Deck 7: Accounting and the Time Value of Money

Question 1

Simple interest on a $620,000, 6%, 18-month note is ________.

A) $74,400
B) $37,200
C) $27,900
D) $55,800

Answer 1

D

Question 2

Compound interest includes interest earned on interest.

Answer 2

True

Question 3

What is the effective interest rate for an investment fund that pays 6% interest compounded semiannually? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations, and round your final answer two decimal places, X.XX%.)

A) 6.50%
B) 6.09%
C) 6.00%
D) 6.17%

Answer 3

B

Question 4

Simple interest is computed on just the accumulated interest left on deposit.

Question 5

The effective interest rate is calculated as the total interest earned during the year divided by the beginning balance of the investment as the first of the year.

Question 6

Determining the future value of one or more present day cash flows is known as ________.

A) disinvesting
B) compounding
C) discounting
D) annuitizing

Question 7

The value of a dollar today is greater than the value of a dollar in the future because a dollar today can be invested to earn interest.

Question 8

Why do accountants need to be familiar with present value concepts?

Question 9

Compound interest is computed on both the principal and on the accumulated interest.

Question 10

The length of a compounding period is determined by the frequency of interest compounding.

Question 11

What is the effective interest rate for an investment fund that pays 4% interest compounded monthly? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations, and round your final answer two decimal places, X.XX%.)

A) 4.33%
B) 4.00%
C) 4.07%
D) 4.04%

Question 12

The effective interest rate is the same as the stated interest rate.

Question 13

Determining the present value of one or more future amounts is known as ________.

A) inverting
B) compounding
C) discounting
D) annuitizing

Question 14

The method of converting a future dollar amount into its present dollar value by removing the time value of money is called ________.

A) devaluing
B) amortizing
C) compounding
D) discounting

Question 15

When payments take place at the beginning of each period, the series of cash flows is called a(n) ________.

A) ordinary annuity
B) annuity due
C) posterior annuity
D) anterior annuity

Question 16

What is the term that describes the value today of a cash flow or series of cash flows to be received or paid in the future?

A) present value
B) compound value
C) discount value
D) temporal value

Question 17

Bob Marby purchased a TV from Tryton Sales and signed a 2-year, 8% promissory note for $1,000. What is the amount required to pay off the note if it accrues simple interest over the term of the loan?

A) $840
B) $1,080
C) $1,160
D) $920

Question 18

What is the time value of money?

Question 19

Which of the following items does not use an accounting measure based on present value?

A) patents
B) leases
C) pensions
D) bonds

Question 20

Interest calculated on the original principal regardless of the amount of interest that has been paid or accrued in the past is ________.

A) principal interest
B) original interest
C) simple interest
D) compound interest

Question 21

You have discovered an investment opportunity that earns a 10% rate of interest compounded annually. What amount should you deposit today to have $10,000 in two years? Use the formula method. (Do not round any intermediary calculations, and round your final answer to the nearest dollar.)

A) $8,227
B) $8,264
C) $8,333
D) $9,000

Question 22

You decide to deposit $3,000 at a local bank for three years at a 5% rate of interest compounded quarterly. The future value of your investment is approximately equal to ________. (Use the formula method and round to the nearest dollar.

A) $3,450
B) $3,482
C) $3,479
D) $3,484

Question 23

Dover Company deposits $30,000 with Second National Bank in an account earning interest at 5% per annum, compounded semi-annually. How much will Dover have in the account after five years if interest is reinvested? Use the formula method. (Do not round any intermediary calculations, and round your final answer to the nearest dollar.)

A) $37,500
B) $33,750
C) $38,461
D) $38,403

Question 24

Future value factors are determined by two characteristics: the interest rate per compounding period and the number of compounding periods.

Question 25

Present value factors are determined by two characteristics: the interest rate and the length of the compounding periods.

Question 26

$70,000 is put in an investment account today. The investment account compounds interest at a rate of 2% per month. What amount will be available five years from today? Use the formula method. (Do not round any intermediary calculations, and round your final answer to the nearest dollar.)

A) $104,016
B) $154,000
C) $85,330
D) $229,672

Question 27

A future value is always less than the corresponding present value.

