F4 - M3 - Long Term Liabilities

Question 1

What is does it mean to find the present value of a single lump sum?

Answer 1

That means that you are trying to find the present value or future value of one payment.

Lets say that you are going to get 10,000 in ten years. You would use the present value to see what that is valued at right now.

If you have 10,000 now and want to see what it is valued at in 10 years, that is the future value.

Question 2

What is present or future value of an ordinary annuity?

Answer 2

That is finding the present value of equal monthly payments. Think of stuff like rent.

Future value would be like, putting 5k into savings at the end of each year, and you want to know what the value of that will be in the future.

These are the at the end of the period, and they will state that on the exam.

Question 3

What is the present value and future value of an annuity due?

Answer 3

This is the same as an ordinary annuity, but instead of paying at the end of each period, we pay at the beginning of each period.

An example of what they might say in the exam is, “they are paying or receiving the payment now or in the beginning of the year”

Question 4

What is the formula for calculating future value and present value?

Answer 4

PV that is given in the problem * (1+r)^n = FV

FV(given)/(1+r)^n = PV

Question 5

If the interest is compounding other than an annual basis, like instead of being compounded annually its compounded quarterly, how would that calculation work? This is for single lump sum.

Answer 5

You would need to divide your interest rate by the frequency, and multiply your period by the frequency.

For example, if the interest rate is 4% and the number of years is 10, but it is being paid quarterly, here is what you would do.

4%/4 = 1% interest rate

10 * 4 = 40 periods

Question 6

If there is a problem, and it is looking for the future value, but they give you the present value, how would you calculate the present value and vise versa? This is for single lump sum.

Answer 6

Just take the rate they gave you divided by 1 for either situation.

FV is 1.6, just take 1/1.6 to get the present value

PV is .6, take 1/.6 to get the future value

Question 7

For ordinary annuities, is the present value factor given on the exam? When the number of periods is not annual, is the same process applied to calculate the interest rate and period amount as the single lump sum?

Answer 7

Yes, they give you the factor which is nice, and same calc applies as it does to single lump sum.

Question 8

On the exam, they give you present value of an ordinary annuity, but they may not give you the present value of an annuity due. How do you find that?

Answer 8

If the problem says what is the present value of an annuity due at 6% for three periods, you need to find the present value of an ordinary annuity for one period less which would be 2. Then add 1 to the present value amount given.

So if the present value of an ordinary annuity of 1 at 6% is 1.8334, take that amount plus 1 to get 2.8834. This is your annuity due rate.

Question 9

What are some examples of long term liabilities?

Answer 9

Long-term promissory notes payable

Bonds payable

Long-term leases

There are more

Question 10

What are the big differences between equity and liabilities?

Answer 10

Equity has no maturity date and no obligation to pay anything.

Liabilities have a maturity date and you have to repay the capital.

Question 11

When would preferred stock need to be classified as a liability?

Answer 11

If the shares are mandatorily redeemable, that means you have to buy back those shares, we would want to classify those as a liability.

Question 12

On the financials, are notes payable recorded at the present value at the date of issuance?

Answer 12

Yes

Question 13

If the note has no interest rate, or the interest rate is well below the market value. What method is used to impute the market interest rate?

Answer 13

The effective interest method. If in the problem, they tell you the interest rate is low or unreasonable, they will tell you what the market rate should be for calculation.

Question 14

What is the formula to record the present value of a note?

Answer 14

Payment * number of payments = Gross note payable

Less Present Value

= Discount - This is deferred interest expense (contra account)

Question 15

When would you not need to impute interest?

Answer 15

Normally you do not need to do this for short term loans.

Question 16

When you record a long term note, what are all the factors at play for this? Just a summary, write it down so you remember.

Answer 16

When you get a loan, and let’s say you owe 1,000 dollars over the next three years, that that is a long term loan with a gross note payable amount of 3,000. We then need to know the present value, which we will say is 2,486. The difference between these two numbers is 514 and that is the discount. This is the interest expense that you are deferring and is a contra asset. It brings the loan balance down to the present value amount on the financials.

So on the books you will have 3,000 in notes payable, and then 514 as a deferred interest expense. Once you make that 1,000 payment in year one, then the note payable balance is 2,000 and the deferred interest is reduced by the interest expense times that 1,000, lets say 249. The new deferred amount is 265. 2000-265 is the present value of 1,735.

Question 17

What is a debt covenant?

Answer 17

This is when a lender wants to protect interest by preventing the borrower from doing something that impact the borrower’s credit rating and decrease the FMV of the investment.

Question 18

When you use the imputed interest rate, the effective interest method is used. To find interest expense, do you use the carrying value times the interest rate?

Answer 18

Yes