Intermediate Accounting Midterm 2

Core Principle When How much

Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods and services _______: upon transfer to customers _______: amount the seller is entitled to receive

Matching

Cost of Goods Sold recorded when revenue is recognized (_______)

Future Value of a Single Amount formula

FV = I × FV Factor

Income statement Balance sheet Disclosure notes

Financial Statement Presentation and Disclosure of Revenue Items -__________: Bad debt expense Interest revenue/expense -__________: Contract liabilities Contract assets Accounts receivable -____________: Nature, amount, timing, and uncertainty of revenue and cash flows Outstanding performance obligations, discuss how performance obligations typically are satisfied, and describe important contractual provisions like payment terms and policies for refunds, returns, and warranties

Addition

Future value requires the ________ of compound interest

deferred revenue liability Revenue

Gift Cards Sales of gift cards are recognized as ________ and then ______ is recognized when a gift card is redeemed or the likelihood of redemption is viewed as remote

Present value of a deferred annuity The calculation is the amount to be deposited today, the present value, of six equal payments (an annuity), that doesn't start for two years (deferred annuity).

Harry Byrd's Chicken Shack agrees to pay an employee $50,000 a year for six years beginning two years from today and decides to fund the payments by depositing one lump sum in a savings account today. The company should use which present value concept to determine the required deposit? Future value of $1 Future value of a deferred annuity Present value of a deferred annuity None of the above

i = 8 PV = -136000 FV = 468000 solve for n $16.06 years

How many years will it take for $136,000 to grow to be $468,000 if it is invested in an account with an annual interest rate of 8%?

i = 0.666667 (8% annually divided by 12 comp. periods per year) PV = -197000 FV = 554000 solve for n (answer on calculator = 155.61) Since the interest rate was entered as a monthly rate, the answer for n is in months. The number of years equals the number of months divided by twelve. Number of years = (155.61)/12 = 12.97 years

How many years will it take for $197,000 to grow to be $554,000 if it is invested in an account with a quoted annual interest rate of 8% with monthly compounding of interest?

Point in time end

If a performance obligation doesn't meet any of the three criteria for recognizing revenue over time: Recognize revenue at the _______ when the performance obligation has been completely satisfied Usually occurs at the _____ of the contract

n = 9 i=8 PMT = 15000 Make sure you are in end mode solve for FV $202,298.44

If you deposit $15,000 per year for 9 years (each deposit is made at the beginning of each year) in an account that pays an annual interest rate of 8%, what will your account be worth at the end of 9 years?

n = 12 i = 14 PMT = 16000 Make sure you are in end mode solve for FV $436,331.98

If you deposit $16,000 per year for 12 years (each deposit is made at the end of each year) in an account that pays an annual interest rate of 14%, what will your account be worth at the end of 12 years?

The timing of the payments If the payments are made at the end of each period, it is an ordinary annuity. If the payments are made at the beginning of each period, it is an annuity due.

If you have a set of present value tables, an annual interest rate, the dollar amount of equal payments made, and the number of semiannual payments, what other information do you need to calculate the present value of the series of payments? -The timing of the payments (whether they are at the beginning or end of the period) -The future value of the annuity -No other information is needed -The rate of inflation

n = 13 i = 14 FV = 140000 solve for PV $25,489.71

If you wish to accumulate $140,000 in 13 years, how much must you deposit today in an account that pays an annual interest rate of 14%?

n = 10. (5 years times 2 comp. periods per year) i = 6.5 (13% annually divided by 2 comp. period per year) FV = 197000 solve for PV $104,947.03

If you wish to accumulate $197,000 in 5 years, how much must you deposit today in an account that pays a quoted annual interest rate of 13% with semi-annual compounding of interest?

Step 1: Identify the contract

In recognizing revenue, which step is this? A contract establishes the legal rights and obligations of the seller and customer with respect to one or more performance obligations.

Step 2: Identify the performance obligation(s)

In recognizing revenue, which step is this? A performance obligation is a promise to transfer a good or service that is distinct, which is the case if the good or service is both (a) capable of being distinct and (b) separately identifiable.

Step 4: Allocate the transaction price

In recognizing revenue, which step is this? The seller allocates the transaction price to performance obligations based on the relative stand-alone selling prices of the goods or services in each performance obligation.

