Present Value Fundamentals

Question 1

When there is a large discrepancy between the stated interest rate and incremental borrowing rate this indicates that the stated rate is unreasonable.

Answer 1

record the transaction at the present value of the note and stated interest payments discounted at market rate or the fair market value, whichever is more clearly evident.

Question 2

How would the amortization of discount on bonds payable affect each of the following? CV and net income

Answer 2

CV increase, NI decrease

Question 3

How would the amortization of premium on bonds payable affect each of the following? CV and Net Income

Answer 3

CV decrease, NI increase

Question 4

Calculate total issue price

Answer 4

Step 1: Face value times 1 payment at maarket rate for appropriate periods

Step 2 Face amount times stated rate times value for mrk rate at approrpriate periods.

Question 5

On January 1, year 1, Beal Corporation adopted a plan to accumulate funds for a new plant building to be erected beginning July 1, year 6, at an estimated cost of $1,200,000. Beal intends to make five equal annual deposits in a fund that will earn interest at 8% compounded annually. The first deposit is made on July 1, year 1. Present value and future amount factors are as follows:

Answer 5

The desired fund balance on July 1, year 6 ($1,200,000) is a future amount. The series of five equal annual deposits is an annuity in advance. Whether this is an ordinary annuity or an annuity in advance can be determined by looking at the last deposit. The last deposit (7/1/Y5)) is made one year prior to the date the future amount is needed. Therefore, these are beginning-of-year payments, and this is an annuity in advance. The deposit amount is computed below.

       Future amount 
       F.A. factor	 =	$1,200,000 /6.34	 =	 $189,274

Question 6

convert ordinary annuity to annuity due factor

Answer 6

PV of ordinary annuity factor could be converted to an annuity in advance by adding 1.00