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Chapter 12: Q18RQ (page 655)

Explain each of the key factors that the time value of money depends on.

Short Answer

Expert verified

The three key factors of the time value of money are principal, number of period and interest rate.

Step by step solution

01

Definition of the time value of money

The invested cash that earns interest over time is called the time value of money.

02

Key factor

The time value of money depends on three factors

  1. Principal: The principal is the invested or borrowed amount. The amount of principal is invested in a single payment or in annuity form.
  2. Number of periods: The number of periods is the duration of the investment from start to end of the investment. Return on the investment directly depends on the number of periods. If the number of periods is low then the rate of return is low and vice versa.
  3. Interest Rate: Interest is the percentage of the return earned on the interest. The interest rate can be calculated in days, weeks, months, or years. The interest rate is reflected by the number of periods.

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Most popular questions from this chapter

What type of account is Premium on Bonds Payable? What is its normal balance? Is it added to or subtracted from the Bonds Payable account to determine the carrying amount?

Journalizing bond issuance and interest payments

On June 30, Parker Company issued 11%, five-year bonds payable with a face value

of $120,000. The bonds are issued at face value and pay interest on June 30 and

December 31.

Requirements

1. Journalize the issuance of the bonds on June 30.

2. Journalize the semiannual interest payment on December 31

In regard to a bond discount or premium, what is the straight-line amortization

method?

Journalizing liability transactions and reporting them on the balance

sheet

The following transactions of Johnson Pharmacies occurred during 2018 and 2019:

2018

Mar. 1 Borrowed \(450,000 from Coconut Creek Bank. The 15-year, 5% note requires

payments due annually, on March 1. Each payment consists of \)30,000 principal

plus one year鈥檚 interest.

Dec. 1 Mortgaged the warehouse for \(250,000 cash with Saputo Bank. The mortgage

requires monthly payments of \)8,000. The interest rate on the note is 12% and

accrues monthly. The first payment is due on January 1, 2019.

31 Recorded interest accrued on the Saputo Bank note.

31 Recorded interest accrued on the Coconut Creek Bank note.

2019

Jan. 1 Paid Saputo Bank monthly mortgage payment.

Feb. 1 Paid Saputo Bank monthly mortgage payment.

Mar. 1 Paid Saputo Bank monthly mortgage payment.

1 Paid first installment on note due to Coconut Creek Bank.

Requirements

1. Journalize the transactions in the Johnson Pharmacies general journal. Round to

the nearest dollar. Explanations are not required.

2. Prepare the liabilities section of the balance sheet for Johnson Pharmacies on

March 1, 2019 after all the journal entries are recorded.

When a bond is issued, what is its present value?
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