Question 28

You decide to deposit $1,000 at a local bank for two years at a 5% rate of interest compounded annually. What is the future value of your investment? (Use the future value of $1 factor table provided).
Excerpt of Future Value of $1 Table
$$\begin{array} { | c | c | } \hline \text { Periods } & 5 \% \\\hline 1 & 1.05 \\\hline 2 & 1.10 \\\hline 3 & 1.16 \\\hline 4 & 1.22 \\\hline 5 & 1.28 \\\hline 6 & 1.34 \\\hline 7 & 1.41 \\\hline 8 & 1.48 \\\hline 9 & 1.55 \\\hline 10 & 1.63 \\\hline 11 & 1.71 \\\hline 12 & 1.80 \\\hline\end{array}$$

A) $1,000
B) $1,050
C) $1,160
D) $1,100

Question 29

You have discovered an investment opportunity that earns a(n) 3% rate of interest compounded quarterly. Which of the following amounts is approximately equal to the amount you should deposit today to have $8,000 in five years? Use the formula method. (Do not round any intermediary calculations, and round your final answer to the nearest dollar.)

A) $6,800
B) $6,901
C) $6,893
D) $6,890

Question 30

A present value is always less than the corresponding future value.

Question 31

The relationship between the future value of a single sum and the corresponding present value of a single sum is determined by two variables. What are those two variables?

A) interest rate; length of compounding periods
B) interest rate per compounding period; number of compounding periods
C) conversion rate; length of compounding periods
D) conversion rate; number of compounding periods

Question 32

You have discovered an investment opportunity that earns a 6% rate of interest compounded semiannually. What amount should you deposit today to have $4,000 in three years? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations, and round your final answer to the nearest dollar.)

A) $3,358
B) $3,346
C) $3,350
D) $3,280

Question 33

How is the effective interest rate determined?

Question 34

You decide to deposit $3,000 at a local bank for three years at a 5% rate of interest compounded semiannually. The future value of your investment is approximately equal to ________. (Use the formula approach and round your final answer to the nearest dollar.)

A) $3,473
B) $3,482
C) $3,479
D) $3,450

Question 35

You decide to deposit $2,000 at a local bank for two years at a 8% rate of interest compounded annually. What is the future value of your investment? (Do not round any intermediary calculations, and round your final answer to the nearest dollar.) Use the formula approach.

A) $2,000
B) $2,160
C) $2,343
D) $2,333

Question 36

A zero-interest bond pays $100,000 in seven years. What amount would you be willing to pay to acquire the bond today if you want to earn a return of approximately 10%? Use the present value of $1 table shown below. (Do not round any intermediary calculations, and round your final answer to the nearest dollar.)
Excerpt of Present Value of $1 Table
$$\begin{array} { | c | c | } \hline \text { Periods } & \mathbf { 1 0 } \% \\\hline 1 & 0.90909 \\\hline 2 & 0.82645 \\\hline 3 & 0.75131 \\\hline 4 & 0.68301 \\\hline 5 & 0.62092 \\\hline 6 & 0.56447 \\\hline 7 & 0.51316 \\\hline\end{array}$$

A) $90,909
B) $68,301
C) $51,316
D) $30,000

Question 37

Which of the following statements is true?

A) The process of accumulating interest on interest is referred to as discounting.
B) The higher the discount rate, the higher the present value.
C) If interest is 11% compounded annually, $1,100 due one year from today is equivalent to $1,000 today.
D) If interest is 4% compounded annually, $10,400 due one year from today is equivalent to $10,000 today.

Question 38

The PV (present value) function for a single sum in a Microsoft Excel spreadsheet requires inputting all of the following variables except ________.

A) length of compounding period
B) number of compounding periods
C) interest rate per compounding period
D) future value of single sum

Question 39

For any specific number of periods, the present value factor for a single sum decreases as the discount rate increases.

Question 40

The relationship between the future value of a single sum and the corresponding present value of a single sum is determined by the interest rate per compounding period and ________.

A) number of compounding periods
B) length of compounding periods
C) principal balance
D) time of year

Question 41

The parents of a recent high school graduate decide to invest the $14,000 she received for her high school graduation in a fund earning 5% annual interest. At the end of the four-year period, she expects to withdraw the money to pay for accumulated college tuition loans. What is the approximate amount that would be available for withdrawal after four years if interest is compounded monthly? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations and round your final answer to the nearest dollar.)

A) $17,868
B) $17,017
C) $2,800
D) $17,093

Question 42

Maria Gonzales is considering two investment options for a $2,500 gift she received for graduation. Both investments have the same annual interest rates but one offers quarterly compounding while the other compounds on a monthly basis. Which investment should she choose? Why?

Question 43

A single amount is invested and increases over time as interest is compounded. If the number of periods is known, the interest rate can be approximately determined by ________.

