Deck 6: Accounting and the Time Value of Money

Question 1

Compound interest, rather than simple interest, must be used to properly evaluate long- term investment proposals.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

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

Question 5

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.

Question 6

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

Question 7

Simple interest is computed on principal and on any interest earned that has not been withdrawn.

Question 8

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

Question 9

The future value of a deferred annuity is less than the future value of an annuity not deferred.

Question 10

The present value of an ordinary annuity is the present value of a series of equal rents withdrawn at equal intervals.

Question 11

The future value of an annuity due factor is found by multiplying the future value of an ordinary annuity factor by 1 minus the interest rate.

Question 12

The number of compounding periods will always be one less than the number of rents when computing the future value of an ordinary annuity.

Question 13

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

Question 14

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

Question 15

Interest is the excess cash received or repaid over and above the amount lent or borrowed.

Question 16

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 present value of the annuity due will be greater than the present value of the ordinary annuity.

Question 17

The present value of an annuity due table is used when payments are made at the end of each period.

Question 18

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.

Question 19

In determining present value, a company moves backward in time using a process of accumulation.

Question 20

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.

Question 21

Charlie Corp. is purchasing new equipment with a cash cost of €150,000 for an assembly line. The manufacturer has offered to accept €34,440 payment at the end of each of the next six years. How much interest will Charlie Corp. pay over the term of the loan?

A) €34,440.
B) €150,000.
C) €184,440.
D) €56,640.

Question 22

Which table would show the largest factor for an interest rate of 8% for five periods?

A) Future value of an ordinary annuity of 1
B) Present value of an ordinary annuity of 1
C) Future value of an annuity due of 1
D) Present value of an annuity due of 1

Question 23

Which table would you use to determine how much must be deposited now in order to provide for 5 annual withdrawals at the beginning of each year, starting one year hence?

A) Future value of an ordinary annuity of 1
B) Future value of an annuity due of 1
C) Present value of an annuity due of 1
D) None of these answer choices are correct.

Question 24

If you invest €50,000 to earn 8% interest, which of the following compounding approaches would return the lowest amount after one year?

A) Daily
B) Monthly
C) Quarterly
D) Annually

Question 25

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

A) 8% for eight periods.
B) 2% for eight periods.
C) 8% for 32 periods.
D) 2% for 32 periods.

Question 26

The risk-free rate of return is defined as the pure rate of return.

Question 27

The rate used to discount the expected cash flows when using the expected cash flow approach includes an adjustment for credit risk.

Question 28

What is the primary difference between an ordinary annuity and an annuity due?

A) The timing of the periodic payment
B) The interest rate
C) Annuity due only relates to present values
D) Ordinary annuity only relates to present values

Question 29

Which table would you use to determine how much you would need to have deposited three years ago at 10% compounded annually in order to have $1,000 today?

A) Future value of 1 or present value of 1
B) Future value of an annuity due of 1
C) Future value of an ordinary annuity of 1
D) Present value of an ordinary annuity of 1

Question 30

Which of the following tables would show the smallest value for an interest rate of 5% for six periods?

A) Future value of 1
B) Present value of 1
C) Future value of an ordinary annuity of 1
D) Present value of an ordinary annuity of 1

Question 31

Under IFRS, if an estimate is being developed for a large number of items with varied outcomes, then the expected cash flow approach is used.

Question 32

What is not a variable that is considered in interest computations?

A) Principal
B) Interest rate
C) Assets
D) Time

Question 33

Present value is

A) the value now of a future amount.
B) the amount that must be invested now to produce a known future value.
C) always smaller than the future value.
D) all of these answer choices are correct.

Question 34

Which factor would be greater - the present value of €1 for 10 periods at 8% per period or the future value of €1 for 10 periods at 8% per period?

A) Present value of €1 for 10 periods at 8% per period
B) Future value of €1 for 10 periods at 8% per period
C) The factors are the same
D) Need more information

Question 35

Which of the following situations does not use an accounting measure based on present values?

