Question 1

Which of the following transactions would best use the present value of an annuity due of 1 table?

Accepted Answer

A) Bengatti,Inc.leases a truck for 5 years with annual lease payments of $20,000 to be made at the beginning of each year. 
B) Turkel Co.leases a warehouse for 7 years with annual lease payments of $120,000 to be made at the end of each year. 
C) Ponzi,Inc.borrows $40,000 and has agreed to pay back the principal plus interest in three years. 
D) Skool,Inc.wants to deposit a lump sum to accumulate $80,000 for the construction of a new parking lot in 4 years. 
A) Bengatti,Inc.leases a truck for 5 years with annual lease payments of $20,000 to be made at the beginning of each year. 
B) Turkel Co.leases a warehouse for 7 years with annual lease payments of $120,000 to be made at the end of each year. 
C) Ponzi,Inc.borrows $40,000 and has agreed to pay back the principal plus interest in three years. 
D) Skool,Inc.wants to deposit a lump sum to accumulate $80,000 for the construction of a new parking lot in 4 years.

Question 2

The value of a bond is equal to the present value of the interest payments plus the present value of the maturity value.

Accepted Answer

A) True 
 B)False

Question 3

You have discovered an investment opportunity that earns a 6% rate of interest compounded semiannually.What amount should you deposit today to have $5,000 in three years?

Accepted Answer

A) $3,832 
B) $4,100 
C) $4,187 
D) $4,237 
A) $3,832 
B) $4,100 
C) $4,187 
D) $4,237

Question 4

Dover Company deposits $50,000 with Second National Bank in an account earning interest at 8% per annum,compounded semi-annually.How much will Dover have in the account after five years if interest is reinvested?

Accepted Answer

A) $60,833 
B) $70,000 
C) $73,467 
D) $74,012 
A) $60,833 
B) $70,000 
C) $73,467 
D) $74,012

Question 5

What is a deferred annuity?

Accepted Answer

A deferred annuity results from a variet

Question 6

On January 1,Yumati Electric borrows $333,333 at an interest rate of 6% today and will repay this amount by making 16 semiannual payments beginning May 31.What is the approximate amount of the payments that Yumati will need to make?

Accepted Answer

A) $32,984 
B) $32,378 
C) $26,537 
D) $25,764 
A) $32,984 
B) $32,378 
C) $26,537 
D) $25,764

Question 7

A zero-interest bond pays $200,000 in seven years.What amount would you be willing to pay to acquire the bond today if you want to earn a return of approximately 10%?

Accepted Answer

A) $151,500 
B) $117,600 
C) $102,600 
D) $60,000 
A) $151,500 
B) $117,600 
C) $102,600 
D) $60,000

Question 8

A present value is always less than the corresponding future value.

Accepted Answer

A) True 
 B)False

Question 9

What is the term that describes the value today of a cash flow or series of cash flows to be received or paid in the future?

Accepted Answer

A) present value 
B) compound value 
C) discount value 
D) temporal value 
A) present value 
B) compound value 
C) discount value 
D) temporal value

Question 10

Baxter desires to purchase an annuity on January 1,2014,that yields him five annual cash flows of $10,000 each,with the first cash flow to be received on January 1,2017.The interest rate is 10% compounded annually.The cost (present value)of the annuity on January 1,2014,is ________.

Accepted Answer

A) $31,329 
B) $34,462 
C) $37,908 
D) $48,684 
A) $31,329 
B) $34,462 
C) $37,908 
D) $48,684

Question 11

All of the following are conditions for an annuity due except ________.

Accepted Answer

A) the interest rate is constant for each time period 
B) interest is compounded at the end of each time period 
C) the time periods between the cash flows are the same length 
D) periodic cash flows must be equal in amount 
A) the interest rate is constant for each time period 
B) interest is compounded at the end of each time period 
C) the time periods between the cash flows are the same length 
D) periodic cash flows must be equal in amount

Question 12

A single amount is invested and increases over time as interest is compounded.If the number of periods is known,the interest rate can be approximately determined by ________.

