ELECMI MIDTERM

• Discounting of notes receivable

  The process of selling a promissory note to a third party before its maturity date, at a discount
• Parties in a promissory note

  • Maker (liable party)
  • Payee (entitled to payment)
• Discounting a note receivable

  1. Payee endorses the note

  2. Bank becomes the endorsee

  3. Payee obtains cash before maturity
• Endorsement

  The transfer of right to a negotiable instrument by signing the back of the instrument
• Endorsement with recourse

  The endorser is liable to pay the endorsee if the maker dishonors the note
• Endorsement without recourse

  The endorser avoids future liability even if the maker refuses to pay the endorsee
• Terms related to discounting of notes

  • Net Proceeds
  • Maturity Value
  • Maturity Date
  • Principal
  • Interest
  • Interest Rate
  • Time
  • Discount
  • Discount Rate
  • Discount Period
• Discount period is the unexpired term of the note

  
• If no discount rate is given, the interest rate is assumed as the discount rate
• The discount rate and interest rate are different
• Gain or loss on note discounting is the difference between net proceeds and carrying amount of the note receivable
• Accounting for note receivable discounting


  1. Without recourse (absolute sale)

  2. With recourse (conditional sale or secured borrowing)
• Ordinary annuity


  A sequence of equal payments made at regular intervals of time
• Ordinary annuity


  • Periodic payments are made at the end of the period
• Payment interval/rent period


  The length of time between two successive payments
• Term of the annuity


  The time between the beginning of the first payment interval and the end of the last payment interval
• Periodic payment


  The size of each payment
• Finding the present value of an ordinary annuity


  Discount each payment back to the present and add them together
• Future value of an ordinary annuity


  The sum of all accumulated value of the set of payments due at the end of the term
• Solution


  S = R × [ (1 + i)^n - 1 / i ]
• S = 56,413.75
• Exercises


  • Mario Orio placed P1,000 in savings account earning 7% interest compounded annually. How much money will he accumulate after 5 years?
  • Find the amount and present value of an ordinary annuity of P1,500 payable for 2 years if money is worth 10% compounded semi-annually.
  • Mr. Tuy bought a refrigerator that costs P19,500. He paid P6,000 as down-payment and the balance will be paid in 36 equal monthly payments at the end of the period. Find the monthly payment if money is 15% compounded monthly.
  • Mr. Rex deposits ₱1,250 every end of 6 months in an account paying 6 ½% interest compounded semi-annually. What amount is in the account at the end of 5 years?
  • What sum will be paid at the end of every month for 8 years and 6 months if the present value of ₱20,200 and interest are paid at 12% compounded monthly?
  • How much must be deposited every month in a fund in order to have ₱200,000 at the end of 10 years, if money is worth 8% compounded monthly?
  • Determine the interest rate compounded semi-annually at which the P500 payment every 6 months will amount to P27,000 in 12 years.
• • -- END OF TOPIC 2 ---
• Annuity due


  An annuity for which the first payment occurs immediately. Payments are made at the beginning of each period.
• Present Value of an Annuity Due


  A = R × [ 1 - (1 + i)^(1-n) / i + 1 ]
• Illustration 1: JC intends to save a small portion of his salary in a bank account every year for 3 years. The yearly amount of P10, 000 will be deposited at a bank that gives interest at 10% every year. The first payment is to be made at the start of the first year, compute the Present Value of Annuity Due.
• Given: R = 10,000, t = 3, n = mt = 1(3) = 3, j = 0.10, m = 1, i = j/m = 0.10
• A = 27,355.37
• Periodic payment for Annuity Due


  R = A(i) / [1 - (1 + i)^(1-n) + i]
• Illustration 2: A P26,500 debt bears interest at 23% compounded semi-annually. It is to be repaid in installments at the beginning of every 6 months for 5 years and 6 months. Find the semi-annual payment.
• Given: A = 26,500, t = 5 years and 6 months = 5.5 years, n = mt = 2(5.5) = 11, j = 0.23, m = 2, i = j/m = 0.115
• R = 3,915.62
• Future Value of an Annuity Due


  S = R × [ (1 + i)^(n+1) - 1 / i - 1 ]
• S = 36,410
• Illustration 2: What sum should be invested at the beginning of each quarter at 18% compounded quarterly in order to have P45,000 in a fund 6 years from now?
• Given: S = 45,000, t = 6 years, n = mt = 4(6) = 24, j = 0.18, m = 4, i = j/m = 0.045
• R = 1,032.93
• Exercises


  • Find the present value and the amount of annuity due with P500 payable quarterly for 9.25 years. Money is worth 10% compounded quarterly.
  • Marlon purchased a car. She paid P120,000 down and P10,000 payable at the beginning of each month for 2 years. If money is worth 16% compounded monthly, what is the equivalent cash price of the car?
  • Jessner Gomez, a college student of the University of the East, is granted a scholarship which will pay P6,500 at the beginning of each month for 4 years. If money is worth 18% compounded monthly, find the present value of the scholarship.
  • Aaron agrees to make equal payments at the beginning of each 3 months for 10 years, to pay all interest and principal in purchasing a house and lot worth P5,000,000 cash. If money is worth 18% compounded quarterly, find the quarterly payment.
  • Emil invests ₱5,000 at the beginning of each 6 months. He makes his first deposit on January 19, 2003. How much will be in his account on January 19, 2015, if money is worth 9% compounded semi-annually?
  • What equal deposit should be placed in a fund at the beginning of each year for 15 years in order to have ₱1,500,000 in a fund at the end of 15 years, if money accumulates 12%?
• • -- END OF TOPIC 3 ---
• Exercises


  • Zyra has been contributing ₱460 at the end of each quarter for the past 18 quarters to a savings plan that earns 9% compounded monthly. What amount will she accumulate if she continues with the plan for another year?
  • A certain investment pays back ₱3,200 at the end of every six months for 15 years. At the end of 15 years, the investment pays back ₱45,000 in addition to the regular ₱3,200. What is the present value of all of the payments if money can earn 8% compounded semi-annually?
  • Maren sold a piece of property for ₱1,300,000. A downpayment of ₱500,000 was made and the remainder was to be repaid in equal quarter installments, the first due 3 months after the date of sale. The interest was 15% compounded quarterly, and the debt was to be amortized in 7 years. a. What quarterly payment is required? b. What will be the total amount of payment? c. How much interest will be paid? d. What is the total cost of the property?
  • How much will Marisol accumulate in her insurance policy by age of 60 if the first semi-annual contribution of ₱10,000 is made on her 28th birthday and the last is made six months before her birthday? Assume that her insurance policy earns 11% compounded semiannually.
  • Mr. Erfelo has already accumulated ₱2.3 million in his retirement plan. His goal is to build it to ₱6 million with equal contribution at the beginning of every six-month period for the next eight years. If his retirement plan earns 10% compounded semi-annually, what must be the size of further contributions?
  • Shiela's Furniture is advertising a Lazy Boy Chair for ₱5,000 down monthly payments of ₱5,000, including interest at 18% compounded monthly. What is the cash price of the chair?