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

Question 44

A specific future value of an ordinary annuity factor for a given number of periods and a specific discount rate is equal to the cumulative sum of the future value of single sum factors over the given number of periods for that discount rate.

Question 45

With an annuity due, a payment is made or received on the date the agreement begins.

Question 46

A series of equal periodic payments in which the first payment is made one compounding period after the date of the contract is ________.

A) an ordinary annuity
B) an annuity due
C) a deferred annuity
D) a compound annuity

Question 47

The future value of an ordinary annuity for any given interest rate and number of periods is always less than the future value of an annuity due for the same interest rate and number of periods.

Question 48

Paula Poser will receive $80,000 on December 31, 2024, from a trust fund established by her mother. Assuming the appropriate interest rate for discounting is 12% (compounded semiannually), what is the present value of this amount as of January 1, 2020 (5 years earlier)? Use the formula approach.

Question 49

Fanagi Corp. borrowed $57,000 from its bank at a 6% annual interest rate and will repay $182,807. Assume annual compounding. In approximately how many years will Fanagi repay the loan? Use the future value of $1 factor table shown below.
Excerpt of Future Value of $1 Table
$$\begin{array} { | c | c | c | c | c | c | c | } \hline \text { Periods } & 1 \% & 2 \% & 3 \% & 4 \% & 5 \% & 6 \% \\\hline 1 & 1.01000 & 1.02000 & 1.03000 & 1.04000 & 1.05000 & 1.06000 \\\hline 2 & 1.02010 & 1.04040 & 1.06090 & 1.08160 & 1.10250 & 1.12360 \\\hline 3 & 1.03030 & 1.06121 & 1.09273 & 1.12486 & 1.15763 & 1.19102 \\\hline 4 & 1.04060 & 1.08243 & 1.12551 & 1.16986 & 1.21551 & 1.26248 \\\hline 5 & 1.05101 & 1.10408 & 1.15927 & 1.21665 & 1.27628 & 1.33823 \\\hline 10 & 1.10462 & 1.21899 & 1.34392 & 1.48024 & 1.62889 & 1.79085 \\\hline 20 & 1.22019 & 1.48595 & 1.80611 & 2.19112 & 2.65330 & 3.20714 \\\hline 25 & 1.28243 & 1.64061 & 2.09378 & 2.66584 & 3.38635 & 4.29187 \\\hline 30 & 1.34785 & 1.81136 & 2.42726 & 3.24340 & 4.32194 & 5.74349 \\\hline 35 & 1.41660 & 1.99989 & 2.81386 & 3.94609 & 5.51602 & 7.68609 \\\hline 40 & 1.48886 & 2.20804 & 3.26204 & 4.80102 & 7.03999 & 10.28572 \\\hline\end{array}$$

A) 35 years
B) 25 years
C) 30 years
D) 20 years

Question 50

Punjab Company borrowed $114,000 from its bank. Punjab will repay $140,000 in 7 years. What is the approximate interest rate that Punjab will incur on this loan, assuming annual compounding? Use a financial calculator or a spreadsheet to derive your answer. (Do not round any intermediary calculations, and round your final answer two decimal places, X.XX%.)

A) 2.16%
B) 2.98%
C) 81.43%
D) 3.79%

Question 51

Henry Rector deposited $5,000 in a certificate of deposit that provides interest of 10% compounded quarterly if the amount is maintained for 5 years. How much will Henry have at the end of 5 years? Use the formula approach.

Question 52

A zero-interest bond pays $200,000 in 10 years. What amount would you be willing to pay to acquire the bond today if you want to earn a return of approximately 4%? Use the present value table of $1 provided. (Do not round any intermediary calculations, and round your final answer to the nearest dollar.)
Excerpt of Present Value of $1 Table
$$\begin{array} { | c | c | } \hline \text { Periods } & \mathbf { 4 } \% \\\hline 1 & 0.96154 \\\hline 2 & 0.92456 \\\hline 3 & 0.88900 \\\hline 4 & 0.85480 \\\hline 5 & 0.82193 \\\hline 6 & 0.79031 \\\hline 7 & 0.75992 \\\hline 8 & 0.73069 \\\hline 9 & 0.70259 \\\hline 10 & 0.67556 \\\hline\end{array}$$

