Chap 6 Accounting Class Notes

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Chapter 6 Class Notes Simple interest vs. Compound interest: o Simple interest amount = Principal * annual interest rate * period o Compound interest amount includes interest not only on the initial investment but also on the accumulated interest in previous periods. Example: Assume we will save $1,000 for three years and earn 6% interest compounded annually. Original balance First year interest Balance, end of year 1 Balance, beginning of year 2 Second year interest Balance, end of year 2 Balance, beginning of year 3 Third year interest Balance, end of year 3 $ 1,000.00 60.00 $ 1,060.00 $ 1,060.00 63.60 $ 1,123.60 $ 1,123.60 67.42 $ 1,191.02 Time value of Money: 1. A single sum: Assume we will save $1,000 for three years and earn 6%…show more content…
Assume the current market interest rate is 12%. 7/1/12 Notes Receivable...............400,000.00 Discount on Notes Receivable..... 178,836.32 Service Revenue............................... 221,163.68 Computation of the present value of the note: Maturity value ...................................................... $400,000.00 (a) Present value of $400,000 due in 8 years at 12%: $400,000 X .40388= $161,552 (b) Present value of $12,000 payable annually for 8 years at 12% annually: $12,000 X 4.96764 = 59,611.68 (a) + (b) Present value of the note ................................. 221,163.68 Discount on notes receivable: 400,000- 221,163.68=$178,836.32 3 (2) Long-term bonds: Example: On January 1, 2006, Fumatsu Electric issues 10% stated rate bonds with a face value of $1 million. The bonds mature in 5 years. The market rate of interest for similar issues was 12%. Interest is paid semiannually beginning on June 30, 2006. What is the price of the bonds? (a) Calculate the Present Value of the Lump-sum Maturity Payment (Face Value) (b) Calculate the Present Value of the Annuity Payments (Interest) Table PV of $1 Face value of the bond n=10; i=6% PV of Ordinary Interest (annuity) Annuity of $1 n=10; i=6% Price of bonds Cash Flow Table Value Amount Present Value 0.5584 $ 1,000,000 $ 558,400 7.3601 50,000 368,005 $ 926,405 (3) Pension obligations: Some pension plans create

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