Question:The following are a number of values taken from compound interest tables involving the same number of periods and the same rate of interest. Indicate what each of these four values represents. (a) 6.71008. (c) .46319. (b) 2.15892. (d) 14.48656.
6.71008 shows the present value, 0.46319 shows the future value, 2.15892 shows the present value, and 14.48656 shows the future value of the ordinary annuity.
Ordinary annuityrefers to a series of frequent or regular payments made at the end of each period.Periods can be monthly, quarterly, half-yearly, and yearly.
The four values mentioned in the question indicates the following:
6.71008 shows the present value of an ordinary annuity at an 8% interest rate for 10 periods (Table 6-4)
0.46319 represents the future value of 1 at 8% for 10 periods.
2.15892 indicates the present value of 1 at 8% for 10 periods
14.48656 represents the future value of the ordinary annuity at 8% for 10 periods
Johnson Co. accepts a note receivable from a customer in exchange for some damaged inventory. The note requires the customer make semiannual installments of $50,000 each for 10 years. The first installment begins six months from the date the customer takes delivery of the damaged inventory. Johnson’s management estimates that the fair value of the damaged inventory is $679,517.
(a) What interest rate is Johnson implicitly charging the customer? Express the rate as an annual rate but assume semiannual compounding.
(b) At what dollar amount do you think Johnson should record the note receivable on the day the customer takes delivery of the damaged inventory?
Assume the note receivable for damaged inventory makes up a significant portion of Johnson’s assets. If interest rates increase, what happens to the fair value of the receivable? Briefly explain why.
The Financial Accounting Standards Board has issued an accounting standard that allows companies to report assets such as notes receivable at fair value. Discuss how fair value versus historical cost potentially involves a trade-off of one desired quality of accounting information against another.
Using the appropriate interest table, answer the following questions. (Each case is independent of the others). (a) What is the future value of 20 periodic payments of $4,000 each made at the beginning of each period and compounded at 8%? (b) What is the present value of $2,500 to be received at the beginning of each of 30 periods, discounted at 5% compound interest? (c) What is the future value of 15 deposits of $2,000 each made at the beginning of each period and compounded at 10%? (Future value as of the end of the fifteenth period.) (d) What is the present value of six receipts of $1,000 each received at the beginning of each period, discounted at 9% compounded interest?
Assume that Sonic Foundry Corporation has a contractual debt outstanding. Sonic has available two means of settlement. It can either make immediate payment of $2,600,000, or it can make annual payments of $300,000 for 15 years, each payment due on the last day of the year. Instructions Which method of payment do you recommend, assuming an expected effective interest rate of 8% during the future period?
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