Preview of Chapter 6: Intermediate Accounting IFRS 2nd Edition Kieso, Weygandt, and Warfield
Preview of Chapter 6: Intermediate Accounting IFRS 2nd Edition Kieso, Weygandt, and Warfield
6-1
Intermediate Accounting
IFRS 2nd Edition
Kieso, Weygandt, and Warfield
BASIC
BASIC TIME
TIME VALUE
VALUE CONCEPTS
CONCEPTS
Time Value of Money
6-2
LO 1
5. Shared-Based
Compensation
6. Business Combinations
7. Disclosures
8. Environmental Liabilities
4. Long-Term Assets
6-3
LO 1
6-4
LO 1
Annual
Interest
= $10,000 x .08 x 1
= $800
6-5
LO 2
Total
Interest
= $10,000 x .08 x 3
= $2,400
6-6
LO 2
Partial
Year
Interest = p x i x n
= $10,000 x .08 x 3/12
= $200
6-7
LO 2
6-8
Computes interest on
principal and
LO 3
Compound Interest
Illustration: Tomalczyk Company deposits $10,000 in the Last National
Bank, where it will earn simple interest of 9% per year. It deposits another
$10,000 in the First State Bank, where it will earn compound interest of 9%
per year compounded annually. In both cases, Tomalczyk will not withdraw
any interest until 3 years from the date of deposit.
ILLUSTRATION 6-1
Simple vs. Compound Interest
Year 1 $10,000.00 x 9%
$ 900.00
$ 10,900.00
Year 2 $10,900.00 x 9%
$ 981.00
$ 11,881.00
Year 3 $11,881.00 x 9%
6-9
$1,069.29 $ 12,950.29
LO 3
LO 3
ILLUSTRATION 6-2
Excerpt from Table 6-1
6-11
LO 3
Where:
FVFn,i = future value factor for n periods at i interest
n
i
6-12
= number of periods
= rate of interest for a single period
LO 3
6-13
LO 3
6-14
LO 3
6-15
ILLUSTRATION 6-5
Comparison of Different
Compounding Periods
LO 3
Rate of Interest
Future Value
Present Value
ILLUSTRATION 6-6
Basic Time Diagram
6-16
LO 4
SINGLE-SUM
SINGLE-SUM PROBLEMS
PROBLEMS
Two Categories
Unknown Present Value
ILLUSTRATION 6-6
Basic Time Diagram
6-17
LO 5
SINGLE-SUM
SINGLE-SUM PROBLEMS
PROBLEMS
Future Value of a Single Sum
Value at a future date of a given amount invested, assuming
compound interest.
Where:
FV = future value
PV = present value (principal or single sum)
FVF n,i = future value factor for n periods at i interest
6-18
LO 5
Future
Future Value
Value of
of aa Single
Single Sum
Sum
Illustration: Bruegger Co. wants to determine the future
value of 50,000 invested for 5 years compounded annually at
an interest rate of 11%.
ILLUSTRATION 6-7
Future Value Time
Diagram (n = 5, i = 11%)
= 84,253
6-19
LO 5
Future
Future Value
Value of
of aa Single
Single Sum
Sum
Alternate
Calculation
ILLUSTRATION 6-7
Future Value Time
Diagram (n = 5, i = 11%)
6-20
What table
do we use?
LO 5
Alternate
Calculation
i=11%
n=5
6-21
1.68506
Factor
84,253
Future Value
LO 5
Future
Future Value
Value of
of aa Single
Single Sum
Sum
Illustration: Shanghai Electric Power (CHN) deposited
250 million in an escrow account with Industrial and Commercial
Bank of China (CHN) at the beginning of 2015 as a commitment
toward a power plant to be completed December 31, 2018. How
much will the company have on deposit at the end of 4 years if
interest is 10%, compounded semiannually?
ILLUSTRATION 6-8
Future Value Time
Diagram (n = 8, i = 5%)
6-22
Future
Future Value
Value of
of aa Single
Single Sum
Sum
i=5%
n=8
250,000,000
Present Value
6-23
1.47746
Factor
369,365,000
Future Value
LO 5
SINGLE-SUM
SINGLE-SUM PROBLEMS
PROBLEMS
Present Value of a Single Sum
Amount needed to invest now, to produce a known future value.
Formula to determine the present value factor for 1:
Where:
PVFn,i = present value factor for n periods at i interest
n
i
6-24
= number of periods
= rate of interest for a single period
LO 5
Present
Present Value
Value of
of aa Single
Single Sum
Sum
Assuming an interest rate of 9%, the present value of 1
discounted for three different periods is as shown in Illustration
6-10.
ILLUSTRATION 6-10
Present Value of 1
Discounted at 9% for
Three Periods
6-25
LO 5
Present
Present Value
Value of
of aa Single
Single Sum
Sum
Illustration 6-9 shows the present value of 1 table for five
different periods at three different rates of interest.
ILLUSTRATION 6-9
Excerpt from Table 6-2
6-26
LO 5
Where:
FV = future value
PV = present value
= present value factor for n periods at i interest
PVF
n,i
6-27
LO 5
Present
Present Value
Value of
of aa Single
Single Sum
Sum
Illustration: What is the present value of 84,253 to be
received or paid in 5 years discounted at 11% compounded
annually?
ILLUSTRATION 6-11
Present Value Time
Diagram (n = 5, i = 11%)
= 50,000
6-28
LO 5
Present
Present Value
Value of
of aa Single
Single Sum
Sum
Alternate
Calculation
ILLUSTRATION 6-11
Present Value Time
Diagram (n = 5, i = 11%)
LO 5
What factor?
84,253
Future Value
6-30
.59345
Factor
50,000
Present Value
LO 5
ILLUSTRATION 6-12
Present Value Time
Diagram (n = 3, i = 8%)
6-31
What factor?