A) Pensions
B) Prepaid insurance
C) Leases
D) Sinking funds

Question 36

What best describes the time value of money?

A) The interest rate charged on a loan.
B) Accounts receivable that are determined uncollectible.
C) An investment in a checking account.
D) The relationship between time and money.

Question 37

Which table has a factor of 1.00000 for 1 period at every interest rate?

A) Future value of 1
B) Present value of 1
C) Future value of an ordinary annuity of 1
D) Present value of an ordinary annuity of 1

Question 38

Which of the following tables would show the smallest factor for an interest rate of 10% for six periods?

A) Future value of an ordinary annuity of 1
B) Present value of an ordinary annuity of 1
C) Future value of an annuity due of 1
D) Present value of an annuity due of 1

Question 39

What is interest?

A) Payment for the use of money
B) An equity investment
C) Return on capital
D) Loan

Question 40

Which of the following is true?

A) Rents occur at the beginning of each period of an ordinary annuity.
B) Rents occur at the end of each period of an annuity due.
C) Rents occur at the beginning of each period of an annuity due.
D) None of these answer choices are correct.

Question 41

If €4,000 is put in a savings account today, what amount will be available six years from now?

A) €4,000 × 1.080 × 6
B) €4,000 × 1.080 × 1.469
C) €4,000 × 1.166 × 3
D) €4,000 × 1.260 × 2
Items 59 through 61 apply to the appropriate use of present value tables. Given below are the present value factors for £1 discounted at 10% for one to five periods. Each of the items 59 to 61 is based on 10% interest compounded annually.

Question 42

If an individual put £4,000 in a savings account today, what amount of cash would be available two years from today?

A) £4,000 × 0.826
B) £4,000 × 0.826 × 2
C) £4,000 ÷ 0.826
D) £4,000 ÷ 0.909 × 2

Question 43

John Jones won a lottery that will pay him €2,000,000 after twenty years. Assuming an appropriate interest rate is 5% compounded annually, what is the present value of this amount?

A) €2,000,000
B) €5,306,600
C) €24,924,420
D) €753,780

Question 44

Angie invested £100,000 she received from her grandmother today in a fund that is expected to earn 10% per annum. To what amount should the investment grow in five years if interest is compounded semi-annually?

A) £155,134
B) £161,050
C) £162,890
D) £177,156

Question 45

If €3,000 is put in a savings account today, what amount will be available three years from today?

A) €3,000 ÷ 1.260
B) €3,000 × 1.260
C) €3,000 × 1.080 × 3
D) (€3,000 × 1.080) + (€3,000 × 1.166) + (€3,000 × 1.260)

Question 46

Peter invests €100,000 in a 3-year certificate of deposit earning 3.5% at his local bank. Which time value concept would be used to determine the maturity value of the certificate?

A) Present value of one.
B) Future value of one.
C) Present value of an annuity due.
D) Future value of an ordinary annuity.

Question 47

What amount should be deposited in a bank today to grow to £3,000 three years from today?

A) £3,000 ÷ 0.751
B) £3,000 × 0.909 × 3
C) (£3,000 × 0.909) + (£3,000 × 0.826) + (£3,000 × 0.751)
D) £3,000 × 0.751

Question 48

Jerry recently was offered a position with a major accounting firm. The firm offered Jerry either a signing bonus of £23,000 payable on the first day of work or a signing bonus of £26,000 payable after one year of employment. Assuming that the relevant interest rate is 10%, which option should Jerry choose?

A) The options are equivalent.
B) Insufficient information to determine.
C) The signing bonus of £23,000 payable on the first day of work.
D) The signing bonus of £26,000 payable after one year of employment.
Items 56 through 58 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 56 to 58 is based on 8% interest compounded annually.

Question 49

If a savings account pays interest at 4% compounded quarterly, then the amount of €1 left on deposit for 6 years would be found in a table using

A) 6 periods at 4%.
B) 6 periods at 1%.
C) 24 periods at 4%.
D) 24 periods at 1%.