Step 5: Recognize revenue when (or as) each performance obligation is satisfied

In recognizing revenue, which step is this? The seller recognizes revenue at a single point in time when control passes to the customer, which is more likely if the customer has: • Obligation to pay the seller • Legal title to the asset • Possession of the asset • Assumed the risks and rewards of ownership • Accepted the asset OR The seller recognizes revenue over a period of time if: • Customer consumes benefit as work performed, • Customer controls asset as it's created, or • Seller is creating an asset that has no alternative use to the seller and the seller has right to receive payment for work completed

Step 3: Determine the transaction price

In recognizing revenue, which step is this? The transaction price is the amount the seller is entitled to receive from the customer.

Compound Interest

Includes interest not only on the initial investment but also on the accumulated interest earned in previous periods Occurs when money remains invested for multiple periods

Simple Interest

Initial investment x Annual Interest rate x Period of Time

realization periodicity

It is important not only to determine how much (_______) revenue to recognize (record), but also when (______) to recognize it

Date Interest Balance Initial deposit $600 After 6 months 4%* × $600 = $24 $624 End of year 4%* × $624 = $25 *$649* *8%/2 = 4% semi-annual rate.

Jacob Lee invested $600 in a savings account paying 8% interest compounded twice a year. What will be his investment balance at the end of the year? Round to the nearest dollar. -$680 -$649 -$624 -$600

- $1.60 5-3=2, 2 x 80% OR 5 x 40% =1.60, 1.60 x 80% - 4.80 + 1.60= 6.40, 4.80/6.40= 75%, 1.60/6.40= 25%, 4.80 x 75% = 3.60

Java Coffee Co. offers a promotional coupon with every cup of coffee it sells. The coupon gives the customer an opportunity to buy a specialty coffee that normally sells for $5 for only $3 (a 40% discount). The coupon must be redeemed within one month of the purchase. Java Coffee estimates that 80% of customers will take advantage of the coupon. - What is the stand-alone selling price of the coupon? - If the original cup of coffee price is $4.80, how much revenue is recognized immediately and how much is deferred?

First, determine the monthly payment. n = 360 (30 years times 12 payments per year) i = 0.5833 (7% annually divided by 12 payment per year) PV = 125000 Make sure you are in end mode. solve for PMT (answer = $831.6281) Second, solve for the outstanding principal after three years. n = 324 (360 total payments minus 36 payments made) i = 0.5833 (7% annually divided by 12 payment per year) PMT = 831.6281 Make sure you are in end mode solve for PV (answer = $120,908.70) Principal repaid = starting balance minus current balance Principal repaid = $125,000 - $120,908.70 = $4,091.30 Interest paid = total of payments made - principal repaid Interest paid = (36)($831.6281) - $4,091.30 = $29,938.61 - $4,091.30 = $25,847.31

John and Peggy recently bought a house. They financed the house with a $125,000, 30-year mortgage with a nominal interest rate of 7 percent. Mortgage payments are made at the end of each month. What total dollar amount of their mortgage payments during the first three years will go towards repayment of principal?

over a period of time consumes the benefit controls the asset as it is created asset that has no alternative use

Revenue is recognized ________ if any of following three criteria is met : The customer ___________ of the seller's work as it is performed (example: a cleaning service) The customer _________ (example: constructing a building extension) The seller is creating an ____________ to the seller and the seller has the legal right to receive payment for progress to date (example: an order of jets customized for the U.S. Air Force)

proportion to the amount

Revenue is recognized in __________ of performance obligation that has been satisfied

Annuity

Series of cash flows of the same amount received or paid each period Examples: A loan on which periodic interest is paid in equal amounts A lease paid in equal instalments during a specified period of time

Does not exist

Special Issues for Step 1: Identify the Contract A contract _________________ if: Neither the seller nor the customer has performed any obligations under the contract, and Both the seller and the customer can terminate the contract without penalty

performed *and* terminate penalty

Special Issues for Step 1: Identify the Contract A contract does not exist if: Neither the seller nor the customer has _______ any obligations under the contract, *______* Both the seller and the customer can ______ the contract without ______