A) $120,000
B) $164,386
C) $134,594
D) $135,112

Question 53

Como Company borrowed $5,200 from its bank. Como will repay $7,300 in five years. What is the approximate interest rate that Como will incur on this loan, assuming annual compounding? Use the future value of $1 table.
Excerpt of Future Value of $1 Table
$$\begin{array} { | c | c | c | c | } \hline \text { Periods } & \mathbf { 7 \% } & \mathbf { 8 \% } & \mathbf { 9 \% } \\\hline 1 & 1.07000 & 1.08000 & 1.09000 \\\hline 2 & 1.14490 & 1.16640 & 1.18810 \\\hline 3 & 1.22504 & 1.25971 & 1.29503 \\\hline 4 & 1.31080 & 1.36049 & 1.41158 \\\hline 5 & 1.40255 & 1.46933 & 1.53862 \\\hline 6 & 1.50073 & 1.58687 & 1.67710 \\\hline\end{array}$$

A) 7%
B) 8%
C) 9%
D) 29%

Question 54

List the variables in a single-sum problem.

Question 55

An annuity due is a series of equal periodic payments made at the beginning of each period.

Question 56

Wasup Corp. is thinking of borrowing $110,000 from its bank at 8% annual interest rate. The amount that will be repaid is $138,568. Assume annual compounding. In approximately how many years will Wasup Corp. need to repay the loan? Use the future value of $1 factor table shown below.
Excerpt of Future Value of $1 Table
$$\begin{array} { | c | c | c | c | } \hline \text { Periods } & \mathbf { 7 \% } & \mathbf { 8 \% } & \mathbf { 9 \% } \\\hline 1 & 1.07000 & 1.08000 & 1.09000 \\\hline 2 & 1.14490 & 1.16640 & 1.18810 \\\hline 3 & 1.22504 & 1.25971 & 1.29503 \\\hline 4 & 1.31080 & 1.36049 & 1.41158 \\\hline 5 & 1.40255 & 1.46933 & 1.53862 \\\hline 6 & 1.50073 & 1.58687 & 1.67710 \\\hline 7 & 1.60578 & 1.71382 & 1.82804 \\\hline\end{array}$$

A) 3 years
B) 4 years
C) 5 years
D) 6 years

Question 57

An ordinary annuity is a series of equal periodic payments made at the beginning of each period.

Question 58

The present value of an annuity due for any given interest rate and number of periods is always less than the future value of an annuity due for the same interest rate and number of periods.

Question 59

You are provided with two time value of money tables. One is a present value of $1 table and one is a future value of $1 table. How can you tell which table is which type?

Question 60

An ordinary annuity is a series of equal periodic payments and an annuity due is a series of unequal periodic payments.

Question 61

On January 1, 2020, Denero Company issued 10-year bonds with a face value of $6,000,000 due on December 31, 2029. The company will accumulate a fund to retire these bonds at maturity. It will make ten annual deposits to the fund beginning on December 31, 2020. How much must Denero deposit each year to achieve this investment goal, assuming that it will earn 5% interest compounded annually? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations, and round your final answer to the nearest dollar.)

A) $777,027
B) $454,612
C) $477,027
D) $600,000

Question 62

All of the following are conditions for an ordinary annuity except ________.

A) the future value is equal to the present value
B) the time periods between the cash flows are the same length
C) periodic cash flows must be equal in amount
D) interest is compounded at the end of each time period

Question 63

Harlan Corporation deposits $225,000 every June 30th and December 31st in a savings account (beginning in the current year) for the next three years so that it can purchase a new piece of machinery at the end of three years. The interest rate is 4%. How much money will Harlan Corporation have at the end of three years? Use the future value of an ordinary annuity factor table shown below to derive your answer.
$$\begin{array} { | c | c | c | c | c | } \hline \text { Periods } & \mathbf { 1 \% } & \mathbf { 2 } \% & \mathbf { 3 } \% & \mathbf { 4 } \% \\\hline 1 & 1 & 1 & 1 & 1 \\\hline 2 & 2.01000 & 2.02000 & 2.03000 & 2.04000 \\\hline 3 & 3.03010 & 3.06040 & 3.09090 & 3.12160 \\\hline 4 & 4.06040 & 4.12161 & 4.18363 & 4.24646 \\\hline 5 & 5.10101 & 5.20404 & 5.30914 & 5.41632 \\\hline 6 & 6.15202 & 6.30812 & 6.46841 & 6.63298 \\\hline 7 & 7.21354 & 7.43428 & 7.66246 & 7.89829 \\\hline 8 & 8.28567 & 8.58297 & 8.89234 & 9.21423 \\\hline 9 & 9.36853 & 9.75463 & 10.15911 & 10.58280 \\\hline 10 & 10.46221 & 10.94972 & 11.46388 & 12.00611 \\\hline\end{array}$$

A) $1,419,327
B) $688,590
C) $1,492,421
D) $702,360

Question 64

BillyBob Corporation deposits $80,000 at the beginning of every quarter in a savings account for the next eight years so that it can purchase a new piece of machinery at the end of eight years. The interest rate is 4%. How much money will BillyBob Corporation have at the end of eight years? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations, and round your final answer to the nearest dollar.)

