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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 is a mortgage payable?

Preparing the liabilities section of the balance sheet

Luxury Suites Hotels includes the following selected accounts in its general ledger at

December 31, 2018:

Notes Payable (long-term) \( 200,000 Accounts Payable \) 33,000

Bonds Payable (due 2022) 450,000 Discount on Bonds Payable 13,500

Interest Payable (due next year) 1,000 Salaries Payable 2,600

Estimated Warranty Payable 1,300 Sales Tax Payable 400

Prepare the liabilities section of Luxury Suites’s balance sheet at December 31, 2018.

What is the carrying amount of a bond?

Preparing an amortization schedule and recording mortgages payable

entries

Kellerman Company purchased a building and land with a fair market value of

\(550,000 (building, \)425,000, and land, \(125,000) on January 1, 2018. Kellerman

signed a 20-year, 6% mortgage payable. Kellerman will make monthly payments of

\)3,940.37. Round to two decimal places. Explanations are not required for journal

entries.

Requirements

1. Journalize the mortgage payable issuance on January 1, 2018.

2. Prepare an amortization schedule for the first two payments.

3. Journalize the first payment on January 31, 2018.

4. Journalize the second payment on February 28, 2018.

Using the effective-interest amortization method

On December 31, 2018, when the market interest rate is 8%, Biggs Realty issues

\(450,000 of 5.25%, 10-year bonds payable. The bonds pay interest semiannually. The

present value of the bonds at issuance is \)365,732.

Requirements

1. Prepare an amortization table using the effective interest amortization method for

the first two semiannual interest periods. (Round to the nearest dollar.)

2. Using the amortization table prepared in Requirement 1, journalize issuance of the

bonds and the first two interest payments.
See all solutions

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