Exam 6: Accounting and the Time Value of Money

Compute the annual rent. (Tables needed.) Crone Co. has machinery that cost $120,000. It is to be leased for 15 years with rent received at the beginning of each year. Crone wants a return of 10%. Compute the amount of the annual rent.

Altman Company will invest $700,000 today. The investment will earn 6% for 5 years, with no funds withdrawn. In 5 years, the amount in the investment fund is

Compound interest uses the accumulated balance at each year end to compute interest in the succeeding year.

Stech Co. is issuing $7.5 million 12% bonds in a private placement on July 1, 2014. Each $1,000 bond pays interest semi-annually on December 31 and June 30 of each year. The bonds mature in ten years. At the time of issuance, the market interest rate for similar types of bonds was 8%. What is the expected selling price of the bonds?

Calculation of unknown rent and interest. Pine Leasing Company purchased specialized equipment from Wayne Company on December 31, 2013 for $800,000. On the same date, it leased this equipment to Sears Company for 5 years, the useful life of the equipment. The lease payments begin January 1, 2014 and are made every 6 months until July 1, 2018. Pine Leasing wants to earn 10% annually on its investment. Instructions (a) Calculate the amount of each rent. (b) How much interest revenue will Pine earn in 2014?

The expected cash flow approach uses a range of cash flows and incorporates the probabilities of those cash flows to provide a more relevant present value measurement.

In the time diagram below, which concept is being depicted?

Items 69 through 72 apply to the appropriate use of present value tables. Given below are the present value factors for $1.00 discounted at 10% for one to five periods. Each of the items 69 to 72 is based on 10% interest compounded annually. -What is the present value today of $9,000 to be received six years from today?

Reegan Company owns a trade name that was purchased in an acquisition of Hamilton Company. The trade name has a book value of $1,800,000, but according to IFRS, it is assessed for impairment on an annual basis. To perform this impairment test, Reegan must estimate the fair value of the trade name. It has developed the following cash flow estimates related to the trade name based on internal information. Each cash flow estimate reflects Reegan's estimate of annual cash flows over the next 7 years. The trade name is assumed to have no residual value after the 7 years. (Assume the cash flows occur at the end of each year.) Reegan determines that the appropriate discount rate for this estimation is 6%. To the nearest dollar, what is the estimated fair value of the trade name?

An amount is deposited for eight years at 8%. If compounding occurs quarterly, then the table value is found at

Lucy and Fred want to begin saving for their baby's college education. They estimate that they will need $100,000 in eighteen years. If they are able to earn 5% per annum, how much must be deposited at the end of each of the next eighteen years to fund the education?

If Jethro wanted to save a set amount each month in order to buy a new pick-up truck when the new models are next available, which time value concept would be used to determine the monthly payment?

Hiller Corporation makes an investment today (January 1, 2014). They will receive $50,000 every December 31st for the next six years (2014 - 2019). If Hiller wants to earn 12% on the investment, what is the most they should invest on January 1, 2014?

On January 1, 2014, Gore Co. sold to Cey Corp. $800,000 of its 10% bonds for $708,236 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Gore report as interest expense for the six months ended June 30, 2014?

If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates, then

Items 65 through 68 apply to the appropriate use of interest tables. Given below are the future value factors for 1 at 8% for one to five periods. Each of the items 65 to 68 is based on 8% interest compounded annually. -What amount should be deposited in a bank account today to grow to $15,000 three years from today?

Present value of an ordinary annuity due. Jill Morris is presently leasing a small business computer from Eller Office Equipment Company. The lease requires 10 annual payments of $5,000 at the end of each year and provides the lessor (Eller) with an 8% return on its investment. You may use the following 8% interest factors: Instructions (a) Assuming the computer has a ten-year life and will have no salvage value at the expiration of the lease, what was the original cost of the computer to Eller? (b) What amount would each payment be if the ten annual payments are to be made at the beginning of each period?

John won a lottery that will pay him $250,000 at the end of each of the next twenty years. Zebra Finance has offered to purchase the payment stream for $3,397,500. What interest rate (to the nearest percent) was used to determine the amount of the payment?

Which of the following is true?

The future value of a single sum is determined by multiplying the future value factor by its present value.