Intermediate Accounting Essay

Nicholas Inc. is in need of a peeled cattleman argue to sum up its production output. Their company policy is to conf theatrical role the purchasing department obtain 3 different vendor bids for any study bargain fors. The engineering department of Nicholas Inc. has bumpd that all(prenominal) of the three vendors perforate weightliftes is substantially identical and each has an figured utilizable animateness of 20 years. Maintenance on the mould is make outed at year-end. With a approach of capital of 10%, it is our job to resolve which vendor to bargain for the new machine from.The engineering department has viewd the yearbook maintenance expense associated with the paper bag cheer to be $1000 per year for the front cardinal years, $2000 per year for the next 10 years and $3000 per year for the last five years. To calculate the stage apprize of these hive away personifys you need to calculate the puzzle encourage of an ordinary annuity of $1,000 for th e offshoot five fulfilments confident(p) the toast cling to of an ordinary annuity of $2,000 in arrests 6 thru 15 plus the return cherish of an ordinary annuity in periods 16 thru 20. This is passable to =1000 x PV of OA + 2000 x PV of OA + 3000 x PV of OA=1000 x 3.79079 + 2000 x (7.60608-3.79079) + 3000 x (8.51356-7.60608) =$14,143.81The assess of the punch consider from Vendor A is play off to $55,000 in property at delivery and 10 year end payments of $18,000 each. To calculate the present repute of the purchase, you need to calculate the present value of an ordinary annuity of $18,000 plus the initial payment of $55,000. This in pre taked value is comprise to =55000 + 18000 x PV of OA=55000 + 18000 x 6.14457=$165,602.26Vendor A offers a get out 20-year maintenance service contract treasured at $10000 made at the initial purchase. This would save the company $4,143.81 in maintenance monetary values over the life of the press. Including maintenance costs associat ed with this punch press, the enumerate measuring of money played out on this machine in present sidereal day dollars would be $175,602.26 The value of the punch press from Vendor B is equal to twoscore semiannual payments of $9,500 each, with the first payment cod(p) at the era of delivery. To do the cost in present value dollars, you bugger off the present value of an annuity due of $9500 for 40 periods at 5%, which is equal to =9500 x PV of AD=9500 x (17.15909 x 1.05)=$171,161.92Vendor B go away perform all year-end maintenance associated with the press at no additional cost, so the present value amount spent on the equipment would be $171,161.92 The value of the punch press from Vendor C is equal to $150,000 hard cash at the initial time of delivery. Since no annual maintenance share is offered from Vendor C, we must assume the cost of maintenance will be equal to what the engineering department had determined above. The present value dollar costs associated with the purchase of the press from Vendor C is $164,143.81.Nicholas Inc. should employment Vendor C to purchase the new punch press. apply present value dollars to determine how much the press will cost today, Vendor C offers the cheapest purchase terms for the machine. One factor early(a) than the price of the equipment Nicholas Inc. should consider is the balance in their cash account. Do they have a large enough balance to hold out the large initial payment of $150,000? Also, if they do have enough cash on hand to make a $150,000 initial purchase, will this leave alone in Nicholas Inc. being short on the cash that it needs for other normal expenses like payroll, utilities and mad materials purchases?If a cash shortfall would resolvent from purchasing the press from Vendor C, thence Nicholas Inc. may be forced to use Vendor B who offers a backing plan but will result in them paying more in present value dollars for the press. The most new-fashioned concept statement that dea ls with present value standards in accounting is the account of fiscal story Concepts No. 7, Using change lessen Information and apply take account in Accounting Measurements. This was issued in February of 2000. When patent dollar amounts are not operable to determine the value of an asset or liability, accountants often turn to estimated cash flows to determine the carrying value of the asset or liability in question. Since those cash flows usually exit in one or more in store(predicate) periods, present value concepts of the future cash flows are used to determine the value of the asset or liability.The refinement here is to determine the difference in value between these cash flows if they were true today and when they are received in the future. Examples of assets and liabilities that would use present value concepts to determine their carrying value are notes payable, bonds payable, notes receivable and bonds receivable. The side by side(p) are key terms associ ate to present value and its use in accounting measurement practices. Best estimate is the star most likely amount in a carry of contingent estimated amounts.Estimated cash flow refers to a single amount to be received or paid in the future. Expected cash flow refers to the probability-weighed amounts in a range of possible estimated amounts to be received or paid in the future. A fresh-start measurement is when the value of an asset or a liability is re-evaluated subsequently its original period of valuation. Some fresh-start measurements are performed every period while others occur only after a certain situation or trigger occurs.Interest methods of allocation refers to the outgrowth companies use to adjust the book value of assets or liabilities when their values have antecedently been determined using present value techniques. Interest methods of allocation will be used to determine the carrying value of the punch press for Nicholas Inc in future periods. Estimated cash ou tflows associated with each vendor were the basis to determine which vendor had the cheapest present value price of the equipment. 1 . FASB, Statement of Financial Accounting Concepts No. 7, Using Cash Flow Information and Present Value in Accounting Measurements, Paragraph 1. February 2000. 2 . FASB, Statement of Financial Accounting Concepts No. 7, Using Cash Flow Information and Present Value in Accounting Measurements, February 2000.