and compound interest.

### \$ 1,400

Federal law requires the disclosure of interest rates on an annual basis in all contracts.

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Chapter 6-9

### computation applied in business situations.

LO 2 Distinguish between simple and compound interest.

LO 2 Distinguish between simple and compound interest.

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### Compound Interest

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

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Chapter

6-11 LO 3 Use appropriate compound interest tables.LO 3 Use appropriate compound interest tables.

### Five Tables in Chapter 6

Number of Periods = number of years x the number of compounding periods per year.

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### daily provides a 9.42% yield.

How compounding affects Effective Yield for a \$10,000 investment.

Illustration 6-5

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Chapter

6-13 LO 4 Identify variables fundamental to solving interest problems.LO 4 Identify variables fundamental to solving interest problems.

Illustration 6-6

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### Categories

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Chapter

6-15 LO 5 Solve future and present value of 1 problems.LO 5 Solve future and present value of 1 problems.

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0 1 2 3 4 5 6

### Single-Sum Problems

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Chapter 6-17

Number

of Discount Rate

Periods 2% 4% 6% 8% 10%

1 1.02000 1.04000 1.06000 1.08000 1.10000 2 1.04040 1.08160 1.12360 1.16640 1.21000 3 1.06121 1.12486 1.19102 1.25971 1.33100 4 1.08243 1.16986 1.26248 1.36049 1.46410 5 1.10408 1.21665 1.33823 1.46933 1.61051

### Single-Sum Problems

LO 5 Solve future and present value of 1 problems.

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Number

of Discount Rate

Periods 2% 4% 6% 8% 10%

1 1.02000 1.04000 1.06000 1.08000 1.10000 2 1.04040 1.08160 1.12360 1.16640 1.21000 3 1.06121 1.12486 1.19102 1.25971 1.33100 4 1.08243 1.16986 1.26248 1.36049 1.46410 5 1.10408 1.21665 1.33823 1.46933 1.61051

Present Value

Factor Future

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Chapter 6-19

### Single-Sum Problems

LO 5 Solve future and present value of 1 problems.

LO 5 Solve future and present value of 1 problems. Beginning Previous Year-End

Year Balance Rate Interest Balance Balance 1 \$ 10,000 x 8% = 800 + 10,000 = \$ 10,800 2 10,800 x 8% = 864 + 10,800 = 11,664 3 11,664 x 8% = 933 + 11,664 = 12,597 Beginning Previous Year-End Year Balance Rate Interest Balance Balance

1 \$ 10,000 x 8% = 800 + 10,000 = \$ 10,800 2 10,800 x 8% = 864 + 10,800 = 11,664 3 11,664 x 8% = 933 + 11,664 = 12,597

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0 1 2 3 4 5 6

### Single-Sum Problems

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Chapter 6-21

Number

of Discount Rate

Periods 2% 4% 6% 8% 10%

1 1.02000 1.04000 1.06000 1.08000 1.10000 2 1.04040 1.08160 1.12360 1.16640 1.21000 3 1.06121 1.12486 1.19102 1.25971 1.33100 4 1.08243 1.16986 1.26248 1.36049 1.46410 5 1.10408 1.21665 1.33823 1.46933 1.61051 6 1.12616 1.26532 1.41852 1.58687 1.77156

### Single-Sum Problems

LO 5 Solve future and present value of 1 problems.

LO 5 Solve future and present value of 1 problems.

### periods

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Number

of Discount Rate

Periods 2% 4% 6% 8% 10%

1 1.02000 1.04000 1.06000 1.08000 1.10000 2 1.04040 1.08160 1.12360 1.16640 1.21000 3 1.06121 1.12486 1.19102 1.25971 1.33100 4 1.08243 1.16986 1.26248 1.36049 1.46410 5 1.10408 1.21665 1.33823 1.46933 1.61051 6 1.12616 1.26532 1.41852 1.58687 1.77156

### \$10,000 x 1.26532 = \$12,653

Present Value

Factor Future

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Chapter

6-23 LO 5 Solve future and present value of 1 problems.LO 5 Solve future and present value of 1 problems.

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0 1 2 3 4 5 6

### Single-Sum Problems

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Chapter 6-25

Number

of Discount Rate

Periods 4% 6% 8% 10% 12%

2 .92456 .89000 .85734 .82645 .79719 4 .85480 .79209 .73503 .68301 .63552 6 .79031 .70496 .63017 .56447 .50663 8 .73069 .62741 .54027 .46651 .40388

### Single-Sum Problems

LO 5 Solve future and present value of 1 problems.

