Straight Line Amortization Calculator - Excel by iha11513


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									Present Value 2 Some common accounting examples

Example 1:         XYZ company has sold goods in exchange for a non-interest bearing note receivable. The note is
                   in the amount of $6,000 and is due in two years. XYZ requires a rate of return of 10% on notes of
                   this type. How much revenue should be recognized in the current year?

                   This is an example of a single sum present value problem:

                   $6,000 * PV(10%, 2) X
                   $6,000 * .82645   =X
                    $       4,958.70 = X               = revenue and net (less discount) note receivable

                   This would then be recorded as follows:

                   dr. Note receivable                       6000
                     cr. Revenue                                         4958.7
                     cr. Discount on note receivable                     1041.3

                   On the balance sheet:

                   Note receivable (net of discount)                     4958.7

                   What happens to the discount? It becomes interest income in each of the two years.
                   (You did not really believe that the company would not charge interest, did you?)

                   using straight line amortization:

                   end of year 1:

                   dr. discount                            520.65
                     cr. Interest income                                 520.65

                   at the end of the first year the note will now appear on the balance sheet as follows:

                   Note receivable (net of discount)                   5479.35

Example 2:         Bond issuance
          XYZ company is issuing bonds with a face value of $ 100,000. The bonds pay 10% interest and mature
          (the principal will be paid) in 5 years. Interest is paid semi- annually.

          How should the bonds be recorded on the balance sheet? That depends on how much money the
          company actually receives for the bonds. And that, in turn, depends on how much investors (the
          market) want to earn on an investment of this type.

Case 1:   Bonds are issued at par (face value)

          If investors want to earn 10%, then the following calculation will take place:

          Principal              coupon       Interest    semi-annual
                                 rate         payment     payment
                      $100,000            10%     $10,000      $5,000

          Bonds are discounted at 5% (10% compounded semi-annually):

                       100000 PV(5%, 10)         0.61391     $61,391
                         5000 Pva(5%,10)         7.72173     $38,609

          to record the bond issue:

          dr. cash                              $100,000
            cr. Bonds payable                               $100,000

Case 2:   What if the market wants to earn 12% (or 6% semi-annually)?

                       100000 PV(6%, 10)         0.55839     $55,839
                         5000 Pva(6%,10)         7.36009     $36,800
                                                             $92,639 Bonds are issued at a discount

          to record the bond issue:

          dr. cash                               $92,639
          dr. discount                            $7,361
                      cr. Bonds payable                               $100,000

Case 3:              What if the market wants to earn only 8%?

                                100000 PV(4%, 10)        0.67556       $67,556
                                  5000 Pva(4%,10)         8.1109       $40,555
                                                                      $108,111 Bonds are issued at a premium

                     to record the bond issue:

                     dr. cash                          $108,111
                       cr. Bonds payable                              $100,000
                       cr. Premium                                      $8,111

                     What happens to the premium or discount? It will be amortized as part of interest expense.

Example III          Which is the better choice? Cash or a note payable?

                     XYZ company is negotiating with WWW company to purchase equipment. WWW offers the

                     The equipment could be purchased for $100,000 cash or XYZ could pay $ 108,000 in one year.
                     XYZ can earn 12% on its investments.

Equation:            Amount              PV(12%,1) Present value
$108,000*PV(12%,1)            $108,000      0.89286   $96,429 < $100,000

                     XYZ should sign the note and in the meantime invest the $100,000 at 12%.

                     What if XYZ cold earn only 6% on its investments?

                                                      Present value
                     108000 x PV (6%, 1)
                               108000        0.9434    101887.2 >                100000

                     XYZ shold pay the $100,000 now.
Example IV   Buying a car                    (you will not need this for either accounting 200, 300 or 301)

             The car could be purchased for cash $30,000 or for 5 annual payments of $7,514. The payments are to be
             made at the end of each of the next five years. What is the interest rate that is being charged?

             30,000 = $7,514xPVa(x%,5)

             30,000/7.514 =                   3.9925472 look up in the PV table for 5 periods and determine that the
                                                        interest rate is 8%

             Or the question could be asked as follows:

             You could either pay $30,000 now or make 5 payments, at 6%. What would be the amount of each
             payment (end of the year!)

             30,000/Pva(6%,5) = X
                               Pva(6%,5) annual payments
                        30000     4.21236 $7,121.90

             Obviously, car payments are made monthly, but, once you understand the principle involved, you use
             a finacial calculator or a computer to calculate the payments or annual interest rate.

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