Exam 23: Understanding Time Value of Money Formulas and Concepts

Although most accountants believe that the use of present value creates relevant accounting measurements, there are some reliability questions. Discuss the reasons why present value computations create less reliable measurements.

The present value factors for any discount rate increase as the number of periods increases.

Marcus Jones wants to invest $10,000 on January 1, 2014, so that he may withdraw 10 annual payments of equal amounts beginning January 1, 2029. If the fund earns 10% annual interest over its life, what will be the amount of each of the withdrawals?

Simple interest on a $25,000, 8%, 18-month note is

Using an appropriate compound interest table, answer the following question. Required: What is the future amount on December 31, 2024, of eleven deposits of $12,000 each with the first deposit being made on December 31, 2014, and interest at 12% compounded annually?

What is the formula for the future value of an ordinary annuity ?

Discounting is the conversion of future cash flow amounts to their present value.

An ordinary annuity is if the cash flows occur on the first day of each period.

The FASB concepts statement relating to cash flow information introduces the concept of expected cash flows when using present values for accounting measurements. Assume that Smith Company determined that it has a 40% probability of receiving $10,000 one year from now and a 60% probability of receiving $10,000 two years from now. Required: Using the FASB concepts, calculate the present value of the expected cash flows assuming a 12% interest rate compounded annually.

Mildred desires to have $7,049 on deposit five years from today. If she has $4,000 to deposit, what rate of interest, compounded annually, must be obtained to accumulate the desired $7,049 in five years?

A beginning accounting student has just been introduced to present and future values analysis and has been told that it is based on compound interest, not simple interest. The student is confused about the differences between the two interest methods. Required: Explain the difference between the two methods using a single deposit of $1,000 for two years at 10% interest.

Tessa won the lottery for $2,500,000 but due to a change in state laws she will not be able to collect it for three years. Ralph is willing to give her a lump sum today in return for the payment in three years. If current interest rates are 14% per year, how much will Tessa receive today?

The future amount of an annuity due is determined

Simple interest on a $1,250,000, 9%, 15-month note is

You deposit in a fund 10 annual payments of $2,500 each beginning January 1, 2016, with the last deposit being made on January 1, 2025. How much will be in the fund on December 31, 2025, one year after the final payment, if the fund earns interest at 4% compounded annually?

Interest compounded monthly on a $10,000 principal amount at 18% for two years is

On July 7, 2014, Lawrence Company sold some machinery to Johnson Construction Company. The sales contract requires Johnson to pay five equal annual payments of $75,000 each, beginning on July 7, 2014. What present value concept is most appropriate for this situation?

The formula to compute the future value of a single sum is: $F V = P V \times ( 1 - i ) ^ { n }.$

The interest that accrues on both the principal and the past unpaid accrued interest is called compound interest.

FASB's Statement of Financial Accounting Concepts No. 7 specifies when fair value should be based on present value.