Question 50

Barkley Company will receive £300,000 in a future year. If the future receipt is discounted at an interest rate of 8%, its present value is £189,051. In how many years is the £300,000 received?

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

Question 51

What amount should be deposited in a bank account today to grow to €10,000 three years from today?

A) €10,000 × 1.260
B) €10,000 × 1.260 × 3
C) €10,000 ÷ 1.260
D) €10,000 ÷ 1.080 × 3

Question 52

Mordica Company will receive €200,000 in 7 years. If the appropriate interest rate is 10%, the present value of the €200,000 receipt is

A) €102,000.
B) €102,632.
C) €302,000.
D) €389,744.

Question 53

Milner Company will invest €400,000 today. The investment will earn 6% for 5 years, with no funds withdrawn. In 5 years, the amount in the investment fund is

A) €400,000.
B) €520,000.
C) €535,292.
D) €536,116.

Question 54

What is the relationship between the future value of one and the present value of one?

A) The present value of one equals the future value of one plus one.
B) The present value of one equals one plus future value factor for n-1 periods.
C) The present value of one equals one divided by the future value of one.
D) The present value of one equals one plus the future value factor for n+1 value

Question 55

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

A) £6,000 × 0.909 × 6
B) £6,000 × 0.751 × 2
C) £6,000 × 0.621 × 0.909
D) £6,000 × 0.683 × 3

Question 56

At the end of two years, what will be the balance in a savings account paying 6% annually if €10,000 is deposited today? The future value of one at 6% for one period is 1.06.

A) €10,000
B) €10,600
C) €11,200
D) €11,236

Question 57

Altman Company will invest €500,000 today. The investment will earn 6% for 5 years, with no funds withdrawn. In 5 years, the amount in the investment fund is

A) €500,000.
B) €650,000.
C) €669,115.
D) €402,087.

Question 58

Dunston Company will receive £200,000 in a future year. If the future receipt is discounted at an interest rate of 10%, its present value is £102,632. In how many years is the £200,000 received?

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

Question 59

Barber Company will receive €1,000,000 in 7 years. If the appropriate interest rate is 10%, the present value of the €1,000,000 receipt is

A) €510,000.
B) €513,160.
C) €1,510,000.
D) €1,948,720.

Question 60

Assume ABC Company deposits €50,000 with First National Bank in an account earning interest at 6% per annum, compounded semi-annually. How much will ABC have in the account after five years if interest is reinvested?

A) €67,196
B) €50,000
C) €65,000
D) €66,912

Question 61

Bella requires €120,000 in four years to purchase a new home. What amount must be invested today in an investment that earns 6% interest, compounded annually?

A) €95,051
B) €98,724
C) €145,336
D) €151,497

Question 62

Ethan has £50,000 to invest today at an annual interest rate of 4%. Approximately how many years will it take before the investment grows to £101,250?

A) 18 years
B) 20 years
C) 16 years
D) 11 years

Question 63

On January 1, 2018, Kline Company decided to begin accumulating a fund for asset replacement five years later. The company plans to make five annual deposits of £80,000 at 9% each January 1 beginning in 2018. What will be the balance in the fund, within $10, on January 1, 2023 (one year after the last deposit)? The following 9% interest factors may be used.

A) £521,866
B) £478,776
C) £436,000
D) £400,000

Question 64

Jane wants to set aside funds to take an around the world cruise in four years. Assuming that Jane has €8,000 to invest today in an account expected to earn 6% per annum, how much will she have to spend on her vacation?

A) €6,336
B) €10,100
C) €34,997
D) €10,705

Question 65

Renfro Corporation will invest £40,000 every December 31st for the next six years (2018 - 2023). If Renfro will earn 12% on the investment, what amount will be in the investment fund on December 31, 2023?

A) £164,456
B) £184,192
C) £324,608
D) £363,560

Question 66

Which statement is false?

