Deck 6: Accounting and the Time Value of Money

Question 1

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.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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 5

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 6

The present value of an ordinary annuity is the present value of a series of equal rents withdrawn at equal intervals.

Question 7

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 8

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

Question 9

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

Question 10

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

Question 11

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 12

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

Question 13

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.

Question 14

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

Question 15

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 16

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

Question 17

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

Question 18

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

Question 19

Simple interest is computed on principal and on any interest earned that has not been withdrawn.

Question 20

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.

Question 21

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

A) Fernetti, Inc. rents a truck for 5 years with annual rental payments of $20,000 to be made at the beginning of each year.
B) Edmiston Co. rents a warehouse for 7 years with annual rental payments of $120,000 to be made at the end of each year.
C) Durant, Inc. borrows $20,000 and has agreed to pay back the principal plus interest in three years.
D) Babbitt, Inc. wants to deposit a lump sum to accumulate $50,000 for the construction of a new parking lot in 4 years.

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

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

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

Question 24

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

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

Question 25

On June 1, 2014, Pitts Company sold some equipment to Gannon 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, 2014. What type of compound interest table is appropriate for this situation?

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

Question 26

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 27

A series of equal receipts at equal intervals of time when each receipt is received at the beginning of each time period is called an

A) ordinary annuity.
B) annuity in arrears.
C) annuity due.
D) unearned receipt.

Question 28

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 29

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 30

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 31

The figure .94232 is taken from the column marked 2% and the row marked three periods in a certain interest table. From what interest table is this figure taken?

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

Question 32

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 33

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 34

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

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

Question 35

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 36

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 37

Which of the following tables would show the largest value for an interest rate of 10% for 8 periods?

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

Question 38

What is interest?

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

Question 39

On December 1, 2014, Richards Company sold some machinery to Fleming Company. The two companies entered into an installment sales contract at a predetermined interest rate. The contract required four equal annual payments with the first payment due on December 1, 2014, the date of the sale. What present value concept is appropriate for this situation?

A) Future amount of an annuity of 1 for four periods
B) Future amount of 1 for four periods
C) Present value of an ordinary annuity of 1 for four periods
D) Present value of an annuity due of 1 for four periods.

Question 40

Which of the following transactions would require the use of the present value of an annuity due concept in order to calculate the present value of the asset obtained or liability owed at the date of incurrence?

A) A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement.
B) A capital lease is entered into with the initial lease payment due one month subse-quent to the signing of the lease agreement.
C) A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 7%.
D) A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 9%.

Question 41

What is the relationship between the present value factor of an ordinary annuity and the present value factor of an annuity due for the same interest rate?

A) The ordinary annuity factor is not related to the annuity due factor.
B) The annuity due factor equals one plus the ordinary annuity factor for n-1 periods.
C) The ordinary annuity factor equals one plus the annuity due factor for n+1 periods.
D) The annuity due factor equals the ordinary annuity factor for n+1 periods minus one.

Question 42

Which of the following statements 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 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 to the ordinary annuity table value for one less period.

Question 43

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.

Question 44

Assume ABC Company deposits $70,000 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) $94,074.
B) $70,000.
C) $91,000.
D) $93,677.

Question 45

Which of the following statements is true?

A) The higher the discount rate, the higher the present value.
B) The process of accumulating interest on interest is referred to as discounting.
C) If money is worth 10% compounded annually, $1,100 due one year from today is equivalent to $1,000 today.
D) If a single sum is due on December 31, 2014, the present value of that sum decreases as the date draws closer to December 31, 2014.

Question 46

Stemway Company requires a new manufacturing facility. It found three locations; all of which would provide the needed capacity, the only difference is the price. Location A may be purchased for $500,000. Location B may be acquired with a down payment of $100,000 and annual payments at the end of each of the next twenty years of $50,000. Location C requires $40,000 payments at the beginning of each of the next twenty-five years. Assuming Stemway's borrowing costs are 8% per annum, which option is the least costly to the company?

A) Location A.
B) Location B.
C) Location C.
D) Location A and Location B.

Question 47

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 48

Which of the following is false?

A) The future value of a deferred annuity is the same as the future value of an annuity not deferred.
B) A deferred annuity is an annuity in which the rents begin after a specified number of periods.
C) To compute the present value of a deferred annuity, we compute the present value of an ordinary annuity of 1 for the entire period and subtract the present value of the rents which were not received during the deferral period.
D) If the first rent is received at the end of the sixth period, it means the ordinary annuity is deferred for six periods.

Question 49

If the number of periods is known, the interest rate is determined by

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

Question 50

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 51

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

A) the present value of the annuity due is less than the present value of the ordinary annuity.
B) the present value of the annuity due is greater than the present value of the ordinary annuity.
C) the future value of the annuity due is equal to the future value of the ordinary annuity.
D) the future value of the annuity due is less than the future value of the ordinary annuity.

Question 52

An accountant wishes to find the present value of an annuity of $1 payable at the beginning of each period at 10% for eight periods. The accountant has only one present value table which shows the present value of an annuity of $1 payable at the end of each period. To compute the present value, the accountant would use the present value factor in the 10% column for

A) seven periods.
B) eight periods and multiply by (1 + .10).
C) eight periods.
D) nine periods and multiply by (1 - .10).

Question 53

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 54

Sue Gray wants to invest a certain sum of money at the end of each year for five years. The investment will earn 6% compounded annually. At the end of five years, she will need a total of $40,000 accumulated. How should she compute her required annual invest-ment?

A) $40,000 times the future value of a 5-year, 6% ordinary annuity of 1.
B) $40,000 divided by the future value of a 5-year, 6% ordinary annuity of 1.
C) $40,000 times the present value of a 5-year, 6% ordinary annuity of 1.
D) $40,000 divided by the present value of a 5-year, 6% ordinary annuity of 1.