Exists

Special Issues for Step 1: Identify the Contract A contract only _______ if it: Has commercial substance Has been approved by the seller and customer Specifies the rights of the seller and customer Specifies payment terms Is probable that the seller will collect the amount it is entitled to receive under the contract

commercial substance approved rights payment terms probable seller will collect

Special Issues for Step 1: Identify the Contract A contract only exists if it: Has _____________ Has been _______ by the seller and customer Specifies the _____ of the seller and customer Specifies ___________ Is _______ that the __________ the amount it is entitled to receive under the contract

Explicit implicit oral written

Special Issues for Step 1: Identify the Contract Contracts can be _____ or _____, ____ or ______

Options material right

Special Issues for Step 2: Identify the Performance Obligation(s) Performance obligations: ______ that provide a _________ (a _________ is something the customer would not receive otherwise, so the seller is obligated to provide it)

extended warranty

Special Issues for Step 2: Identify the Performance Obligation(s) Performance obligations: __________: A __________ is an ____________ if either The customer has the option to purchase the ______ separately, or The _________ provides a service to the customer beyond quality assurance

Prepayments or deposits Quality-assurance warranties Right of return

Special Issues for Step 2: Identify the Performance Obligation(s) What are not performance obligations

Extended warranties Options

Special Issues for Step 2: Identify the Performance Obligation(s) What are performance obligations?

Prepayments/deposits = part of the transaction price Quality-assurance warranties = part of the performance obligation to deliver products of acceptable quality Right of return = represents a potential failure to satisfy the original performance obligation to provide goods that the customer wants to keep

Special Issues for Step 2: Identify the Performance Obligation(s) Why are prepayments/deposits, quality assurance warranties, and right of return not performance obligations?

probable significant revenue reversal will not occur

Special Issues for Step 3: Constraint on Recognizing Variable Considerations Sellers only include an estimate of variable consideration in the transaction price to the extent it is "______" that a __________ when the uncertainty associated with the variable consideration is resolved.

Variable consideration right of return principal or an agent Time value of money Payments by the seller

Special Issues for Step 3: Determine the Transaction Price Estimating the transaction price involves a variety of considerations, including: -________ and the constraint on its recognition -Sales with a _______ (a particular type of variable consideration -Identifying whether the seller is acting as a __________ -__________ -__________________ to the customer

Examples: Construction—Incentive payments Entertainment and media—Royalties Health care—Medicare and Medicaid reimbursements Manufacturing—Volume discounts and product returns Telecommunications—Rebates

Special Issues for Step 3: Determine the Transaction Price List some examples of variable consideration

Methods of estimation: -Expected value -Most likely amount Select method based on ability to best predict the amount the seller will receive

Special Issues for Step 3: Determine the Transaction Price List the methods of estimation of variable consideration and how do you select which method to use?

Variable Consideration

Special Issues for Step 3: Determine the Transaction Price ___________________: Portion of a transaction price depends on the outcome of future events

Agent

Special Issues for Step 3: Is the Seller a Principal or Agent? Performance obligation: To facilitate a transaction between a principal and a customer Recording Revenue: Only the commission it receives on the transaction

Principal

Special Issues for Step 3: Is the Seller a Principal or Agent? Performance obligation: To provide goods and services (so is vulnerable to risks associated with holding inventory) Recording revenue: Total sales price paid by customers Also recognizes cost of goods sold"

Right of return

Special Issues for Step 3: _________ ___________: - Exists when the customer can return the good if not satisfied or unable to resell it - Viewed as a failure to satisfy the original performance obligation - Sellers report net sales revenue in the income statement, equal to gross sales revenue less actual and estimated returns.

Distinct

Step 2: Identify the Performance Obligation(s) Sellers account for a promise to provide a good or service as a performance obligation if the good or service is _________ from other goods or services in the contract

significant standalone functionality is right of access over the license period

Symbolic IP: - Lacks ________ - The benefit the customer receives from the license ___ affected by the seller's ongoing activity - Therefore, the license transfers a _________ to the seller's IP Examples: Trademarks, logos, brand names, franchise rights Recognize revenue _________

$15,000 plus the present value of an ordinary annuity of $500 for 36 periods The cash price is equal to the present value of the future cash outflows. This includes the $15,000 today plus the value today (present value) of the $500 payments made at the end of each month (ordinary annuity).

