Intermediate

Accounting
13th Canadian Edition, Volume 1
Kieso ● Weygandt ● Warfield ● Wiecek ● McConomy

Chapter 3

Data, Decisions, and Measurement

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Copyright ©2022 John Wiley & Sons, Canada, Ltd.

 Learning Objective 4

Understand and apply present value concepts.

Chapter 3
Data, Decisions, and Measurement

Intermediate Accounting
13th Canadian Edition, Volume 1
Kieso ● Weygandt ● Warfield ● Wiecek ● McConomy

Copyright ©2022 John Wiley & Sons, Canada, Ltd.

Present Value Concepts—The Nature of
Interest
• Time value concepts are used by accountants when
preparing financial statements under IFRS and ASPE
• The value of one dollar today is not equal to the value of
one dollar in the future
• Money today can be invested, and interest can be
earned over time
• The more risk involved in the investment, the higher the
interest rate
• Macroeconomic factors also affect interest rates (e.g.,
the prime interest rate)

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Present Value Concepts—Fundamental
Variables
• When money is borrowed or invested, interest is usually paid
• The amount of interest is a function of 3 variables:
o Principal (p): the amount borrowed or invested
o Interest rate (i): percentage of outstanding principal; stated as an
annual rate; also called nominal, stated or coupon rate
o Time or number of periods (n): number of years or fractional
portion of a year that the principal is outstanding
• Three factors increase the dollar amount of interest
o The larger the principal
o The higher the interest rate
o The longer the time period

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Present Value Concepts—Calculating
Interest
• Simple interest—the return on the principal for one time
period [Interest = p × i × n] where
p = principal
i = rate of interest for a single period
n = number of periods
• Compound interest—calculates interest not only on the
principal but also on the interest earned to date (assuming
interest is added to the principal)
o Interest in period one: [p × i × n]
o Interest in period two: [(p + interest from period one) × i × n]

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Present Value Concepts—Performing
Calculations
• The initial principal, invested at the beginning of Year 1,
is the present value (PV) of the investment
• The value of the investment at the end of the term is the
future value (FV) of the investment
• Different tools for calculating present value:
o Present value formulas
o Present value tables
o Financial calculators
o Spreadsheets such as Excel

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Present Value of a Single Future
Amount
Assume you want to invest a sum of money at 5% in order
to have $1,000 at the end of one year. The amount that you
would need to invest today is called the present value of
$1,000 discounted for one year at 5%.

$952.38 × 1.05 = $1, 000.00 (rounded)

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Present Value of a Single Future
Amount—Using a Formula
PiP 3.11 Assume you
Future Value (FV)
want to invest a sum of Present Value (PV) =
(1 + i)n
money at 5% in order to
have $1,000 at the end of $1,000
PV =
 
1
one year. The amount 1 + 5%
that you would need to =
$1,000
invest today is called the 1.05
present value of $1,000 = $952.38
discounted for one year
at 5%.

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Present Value of a Single Future
Amount—Using a Present Value Table
PiP 3.12 Assume you want to invest a sum of money at 5% in
order to have $1,000 at the end of one year. The amount
that you would need to invest today is called the present
value of $1,000 discounted for one year at 5%.

Present Value (PV) = $1,000 × 0.95238*

= $952.38
* PV factor from the “Present value of 1” Table A.2

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Present Value of a Single Future
Amount—Using a Financial Calculator
Illustration 3.16 Assume you want to invest a sum of
money at 5% in order to have $1,000 at the end of one
year. The amount that you would need to invest today is
called the present value of $1,000 discounted for one
year at 5%.
PV = Present Value ?
I = Interest Rate 5% Present value =
N = Number of Periods 1 $952.38
FV = Future Value $1,000

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Present Value of a Single Future
Amount—Using an Excel Spreadsheet
Illustration 3.17 Assume you want to invest a sum of
money at 5% in order to have $1,000 at the end of one
year. The amount that you would need to invest today is
called the present value of $1,000 discounted for one
year at 5%.

To begin:
Select Formulas
Then select Financial
Select PV in the drop-down menu
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Present Value of a Single Future
Amount—Input for Excel PV Formula
Fx PV: Returns the present value of an investment: the total amount that a series of future
payments is worth now.

Syntax: PV(rate,nper,pmt,fv,type)

 Rate: is the interest rate per period. In our case, 5% or 0.05.

 Nper: is the total number of payment periods in an investment. Use 1.
 Pmt: is the payment made each period and cannot change over the life of the
investment; usually entered as a negative number. No entry required.
 Fv: is the future value, or a cash balance you want to attain after the last payment is
made; usually entered as a negative number. Use -1,000.
 Type: is a logical value: payment at the beginning of the period = 1; payment at the
end of the period = 0 or omitted. Use 0 or leave blank.

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Present Value of a Single Future
Amount—Excel Solution

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Present Value of a Series of Future Cash
Flows (Annuities)
Assume you will pay $1,000 cash annually for three
years (at the end of the year) and that the discount rate
is 4%.

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Present Value of an Annuity—Using a
Present Value Formula
PiP 3.14 Assume you will pay $1,000 cash annually for
three years (at the end of the year) and that the
discount rate is 4%.
Future Value (FV)
Present Value (PV) 
1 + in

$1,000 $1,000 $1,000

  
1  4% 1 1  4% 2 1  4% 3
 $961.54  $924.56  $889.00
 $2,775.10

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Present Value of an Annuity—Using a
Present Value Table
PiP 3.15 Assume you will pay $1,000 cash annually for
three years (at the end of the year) and that the
discount rate is 4%.
Future Value × PV Factor (4%) = Present Value
$1,000 (one year away) × 0.96154 = $961.54
$1,000 (two years away) × 0.92455 = $924.55
$1,000 (three years away) × 0.88900 = $889.00
Total 2.77509 = $2,775.09

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Present Value of an Annuity—Using a
Financial Calculator
Illustration 3.19 Assume you will pay $1,000 cash
annually for three years (at the end of the year) and
that the discount rate is 4%.
PV = Present Value ?
Present value
I = Interest Rate 4% = $2,775.09
N = Number of Periods 3
PMT = Payment −$1,000

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Present Value of an Annuity—Using an
Excel Spreadsheet
Illustration 3.20 Assume you will pay $1,000 cash annually for
three years (at the end of the year) and that the discount rate
is 4%.

To begin:
Select Formulas
Then select Financial
Select PV in the drop-down menu

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Present Value of an Annuity—Input for
Excel FV Formula
Fx PV: Returns the present value of an investment: the total amount that a
series of future payments is worth now.

Syntax: PV(rate,nper,pmt,fv,type)

• Rate: is the interest rate per period. Use 4% or 0.04.

• Nper: is the total number of payment periods in an investment. Use 3.
• Pmt: is the payment made each period and cannot change over the life of
the investment; usually entered as a negative number. Enter -1,000.
• Fv: is the future value, or a cash balance you want to attain after the last
payment is made; usually entered as a negative number. No entry required.
• Type: is a logical value: payment at the beginning of the period = 1; payment
at the end of the period = 0 or omitted. Use 0 or leave blank.

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Present Value of an Annuity—Excel
Solution

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Additional Present Value Concepts
• Using time periods of less than one year
o Convert the annual interest rate to the applicable time
frame (6% annual = 3% semi-annual)
• Interpolation
o Determining discount factors not on the table
o Use the fraction and the difference between the factors on
the table (5.25%: add 1/4 of the difference between factors
at 5% and 6% to the factor at 5%)
• Calculating interest rate or payment
o Use the formula with the interest rate or the payment
amount as the unknown (x)

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