Question 55

Al Darby wants to withdraw $20,000 (including principal) from an investment fund at the end of each year for five years. How should he compute his required initial investment at the beginning of the first year if the fund earns 10% compounded annually?

A) $20,000 times the future value of a 5-year, 10% ordinary annuity of 1.
B) $20,000 divided by the future value of a 5-year, 10% ordinary annuity of 1.
C) $20,000 times the present value of a 5-year, 10% ordinary annuity of 1.
D) $20,000 divided by the present value of a 5-year, 10% ordinary annuity of 1.

Question 56

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 57

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 58

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 59

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 60

Paula purchased a house for $300,000. After providing a 20% down payment, she borrowed the balance from the local savings and loan under a 30-year 6% mortgage loan requiring equal monthly installments at the end of each month. 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 ordinary annuity.
D) Future value of an ordinary annuity.

Question 61

Charlie Corp. is purchasing new equipment with a cash cost of $250,000 for an assembly line. The manufacturer has offered to accept $57,400 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) $57,400.
B) $250,000.
C) $307,400.
D) $94,400.

Question 62

John Jones won a lottery that will pay him $3,000,000 after twenty years. Assuming an appropriate interest rate is 5% compounded annually, what is the present value of this amount?

A) $3,000,000.
B) $7,959,900.
C) $37,386,630.
D) $1,130,670.

Question 63

At the end of two years, what will be the balance in a savings account paying 6% annually if $15,000 is deposited today? The future value of one at 6% for one period is 1.06.

A) $15,000
B) $15,900
C) $16,800
D) $16,854

Question 64

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?

A) $9,000 × 0.909 × 6
B) $9,000 × 0.751 × 2
C) $9,000 × 0.621 × 0.909
D) $9,000 × 0.683 × 3

Question 65

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 will be in a bank account three years from now if $8,000 is invested each year for four years with the first investment to be made today?

A) ($8,000 × 1.260) + ($8,000 × 1.166) + ($8,000 × 1.080) + $8,000
B) $8,000 × 1.360 × 4
C) ($8,000 × 1.080) + ($8,000 × 1.166) + ($8,000 × 1.260) + ($8,000 × 1.360)
D) $8,000 × 1.080 × 4

Question 66

Barkley Company will receive $400,000 in a future year. If the future receipt is discounted at an interest rate of 8%, its present value is $252,068. In how many years is the $400,000 received?

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

Question 67

Barber Company will receive $900,000 in 7 years. If the appropriate interest rate is 10%, the present value of the $900,000 receipt is

A) $459,000.
B) $461,844.
C) $1,359,000.
D) $1,753,848.

Question 68

Mordica Company will receive $300,000 in 7 years. If the appropriate interest rate is 10%, the present value of the $300,000 receipt is

A) $153,000.
B) $153,948.
C) $453,000.
D) $584,616.

Question 69

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 amount should an individual have in a bank account today before withdrawal if $7,000 is needed each year for four years with the first withdrawal to be made today and each subsequent withdrawal at one-year intervals? (The balance in the bank account should be zero after the fourth withdrawal.)

A) $7,000 + ($7,000 × 0.909) + ($7,000 × 0.826) + ($7,000 × 0.751)
B) $7,000 ÷ 0.683 × 4
C) ($7,000 × 0.909) + ($7,000 × 0.826) + ($7,000 × 0.751) + ($7,000 × 0.683)
D) $7,000 ÷ 0.909 × 4

Question 70

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

A) $700,000.
B) $910,000.
C) $936,761.
D) $938,203.

Question 71

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?

A) $15,000 × 1.260
B) $15,000 × 1.260 × 3
C) $15,000 ÷ 1.260
D) $15,000 ÷ 1.080 × 3

Question 72

Dunston Company will receive $300,000 in a future year. If the future receipt is discounted at an interest rate of 10%, its present value is $153,948. In how many years is the $300,000 received?

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

Question 73

Bella requires $160,000 in four years to purchase a new home. What amount must be invested today in an investment that earns 6% interest, compounded annually?

A) $126,734.
B) $131,632.
C) $193,783.
D) $201,996.

Question 74

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.

If an individual deposits $8,000 in a savings account today, what amount of cash would be available two years from today?

A) $8,000 × 0.826
B) $8,000 × 0.826 × 2
C) $8,000 ÷ 0.826
D) $8,000 ÷ 0.909 × 2

Question 75

Angie invested $150,000 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) $232,701.
B) $241,575.
C) $244,335.
D) $265,734.

Question 76

Milner 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) $670,145.

Question 77

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.

If $5,000 is deposited in a savings account today, what amount will be available three years from today?

A) $5,000 ÷ 1.260
B) $5,000 × 1.260
C) $5,000 × 1.080 × 3
D) ($5,000 × 1.080) + ($5,000 × 1.166) + ($5,000 × 1.260)

Question 78

If a savings account pays interest at 4% compounded quarterly, then the amount of $1 left on deposit for 5 years would be found in a table using

A) 5 periods at 4%.
B) 5 periods at 1%.
C) 20 periods at 4%.
D) 20 periods at 1%.

Question 79

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.

If $6,000 is deposited in a savings account today, what amount will be available six years from now?

A) $6,000 × 1.080 × 6
B) $6,000 × 1.080 × 1.469
C) $6,000 × 1.166 × 3
D) $6,000 × 1.260 × 2

Question 80

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 amount should be deposited in a bank today to grow to $6,000 three years from today?

A) $6,000 ÷ 0.751
B) $6,000 × 0.909 × 3
C) ($6,000 × 0.909) + ($6,000 × 0.826) + ($6,000 × 0.751)
D) $6,000 × 0.751