Deck 13: Finance and Stock Market Equilibrium

Question 1

Interest is the time value of money.

Answer 1

True

Question 2

When the calculated present value is reversed, the resulting figure is the

A)interest accrued.
B)future value.
C)total interest earned.
D)total interest paid.

Answer 2

B

Question 3

When a contract establishes a relationship between an amount borrowed and one or more future cash flows, the initial amount is known as

A)future value.
B)present value.
C)an annuity.
D)interest rate.

Answer 3

B

Question 4

Compound interest is a method of calculating the time value of money in which interest is earned on the previous periods' interest.

Question 5

When determining the future value of an annuity, cash flows are presumed to occur

A)at the start of the first period.
B)at the end of the first period.
C)when the interest is received.
D)at the maturity date.

Question 6

In transactions involving the borrowing or lending of money, as interest is paid, the balance in the liability account of the borrower

A)decreases.
B)increases.
C)remains unchanged.
D)is transferred to interest income

Question 7

The Future Value is the amount to which an account may grow when interest is compounded.

Question 8

Compound interest is computed on which of the following?

A)Only the original amount.
B)The original amount and any undistributed interest earned in prior periods.
C)The original amount and any distributed or undistributed interest earned in prior periods.
D)Only the distributed and undistributed interest earned in prior periods.

Question 9

The interest rate is the percentage that is multiplied by the future value to yield the amount of interest for that period.

Question 10

The future value of a single amount is the original cash flow plus simple interest as of a specific future date.

Question 11

The present value of an annuity is the discounted future value of cash flows made at regular intervals.

Question 12

Cash flows that are equal and occur multiple times, one period apart are called Annuities.

Question 13

Interest may only be charged to a borrower by a bank.

Question 14

When the present value of an annuity is calculated, which of the following is not required?

A)The number of cash flows.
B)The interest of discount rate per period.
C)The future value of the cash flows.
D)The amount of each repeating cash flow.

Question 15

If the stated interest rate is 12% per year, but it is compounded semiannually, then the adjusted rate used for present or future value calculations will be

A)12% per year.
B)3% per quarter.
C)6% per 6-month period.
D)1% per 6-month period.

Question 16

The first cash flow in the future value of an annuity occurs when?

A)At the start of the first period.
B)At the maturity date of the loan.
C)When interest is collected.
D)At the end of the first period.

Question 17

The interest period is the time interval between interest calculations.

Question 18

Calculations of future values are projections of the future balance based upon

A)past cash flows.
B)future cash flows.
C)past and future cash flows.
D)expected future cash flows.

Question 19

The initial amount of money borrowed or loaned is also known as the future value of cash flows.

Question 20

The journal entry to record the interest income from an annuity would include a

A)debit to interest income.
B)credit to interest income.
C)debit to interest expense.
D)None of the above.

Question 21

Jay has made a deal with his daughter to start a car fund for when she graduates college in 6 years. He has found an investment that will yield an interest rate of 8% per year. If he wants to have $25,000 to spend on the car for his daughter, how much must he initially invest?

A)$15,754.28
B)$16,113.45
C)$13,772.55
D)$14,038.95

Question 22

Chuck is looking to invest $15,000 now so that he can purchase a new car in 4 years. The expected price of the car, after tax, title and registration, is expected to be $18,232.65. What is the interest rate required on Chuck's investment to achieve this amount?

A)4%
B)5%
C)6%
D)7%

Question 23

Manatee Manufacturing sells a piece of equipment to make room for new machinery. Manatee will receive the sales price of $50,000 at the end of 4 years. Assuming interest at a rate of 6% per year, the Present Value of this future cash flow is how much?

A)$39,604.50
B)$39,515.50
C)$63,124.00
D)$173,255.50

Question 24

Jack and Jill are saving for a house. How much will they have saved if they make 8 deposits of $5,000 each (one at the end of each year) into an account that earns 4% interest compounded annually?

A)$51,169.86
B)$63,732.74
C)$46,071.15
D)$49,506.11

Question 25

Harlan Fuller needs $2,000 in 7 years. What amount must he invest in a 6% savings bond?

A)$1,425.98
B)$1,330.12
C)$9,533.08
D)$8,200.40

Question 26

An investor expects to receive payments of $3,000 every 6 months for the next 7 years. If the market rate of interest is 4% per year compounded semi-annually, what is the future value of these payments?

A)$22,302.84
B)$23,694.87
C)$47,921.82
D)$54,875.73

Question 27

What is the interest rate of a single $20,000 cash flow in 3 years if the present value is $15,443.60?

A)7%
B)8%
C)9%
D)10%

Question 28

Merlin is saving money to purchase a new car. If he deposits $5,000 into a saving account that pays 8% interest, compounded semi-annually, how much will he have in his account at the end of the first year?

