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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.

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Most popular questions from this chapter

(Available-for-Sale and Held-to-Maturity Debt Securities Entries) The following information relates to the debt

securities investments of Wildcat Company.

1. On February 1, the company purchased 10% bonds of Gibbons Co. having a par value of \(300,000 at 100 plus accrued interest.

Interest is payable on April 1 and October 1.

2. On April 1, semiannual interest is received

3. On July 1, 9% of bonds of Sampson, Inc. were purchased. These bonds with a par value of \)200,000 were purchased at 100

plus accrued interest. Interest dates are June 1 and December 1.

4. On September 1, bonds with a par value of $60,000, purchased on February 1, are sold at 99 plus accrued interest.

5. On October 1, semiannual interest is received.

6. On December 1, semiannual interest is received.

7. On December 31, the fair value of the bonds purchased February 1 and July 1 were 95 and 93, respectively.

Instructions

(a) Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are

available-for-sale securities.

(b) If Wildcat classified these as held-to-maturity investments, explain how the journal entries would differ from those in part (a).

Use the information from IFRS17-10 but assume the shares were purchased to meet a non-trading regulatory requirements. Prepare Fairbanks' journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment.

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 Fairbanksโ€™ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment

BE13-1 (L01) Roley Corporation uses a periodic inventory system and the gross method of accounting for purchase discounts. On July 1, Roley purchased \(60,000 of inventory, terms 2/10, n/30, FOB shipping point. Roley paid freight costs of \)1,200. On July 3, Roley returned damaged goods and received credit of $6,000. On July 10, Roley paid for the goods. Prepare all necessary journal entries for Roley.

Presented below are two independent cases related to available-for-sale debt investments.

Case 1 Case 2

Amortized cost \(40,000 \)100,000

Fair value 30,000 110,000

Expected credit losses 25,000 92,000

For each case, determine the amount of impairment loss, if any

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