$2,000
Future Value
6-32
.79383
Factor
$1,587.66
Present Value
LO 5
SINGLE-SUM PROBLEMS
Solving for Other Unknowns
ExampleComputation of the Number of Periods
The Village of Somonauk wants to accumulate $70,000 for the
construction of a veterans monument in the town square. At the
beginning of the current year, the Village deposited $47,811 in a
memorial fund that earns 10% interest compounded annually. How
many years will it take to accumulate $70,000 in the memorial
fund?
ILLUSTRATION 6-13
6-33
LO 5
6-34
LO 5
6-35
LO 5
6-36
LO 5
6-37
LO 5
6-38
LO 5
ANNUITIES
Annuity requires:
(1) Periodic payments or receipts (called rents) of the
same amount,
(2) Same-length interval between such rents, and
(3) Compounding of interest once each interval.
Two
Types
6-39
LO 6
ANNUITIES
Future Value of an Ordinary Annuity
Future Value
Present Value
$20,000
6-40
20,000
20,000
20,000
20,000
20,000
20,000
20,000
LO 6
6-41
LO 6
*Note that this annuity table factor is the same as the sum of
the future values of 1 factors shown in Illustration 6-17.
6-42
LO 6
Where:
R =
FVF-OA n,i =
i =
n =
6-43
periodic rent
future value factor of an ordinary annuity
rate of interest per period
number of compounding periods
LO 6
= $31,764.25
ILLUSTRATION 6-19
Time Diagram for Future
Value of Ordinary
Annuity (n = 5, i = 12%)
6-44
LO 6
Alternate
Calculation
LO 6
What factor?
$5,000
Deposits
6-46
6.35285
Factor
$31,764
Future Value
LO 6
Present Value
$30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
LO 6
$30,000
Deposit
6-48
12.29969
Factor
$368,991
Future Value
LO 6
ANNUITIES
Future Value of an Annuity Due
$20,000
0
6-49
20,000
20,000
20,000
20,000
20,000
20,000
20,000
8
LO 6
6-50
LO 6
ILLUSTRATION 6-24
R = CHF1,166.07
6-51
LO 6
Alternate
Calculation
Computation of Rent
CHF14,000
= CHF1,166.07
12.00611
6-52
LO 6
ILLUSTRATION 6-25
6-53
5.86660
LO 6
6-54
LO 6
$20,000
20,000
Future Value
20,000
20,000
20,000
20,000
20,000
LO 6
12.29969
$20,000
Deposit
6-56
1.12
x
13.775652
13.775652
Factor
$275,513
Future Value
LO 6
ANNUITIES
Present Value of an Ordinary Annuity
Present Value
$100,000
100,000
100,000
100,000
100,000
100,000
.....
0
6-57
19
20
LO 7
6-58
LO 7
Where:
6-59
LO 7
6-60
LO 7
100,000
100,000
100,000
100,000
100,000
.....
0
19
20
LO 7
$100,000
Receipts
6-62
9.81815
Factor
$981,815
Present Value
LO 7
UP
IN SMOKE
WHATS
YOUR
Time value of money concepts also can be
relevant to public policy debates. For example,
many governments must evaluate the financial
cost-benefit of selling to a private operator the
future cash flows associated with government-run
services, such as toll roads and bridges. In these
cases, the policymaker must estimate the present
value of the future cash flows in determining the
price for selling the rights. In another example,
some governmental entities had to determine
how to receive the payments from tobacco
companies as settlement for a national lawsuit
against the companies for the healthcare costs of
smoking. In one situation, a governmental entity
was due to collect 25 years of payments totaling
$5.6 billion. The government could wait to collect
the payments, or it could sell the payments to an
investment bank (a process called securitization).
If it were to sell the payments, it would receive a
lump-sum payment today of $1.26 billion. Is this a
good deal for this governmental entity? Assuming
a discount rate of 8% and that the payments will
be received in
6-63
PRINCIPLE
LO 7
ANNUITIES
Present Value of an Annuity Due
Present Value
$100,000
100,000
100,000
100,000
100,000
100,000
.....
0
6-64
19
20
LO 7
ILLUSTRATION 6-33
Computation of Present
Value of an Annuity Due
6-65
LO 7
100,000
100,000
100,000
100,000
100,000
.....
0
19
20
LO 7
$100,000
Receipts
6-67
10.60360
Factor
$1,060,360
Present Value
LO 7
Referring to Table 6-4 and reading across the 12-period row, you find 10.57534 in
the 2% column. Since 2% is a monthly rate, the nominal annual rate of interest is
12
24% (12 x 2%). The effective annual rate is 26.82413% [(1 + .02) - 1].
6-68
LO 7
12
6-69
LO 7
Present Value
100,000
100,000
100,000
.....
0
6-70
19
20
LO 8
ILLUSTRATION 6-37
6-71
LO 8
6-72
LO 8
6-73
ILLUSTRATION 6-39
LO 8
6-74
LO 8
2,000,000
$140,000
140,000
140,000
140,000
140,000 140,000
.....
0
6-75
10
LO 8
140,000
140,000
140,000
2,140,000
.....
0
10
6-76
LO 8
i=8%
n=10
PV of Interest
HK$140,000
Interest Payment
6-77
6.71008
Factor
HK$939,411
Present Value
LO 8
i=8%
n=10
PV of Principal
HK$2,000,000
Principal
6-78
.46319
Factor
HK$926,380
Present Value
LO 8
6-79
HK$ 939,411
926,380
HK$1,865,791
LO 8
6-80
LO 8
6-81
Pure Rate
Risk-free rate of
return. IASB states a
company should
discount expected
cash flows by the riskfree rate of return.
LO 9
LO 9
6-83
LO 9
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6-84