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Number

of Discount Rate

Periods 4% 6% 8% 10% 12%

2 .92456 .89000 .85734 .82645 .79719 4 .85480 .79209 .73503 .68301 .63552 6 .79031 .70496 .63017 .56447 .50663 8 .73069 .62741 .54027 .46651 .40388

### \$20,000 x .63552 = \$12,710

Future Value Factor Present

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Chapter 6-27

0 1 2 3 4 5 6

### \$20,000

LO 5 Solve future and present value of 1 problems.

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Number

of Discount Rate

Periods 3% 4% 6% 9% 12%

4 0.88849 0.85480 0.79209 0.70843 0.63552 8 0.78941 0.73069 0.62741 0.50187 0.40388 12 0.70138 0.62460 0.49697 0.35554 0.25668 16 0.62317 0.53391 0.39365 0.25187 0.16312

### Single-Sum Problems

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Chapter 6-29

Number

of Discount Rate

Periods 3% 4% 6% 9% 12%

4 0.88849 0.85480 0.79209 0.70843 0.63552 8 0.78941 0.73069 0.62741 0.50187 0.40388 12 0.70138 0.62460 0.49697 0.35554 0.25668 16 0.62317 0.53391 0.39365 0.25187 0.16312

### Single-Sum Problems

LO 5 Solve future and present value of 1 problems.

LO 5 Solve future and present value of 1 problems.

### \$20,000 x .62317 = \$12,463

Future Value Factor Present

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### Annuity requires the following:

Ordinary annuity - rents occur at the end of each period.

Annuity Due - rents occur at the beginning of each period.

Two Type

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Chapter

6-31 LO 6 Solve future value of ordinary and annuity due problems.LO 6 Solve future value of ordinary and annuity due problems.

st

0 1

2 3 4 5 6 7 8

\$20,00 0

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0 1

### Future Value of an Ordinary Annuity

2 3 4 5 6 7 8

\$20,00 0

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Chapter 6-33

Number

of Discount Rate

Periods 4% 6% 8% 10% 12%

2 2.04000 2.06000 2.08000 2.10000 2.12000 4 4.24646 4.37462 4.50611 4.64100 4.77933 6 6.63298 6.97532 7.33592 7.71561 8.11519 8 9.21423 9.89747 10.63663 11.43589 12.29969 10 12.00611 13.18079 14.48656 15.93743 17.54874

### Future Value of an Ordinary Annuity

LO 6 Solve future value of ordinary and annuity due problems.

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Number

of Discount Rate

Periods 4% 6% 8% 10% 12%

2 2.04000 2.06000 2.08000 2.10000 2.12000 4 4.24646 4.37462 4.50611 4.64100 4.77933 6 6.63298 6.97532 7.33592 7.71561 8.11519 8 9.21423 9.89747 10.63663 11.43589 12.29969 10 12.00611 13.18079 14.48656 15.93743 17.54874

### \$20,000 x 12.29969 = \$245,994

Deposit Factor Future

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Chapter

6-35 LO 6 Solve future value of ordinary and annuity due problems.LO 6 Solve future value of ordinary and annuity due problems.

st

### Annuities

0 1 2 3 4 5 6 7 8

20,000 20,000 20,000 20,000 20,000 20,000 20,000 \$20,00

0

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0 1

### Future Value of an Annuity Due

2 3 4 5 6 7 8

\$20,00 0

20,000 20,000 20,000 20,000 20,000 20,000 20,000

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Chapter 6-37

Number

of Discount Rate

Periods 4% 6% 8% 10% 12%

2 2.04000 2.06000 2.08000 2.10000 2.12000 4 4.24646 4.37462 4.50611 4.64100 4.77933 6 6.63298 6.97532 7.33592 7.71561 8.11519 8 9.21423 9.89747 10.63663 11.43589 12.29969 10 12.00611 13.18079 14.48656 15.93743 17.54874

### What factor do we use?

LO 6 Solve future value of ordinary and annuity due problems.

LO 6 Solve future value of ordinary and annuity due problems.

### Future Value of an Annuity Due

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Number

of Discount Rate

Periods 4% 6% 8% 10% 12%

2 2.04000 2.06000 2.08000 2.10000 2.12000 4 4.24646 4.37462 4.50611 4.64100 4.77933 6 6.63298 6.97532 7.33592 7.71561 8.11519 8 9.21423 9.89747 10.63663 11.43589 12.29969 10 12.00611 13.18079 14.48656 15.93743 17.54874

### Table 6-3

Deposit Factor Future

### = 13.775652

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Chapter

6-39 LO 7 Solve present value of ordinary and annuity due problems.LO 7 Solve present value of ordinary and annuity due problems.

