Question 1

How much must be deposited on January 1, 2010 in a savings account paying 6% annually in order to make annual withdrawals of $20,000 at the end of the years 2010 and 2011? The present value of one at 6% for one period is .9434.

Accepted Answer

A) $36,668 
B) $37,740 
C) $40,000 
D) $17,800

Question 2

What amount should an individual have in a 10% bank account today before withdrawal if $5,000 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.)

Accepted Answer

A) $5,000 + ($5,000 × 0.909) + ($5,000 × 0.826) + ($5,000 × 0.751) 
B) $5,000 ÷ 0.683 × 4 
C) ($5,000 × 0.909) + ($5,000 × 0.826) + ($5,000 × 0.751) + ($5,000 × 0.683) 
D) $5,000 ÷ 0.909 × 4

Question 3

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

Accepted Answer

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

Question 4

Garretson Corporation will receive $10,000 today (January 1, 2010), and also on each January 1st for the next five years (2013 - 2017).What is the present value of the six $10,000 receipts, assuming a 12% interest rate?

Accepted Answer

A) $41,114. 
B) $46,048. 
C) $81,152. 
D) $90,890.

Question 5

Lucy and Fred want to begin saving for their baby's college education.They estimate that they will need $250,000 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?

Accepted Answer

A) $8,089. 
B) $7,631. 
C) $13,889. 
D) $7,405.

Question 6

Anna has $60,000 to invest.She requires $100,000 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?

Accepted Answer

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

Question 7

John won a lottery that will pay him $100,000 at the end of each of the next twenty years.Assuming an appropriate interest rate is 8% compounded annually, what is the present value of this amount?

Accepted Answer

A) $1,060,360. 
B) $21,455. 
C) $981,815. 
D) $4,576,196.

Question 8

Bella requires $80,000 in four years to purchase a new home.What amount must be invested today in an investment that earns 6% interest, compounded annually?

Accepted Answer

A) $63,367. 
B) $65,816. 
C) $96,891. 
D) $100,998.

Question 9

On January 1, 2012, Ball Co.exchanged equipment for a $160,000 zero-interest-bearing note due on January 1, 2015.The prevailing rate of interest for a note of this type at January 1, 2012 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 2013 income statement?

Accepted Answer

A) $0 
B) $12,000 
C) $13,200 
D) $16,000

Question 10

James leases a ski chalet to his best friend, Janet.The lease term is five years with $22,000 annual payments due at the beginning of each year.What is the present value of the payments discounted at 8% per annum?

Accepted Answer

A) $94,867. 
B) $87,840. 
C) $83,981. 
D) $79,736.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Spencer Corporation will invest $10,000 every December 31st for the next six years (2012 - 2017).If Spencer will earn 12% on the investment, what amount will be in the investment fund on December 31, 2017?

Accepted Answer

A) $41,114. 
B) $46,048. 
C) $81,152. 
D) $90,890.

Question 13

On January 1, 2012, Kline Company decided to begin accumulating a fund for asset replacement five years later.The company plans to make five annual deposits of $50,000 at 9% each January 1 beginning in 2012.What will be the balance in the fund, within $10, on January 1, 2017 (one year after the last deposit)? The following 9% interest factors may be used.

Accepted Answer

A) $326,166 
B) $299,235 
C) $272,500 
D) $250,000

Question 14

For which of the following transactions would the use of the present value of an ordinary annuity concept be appropriate in calculating the present value of the asset obtained or the liability owed at the date of incurrence?

Accepted Answer

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

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

Jonas won a lottery that will pay him $100,000 at the end of each of the next twenty years.Zebra Finance has offered to purchase the payment stream for $1,359,000.What interest rate (to the nearest percent) was used to determine the amount of the payment?

Accepted Answer

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

Question 17

Lucy and Fred want to begin saving for their baby's college education.They estimate that they will need $350,000 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?

Accepted Answer

A) $13,554. 
B) $29,941. 
C) $28,960. 
D) $12,441.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Lane Co.has a machine that cost $200,000.It is to be leased for 20 years with rent received at the beginning of each year.Lane wants a return of 10%.Calculate the amount of the annual rent.

Accepted Answer

A) $21,356 
B) $23,909 
C) $29,728 
D) $23,492

Question 20

On July 1, 2012, Ed Wynne signed an agreement to operate as a franchisee of Kwik Foods, Inc., for an initial franchise fee of $180,000.Of this amount, $60,000 was paid when the agreement was signed and the balance is payable in four equal annual payments of $30,000 beginning July 1, 2013.The agreement provides that the down payment is not refundable and no future services are required of the franchisor.Wynne's credit rating indicates that he can borrow money at 14% for a loan of this type.Information on present and future value factors is as follows:  Wynne should record the acquisition cost of the franchise on July 1, 2012 at

Accepted Answer

A) $130,800. 
B) $147,300. 
C) $180,000. 
D) $202,800.

Exam 6: Accounting and the Time Value of Money

How much must be deposited on January 1, 2010 in a savings account paying 6% annually in order to make annual withdrawals of $20,000 at the end of the years 2010 and 2011? The present value of one at 6% for one period is .9434.

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

Garretson Corporation will receive $10,000 today (January 1, 2010) , and also on each January 1st for the next five years (2013 - 2017) .What is the present value of the six $10,000 receipts, assuming a 12% interest rate?

Lucy and Fred want to begin saving for their baby's college education.They estimate that they will need $250,000 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?

Anna has $60,000 to invest.She requires $100,000 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?

John won a lottery that will pay him $100,000 at the end of each of the next twenty years.Assuming an appropriate interest rate is 8% compounded annually, what is the present value of this amount?

Bella requires $80,000 in four years to purchase a new home.What amount must be invested today in an investment that earns 6% interest, compounded annually?

James leases a ski chalet to his best friend, Janet.The lease term is five years with $22,000 annual payments due at the beginning of each year.What is the present value of the payments discounted at 8% per annum?

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

Spencer Corporation will invest $10,000 every December 31st for the next six years (2012 - 2017) .If Spencer will earn 12% on the investment, what amount will be in the investment fund on December 31, 2017?

For which of the following transactions would the use of the present value of an ordinary annuity concept be appropriate in calculating the present value of the asset obtained or the liability owed at the date of incurrence?

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.

Jonas won a lottery that will pay him $100,000 at the end of each of the next twenty years.Zebra Finance has offered to purchase the payment stream for $1,359,000.What interest rate (to the nearest percent) was used to determine the amount of the payment?

Lucy and Fred want to begin saving for their baby's college education.They estimate that they will need $350,000 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?

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

Lane Co.has a machine that cost $200,000.It is to be leased for 20 years with rent received at the beginning of each year.Lane wants a return of 10%.Calculate the amount of the annual rent.