Accounting Chapter 6

how to calc annuity due

plug in on calc and take that answer and times it by 1 + interest rate and that's your AD AD+beginning of the year

Future Value of single sum problems involve asking the question

"If an known amount is invested, to what amount will it accumulate at a future point in time?"

Table 6-1, Future Value of 1 (single sum) ($100 invested at 5%, compounded annually for two years)

$100 x 1.10250 = $110.25 (same as previous example)

Table 6-2, Present Value of 1 (single sum) (Need $110.25 in 2 years. If interest is 5%, compounded annually, what must be invested?)

$110.25 x 0.90703 = $100.00 (same as previous example) Note: that for a single sum, the future value and present value tables are Inversely related.

effective interest rate

(1 + interest rate)^ - 1 = Effective Interest Rate ^ = compounding frequency (i.e., quarterly = 4; monthly = 12; semiannually = 2) So, 8% compounded semiannually (1 + .04) (1 + .04) - 1 = .0816, or 8.16%

Determine the Factor for FV of Annuity Due as follows:

(1) Obtain the FV factor for the Ordinary Annuity (2) Multiply the FV Ordinary Annuity FV factor by Interest Rate (both expressed in decimal form).

annuities require 3 things

(1) periodic payments or receipts ("rents") (2) same length of interval between the "rents" (3) compounding of interest once each interval

(1) Annuity Due (2) Ordinary Annuity

(immediate payment - made at the beginning of the period) (payment delayed - made at the end of the period)

(1) Future Value (2) Present Value

(increases in value), declines in value)

3 Ways to Do Time Value Calculations

1 - Time Value Tables at the end of Chapter 6 (Tables will be provided for Final Exam) 2 - Financial Calculator (may use for Final Exam) 3 - Excel Financial Function (realistically what you will be using after you graduate from college; may not use for Final Exam)

FV Annuity Due (5%, 3 periods)

3.15250 (FV Ordinary Annuity) x 1.05 = 3.310125 So, FV of Annuity Due is $100.00 x 3.310125 = $331.01 So when doing a FV of an ordinary annuity due take the total amount and find the number on the table and divide the total number by the table number

bond discount amortization

Bond Interest Expense - Bond Interest Paid = Amortization Amount Bond Interest Expense = Carrying Value of Bonds at Beginning of Period x Effective Interest Rate Bond Interest Paid = Face Amount of Bonds x Stated Interest Rate

($100 is placed in a bank account to earn 5%): how to calc future value using compound interest

COMPOUND INTEREST (computed on beginning balance, which includes the principle amount of loan and unpaid interest) Balance at Beginning of Year 1 $100.00 Interest for Year 1 5.00 Balance at End of Year 1 $105.00 Interest for Year 2 ($105 x .05 x 12/12) 5.25 Balance at End of Year 2 $110.25

Using the tables... If interest is paid semiannually, then: If interest is paid quarterly, then:

Half the annual interest rate Double the number of periods Quarter the annual interest rate Quadruple the number of periods

Expanding Present Value Measurements in Accounting Today

Notes Receivable and Notes Payable Leases Pension Plans Other Postretirement Benefits Asset Impairment Considerations involving Discounted Cash Flows Acquisition Accounting Considerations Stock-Based Compensation Environmental and Other Long-Term Liabilities

interest eqution

Principle x Rate x Time Interest rates are quoted as "annual rates" and must be adjusted for periods of less than one year.

($100 is placed in a bank account to earn 5%): how to calc future value using compound simple interest

SIMPLE INTEREST (computed only on principle amount of loan) Balance at Beginning of Year 1=$100.00 Interest for Year 1=5.00 Balance at End of Year 1=$105.00 Interest Yr. 2=5.00 Balance at End Year 2=$110.00

To illustrate, Alltech Corporation on January 1, 2014, issues $100,000 of 9% bonds due in 5 years with interest payable annually at year-end. The current market rate of interest for bonds of similar risk is 11%. What will the buyers pay for this bond issue?

So do lower table number times 2000000 and then take higher table number times 1400000 (2000000 x .07) and then add them together

PRESENT VALUES (3 withdrawals $100 each period with interest compounded annually at 5%)

Table 4 PV of an Ordinary Annuity - $100.00 x 2.72325 = $272.33 Table 5 PV of an Annuity Due - $100.00 x 2.85941 = $285.94 For PV of ordinary annuity take number they give you and divide it by the table number

tables assume what

Tables assume compounding interest; do not use for "simple interest".

when are ordinary annuities due

due at end of year

Present Value of single sum problems involves asking the question,

, "If I need a certain amount at a future point in time, what amount do I need to invest now to accumulate the needed amount?"