The Knotworth Gedding Consulting Company purchased a machine for $15,000 down and $500 a month payable at the end of each of the next 36 months. How would the company calculate the cash price of the machine, assuming the annual interest rate is known? -$15,000 plus the present value of $18,000 ($500 × 36) -$15,000 plus the present value of an annuity due of $500 for 36 periods -$33,000 -$15,000 plus the present value of an ordinary annuity of $500 for 36 periods

Transaction Price

The _________ is the amount the seller is entitled to receive from the customer.

Time Value of Money

The ____________ means that money can be invested today to earn interest and grow to a larger dollar amount in the future Example: Invested in bank[Present value]($100) -> Annual Yield(6%)-> Future value($106) Useful in valuing a variety of assets and liabilities

32,428.79 i=3.5/12 n= 72 PMT= 500 FV=0 Compute for PV

The dealer is offering a promotion on the car in the picture that says you pay 72 month equal installment payments of $500. The market interest rate for a 6-year car loan is 3.5%. What is the actual selling price of this car?

After Last

The first cash flow (receipt or payment) of an ordinary annuity is made one compounding period _____ the date on which the agreement begins. The final cash flow takes place on the _____ day covered by the agreement.

First Before

The first payment of an annuity due is made on the ____ day of the agreement, and the last payment is made one period _____ the end of the agreement.

1. Identify the contract 2. Identify the performance obligation(s) 3.Determine the transaction price 4.Allocate the transaction price 5.Recognize revenue when (or as) each performance obligation is satisfied

The five steps to Recognizing Revenue are:

Over a period of time

The seller recognizes revenue ______________ if: • Customer consumes benefit as work performed, • Customer controls asset as it's created, or • Seller is creating an asset that has no alternative use to the seller and the seller has right to receive payment for work completed

Single point in time

The seller recognizes revenue at _______________ when control passes to the customer, which is more likely if the customer has: • Obligation to pay the seller • Legal title to the asset • Possession of the asset • Assumed the risks and rewards of ownership • Accepted the asset

Present Value of A Single Amount

Today's equivalent to a particular amount in the future

747,736.62 n=20 i= 5 PMT= -60,000 FV=0 solve for PV 34,651.64 FV= 747,736.62 PV=0 n=15 i=5 solve for PMT

Tom will retire in 15 years, His life expectancy is 20 years after his retirement. Tom has come to you, his CPA, to learn how much he should deposit at the end of every year to be able to withdraw $60,000 at the end of each year for 20 years after his retirement, assuming the amount on deposit will earn 5% interest annually.

$218,160 ($240,000 × 0.909) $247,800 ($300,000 × 0.826) _____________ *$465,960*

Turp and Tyne Distillery is considering investing in a two-year project. The company's required rate of return is 10%. The present value of $1 for one period at 10% is .909 and .826 for two periods at 10%. The project is expected to create cash flows, net of taxes, of $240,000 in the first year, and $300,000 in the second year. The distillery should invest in the project if the project's cost is less than or equal to: $540,000 $490,860 $465,960 $446,040

n = 156 (13 years times 12 comp. periods per year) i = 0.833333 (10% annually divided by 12 comp. periods per year) PV = -153,000 solve for FV $558,386.38

What will $153,000 grow to be in 13 years if it is invested today in an account with a quoted annual interest rate of 10% with monthly compounding of interest?

n = 9 i = 11 PV = -247000 solve for FV $631,835.12

What will $247,000 grow to be in 9 years if it is invested today in an account with an annual interest rate of 11%?

Seller can identify the contract with a buyer

Which of the following is not a key indicator used in deciding whether control has passed from the seller to the buyer? Seller can identify the contract with a buyer Buyer has an obligation to pay the seller Buyer has legal title to the asset Buyer has physical possession of the asset

Buyer has scheduled delivery

Which of the following is not an indicator that control of a good has passed from the seller to the buyer? Buyer has legal title Buyer has an unconditional obligation to pay Buyer has scheduled delivery Buyer has assumed the risk and rewards of ownership

Revenues

are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations (FASB Stmt of Concepts 6)

Monetary Liabilities

are obligations to pay amounts of cash in the future, the amount of which is fixed or determinable Example: Notes payable

Deferred Annuity

exists when the first cash flow occurs more than one period after the date the agreement begins

Present Value of a Deferred Annuity Alternative: Two Step Process

1. Calculate the PV of the annuity as of the beginning of the annuity period 2. Reduce the single amount calculated in (1) to its present value as of today

