Deck 6: Accounting and the Time Value of Money

Question 1

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.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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 5

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 6

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

Question 7

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 8

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 9

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

Question 10

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

Question 11

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

Question 12

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

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

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

Question 15

The present value of an ordinary annuity is the present value of a series of equal rents withdrawn at equal intervals.

Question 16

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

Question 17

Simple interest is computed on principal and on any interest earned that has not been withdrawn.

Question 18

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

Question 19

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 20

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

Question 21

What is interest?

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

Question 22

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 23

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 24

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 25

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 26

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

Question 27

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 28

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 29

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

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

Question 30

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 31

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 32

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 33

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 34

On June 1, 2015, 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, 2015.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 35

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 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

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

Question 38

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 39

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 40

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 41

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 42

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 43

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 44

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 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

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 47

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 48

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, 2015, the present value of that sum decreases as the date draws closer to December 31, 2015.

Question 49

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 50

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 51

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 52

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 $1.00 discounted at 10% for one to five periods.Each of the items 59 to 61 is based on 10% interest compounded annually.

Question 53

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 54

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 55

On May 1, 2015, a company purchased a new machine which it does not have to pay for until May 1, 2017.The total payment on May 1, 2017 will include both principal and interest.Assuming interest at a 10% rate, the cost of the machine would be the total payment multiplied by what time value of money factor?

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

Question 56

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 57

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 58

On December 1, 2015, 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, 2015, 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 59

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 60

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 61

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 62

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 63

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 64

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 65

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 66

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 67

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 68

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 69

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

Question 70

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 71

On January 1, 2015, Ball Co.exchanged equipment for a $200,000 zero-interest-bearing note due on January 1, 2018.The prevailing rate of interest for a note of this type at January 1, 2015 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 2016 income statement?

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

Question 72

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 73

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 74

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 75

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 76

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 77

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 78

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 79

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 80

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