Accounting 200 Exam 3 Study Guide Appendix D FUTURE VALUE OF 1 FV P x 1 i n FV Future Value P Principal i Interest rate for one period n Number of periods Instead of using this formula you can use the Future Value of 1 Table seen below to multiply the principle value by to find the future value of a sum of money Example You invest 5000 in a savings account that pays 8 interest You do not touch the money for 10 years How much is it worth when you withdrawal the money 2 15892 x 5000 10 794 60 NOTE You find the 2 15892 by going to the table under 8 interest and 10 period FUTURE VALUE OF ANNUITY Annuity Equal dollar amount deposited over a fixed period of time An example of an annuity is if I were to deposit 2000 per year into a savings account for my retirement fund Use the Future Value of an Annuity Table to calculate Example You save 400 each year for 9 years at an 8 interest rate 400 x 12 48756 4995 02 NOTE If interest were compounded semi annually you would DOUBLE the periods in this case would become 18 and you would DIVIDE 8 by 2 to get 04 PRESENT VALUE OF 1 Present Value An estimate of how much a future sum of money is currently valued at PV FV 1 i n Instead of using the formula you can use the Present Value of 1 Table Example A 6yr old child will receive 6 000 000 in 20 years with an 8 discount rate What is the Present Value or How much do the parents need to invest 21455 x 5 000 000 1 072 750 PRESENT VALUE OF ANNUITY Present Value of an Annuity the current amount of a series of future payments Example Assume you will receive 2 000 annually for 5 years when the discount rate is 8 3 99271 x 2 000 7 985 42 Chapter 10 NOTES PAYABLE Note Payable A loan made to record an entity s obligation to pay back money Example Assume on October 1 2012 Company X signs a 100 000 13 3 month note maturing on January 1st with JP Morgan Chase Journal Entry to show Company X received the cash Oct 1 Cash 100 000 Note Payable 100 000 Then interest is accrued by Company X Dec 31Interest Expense 3 250 Interest Payable 3 250 NOTE The Interest Expense is calculated by multiplying the amount of time that has passed 3 12 x 13 x 100 000 3 250 Then on January 1st the note is paid at maturity Jan 1 Notes Payable Interest Payable Cash 100 000 3 250 103 250 BONDS Secured Bonds Bonds that are backed by assets Unsecured Bonds Bonds that are not backed by assets Convertible Bonds Bonds that can be convertible into stock Callable Bonds Bonds that the issuing company or government can buy back before maturity Example Company X issued a 4 000 000 bond on January 1st 2013 with a contract rate of 8 and 10 years Interest payments are paid semi annually Company X must record receiving the 4 000 000 on their books Jan 1 Cash 4 000 000 Bond Payable 4 000 000 Company X must record the payment of interest at July 1 2013 July 1 Interest Expense 160 000 Cash 160 000 NOTE Interest expense is calculated by multiplying 4 000 000 x 08 x You use the CONTRACT RATE only to calculate the interest payment Then 5 years after the bond is issued the market rate rises to 10 When this happens what is now the Present Value of the bond PV of Bond AKA Carrying Value 160 000 x 7 72173 4 000 000 x 61391 PV of Bond AKA C V Present Value of Interest Present Value of Principle NOTE 7 72173 is found on the PV of Annuity Table using 5 and 10 periods 5 because 10 2 equals 5 and 10 Periods because there are still 5 years of semi annual payments LEFT NOTE 61391 is found on the PV of 1 Table using 5 and 10 periods for the same reasons as listen above PV of Interest 1 235 476 80 PV of Principle 2 455 640 3 691 116 80 Discount Chapter 11 CORPORATIONS AND COMMON STOCK Corporations Separate Legal Existence o Advantages Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life o Disadvantages More Taxes Ownership Separation Federal Regulations Authorized Stock their charter Issued Stock Par Value o The number of shares a corporation is allowed to sell as it is stated in o The number of shares a corporation has sold to individuals o The value of a stock before it goes public as an IPO o Means nothing unless you are an accountant and you must account for the money made or lost relative to the par value Example of when a corporation sells stock for more than what the par value is Corporation X sells 200 000 shares of 3 par value stock for 13 each Cash 2 600 000 Par Value Additional PIC 600 000 2 000 000 NOTE PIC means Paid in Capital TREASURY STOCK Treasury Stock o Stock that a corporation buys back from the open market that was once theirs o Decreases Stocker Holder s Equity and decreases Assets Example a Corporation buys Treasury Stock Corporation X decides to purchase 12 000 shares of it s stock at 15 Treasury Stock Cash 180 000 180 000 NOTE Treasury Stock is a CONTRA ASSET that is why the purchase of treasury stock decreases stockholder s equity and assets PREFERRED STOCK AND DIVIDENDS Preferred Stock pass due Dividends o Very similar to common stock o Has priority to dividends including dividends in arrears dividends o Has priority to assets if the company had to liquidate assets o Cash distribution to share holders o Must have 3 things to distribute dividends Retained Earnings Adequate Cash Declared Dividends entry is required o When dividends are declared announced by a corporation a journal Example of when a corporation first declares dividends will be distributed Corporation X plans to distribute 3 dividends to 200 000 shares Cash Dividends 600 000 Dividends Payable 600 000 Then when the time comes for Corporation X to distribute the dividends here is the Journal Entry Dividends Payable Cash 600 000 600 000 Chapter 12 Statement of Cash Flows o Information on this statement allows investors to see Ability to generate cash in the future Ability to pay dividends or meet obligations Reasons for differences between N I net cash from Ops Cash investing financing transactions during a period o There are 3 parts to a Statement of Cash Flows Operating Activities o Inflows o Outflows Cash Sales Interest Received Dividends Received Purchasing Supplies Taxes to Gov Wages Expense Salaries Expense Interest Paid Investing Activities o Inflows Sale of PPE Sale of Investments Collections on Principle of Loans Collections of Notes Receivable o Outflows Purchase of PPE Purchase of Investments Making loans to other entities Financing Activities o Inflows o …