TVM Concepts
The value today of receiving an amount in the future is referred to as the:
present value of a single amount
49er Company borrowed money from a local bank. The note they signed requires five annual installment payments of $10,000 beginning one year from today. The interest rate on the note is 7%.
What amount did the company borrow?
$41,002
PVA of $1
PMT $10,000, n=5, i=7%
What is the first step in the revenue recognition process?
Identify the contract
Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings initiatives. Thomas’s contract specifies that it will receive a flat fee of $50,000 and an additional $20,000 if Bran reaches a prespecified target amount of cost savings. Thomas estimates that there is a 20% chance that Bran will achieve the cost-savings target.
Using most likely value, what is the transaction price?
$50,000
Is a prepayment a separate performance obligation?
No
You are investing $100 today. What refers to the value of the investment in a year?
Future value
You contribute to a savings account over the next three years. Assume an interest rate of 4%, compounded quarterly.
How much will accumulate in three years by depositing $500 at the end of each of the next 12 quarters?
$6,341
FVA of $1
PMT $500, n=12, i=1%
Could be:
an obligation to pay the seller
legal title to the asset
physical possession of the asset
the buyer has accepted the asset
the owner has assumed the risks and rewards of ownership
Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings initiatives. Thomas’s contract specifies that it will receive a flat fee of $50,000 and an additional $20,000 if Bran reaches a prespecified target amount of cost savings. Thomas estimates that there is a 20% chance that Bran will achieve the cost-savings target.
Using expected value, what is the transaction price?
$54,000
Is an extended warranty a separate performance obligation?
Yes
The 49er Company purchased a delivery truck on February 1, 2024. The purchase agreement required Sanchez to pay the total amount due of $10,000 on February 1, 2025. Assuming an 8% rate of interest, the calculation of the price of the truck would involve multiplying $10,000 by the:
(Not looking for a numerical answer here)
Present value of $1
Sally originally invested $10,000 in a stock and the stock has averaged a compound annual return of 12%. The stock is now worth $15,735.20. For how many years has Sally owned the stock?
4 years
$10,000 (initial investment) x FV factor = $15,735.20 (FV)
FV of $1: n=?, i=12%
Single and multiple
Video Planet (VP) sells a big screen TV package consisting of a 60-inch plasma TV, a universal remote, and on-site installation by VP staff. The installation includes programming the remote to have the TV interface with other parts of the customer’s home entertainment system. VP concludes that the TV, remote, and installation service are separate performance obligations. VP sells the 60-inch TV separately for $1,700, sells the remote separately for $100, and offers the installation service separately for $200. The entire package sells for $1,900.
How much revenue would be allocated to the TV?
$1,615
Is the right to return a separate performance obligation?
No
Joe wants to know how much to invest today at 10% interest in order to accumulate a sum of $50,000 in five years. Which time value concept would be used to compute this amount?
Present value of $1
We borrow $50,000 today and promise to repay $57,881 three years from now. What is the interest rate applied in our agreement?
5%
$50,000 (PV) = $57,881 x PV factor
Present value of $1: n=3, i=?
The amount the seller is entitled to receive from the customer is the...
Transaction price
Video Planet (VP) sells a big screen TV package consisting of a 60-inch plasma TV, a universal remote, and on-site installation by VP staff. The installation includes programming the remote to have the TV interface with other parts of the customer’s home entertainment system. VP concludes that the TV, remote, and installation service are separate performance obligations. VP sells the 60-inch TV separately for $1,700, sells the remote separately for $100, and offers the installation service separately for $200. The entire package sells for $1,900.
How much revenue would be allocated to the remote?
$95
Clarks Incorporated, a shoe retailer, sells boots in different styles. In early November, the company starts selling “SunBoots” to customers for $70 per pair. When a customer purchases a pair of SunBoots, Clarks also gives the customer a 30% discount coupon for any additional future purchases made in the next 30 days. Customers can’t obtain the discount coupon otherwise. Clarks anticipates that approximately 20% of customers will utilize the coupon, and that on average those customers will purchase additional goods that normally sell for $100.
How many performance obligations are in the contract?
2
Equal payments are paid at regular intervals over a stated period. What is this called in TVM terms?
an ordinary annuity
A company signs a note requiring 5 annual payments of $20,000 starting 3 years from now. The interest rate is 6%. What is the present value of the note?
$74,979.78
PVA n=5 i=7%
PV $1 n=2 i=7%
What is the fourth step in the revenue recognition process?
Allocate the transaction price to each performance obligation
Video Planet (VP) sells a big screen TV package consisting of a 60-inch plasma TV, a universal remote, and on-site installation by VP staff. The installation includes programming the remote to have the TV interface with other parts of the customer’s home entertainment system. VP concludes that the TV, remote, and installation service are separate performance obligations. VP sells the 60-inch TV separately for $1,700, sells the remote separately for $100, and offers the installation service separately for $200. The entire package sells for $1,900.
How much revenue would be allocated to the installation service?
$190
On March 1, 2024, Gold Examiner receives $147,000 from a local bank and promises to deliver 100 units of certified 1-ounce gold bars on a future date. The contract states that ownership passes to the bank when Gold Examiner delivers the products to Brink’s, a third-party carrier. In addition, Gold Examiner has agreed to provide a replacement shipment at no additional cost if the product is lost in transit.
How many performance obligations are in the contract?
2