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Chapter 6: Q1FRP (page 311)

The Procter & Gamble Company (P&G)

The financial statements of P&G are presented in Appendix B. The company鈥檚 complete annual report, including the notes to the financial statements, is available online.

Instructions (a) Examining each item in P&G鈥檚 balance sheet, identify those items that require present value, discounting, or interest computations in establishing the amount reported. (The accompanying notes are an additional source for this information.)

(b) (1) What interest rates are disclosed by P&G as being used to compute interest and present values?

(2) Why are there so many different interest rates applied to P&G鈥檚 financial statement elements (assets, liabilities, revenues, and expenses)?

Short Answer

Expert verified

The financial items are assets like pension assets. Credit risk and interest rate curves are used.

Step by step solution

01

Financial statement items

The financial statement items requiring present value, discounting, and interest computation is certain assets like pensions, leases, liabilities, revenues, and expenses.

02

Interest rate used

1 Credit risk and interest rate curves are used by the P&G to compute various interest and present values in notes to accounts

2 There are many interest rates applied to various balance sheets and income statement items. All items have different natures; some require compound interest, some require present value factor, and some require future value factor.

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Most popular questions from this chapter

Murphy Mining Company recently purchased a quartz mine that it intends to work for the next 10 years. According to state environmental laws, Murphy must restore the mine site to its original natural prairie state after it ceases mining operations at the site. To properly account for the mine, Murphy must estimate the fair value of this asset retirement obligation. This amount will be recorded as a liability and added to the value of the mine on Murphy鈥檚 books. (You will learn more about these asset retirement obligations in Chapters 10 and 13.) There is no active market for retirement obligations such as these, but Murphy has developed the following cash flow estimates based on its prior experience in mining-site restoration. It will take 3 years to restore the mine site when mining operations cease in 10 years. Each estimated cash outflow reflects an annual payment at the end of each year of the 3-year restoration period.

Restoration Estimated Probability Cash Outflow Assessment $15,000 10% 22,000 30% 25,000 50% 30,000 10%

Instructions (a) What is the estimated fair value of Murphy鈥檚 asset retirement obligation? Murphy determines that the appropriate discount rate for this estimation is 5%. Round calculations to the nearest dollar. (b) Is the estimate developed for part (a) a Level 1 or Level 3 fair value estimate? Explain.

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.

Danny鈥檚 Lawn Equipment sells high-quality lawn mowers and offers a 3-year warranty on all new lawn mowers sold. In 2017, Danny sold \(300,000 of new specialty mowers for golf greens for which Danny鈥檚 service department does not have the equipment to do the service. Danny has entered into an agreement with Mower Mavens to provide all warranty service on the special mowers sold in 2017. Danny wishes to measure the fair value of the agreement to determine the warranty liability for sales made in 2017. The controller for Danny鈥檚 Lawn Equipment estimates the following expected warranty cash outflows associated with the mowers sold in 2017.

Cash Flow Probability Year Estimate Assessment 2018 \)2,500 20% 4,000 60% 5,000 20% 2019 \(3,000 30% 5,000 50% 6,000 20% 2020 \)4,000 30% 6,000 40% 7,000 30%

Instructions Using expected cash flow and present value techniques determine the value of the warranty liability for the 2017 sales. Use an annual discount rate of 5%. Assume all cash flows occur at the end of the year.

Tony Bautista needs $25,000 in 4 years. What amount must he invest today if his investment earns 12% compounded annually? What amount must he invest if his investment earns 12% annual interest compounded quarterly?

Hincapie Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company鈥檚 bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $2,000,000 of 11% term corporate bonds on March 1, 2017, due on March 1, 2032, with interest payable each March 1 and September 1. At the time of issuance, the market interest rate for similar financial instruments is 10%. Instructions As the controller of the company, determine the selling price of the bonds
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