A)$5,400.00
B)$5,200.00
C)$5,408.00
D)$5,008.00

Question 29

You just won the lottery and have elected to receive 10 annual payments instead of the lump sum of $74,818.59. Calculate the amount of your annual payment assuming a 6% interest rate.

A)$17,178.90
B)$10,165.44
C)$18,000.00
D)$10,832.11

Question 30

Tom Nelson invested $9,000 into an account yielding 6%. How long must he leave the money in the account to obtain $12,060.90?

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

Question 31

Hanson's Pilings is planning to purchase a new dredge pump in 4 years. Billy Hanson, the owner, invests $11,800 in an account that pays 8% interest compounded quarterly. How much will Mr. Hanson have in the account at the end of 4 years?

A)$14,864.58
B)$16,198.92
C)$16,053.78
D)$21,840.97

Question 32

Tom liquidates an investment, and his proceeds will be received in 8 annual payments of $10,000 each with interest computed at 7%. What is the Present Value of this Annuity?

A)$89,228.00
B)$59,713.00
C)$17,181.90
D)$5,820.10

Question 33

Mark is planning on making an investment in a new computer system. He wants to know how much he must invest to have $9,000 in 4 years if the interest rate is 5% per year?

A)$10,939.59
B)$2,479.41
C)$7,826.83
D)$7,404.30

Question 34

Chris Hines invested $12,000 in a municipal bond. The bond pays 8% interest and matures in 3 years. How much money will Chris have at maturity?

A)$22,211,16
B)$15,116.52
C)$36,960.00
D)$38,596.80

Question 35

Tom is saving for an engagement ring. If he deposits $500 payments into an account (one at the end of each year) that earns 6% interest compounded annually, how much will he have saved by the end of the 10^th year?

A)$895.42
B)$13,435.18
C)$6,590.39
D)$6,554.39

Question 36

Betty has received an inheritance from her uncle. She would like to invest some of the inheritance to pay for her son's college. To pay for college she will need to withdraw $25,000 per year for 4 years beginning 1 year from today. How much must she invest if she can earn 5%?

A)$77,397.37
B)$20,567.50
C)$31,913.55
D)$88,648.75

Question 37

Mark would like to retire in 25 years. If he deposits $10,000 at the end of each of the next 25 years into an account earning 7% interest, how much will he have in this account at the end of 25 years?

A)$250,000
B)$758,292.17
C)$632,490.40
D)$291,339.50

Question 38

Julie expects to receive payments of $1,200 at the end of the year for the next 3 years. Assuming Julie invests the payments into an account earning 8%, how much will she have at the end of the 3 years?

A)$3,985.68
B)$3,600.00
C)$10,670.81
D)$3,092.52

Question 39

Eric is considering buying a car. He can either purchase the car outright or make 5 annual payments of $10,000 at the end of each year. If the interest rate is 7%, how much is the outright purchase price?

A)$14,025.50
B)$7,129.90
C)$41,002.00
D)$57,863.70

Question 40

An investor expects to receive 10 payments of $5,000 each made at the end of each period. If interest is compounded at 5% annually, what is the future value of these payments?

A)$3,069.55
B)$7,387.30
C)$38,608.65
D)$62,889.45

Question 41

A purchased company must be recorded at the value of the cash and other consideration given by the acquiring company.

Question 42

The amount to which an account will grow when interest is compounded is the ______________ value.

Question 43

Cash flows are described as either single cash flows or _______________.

Question 44

Held-to-maturity securities are equity and debt investments that management intends to sell in the future, but not necessarily in the near term.

Question 45

A debt security exists when another entity owes the security holder some combination of interest and principal.

Question 46

If the investor holds 50% or more of the investee's outstanding common stock, then the investor is referred to as the parent and the investee is called the subsidiary.

Question 47

The _______________ treats the present value as a liability that will be paid through a series of equal payments.

Question 48

If the investor holds enough common stock to control the investee (50% or more common stock ownership), then the two corporations are no longer separate accounting entities and therefore they no longer may maintain separate accounting records.

Question 49

Beach Catering sold its business for $75,000 under an asset purchase agreement. Under the agreement, the buyer made an initial payment of $35,000 which Beach Catering invested at 6% compounded semiannually. At the beginning of the fourth year, the balance of the purchase price was paid by the buyer. Beach Catering places this $40,000 in the same investment with interest compounded semiannually at 6%. At the end of 6 years, how much does Beach Catering have in its investment account?

Question 50

In present value problems, the interest rate is also called the __________________.

Question 51

The equity method of accounting is used if the investor owns between 20-50% of another company and the investor is able to exert influence over the other company.

