Deck 15: The Time Value of Money

Question 1

Ivy Company purchases land with a fair market value of $71,500, paying for it by signing a note payable requiring cash payments of $20,000 at the beginning of each year for four years. What is the interest rate implicit in the note?

A)6%.
B)7%
C)8%
D)9%.

Answer 1

C

Question 2

Kaeli Company will invest $10,000 a year for 5 years, with all investments at the beginning of each year. If the fund earns 10% compound interest, what amount will be in the fund at the end of 5 years?

A)$60,000
B)$61,051
C)$65,000
D)$67,156

Answer 2

D

Question 3

Wyatt Borke purchased an automobile with a list price of $5,580. He signed a contract requiring a $1,000 down payment and $1,000 payments at the beginning of each subsequent year for five years. Compute the annual implicit (effective) rate of interest on this financing loan.

A)2%
B)3%
C)4%
D)5%

Answer 3

B

Question 4

Inflation would cause someone to

A)have no preference as to a dollar today or a dollar in the future.
B)prefer a dollar in the future to a dollar today.
C)prefer a dollar today to a dollar in the future.
D)prefer either a dollar today or a dollar in the future, depending on other factors.

Question 5

The price of money is called

A)principal.
B)interest.
C)inflation.
D)the table factor.

Question 6

Understanding the concepts of valuation is

A)More important now as IFRS and GAAP move more towards a fair market value framework.
B)Less important now as IFRS and GAAP move more towards a fair market value framework.
C)More important as determining valuations becomes easier.
D)Less important as determining valuations becomes easier.

Question 7

Cora Company will receive $10,000 in 5 years. If the relevant interest rate is 10%, what is the present value of this receipt?

A)$ 5,000
B)$ 6,209
C)$ 7,500
D)$10,000

Question 8

A dollar today is worth

A)more than a dollar in the future.
B)less than a dollar in the future.
C)the same as a dollar in the future.
D)either more or less than a dollar in the future,

Question 9

With all other factors equal, the simple interest amount will be

A)greater than the compound interest amount.
B)less than the compound interest amount.
C)equal to the compound interest amount
D)either higher or lower than the compound interest amount, depending on other factors.

Question 10

Cora Company will receive $10,000 a year for 5 years, with all receipts at the beginning of each year. What is the present value of this annuity using a 10% discount rate?

A)$35,000
B)$37,908
C)$40,000
D)$41,699

Question 11

Luke Galen purchased an automobile with a list price of $4,387. He signed a contract requiring a $1,000 down payment and $1,000 payments at the beginning of each subsequent year for four years. Compute the annual implicit (effective) rate of interest on this financing loan.

A)5%
B)6%
C)7%
D)8%

Question 12

Kaeli Company will invest $10,000 on January 1. If the fund earns 10% compound interest, what amount will be in the fund at the end of 5 years?

A)$10,000
B)$15,000
C)$16,000
D)$16,105

Question 13

The present value of an annuity due, as compared to the present value of an ordinary annuity of the same length and interest rate, will

A)sometimes be greater and sometimes be smaller.
B)always be the same.
C)always be smaller.
D)always be greater.

Question 14

A company purchases a piece of property with a fair market value of $100,000, paying for it by signing a note payable requiring cash payments of $20,000 at the beginning of each year for six years. What is the interest rate implicit in the note?

A)6%.
B)7%
C)8%
D)9%.

Question 15

Cora Company will receive $10,000 a year for 5 years, with all receipts at yearend. What is the present value of this annuity using a 10% discount rate?

A)$35,000
B)$37,908
C)$40,000
D)$41,699

Question 16

The future value of an annuity due, as compared to the future value of an ordinary annuity of the same length and interest rate, will

A)sometimes be greater and sometimes be smaller.
B)always be the same.
C)always be smaller.
D)always be greater.

Question 17

Kaeli Company will invest $10,000 a year for 5 years, with all investments at yearend. If the fund earns 10% compound interest, what amount will be in the fund at the end of 5 years?

A)$60,000
B)$61,051
C)$65,000
D)$67,156

Question 18

Lilly Company purchases land with a fair market value of $49,175, paying for it by signing a note payable requiring cash payments of $10,000 at the end of each year for six years. What is the interest rate implicit in the note?

A)5%.
B)6%
C)7%
D)8%.

Question 19

The size of the time value of money gets

A)bigger as interest rates increase and as the time period gets longer.
B)bigger as interest rates decrease and as the time period gets longer.
C)bigger as interest rates increase and as the time period gets shorter.
D)bigger as interest rates decrease and as the time period gets shorter.

Question 20

Cash payments of equal amounts, made at the beginning of each period, is called an

A)ordinary annuity.
B)annuity in arrears.
C)annuity due.
D)installment series.

Question 21

Which of the following statements is false?

A)A critical problem is associated with using present value on the financial statements is that it requires that both future cash flows and future interest rates be predicted.
B)In most cases, predicting the future cash flows associated with a particular asset or liability with a reasonable degree of confidence is almost impossible.
C)The predictions that management must make to apply present value are not too subjective for financial statements that are to be used by those outside the company.
D)Auditors are unwilling and unable to verify subjective present value judgments.

Question 22

Business decision makers use present value concepts to derive the terms of contracts like

A)mortgages.
B)leases.
C)pensions.
D)mortgages, leases, and pensions.

Question 23

Which of the following accounts did not rely on the calculation of present value or the implicit rate of interest in the determination of the balance sheet dollar value?

A)Capital Lease Equipment
B)Long-term Notes Payable
C)Additional Paid-in Capital
D)Capital Lease Obligations

Question 24

Which of the following statements is false?

A)Virtually any transaction that can be broken down into periodic cash flows utilizes the time value of money concept and can be reduced to present value, future value, and other equivalent values
B)The uses of present value in business decision making are limited.
C)Financial accounting information is useful because it helps investors, creditors, and other interested parties evaluate and control the business decisions of management.
D)Because present value is the economic form of valuation, financial accounting information must reflect present value if it is to be useful.

Question 25

Which of the following accounts relied on the calculation of present value or the implicit rate of interest in the determination of the balance sheet dollar value?

A)Treasury Stock
B)Long-term Notes Receivable
C)Property, Plant, and Equipment
D)Accrued Liabilities