- Bill-and-Holds Sales - control has not occurred - revenue typically should not be recognized until actual delivery to the customer occurs

A ______ is an arrangement where a customer purchases goods but requests that the seller not ship the product until a later date Since the customer doesn't have physical possession of the asset until the seller has delivered it, transfer of ________, so ______________ ___________ _______

Performance Obligation

A ____________ is a promise to transfer a good or service that is distinct, which is the case if the good or service is both (a) capable of being distinct and (b) separately identifiable.

obligation to pay Legal title Physical possession risks and rewards of ownership Accepted

A customer is more likely to control a good or service if the customer has: An __________ the seller. ____________ to the asset. __________________ of the asset. Assumed the __________________. __________ the asset

both Capable Separately identifiable

A good or service is distinct if it is _______: _________ of being distinct _________________ from other goods or services in the contract Example of failing the "separately identifiable" criterion: Construction contracts

Effective Rate

Actual rate at which money grows per year

Interest

Amount of money paid or received in excess of the amount of money borrowed or lent

n=14 PV = -137000 FV = 475000 solve for I 9.29%

At what annual interest rate must $137,000 be invested so that it will grow to be $475,000 in 14 years?

n = 780 (15 years times 52 comp. periods per year) PV = -134,000 FV = 459,000 solve for i (answer on calculator = 0.157972) Since the number of periods was entered as weeks, the answer for i is the weekly rate. The annual rate equals the weekly rate times 52. Annual rate = (0.157972%)(52) = 8.21%

At what quoted annual interest rate must $134,000 be invested so that it will grow to be $459,000 in 15 years if interest is compounded weekly?

12 PV= 126,168 PMT=35,000 n=5 solve for I

Bates Company has entered into two lease agreements. Lease A — Lease A covers office equipment which could be purchased for $126,168. Bates Company has, however, chosen to lease the equipment for $35,000 per year, payable at the end of each of the next 5 years. What is the implied interest rate?

27,999.79 i=10 n=6 PV= 134,141 solve for PMT

Bates Company has entered into two lease agreements. Lease B — Lease B applies to a machine which can be purchased for $134,141. Bates Company has chosen to lease the machine for an annual payment based on 10% interest for 6-years. Payments are due at the start of each year. What is the annual payment amount?

- Most likely: $400,000 (60%) 400,000/6 months = 66,666 per month 66,666 + 200,000 = 266,666 per month - Expected Value 400,000 x 60% = 240,000, 600,000 x 40% = 240,000 240,000 + 240,000 = 480,000 480,000/ 6 months = 80,000 80,000 + 200,000 (guaranteed amount) = 280,000

Big 4 Consulting enters into a contract offering variable consideration. The contract pays Big 4 $200,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay a completion bonus of $400,000 and a 40% chance the contract will pay a completion bonus of $600,000. Big 4 concludes that this contract qualifies for revenue recognition over time. - Under the Most Likely Amount method, monthly revenue will be: $________________ - Under the Expected Value method, monthly revenue will be: $___________

Annuity Due

Cash flows occur at the beginning of each period

Ordinary Annuity

Cash flows occur at the end of each period

Present value of an ordinary annuity of $1 for five periods The calculation is how much needs to be deposited TODAY (the present value) so that equal amounts can be withdrawn over the next six years at the end of the year (ordinary annuity).

Justin Investor wants to calculate how much money he needs to deposit today into a savings account that earns 4% in order to be able to withdraw $6,000 at the end of each of the next five years. He should use which present value concept? Present value of $1 for five periods Present value of an annuity due of $1 for five periods Present value of an ordinary annuity of $1 for five periods Future value of $1 for five periods

Functional Intellectual Property

Licenses of ___________ transfer a right of use, so sellers typically recognize revenue at a point in time.

significant standalone functionality isn't right of use point in time

Licenses of functional Intellectual Property: Has ___________ (can perform a function or a task, or be played or aired) The benefit the customer receives from the license _____ affected by the seller's ongoing activity Therefore, viewed as transferring ___________ Example: a music download Revenue is recognized at the ________ that the customer can start using the IP.

