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Chapter 6: Q3Q (page 301)
Question:What is the nature of interest? Distinguish between 鈥渟imple interest鈥� and 鈥渃ompound interest.鈥�
Interest is the amount charged to use the sum of money. Compound interest is calculated on principle plus interest while simple interest is calculated on only principle
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Question:What are the primary characteristics of an annuity? Differentiate between an 鈥渙rdinary annuity鈥� and an 鈥渁nnuity due.鈥�
Johnson Co. accepts a note receivable from a customer in exchange for some damaged inventory. The note requires the customer make semiannual installments of \(50,000 each for 10 years. The first installment begins six months from the date the customer takes delivery of the damaged inventory. Johnson鈥檚 management estimates that the fair value of the damaged inventory is \)679,517.
Accounting
(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?
Analysis
Assume the note receivable for damaged inventory makes up a significant portion of Johnson鈥檚 assets. If interest rates increase, what happens to the fair value of the receivable? Briefly explain why.
Principles
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.
Bo Newman will invest \(10,000 today in a fund that earns 5% annual interest. How many years will it take for the fund to grow to \)17,100?
Question:Regina Henry deposited $20,000 in a money market certificate that provides interest of 10% compounded quarterly if the amount is maintained for 3 years. How much will Regina have at the end of 3 years?
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.
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