Annuity repeated amount year after year. Purchase initial amount to get the repeated payment. Payments that are going to occur in the future and what is the present value. Net present value on balance sheet.
11.6
Two interest rates
• Stated interest rate – 0%, 6%, 8%
o Used to calculate cash payments
• Effective interest rate - 8%
o Used to calculate interest expense
Stated rate = effective rate Simple from an accounting perspective
$10,000 note, making $800(8% of 10k) for 4 years
$10,000=payment of 1 time payment of $10k in 4yrs = X
800(8% of 10k) = Present Value of $800/year for 4 years = Y
X+Y = 10,000
8%
Dr Interest Expense $800 (8% effective rate x 10,000 Carrying)
Cr Cash $800 (8% Stated Rate x $10,000 Face)
6%
Dr Interest Expense XX (8% effective rate x Carrying Value) carrying value changes value every year. Every payment changes the value
Cr Cash $600 (6% stated x 10,000 face value)
Cr Disc on Notes Payable XX-$600
If semi-annual payments, Halve the percentage
11-2 if you make a payment at the first day of loan, it is an annuity due.
14-13
Indirect Method
Name of company
Statement of cash flows
For Y/E XXXX
Operating Cash Flows
Net Income $11,000
Adjustments to reconcile Net Income to Cash flow from operating activities