FV = I × FV Factor FV = $5,000 × 1.36049 FV = *$6,802*

Oliver Kim invests $5,000 in a bank account earning 8% interest compounding annually. How much will he have in his account in four years? The future value of $1 at 8% for four years is 1.36049 per Table 1 (Future Value of $1). Round to the nearest dollar. $5,412 $6,242 $5,937 $6,802

35,686.18 i=9 FV= 200,000 n=20 PMT=0 solve for PV

On May 1, 2018, Bo Smith, purchased $200,000 in zero-coupon bonds that mature on May 1, 2038. The bonds pay no interest during the period of time they are outstanding. The interest rate for such borrowings is at 9%. Interest compounds annually. What is the price (PV) Bo paid for the bonds?

1,777,992.72 i=4 n=3 PMT= 0 FV= 2,000,000 solve for PV

On May 1, 2018, Callaway Golf Co. purchased machinery from Caterpillar Co. They do not need to pay for the machinery until May 1, 2021. Callaway will pay $2,000,000 to Caterpillar Co. on May 1, 2021. Callaway does not pay any interest and interest compounds annually. The interest rate for Callaway Golf co. to borrow similar amount from the bank is at 4%. How much revenue can Caterpillar recognize on May 1, 2018 (assume the machinery is delivered on the same day)?

Due

Ordinary Annuity or Annuity Due? A three-year lease of a building that begins on December 31, 2021, and ends on December 31, 2024, may require the first year's lease payment in advance on December 31, 2021. The third and last payment would take place on December 31, 2023, the beginning of the third year of the lease.

Ordinary

Ordinary Annuity or Annuity Due? An installment note payable dated December 31, 2021, might require the debtor to make three equal annual payments, with the first payment due on December 31, 2022, and the last one on December 31, 2024.

Present Value of A Single Amount formula

PV = FV x PV Factor

Removal

Present value requires the ________ of compound interest

realization virtually complete reasonable certainty

Prior GAAP: The _______ principle required that revenue be recognized when both: The earnings process is __________, and There is _____________ as to the collectability of the assets to be received

Licensing fees always are recognized as revenue at the end of the license period, when the seller has completed its performance obligation to provide access to its IP

Which of the following is not true? - License fees are recognized over time for any license that is viewed as providing a right of access - Licensing fees are recognized as revenue over time for licenses of symbolic IP, for which the seller expects its ongoing activities to affect the benefits that the buyer receives from IP - License fees are recognized as revenue at a point in time for licenses of function IP, for which the buyer expects that the seller's future activities will not affect the benefit the buyer derives from the IP - Licensing fees always are recognized as revenue at the end of the license period, when the seller has completed its performance obligation to provide access to its IP

Revenue is recognized when the delivery of goods is made

Which of the following is typically true for a bill-and-hold arrangement? - Revenue is recognized when goods are manufactured - Revenue is recognized when the arrangement is made - Revenue is recognized when the delivery of goods is made - Revenue is recognized at the point in time at which payment from the customer is received

n=60 (total number of payments) PV = -31430 (price of $33,800 minus $2,370 down payment) FV = 20,430 (residual value) PMT = 477 Make sure you are in begin mode solve for I (answer on calculator= 1.122834%) Since the number of periods was entered as months, the answer for i is the monthly rate. The annual rate equals the monthly rate times 12. Annual rate = (1.122834%)(12) = 13.47%

You are considering leasing a car. You notice an ad that says you can lease the car you want for $477.00 per month. The lease term is 60 months with the first payment due at inception of the lease. You must also make an additional down payment of $2,370. The ad also says that the residual value of the vehicle is $20,430. After much research, you have concluded that you could buy the car for a total "drive- out" price of $33,800. What is the quoted annual interest rate you will pay with the lease?

n = 7 i = 11 PMT = 17000 Make sure you are in end mode solve for PV $88,919.14

You are offered an annuity that will pay $17,000 per year for 7 years (the first payment will be made today). If you feel that the appropriate discount rate is 11%, what is the annuity worth to you today?

n = 11 i = 13 PMT = -24000 Make sure you are in end mode solve for PV $136,486.59

You are offered an annuity that will pay $24,000 per year for 11 years (the first payment will occur one year from today). If you feel that the appropriate discount rate is 13%, what is the annuity worth to you today?

n = 4. (number of comp. periods in one year) i = 3.25 (13% annually divided by 4 comp. periods in one year) PV = -100 solve for FV Subtract the 100 (percent) you initial had to get the EAR EAR= 113.65-100 = 13.65%

You are offered an investment with a quoted annual interest rate of 13% with quarterly compounding of interest. What is your effective annual interest rate?

