Alas, School Invades My Life Once More (Intermediate Accounting)

Think of this as my own online study guide.  I have been writing this stuff out by hand, but as of late, the steps involved have reached the ridiculous level in some cases, and I have decided to try a different approach.

I.  Present Value; single amount –

Given this info, determine the present value of single amounts.

Future Amount	Interest Rate	# of Periods
$20000	7	10
14000	8	12
25000	12	20
40000	10	8

PV = $________ * (_______) = $ _______

Do this for each line.

This is pretty simple, considering.

Step 1

You take your $ amount and multiply it by the corresponding amount on the present value table that every good accounting major has stuffed in an index somewhere.    So:

PV = $20000 * (.50835) = $10167

Woot!

The second number – “.50835” – is from that good ol’ PV (Present Value) table, using your % and # of periods to find said # (the table itself is pretty self-explanatory in my honest, but most humble opinion).  Oh yeah, and for this particular exercise, our teacher wanted us to round to the nearest whole number.

Then, for the rest of the lines, you just get to plug stuff in and then that’s it.

II.  Noninterest-bearing note; single payment -

So you get a problem that says something like:  Company A sold something to Company B on June 30, 2009. Payment was made in the form of a noninterest-bearing note requiring Company B to pay $85,000 on June 30, 2011. Assume that a 10% interest rate properly reflects the time value of money in this situation.

Calculate the amount at which Field should record the note receivable and corresponding sales revenue on June 30, 2009.

Fun, no?

Kinda terrifying at first, actually, for me–but anyways . . .

This is rather similar to the previous problem, you know?  Only this time, you have to figure out the # of periods, since it isn’t just laid out for you this time.  So, from what I understand, a period is a year unless otherwise stated.  I know that’s a rather simplistic definition, but it works for my purposes at this time, so meh.

With that in mind, you take the difference in time from the point that the note was issued to the time that it required to be paid by (i.e. – June 30, 2009 -> June 30, 20011).  So n (number of periods) = 2, ’cause that’s two years of time.  Then you plop back over to your PV table with your # of periods (2) and your % (10), match them up and get .82645 (ish – some tables figure it slightly differently; don’t ask me.  I’m just using the chart that my teacher told me to use).

Now just compute:

$85000 * .82645 = 70248.25 or 70248 if you round to the nearest whole number.

Like I said, welcome to my life.

III. Price of a Bond

On September 30, 2009, Corporation C issued 8% stated rate bonds with a face amount of $300 million. The bonds mature on September 30, 2029 (20 years). The market rate of interest for similar bonds was 10%. Interest is paid semiannually on March 31 and September 30.

First thing you gotta do is take the problem apart, bit by bit.  Since one of the components you know you’ll need first is your # of periods, then it’s best to find that first, if possible.

On September 30, 2009, Corporation C issued 8% stated rate bonds with a face amount of $300 million. The bonds mature on September 30, 2029 (20 years). The market rate of interest for similar bonds was 10%. Interest is paid semiannually on March 31 and September 30.

Step 1: Since there are TWO pay periods per year – due to the semiannual interest payments, and it will take TWENTY years for the bonds to mature, we just get to multiply the two together to equal FORTY.  2 * 20 = 40

Step 2 (this step has a tendency to really screw me up when I don’t read the problem closely enough): Look at the second half of the first statement: Corporation C issued 8% stated rate bonds with a face amount of $300 million.

This is where you get your $ amount from, believe it or not.  The 8% stated rate is the yearly interest rate for the bonds; however, since the interest is paid SEMIANNUALLY, that’s twice a year btw, the 8% has to be divided by 2 in order to the right answer:  8%/2 = .04 (4%).

See, ’cause if you paid 8% on March 31st, then you’d be paying more interest than what is due – which probably is okay in real life . . . hmm, but that’s not what the problem wants you to do.

So then you multiply the FACE AMOUNT of 300 million (that’s a 3 followed by 8 zeros, btw) by the semiannual stated rate of 8%, or better known as 8%/2 = .04 (4%).  Or put in purely worded equation form:

Face Amount
Stated Rate/2

Numerically stated then:

300,000,000 = 12000000 (which my book refers to as the “annuity amount”)
.04

Step 3!!! – Whoo!

That was fun. *snorts*  Well, kinda anyways. 

The first part of step 3 we actually completed in step 1.  The number of periods is 40; so n = 40.  Yay.

We need the interest % now.  This time we look to the statement reading: The market rate of interest for similar bonds was 10%. So is it 10%?  NOPE.  Remember that semiannual thing???  Yup.  10%/2 = 5%

We know that n = 40 and i (interest) = .05 (5%).  According to the Present Value Table of an Ordinary Annuity (remember, 300 million was the annuity amount), 17.15909.

Let’s restate what we have so far:

PV = $12000000 * 17.15909 + 300,000,000 (lump sum) * ________ = $ ________

Is it any wonder that it takes me a while to get my homework done?

BTW, the 300,000,000 was given to me in the equation set-up I have.  It’s just a plug-in number though, really.  From what I can tell, what you do is figure out the interest for the annuity amount, and then do the same thing for the lump sum amount, before finally adding the two together.  Meh.

Step 4

Okay, remember the number of periods that we had?  40, right?  Remember what i was?  5%, yah?  You just plug those two into the regular ol’ Present Value Table now.

= .14205

Our problem now looks like this:  PV = $12000000 * 17.15909 + 300,000,000 (lump sum) * .14205 =

Step 5 (Bringing it Together)

$12000000 * 17.15909 = 205909080
$300000000 * .14205 = 42615000

205909080 + 42615000 = $248,524,080

And that’s the answer.

*slumps over*

I’ll continue this on another page . . .