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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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An accountant wishes to find the present value of an annuity of $1 payable at the beginning of each period at 10% for 8 periods. He has only one present value table, which shows the present value of an annuity of $1 payable at the end of each period. To compute the present value factor he needs, the accountant would use the present value factor in the 10% column for:

  1. a. 7 periods
  2. b. 7 periods and add 1
  3. c. 8 periods
  4. d. 9 periods and subtract 1

To determine

Identify the period which has to be used for calculating present value of an annuity due, using the present value of ordinary annuity formula.

Explanation

An accountant requires to find out the present value of an annuity $1 for 8 periods at 10%, where the amount is payable at the beginning of each period. This is an annuity due.

But, the only table he is having for calculation is present value of an annuity $1 payable at the end of each period that is present value of ordinary annuity table.

However, the accountant can use the present value of ordinary annuity table to calculate the present value of annuity due. For that, he has to take the factor of present value of ordinary annuity in the 10% column for 7 periods and add 1.­­­

Present valueD

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