[harrjc]

I haven’t been able to understand the concept of present values, and how it is applied in FAR.

Do we measure assets and liabilities using PV only when payments are to be made or received over a period of a year (hence the effect of an interest comes into play).

[TiffaNiffaNi]

I'm not sure if i understand your question exactly. This is what I know: PV's come into play when you need to value a future amount at present-day value. The basis is that a dollar 10 years from now is not worth the same to you as getting that dollar today. In fact, because you have to wait for that dollar, it's worth much less. To find what it is worth to you today (present value), you need to take that $1 and discount it down, utilizing a discount rate. When the future amounts are several payments (so a payment next year, the year after, the year after that, etc.), you need to discount all of those and obtain what is known as the NET present value.

FAR: 7/17/14- 79
AUD: 8/20/14- 91
REG: 10/1/14- 88
BEC: 11/10/14- 85

Becker Self-Study

[Anonymous]

Is this your question? I struggle with the same topic.

On October 1, year 1, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note’s market rate of interest was 11%. Fleur recorded the purchase at the note’s face amount. All of the merchandise was sold by December 1, year 1. Fleur’s year 1 financial statements reported interest payable and interest expense on the note for 3 months at 16%. All amounts due on the note were paid February 1, year 2. As a result of Fleur’s accounting treatment of the note, interest, and merchandise, which of the following items was reported correctly?

12/31/Y1 retained earnings/ 12/31/Y1 interest payable

Yes/ Yes

No/ No

Yes/ No

No/ Yes

CORRECT: D. No/Yes

[Anonymous]

EXPLANATION:

Since cost of goods sold was understated in year 1, not enough cost was deducted from sales, resulting in an overstatement of income and retained earnings. However, the interest expense for 3 months would also be misstated because it was calculated as 16% of the face value of the note rather than as 11% of the present value of the note. On February 1 when the note is paid these two effects will have offset each other. However, on December 31, year 1, retained earnings would be misstated. Interest payable was properly accrued at the 16% stated (cash) rate for the 3 months from the date the note was issued until year-end, resulting in the correct reporting of interest payable.

[harrjc]

TiffaNiffaNi, I think I get it, but what's the discount rate for. I think it was something to do with the interest rate of the market which you would get if you invested the money today, but I don't understand it exactly.

[Author]

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