Since we do not have a NFV key, we have to solve this problem in two steps. First, calculate the PV of the uneven cash flows. Second, calculate the future value as a lump sum problem. CF0 = 0 C01 = 4200 F01(Nj) = 7 C02 = 6900 F02(Nj) = 11 C03 = 14500 F03(Nj) = 16 i = 9.7 NPV = $66,239.9844 TI83: npv(9.7,0,{4200,6900,14500},{7,11,16}) n = 34 i = 9.7 PV = -66239.9844 solve for FV (answer = $1,542,217.26)

You are planning for retirement 34 years from now. You plan to invest $4,200 per year for the first 7 years, $6,900 per year for the next 11 years, and $14,500 per year for the following 16 years (assume all cash flows occur at the end of each year). If you believe you will earn an effective annual rate of return of 9.7%, what will your retirement investment be worth 34 years from now?

n = 23 FV = 366000 PMT = -11000 Make sure you are in end mode solve for i 3.21%

You are told that if you invest $11,000 per year for 23 years (all payments made at the end of each year) you will have accumulated $366,000 at the end of the period. What annual rate of return is the investment offering?

n = 19 FV = 375000 PMT = -11100 ' Make sure you are in begin mode solve for I 5.48%

You are told that if you invest $11,100 per year for 19 years (all payments made at the beginning of each year) you will have accumulated $375,000 at the end of the period. What annual rate of return is the investment offering?

CF0 = 0 C01 = 12000 C02 = 14000 C03 = 17000 C04 = 19000 C05 = 23000 C06 = 29000 i = 11 NPV = $76,273.63 TI83: npv(11,0,{12000,14000,17000,19000,23000,29000})

You are valuing an investment that will pay you $12,000 the first year, $14,000 the second year, $17,000 the third year, $19,000 the fourth year, $23,000 the fifth year, and $29,000 the sixth year (all payments are at the end of each year). What it the value of the investment to you now is the appropriate annual discount rate is 11.00%?

Since the payments occur annually, but the interest is compounded monthly, we first must calculate the effective annual interest rate. n = 12 (number of comp. periods in one year) i = 0.75 (9% annually divided by 12 comp. periods in one year) PV = -100 solve for FV (answer= 109.3807) Subtract the 100 (percent) you initial had to get the EAR. EAR = 109.3807 - 100 = 9.3807% Now calculate the PV of the cash flows using the EAR as the discount rate. CF0 = 0 C01 = 26000 F01(Nj) = 9 C02 = 34000 F02(Nj) = 11 C03 = 47000 F03(Nj) = 14 i = 9.3807 NPV = $314,517.85 TI83: npv(9.3807,0,{26000,34000,47000},{9,11,14})

You are valuing an investment that will pay you $26,000 per year for the first 9 years, $34,000 per year for the next 11 years, and $47,000 per year the following 14 years (all payments are at the end of each year). Another similar risk investment alternative is an account with a quoted annual interest rate of 9.00% with monthly compounding of interest. What is the value in today's dollars of the set of cash flows you have been offered?

CF0 = 0 C01 = 27000 F01(Nj) = 10 C02 = 35000 F02(Nj) = 10 C03 = 48000 F03(Nj) = 10 i=9 NPV = $323,123.04 TI83: npv(9,0,{27000,35000,48000},{10,10,10})

You are valuing an investment that will pay you $27,000 per year for the first ten years, $35,000 per year for the next ten years, and $48,000 per year the following ten years (all payments are at the end of each year). If the appropriate annual discount rate is 9.00%, what is the value of the investment to you today?