A) The factor for the future value of an annuity due is found by multiplying the ordinary annuity table value by one plus the interest rate.
B) The factor for the present value of an annuity due is found by multiplying the ordinary annuity table value by one minus the interest rate.
C) The factor for the future value of an annuity due is found by subtracting 1.00000 from the ordinary annuity table value for one more period.
D) The factor for the present value of an annuity due is found by adding 1.00000 to the ordinary annuity table value for one less period.

Question 67

Lucy and Fred want to begin saving for their baby's college education. They estimate that they will need €200,000 in eighteen years. If they are able to earn 6% per annum, how much must be deposited at the beginning of each of the next eighteen years to fund the education?

A) €6,471
B) €6,105
C) €11,111
D) €5,924

Question 68

On January 1, 2018, Ball Co. exchanged equipment for a £200,000 zero-interest-bearing note due on January 1, 2021. The prevailing rate of interest for a note of this type at January 1, 2018 was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of interest revenue should be included in Ball's 2019 income statement?

A) £0
B) £15,000
C) £16,500
D) £20,000

Question 69

Spencer Corporation will invest €20,000 every December 31st for the next six years (2018 - 2023). If Spencer will earn 12% on the investment, what amount will be in the investment fund on December 31, 2023?

A) €82,228
B) €92,096
C) €162,304
D) €181,780

Question 70

What interest rate (the nearest percent) must Charlie earn on a €300,000 investment today so that he will have €760,000 after 12 years?

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

Question 71

Jane wants to set aside funds to take an around the world cruise in four years. Jane expects that she will need €15,000 for her dream vacation. If she is able to earn 8% per annum on an investment, how much will she have to set aside today so that she will have sufficient funds available?

A) €3,329
B) €20,406
C) €11,025
D) €10,208

Question 72

Anna has $30,000 to invest. She requires €50,000 for a down payment for a house. If she is able to invest at 6%, how many years will it be before she will accumulate the desired balance?

A) 6 years
B) 7 years
C) 8 years
D) 9 years

Question 73

Lucy and Fred want to begin saving for their baby's college education. They estimate that they will need €300,000 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?

A) €11,618
B) €25,664
C) €24,823
D) €10,664

Question 74

What would you pay for an investment that pays you €20,000 at the end of each year for the next ten years and then returns a maturity value of €300,000 after ten years? Assume that the relevant interest rate for this type of investment is 8%.

A) €138,958
B) €134,202
C) €144,936
D) €273,158

Question 75

Jane wants to set aside funds to take an around the world cruise in four years. Jane expects that she will need £15,000 for her dream vacation. If she is able to earn 8% per annum on an investment, how much will she need to set aside at the beginning of each year to accumulate sufficient funds?

A) £3,329
B) £20,406
C) £11,025
D) £3,082

Question 76

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?

A) Present value of one
B) Future value of one
C) Present value of an annuity due
D) Future value of an ordinary annuity

Question 77

What amount will be in an 8% bank account three years from now if £6,000 is invested each year for four years with the first investment to be made today?

A) (£6,000 × 1.260) + (£6,000 × 1.166) + (£6,000 × 1.080) + £6,000
B) £6,000 × 1.360 × 4
C) (£6,000 × 1.080) + (£6,000 × 1.166) + (£6,000 × 1.260) + (£6,000 × 1.360)
D) £6,000 × 1.080 × 4

Question 78

Tipson Corporation will invest €30,000 every January 1st for the next six years (2018 - 2023). If Linton will earn 12% on the investment, what amount will be in the investment fund on December 31, 2023?

A) €123,342
B) €138,144
C) €243,456
D) €272,670

Question 79

Vannoy Corporation will invest €50,000 every January 1st for the next six years (2018 - 2023). If Wagner will earn 12% on the investment, what amount will be in the investment fund on December 31, 2023?

A) €205,570
B) €230,240
C) €405,760
D) €454,450

Question 80

What would you pay for an investment that pays you £500,000 after forty years? Assume that the relevant interest rate for this type of investment is 6%.

A) £15,590
B) £155,900
C) £48,610
D) £51,835