Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 13: Question 6Q (page 691)

How is present value related to the concept of a liability?

Short Answer

Expert verified

Interest included in payables and receivables, makes us consider future value at their current value. The present value of liability shows the debt, excluding the interest factor.

Step by step solution

01

Definition of Present Value

The present value concept in liability is an estimation of future liability at a discounted rate. It represents the amount that should be invested at present, at a particular rate of interest, to add to a future amount.

02

Relationship between present value and concept of a liability

The present value is calculated to check the fairness of the liabilities that will be availed or to compare the difference between the present value of the investment income and the nominal value of the liability.

The present value method indicates that the value of money today is greater than its future value. An amount that is not invested in an investment today may lose its value in the future due to inflation or the rate of return by applying an annualized rate. Hence, risks and uncertainties; regarding the events and situations should be considered while estimating provision.

Hence, the present value of liability considers the time value of money including interest. If the time value of money is ignored while considering liability then it will actually be wrong as a factor of inflation changes with time. Thus, it is necessary to consider the present value of liabilities.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Under what conditions should a short-term obligation be excluded from current liabilities?

Fairbanks Corporation purchased 400 ordinary shares of Sherman Inc. as a trading investment for \(13,200. During the year, Sherman paid a cash dividend of \)3.25 per share. At year-end, Sherman shares were selling for $34.50 per share. Prepare Fairbanks’ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment

Eddie Zambrano Corporation began operations on January 1, 2017. During its first 3 years of operations, Zambrano reported net income and declared dividends as follows.

Net Income Dividends Declared

2014 \( 40,000 \) –0–

2015 125,000 50,000

2016 160,000 50,000

The following information relates to 2017.

Income before income tax \(240,000

Prior period adjustment: understatement of 2015 depreciation expense (before taxes) \)25,000

Cumulative decrease in income from change in inventory methods (before taxes) \(35,000

Dividends declared (of this amount, \)25,000 will be paid on Jan. 15, 2018) \(100,000

Effective tax rate 40%

Instructions

  1. Prepare a 2017 retained earnings statement for Eddie Zambrano Corporation.
  2. Assume Eddie Zambrano Corporation restricted retained earnings in the amount of \)70,000 on December 31, 2017. After this action, what would Zambrano report as total retained earnings in its December 31, 2017, balance sheet?

How should a debt callable by the creditor be reported in the debtor’s financial statements?

(Equity Securities Entries) McElroy Company has the following portfolio of investment securities at September

30, 2017, its most recent reporting date.

Investment Securities Cost Fair Value

Horton, Inc. common (5,000 shares) \(215,000 \)200,000

Monty, Inc. preferred (3,500 shares) 133,000 140,000

Oakwood Corp. common (1,000 shares) 180,000 179,000

On October 10, 2017, the Horton shares were sold at a price of \(54 per share. In addition, 3,000 shares of Patriot common stock

were acquired at \)54.50 per share on November 2, 2017. December 31, 2017, fair values were Monty \(106,000, Patriot

\)132,000, and Oakwood $193,000.

Instructions

Prepare the journal entries to record the sale, purchase, and adjusting entries related to the equity securities in the last quarter of 2017
See all solutions

Recommended explanations on Business Studies Textbooks

Change Management

Read Explanation

Managerial Economics

Read Explanation

Nature of Business

Read Explanation

Organizational Behavior

Read Explanation

Influences On Business

Read Explanation

Managers

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free