If the principal amount of the note is payable in lump-sum, the entity should use the present value of 1.Group of answer choicesTrueFalse
Question
If the principal amount of the note is payable in lump-sum, the entity should use the present value of 1.
Group of answer choices
True
False
Solution
Answer
The statement is True.
When the principal amount of a note is payable in a lump-sum at a future date, the present value of 1 is used to calculate the present value of that future payment. The concept of present value is critical in finance because it allows entities to assess the current worth of a future sum of money, considering a specific interest rate. Thus, when accounting for a lump-sum payment due in the future, the present value formula is applied to determine how much that future amount is worth today.
In summary, the correct approach is to use the present value of 1 when calculating the present value of a lump-sum payment due at a future date.
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