Present Value Future Value Logic?

May 31, 2012
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I have been drilling the present value and future value calculations for my intermediate course, but I am trying to grasp the logic behind it.

I know how to do the problems, but I like to implement the logic behind everything done in accounting. This is one topic I just can't seem to understand.

I have a few questions that I'm hoping someone can shed some light on.

Are you supposed to use present/future values for all long term receivables and payables? Why can't we just record a bonds payable at 90K credit and cash at 90K debit? Can any excess be recorded simply as an interest instead of going through the "discount on B/P"?

At first I thought these values were adjustments for inflation, do we take inflation into consideration or are the numbers solely based off compound interest?

Finally, how do annuities really work? I get confused whether the annuity rents are amounts a person is receiving or paying. Does a person pay X amount up front, and then he receives the installments (rents)?



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May 12, 2011
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United States
So there you are a bond issuer and the market rate for bonds is 3% right now. So you use that and set your bonds at that rate. At issuance time the market rate goes to 2%.
So, now your 3% bonds are MORE desirable in a 2% world. So you have to issue them at a PREMIUM. If you were offering $90K in bonds now you are not going to take in $90K but a larger number, say 95K AND THIS VALUE IS FIGURED OUT BY PRESENT VALUE METHOD. But your bonds have a face value so entry is
Dr Cash 95K
Cr Bonds Payable $90K
Cr Premium on bonds $5K
Which corresponds to your question.

You can't "simply record any excess (the $5K) to interest"cause you have not earned it all at this point. You earn it OVER TIME. Also this is DISCOUNT income and not interest income.

As to whether inflation is involved. Not as a unique component. Again a MARKET RATE is used and that of course is made up of many factors and inflation can be one factor.

regarding annuities - you just have to read those questions carefully to see who is making the initial payment. And yes usually they are structured so there is a payment OUT followed by payments IN. Note that the annuity tables presume a stream of payments of EXACTLY the same amount. So if you have uneven amounts you cannot use an annuity table
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