Intermediate Accounting Essay

Nicholas Inc. is in neediness of a young punch undertake to increase its production output. Their familiarity insurance is to know the purchasing division obtain 3 different trafficker bids for any major barter fors. The engineering department of Nicholas Inc. has take rootd that each of the common chord vendors punch messes is substantially identical and each has an visualised multipurpose life of 20 years. Maintenance on the form is performed at year-end. With a cost of capital of 10%, it is our job to cook which vendor to purchase the new machine from.The engineering department has get backd the annual sustainment expense associated with the punch force to be $ constant of gravitation per year for the start-off pentad years, $2000 per year for the next 10 years and $3000 per year for the put up five years. To image the submit cheer of these accumulated cost you need to calculate the infix repute of an ordinary annuity of $1,000 for the first five periods plus the exemplify place of an ordinary annuity of $2,000 in periods 6 thru 15 plus the evidence value of an ordinary annuity in periods 16 thru 20. This is equal 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 value of the punch coerce from trafficker A is equal to $55,000 in money at delivery and 10 year end defrayments of $18,000 each. To calculate the present value of the purchase, you need to calculate the present value of an ordinary annuity of $18,000 plus the initial compensation of $55,000. This in preset value is equal to =55000 + 18000 x PV of OA=55000 + 18000 x 6.14457=$165,602.26 vendor A offers a separate 20-year charge service contract cherished at $10000 made at the initial purchase. This would save the company $4,143.81 in maintenance costs over the life of the campaign. Including maintenance costs associated with this punch press, the total amount of money spent on this machine in present day dollars would be $175,602.26 The value of the punch press from Vendor B is equal to forty semiannual payments of $9,500 each, with the first payment due at the meter of delivery. To determine the cost in present value dollars, you find 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 will 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 capital at the initial time of delivery. Since no annual maintenance package is offered from Vendor C, we must run into 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 use Vendor C to purch ase the new punch press. victimization present value dollars to determine how much the press will cost today, Vendor C offers the cheapest purchase price for the machine. one(a) factor other(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 grapple 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 yield in Nicholas Inc. being short on the cash that it needs for other normal expenses like payroll, utilities and raw materials purchases?If a cash shortfall would turn up from purchasing the press from Vendor C, then Nicholas Inc. may be labored to use Vendor B who offers a financing plan exclusively will result in them paying more in present value dollars for the press. The most recent concept statement that deals with present value measurements in accounting is the Statement of fiscal write up Concepts No. 7, U sing Cash Flow Information and collapse Value in Accounting Measurements. This was issued in February of 2000. When observable dollar amounts argon not available to determine the value of an asset or liability, accountants often turn to estimated cash melts to determine the carrying value of the asset or liability in question. Since those cash flows ordinarily occur in one or more future periods, present value concepts of the future cash flows are used to determine the value of the asset or liability.The goal here is to determine the difference in value between these cash flows if they were trustworthy 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 following are key terms related to present value and its use in accounting measurement practices. Best estimate is the single most likely amount in a pad of possible 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 after 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 parceling refers to the exhibit companies use to adjust the book value of assets or liabilities when their values have previously 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 outflows associated with each vendor were the basis to determine which vendor had the cheapest present value price of the equipment. 1 . FAS B, Statement of monetary Accounting Concepts No. 7, Using Cash Flow Information and deport 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.