Question 52

Wanda Ward makes an investment of $11,800, which pays 8% interest that is compounded quarterly. How much interest will have accrued at the end of 48 months?

Question 53

If the parent owns 90% of the subsidiary's stock, then 90% of the subsidiary's assets and liabilities are included in the consolidated balance sheet.

Question 54

If the investor owns over 50% of the outstanding common stock, the investor is deemed to have control over the operating and financial policies of the investee.

Question 55

Securities issued by a corporation as a form of ownership in the business, such as common stock and preferred stock, are called equity securities.

Question 56

The fair value method should be used to account for stock investments of less than 20% of the outstanding shares.

Question 57

An advantage of the equity method over the fair value method is that it prevents an investor from manipulating its own income by exerting influence over the amount and timing of investee dividends.

Question 58

Marvin's Manufacturing can invest in a new process, but will need to purchase new equipment. The cost of the equipment is $75,000 and needs to be in place in 8 years. The company invests the money at 8% interest compounded semiannually. How much will they need to invest in order to have $75,000 in 8 years?

Question 59

The excess of acquisition cost over the current value of the investee's identifiable net assets, referred to as goodwill, may not be recorded by the investor under current generally accepted accounting principles.

Question 60

Any transaction or set of transactions that brings together two or more previously separate entities to form a single accounting entity is called a business combination.

Question 61

The practice of adjusting the market value of securities that are accounted for using the fair value method is referred to as

A)consolidation.
B)marking-to-market.
C)passive investing.
D)segregation of investments.

Question 62

____________________ securities are debt investments that are accounted for on an amortized cost basis because management intends to hold the investment until the debt contract requires the borrower to completely repay the debt.

Question 63

____________________ securities are equity or debt investments that are bought and sold frequently and are typically owned for less than one month.

Question 64

Consolidation is required when a parent acquires between 50% and 100% of the subsidiary's stock. Any voting stock not held by the parent is called the ____________________.

Question 65

The equity method of accounting for an investment is used when a company purchases

A)more than 20% of the debt securities of another company.
B)100% of the debt securities of another company.
C)15% of the equity securities of another company.
D)between 20-50% of the equity securities of another company.

Question 66

Any transaction or set of transactions that brings together two or more previously separate entities to form a single accounting entity is called a ____________________.

Question 67

If the acquisition cost exceeds the current value of the net assets (assets minus liabilities) acquired, the investor must also be purchasing an intangible asset arising from attributes that are not separable from the business-such as customer satisfaction, product quality, skilled employees, and business location.

Question 68

Ownership in a corporation is represented by shares of common or preferred stock called ____________________ securities.

Question 69

A passive investment is one in which the owner

A)is not attempting to exert influence over the company.
B)owns between 15-25% of the company's outstanding stock.
C)uses the equity method of accounting for the investment.
D)is gradually attempting to gain control over the company.

Question 70

The excess of the investor's acquisition cost over the current value of the investee's identifiable net assets is recorded as an intangible asset called ____________________.

Question 71

Minority (or noncontrolling) interest is disclosed when the parent owns more than 50%, but less than 100% of the outstanding common stock.

Question 72

____________________ securities, such as bonds, exist when another entity owes the security holder some combination of principal and interest.

Question 73

If the investor holds 50% or more of the common stock of the investee, then the investor is referred to as the ____________________ and the investee is referred to as the ____________________.

Question 74

When a company purchases less than 50% of the equity securities of another company, which of the following statements is true?

A)Both companies' financial statements must be combined in consolidation.
B)The equity method of accounting will be required if the company's investment is at least 20%.
C)The fair value method of accounting will be used only if the securities are classified as available-for-sale.
D)The fair value method of accounting will be used only if they are trading securities.

Question 75

Business combinations can occur through either an asset or ____________________ acquisition.

Question 76

When an investor is able to exert significant influence over another company, the ____________________ method of accounting is used for the investment.

Question 77

If the investor holds 50% or more of the common stock of the investee, then the two corporations are no longer separate accounting entities and therefore must prepare ____________________ financial statements, which combine information about the two corporations as if they were a single company.

Question 78

What are the effects on the accounting equation from the recognition of an unrealized loss on trading securities?

A)Assets and stockholders' equity decrease.
B)No effects; unrealized gains and losses should not be recorded.
C)Assets and liabilities decrease.
D)Stockholders' equity decreases and liabilities increase.

Question 79

A business combination is recorded at the cost of acquisition, without regard to the seller's ____________________ value.

Question 80

What are the effects on the accounting equation from the purchase of a short-term investment?

A)Assets and stockholders' equity increase.
B)No effects; assets increase and decrease by the same amount.
C)Assets and liabilities decrease.
D)Stockholders' equity increases and liabilities decrease.