Accepted Answer

A) dividing the present value by the future value and looking for the quotient in the future value of $1 table 
B) multiplying the present value by the future value and looking for the product in the present value of $1 table 
C) dividing the future value by the present value and looking for the quotient in the future value of $1 table 
D) dividing the future value by the present value and looking for the quotient in the present value of $1 table 
A) dividing the present value by the future value and looking for the quotient in the future value of $1 table 
B) multiplying the present value by the future value and looking for the product in the present value of $1 table 
C) dividing the future value by the present value and looking for the quotient in the future value of $1 table 
D) dividing the future value by the present value and looking for the quotient in the present value of $1 table

Question 13

For any discount rate and number of periods,the present value of an annuity due factor is always greater than the corresponding the present value of an ordinary annuity factor.

Accepted Answer

A) True 
 B)False

Question 14

Punjab Company borrowed $114,000 from its bank.Punjab will repay $150,000 in 7 years.What is the approximate interest rate that Punjab will incur on this loan,assuming annual compounding?

Accepted Answer

A) 3% 
B) 4% 
C) 5% 
D) 6% 
A) 3% 
B) 4% 
C) 5% 
D) 6%

Question 15

The factor for the present value of an ordinary annuity for 10% and eight periods is less than ________.

Accepted Answer

A) the factor for the present value of an ordinary annuity for 8% and eight periods 
B) the factor for the present value of an annuity due for 10% and eight periods 
C) the factor for the present value of an ordinary annuity for 12% and eight periods 
D) the factor for the present value of an ordinary annuity for 10% and ten periods 
A) the factor for the present value of an ordinary annuity for 8% and eight periods 
B) the factor for the present value of an annuity due for 10% and eight periods 
C) the factor for the present value of an ordinary annuity for 12% and eight periods 
D) the factor for the present value of an ordinary annuity for 10% and ten periods

Question 16

Why do accountants need to be familiar with present value concepts?

Accepted Answer

The time value of money concept is criti

Question 17

The effective interest rate is calculated as total interest during the year divided by the beginning balance as the first of the year.

Accepted Answer

A) True 
 B)False

Question 18

You are provided with two time-value-of-money tables.One table provides factors for the future value of an ordinary annuity and the other provides factors for future value of an annuity due.How can you tell which table is which type?

Accepted Answer

An ordinary annuity is an annuity where

Question 19

What is the time value of money?

Accepted Answer

The time value of money concept means th

Question 20

List the five primary characteristics of an annuity and explain the difference between an ordinary annuity and an annuity due.

Accepted Answer

Annuity problems can have five variables

Exam 7: Accounting and the Time Value of Money

Which of the following transactions would best use the present value of an annuity due of 1 table?

The value of a bond is equal to the present value of the interest payments plus the present value of the maturity value.

You have discovered an investment opportunity that earns a 6% rate of interest compounded semiannually.What amount should you deposit today to have $5,000 in three years?

Dover Company deposits $50,000 with Second National Bank in an account earning interest at 8% per annum,compounded semi-annually.How much will Dover have in the account after five years if interest is reinvested?

What is a deferred annuity?

On January 1,Yumati Electric borrows $333,333 at an interest rate of 6% today and will repay this amount by making 16 semiannual payments beginning May 31.What is the approximate amount of the payments that Yumati will need to make?

A zero-interest bond pays $200,000 in seven years.What amount would you be willing to pay to acquire the bond today if you want to earn a return of approximately 10%?

A present value is always less than the corresponding future value.

What is the term that describes the value today of a cash flow or series of cash flows to be received or paid in the future?

Baxter desires to purchase an annuity on January 1,2014,that yields him five annual cash flows of $10,000 each,with the first cash flow to be received on January 1,2017.The interest rate is 10% compounded annually.The cost (present value)of the annuity on January 1,2014,is ________.

All of the following are conditions for an annuity due except ________.

A single amount is invested and increases over time as interest is compounded.If the number of periods is known,the interest rate can be approximately determined by ________.

For any discount rate and number of periods,the present value of an annuity due factor is always greater than the corresponding the present value of an ordinary annuity factor.

Punjab Company borrowed $114,000 from its bank.Punjab will repay $150,000 in 7 years.What is the approximate interest rate that Punjab will incur on this loan,assuming annual compounding?

The factor for the present value of an ordinary annuity for 10% and eight periods is less than ________.

Why do accountants need to be familiar with present value concepts?

The effective interest rate is calculated as total interest during the year divided by the beginning balance as the first of the year.

You are provided with two time-value-of-money tables.One table provides factors for the future value of an ordinary annuity and the other provides factors for future value of an annuity due.How can you tell which table is which type?

What is the time value of money?

List the five primary characteristics of an annuity and explain the difference between an ordinary annuity and an annuity due.

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