Identify three situations in which accounting measures are based on present values. Do these present value applications involve single sums or annuities, or both single sums and annuities? Explain.
(a) Notes receivable and payable—these involve single sums (the face amounts) and may involve annuities if there are periodic interest payments.
(b) Leases—involve measurement of assets and obligations, which are based on the present value of annuities (lease payments) and single sums (if there are residual values and/or bargain purchase options to be paid at the conclusion of the lease).
(c) Pensions and other deferred compensation arrangements—involve discounted future annuity payments that are estimated to be paid to employees upon retirement.
(d) Bond pricing—the price of bonds payable is comprised of the present value of the principal or face value of the bond plus the present value of the annuity of interest payments.
(e) Long-term assets—evaluating various long-term investments or assessing whether an asset is impaired requires determining the present value of the estimated cash flows associated with an investment or long-term asset (maybe single sums and/or an annuity).
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