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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Samuel Ames owes $20,000 to a friend. He wants to know how much he would have to pay if he paid the debt in 3 annual installments at the end of each year, which would include interest at 14%. Draw a time line for the problem. Indicate what table to use. Look up the table value and place it in a brief formula. Solve.

To determine

Calculate the amount to be paid, draw a timeline and indicate the table to be used to solve the problem.

Explanation

Present Value: The value of today’s amount expected to be paid or received in the future at a ­­­compound interest rate is called as present value.

 Annuity: An annuity is referred as a sequence of payment of fixed amount of cash flows that occurs over the equal intervals of time.

Present value of an ordinary equity: Present value of an ordinary annuity represents the present value of future annual cash flows, where annual cash flows occur at the end of each time period.

Timeline for the present value of an ordinary equity will be appears as follows:

Figure (1)

The correct table that should be used is present value of an ordinary annuity of $1 table...

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