Since the payments occur annually, but the interest is compounded monthly, we first must calculate the effective annual interest rate. n = 12 (number of comp. periods in one year) i = 0.75 (9% annually divided by 12 comp. periods in one year) PV = -100 solve for FV (answer = 109.3807) Subtract the 100 (percent) you initial had to get the EAR. EAR = 109.3807 - 100 = 9.3807% Now calculate the PV of the cash flows using the EAR as the discount rate. n = 26 i = 9.3807 PMT = (11,000,000)/(26) Make sure you are in begin mode. solve for PV (answer = $4,453,789.97)

You have just won the Georgia Lottery with a jackpot of $11,000,000. Your winnings will be paid to you in 26 equal annual installments with the first payment made immediately. If you had the money now, you could invest it in an account with a quoted annual interest rate of 9% with monthly compounding of interest. What is the present value of the stream of payments you will receive?

n = 26 i=8 PMT = (40,000,000)/(26) Make sure you are in begin mode. solve for PV (answer = $17,961,194.14)

You have just won the Georgia Lottery with a jackpot of $40,000,000. Your winnings will be paid to you in 26 equal annual installments with the first payment made immediately. If you feel the appropriate annual discount rate is 8%, what is the present value of the stream of payments you will receive?

n = 12 i=9 FV = 450000 Make sure you are in begin mode solve for PMT $20,497.98

You plan to accumulate $450,000 over a period of 12 years by making equal annual deposits in an account that pays an annual interest rate of 9% (assume all payments will occur at the beginning of each year). What amount must you deposit each year to reach your goal?

n = 25 i = 14 PV = -389000 Make sure you are in end mode solve for PMT $56,598.88

You plan to borrow $389,000 now and repay it in 25 equal annual installments (payments will be made at the end of each year). If the annual interest rate is 14%, how much will your annual payments be?

n = 60 (5 years times 12 payments per year) i = 0.6667 (8% annually divided by 12 payments per year) PV = -22102 ($25,700 price minus down payment of $3,598) Make sure you are in end mode solve for PMT $448.15

You plan to buy a car that has a total "drive-out" cost of $25,700. You will make a down payment of $3,598. The remainder of the car's cost will be financed over a period of 5 years. You will repay the loan by making equal monthly payments. Your quoted annual interest rate is 8% with monthly compounding of interest. (The first payment will be due one month after the purchase date.) What will your monthly payment be?

You must solve this problem in two steps. First, calculate the PV at the time of retirement of the amount needed to give you the annuity and remaining sum wanted. Second, calculate the payment necessary each year over the period from now until retirement to generate the goal. n = 27 i=6 FV = 2500000 PMT = 180000 solve for PV (answer: = $3,038,989.79) (make sure you are in begin mode) n = 33 i = 12 FV = 3038989.79 solve for PMT (answer: = $8,874.79) (make sure you are in end mode)

You plan to retire 33 years from now. You expect that you will live 27 years after retiring. You want to have enough money upon reaching retirement age to withdraw $180,000 from the account at the beginning of each year you expect to live, and yet still have $2,500,000 left in the account at the time of your expected death (60 years from now). You plan to accumulate the retirement fund by making equal annual deposits at the end of each year for the next 33 years. You expect that you will be able to earn 12% per year on your deposits. However, you only expect to earn 6% per year on your investment after you retire since you will choose to place the money in less risky investments. What equal annual deposits must you make each year to reach your retirement goal?

Indicators Poor evidence outside the seller's control history broad range of outcomes long delay

_______ that a significant revenue reversal could occur include: ___________ on which to base an estimate Dependence of the estimate on factors __________________________ A ___________ of the seller changing payment terms on similar contracts A ____________ that could occur A __________before uncertainty resolves

Licenses

________ allow the customer to access the seller's intellectual property (IP).

Symbolic IP

________: Transfer seller's IP with the understanding that the seller will undertake ongoing activities

Exception

_________: Functional IP is viewed as transferring a right of access (and requiring revenue recognition over time) if both - The seller is expected to change the functionality over time and - The customer is required to use the updated version Example: virus protection software

Input-based

_______________ estimate Measured as the proportion of effort expended thus far relative to the total effort expected to satisfy the performance obligation

Output-based

_______________ estimate Measured as the proportion of the goods or services transferred to date

Consignment Arrangements consignor(1) consignee(2) postpones third party

_________________: The "____(1)____" physically transfers the goods to the other company (the consignee), but the consignor retains legal title If a buyer is found, the ____(2)___ remits the selling price (less commission and approved expenses) to the ___(1)____ If the ___(2)__ can't find a buyer within an agreed-upon time, the _____(2)____ returns the goods to the _____(1)____ Given that the consignor retains the risks of ownership, it _______ revenue recognition until sale to a ______ occurs

Monetary Assets

include money and claims to receive money in the future, the amount of which is fixed or determinable Example: Cash and most receivables