Chapter 7- Accounting and the Time Value of Money
Pension obligation
A company promises to pay employees a certain amount after they retire
What is an effective interest rate?
Actual return that the investors will receive. Also called market rate or yield
Interest rate per compounding period:
Annual interest rate / number of times per year that interest compounds
PV=
FV x Factor
Interest payment=
Face amount x face rate
Time value of money
Means that a dollar received today is worth more than a dollar received at some time in the future
Number of compounding periods:
Number of times per year that interest compounds x total number of years for which a PV or FV is computed
Sales price=
PV (face amount) + PV (interest payments)
FV=
PV x Factor
Simple interest =
Principal x interest rate x time
Simple interest=
Principle (face) x interesst rate x time
What is a deferred annuity
Results from a variety of contracts where payments or receipts are delayed until a future period
Discounting
The difference between the face value of the note and the fair value of the goods and services provided or the present value of the note in a discount, which represents the deferred interest to be earned over the notes life
Notes receivable
a company makes a loan today and receives periodic payments and a principal payment at the note maturity
Annuity due
an annuity where the cash flows occur at the beginning of the interest period
Ordinary annuity
an annuity where the cash flows occur at the end of the interest period
Person who pays for the bond?
bond holder, lender, creditor
You want bond that pays more interest
bond will be worth higher than face amount
Interest expense=
carrying amount x market (effective) rate
Coupon bond- coupons on bond
clip them off to make payments, coupons are interest payments (face amount x face rate= interest payments)
Leases Receivable
company provides the use of a product or property and receives periodic payments from the party to whom it gives the use of the product or property
Bond payable
company receives cash today and promises to make periodic interest payments over time and a principle payment at the bonds maturity
Leases payable
company receives the use of a product or property and promises to make periodic payments to the party from whom it obtained the use of the product or property
Warranty Liability
company sells some products and promises to maintain, repair, or replace the products, which represent estimated future cash outflows
(Face rate may not be market rate)-
determined on credit risk
Zero coupon bond (accrual bonds)
doesn't have payments, but has interest (accrual bond) traded at deep discount, interest is buried in face amount of bond- renders profit at maturity (one cash flow)
Two cash flows on coupon bonds
face amount and interest payments
Simple interest
initial investment by the stated interest rate for a single period and the amount of time the investment is held
Compound interest
interest computed on both the principle and the interest left on deposit
Person who gave the bond?
issuer, debtor ( payable side of the transaction)
Compounding
the process of moving from the PV to the FV
Interest
the return on money over time
Future value
the value at some specified point in the future of a cash flow or a series of cash flows to be paid or received between the current date and the specified point in the future
Present value
the value today of a cash flow or a series of cash flows to be received or paid in the future
Face value
what is the bond worth- what you paid for the bond
