Exam 6: Accounting and the Time Value of Money

On December 30, 2007, Cey, Inc.purchased a machine from Frank Corp.in exchange for a noninterest-bearing note requiring eight payments of $50,000.The first payment was made on December 30, 2007, and the others are due annually on December 30.At date of issuance, the prevailing rate of interest for this type of note was 11%.Present value factors are as follows: Present Value of Ordinary Present Value of Period Annuity of 1 at 11 \% Annuity Due of 1 at 11 \% 7 4.712 5.231 8 5.146 5.712 On Cey's December 31, 2007 balance sheet, the net note payable to Frank is

Which of the following is false?

How much must be invested now to receive $10,000 for 15 years if the first $10,000 is received today and the rate is 9%? Present Value of Periods Ordinary Annuity at 9\% 14 7.78615 15 8.06069 16 8.31256

If the compounding period is less than one year, the annual interest rate must be converted to the compounding period interest rate by dividing the annual rate by the number of compounding periods per year.

Present value is the value now of a future sum or sums discounted assuming compound interest.

What is the present value today of $6,000 to be received six years from today?

On June 1, 2006, Walsh Company sold some equipment to Fischer Company.The two companies entered into an installment sales contract at a rate of 8%.The contract required 8 equal annual payments with the first payment due on June 1, 2006.What type of compound interest table is appropriate for this situation?

At the date of issue, bond buyers determine the present value of the bonds' cash flows using the market interest rate.

The time value of money refers to the fact that a dollar received today is worth less than a dollar promised at some time in the future.

Use the following 8% interest factors for questions . Present Value of Future Value of Ordinary Annuity Ordinary Annuity 7 periods 5.2064 8.92280 8 periods 5.7466 10.63663 9 periods 6.2469 12.48756 -Henson Company wishes to accumulate $300,000 by May 1, 2015 by making 8 equal annual deposits beginning May 1, 2007 to a fund paying 8% interest compounded annually.What is the required amount of each deposit?

The future value of an ordinary annuity table is used when payments are invested at the beginning of each period.

Use the following 8% interest factors for questions . Present Value of Future Value of Ordinary Annuity Ordinary Annuity 7 periods 5.2064 8.92280 8 periods 5.7466 10.63663 9 periods 6.2469 12.48756 -What will be the balance on September 1, 2013 in a fund which is accumulated by making $8,000 annual deposits each September 1 beginning in 2006, with the last deposit being made on September 1, 2013? The fund pays interest at 8% compounded annually.

The rents that comprise an annuity due earn no interest during the period in which they are originally deposited.

The unknown present value is always a larger amount than the known future value because dollars received currently are worth more than dollars to be received in the future.

If two annuities have the same number of rents with the same dollar amount, but one is an annuity due and one is an ordinary annuity, the future value of the annuity due will be greater than the future value of the ordinary annuity.

Jasper Company will invest $300,000 today.The investment will earn 6% for 5 years, with no funds withdrawn.In 5 years, the amount in the investment fund is

On January 1, 2007, Lex Co.sold goods to Eaton Company.Eaton signed a noninterest-bearing note requiring payment of $80,000 annually for seven years.The first payment was made on January 1, 2007.The prevailing rate of interest for this type of note at date of issuance was 10%.Information on present value factors is as follows: Present Value Present Value of Ordinary Period of 1 at 10\% Annuity of 1 at 10\% 6 .5645 4.3553 7 .5132 4.8684 Lex should record sales revenue in January 2007 of

A machine is purchased by making payments of $5,000 at the beginning of each of the next five years.The interest rate was 10%.The future value of an ordinary annuity of 1 for five periods is 6.10510.The present value of an ordinary annuity of 1 for five periods is 3.79079.What was the cost of the machine?

Sheeley Company will receive $100,000 in a future year.If the future receipt is discounted at an interest rate of 10%, its present value is $51,316.In how many years is the $100,000 received?

Find the present value of an investment in plant and equipment if it is expected to provide annual earnings of $21,000 for 15 years and to have a resale value of $40,000 at the end of that period.Assume a 10% rate and earnings at year end.The present value of 1 at 10% for 15 periods is .23939.The present value of an ordinary annuity at 10% for 15 periods is 7.60608.The future value of 1 at 10% for 15 periods is 4.17725.