0 1

### Present Value

2 3 4 19 20

\$100,00

0 100,000 100,000 100,000 100,000

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0 1

2 3 4 19 20

### . . . . .

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Chapter 6-41

Number

of Discount Rate

Periods 4% 6% 8% 10% 12%

1 0.96154 0.94340 0.92593 0.90900 0.89286 5 4.45183 4.21236 3.99271 3.79079 3.60478 10 8.11090 7.36009 6.71008 6.14457 5.65022 15 11.11839 9.71225 8.55948 7.60608 6.81086 20 13.59033 11.46992 9.81815 8.51356 7.46944

### Present Value of an Ordinary Annuity

LO 7 Solve present value of ordinary and annuity due problems.

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Number

of Discount Rate

Periods 4% 6% 8% 10% 12%

1 0.96154 0.94340 0.92593 0.90900 0.89286 5 4.45183 4.21236 3.99271 3.79079 3.60478 10 8.11090 7.36009 6.71008 6.14457 5.65022 15 11.11839 9.71225 8.55948 7.60608 6.81086 20 13.59033 11.46992 9.81815 8.51356 7.46944

### \$100,000 x 9.81815 = \$981,815

Receipt Factor Present

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Chapter

6-43 LO 7 Solve present value of ordinary and annuity due problems.LO 7 Solve present value of ordinary and annuity due problems.

0 1

### Present Value

2 3 4 19 20

\$100,00

0 100,000 100,000 100,000 100,000

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0 1

2 3 4 19 20

### Present Value of an Annuity Due

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Chapter 6-45

Number

of Discount Rate

Periods 4% 6% 8% 10% 12%

1 1.00000 1.00000 1.00000 1.00000 1.00000 5 4.62990 4.46511 4.31213 4.16986 4.03735 10 8.43533 7.80169 7.24689 6.75902 6.32825 15 11.56312 10.29498 9.24424 8.36669 7.62817 20 14.13394 12.15812 10.60360 9.36492 8.36578

### What factor do we use?

LO 7 Solve present value of ordinary and annuity due problems.

LO 7 Solve present value of ordinary and annuity due problems.

### Present Value of an Annuity Due

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Number

of Discount Rate

Periods 4% 6% 8% 10% 12%

1 1.00000 1.00000 1.00000 1.00000 1.00000 5 4.62990 4.46511 4.31213 4.16986 4.03735 10 8.43533 7.80169 7.24689 6.75902 6.32825 15 11.56312 10.29498 9.24424 8.36669 7.62817 20 14.13394 12.15812 10.60360 9.36492 8.36578

### \$100,000 x 10.60360 = \$1,060,360

Receipt Factor Present

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Chapter

6-47 LO 8 Solve present value problems related to deferred annuities and LO 8 Solve present value problems related to deferred annuities and

bonds.

bonds.

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Chapter

### Valuation of Long-Term Bonds

0 1 2 3 4 9 10

70,000 70,000 70,000

\$70,00 0

70,000 70,000

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Chapter 6-49

0 1

### Present Value

2 3 4 9 10

70,000 70,000 70,000

\$70,00 0

70,000

### Valuation of Long-Term Bonds

1,070,000

LO 8 Solve present value problems related to deferred annuities and

LO 8 Solve present value problems related to deferred annuities and

bonds.

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Chapter

Number

of Discount Rate

Periods 4% 6% 8% 10% 12%

1 0.96154 0.94340 0.92593 0.90900 0.89286 5 4.45183 4.21236 3.99271 3.79079 3.60478 10 8.11090 7.36009 6.71008 6.14457 5.65022 15 11.11839 9.71225 8.55948 7.60608 6.81086 20 13.59033 11.46992 9.81815 8.51356 7.46944

Interest Payment

Factor Present

Value

### Valuation of Long-Term Bonds

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Chapter 6-51

Number

of Discount Rate

Periods 4% 6% 8% 10% 12%

LO 8 Solve present value problems related to deferred annuities and

LO 8 Solve present value problems related to deferred annuities and

bonds.

bonds.

### \$1,000,000 x .46319 = \$463,190

Principal Payment

Factor Present

Value

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Chapter

### \$932,896

Account Title Debit Credit

Cash 932,896 Discount on Bonds 67,104

Bonds payable 1,000,000

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Chapter 6-53

### Credit Risk Rate

LO 9 Apply expected cash flows to present value measurement.

LO 9 Apply expected cash flows to present value measurement.

### Present Value Measurement

Risk-free rate of return. FASB

states a company should discount expected cash flows by the risk-free rate of return.

Risk-free rate of return. FASB

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