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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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For which of the following transactions would the use of the present value of an annuity due concept be appropriate in calculating the present value of the asset obtained or liability owed at the date of incurrence?

  1. a. A capital lease is entered into with the initial lease payment due 1 month subsequent to the signing of the lease agreement.
  2. b. A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement.
  3. c. A 10-year, 8% bond is issued on January 2, with interest payable semiannually on July 1 and January 1, yielding 7%.
  4. d. A 10-fear, 8% bond is issued on January 2, with interest payable semiannually on July 1 and January 1, yielding 9%.

To determine

Identify the transaction for which the use of present value of annuity due concept is suitable in determining the present value of the asset purchased or liability owed at the date of incurrence.

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.

Present value of annuity due represents the present value of a series of future payments of $1made at the beginning of the each period.

Justification for wrong options:

Option a is wrong, because the first lease payment will be made at the end of 1 month after the signing of lease agreement. This is an ordinary annuity. Hence, the use of present value of annuity due concept is not suitable in determining the present value of this lease.

Option b and c are wrong, because the bond is issued on January 2, but the first interest payment will be made at July 1...

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