A) $2,999,525
B) $669,482
C) $766,624
D) $3,029,521

Question 65

The future amount of an annuity due is determined ________.

A) one period after the last cash payment in the series
B) one period before the last cash payment in the series
C) at the same time as the first cash payment in the series
D) at the same time as the last cash payment in the series

Question 66

Bobby's parents loaned him $60,000 to fund his college education. His parents are not charging interest. They desire to be paid one lump sum of $60,000 when Bobby can accumulate that amount. Bobby established a savings plan that earns 11% compounded annually. His new job promises to pay an annual holiday bonus that will enable him to make equal annual, year-end deposits of $6,800 starting next year. Approximately how many years will it take Bobby to accumulate the $60,000? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations, and round your final answer to the nearest year.)

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

Question 67

For any discount rate and number of periods, the present value of an annuity due factor is always greater than the corresponding present value of an ordinary annuity factor.

Question 68

List the five primary variables of an annuity problem and explain the difference between an ordinary annuity and an annuity due.

Question 69

Maddie's Place Corporation deposits $100,000 at the beginning of every quarter in a savings account for the next six years so that it can purchase a new piece of machinery at the end of six years. The interest rate is 8%. How much money will Maddie's Place Corporation have at the end of six years? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations, and round your final answer to the nearest dollar.)

A) $3,042,186
B) $3,103,030
C) $792,280
D) $643,428

Question 70

Anne wants to accumulate $20,000 by December 31, 2019. To accumulate that sum, she will make twelve equal quarterly deposits of $1,576.98 at the end of March, June, September, and December for the next three years, beginning on March 31, 2016, into a fund that earns interest compounded quarterly. What annual rate of interest must the fund provide to yield the desired sum? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations, and round your final answer to the nearest year.)

A) 1%
B) 2%
C) 4%
D) 5%

Question 71

Cline Corporation deposits $75,000 every quarter in a savings account (beginning at the end of the current quarter) for the next five years so that it can purchase a new piece of machinery at the end of five years. The interest rate is 12%. How much money will Cline Corporation have at the end of five years? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations, and round your final answer to the nearest dollar.)

A) $5,403,933
B) $2,015,278
C) $2,075,736
D) $1,316,155

Question 72

Each year for the next 10 years, Carmen Lector will deposit $4,000 into an investment fund that pays 10% compounded annually. Use the formula approach.
a. How much will Carmen have at the end of 10 years if the first of 10 deposits are made at the end of each year?
b. How much will Carmen have at the end of 10 years if the first of 10 deposits are made at the beginning of each year?

Question 73

Aucutt Incorporated deposits $200,000 every January 1st and July 1st in a savings account for the next five years so that it can purchase a new piece of machinery at the end of five years. The interest rate is 12%. How much money will Aucutt Incorporated have at the end of five years? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations, and round your final answer to the nearest dollar.)

A) $2,794,329
B) $2,636,159
C) $1,423,038
D) $1,270,569

Question 74

A specific present value of an ordinary annuity factor for a given number of periods and a specific discount rate is equal to the cumulative sum of the present value of single sum factors over the given number of periods for that discount rate.

Question 75

All of the following are conditions for an annuity due except ________.

A) the interest rate is constant for each time period
B) payments occur at the end of each time period
C) the time periods between the cash flows are the same length
D) periodic cash flows must be equal in amount

Question 76

Leberland Corporation deposits $125,000 every year in a savings account (beginning at the end of the current year) for the next six years so that it can purchase a new piece of machinery at the end of six years. The interest rate is 6%. How much money will Leberland Corporation have at the end of six years? Use the future value of an ordinary annuity factor table shown below to derive your answer.
Excerpt from future value of an ordinary annuity factor table
$$\begin{array} { | c | c | c | c | c | } \hline \text { Periods } & 3 \% & 4 \% & 5 \% & 6 \% \\\hline 1 & 1.00000 & 1.00000 & 1.00000 & 1.00000 \\\hline 2 & 2.03000 & 2.04000 & 2.05000 & 2.06000 \\\hline 3 & 3.09090 & 3.12160 & 3.15250 & 3.18360 \\\hline 4 & 4.18363 & 4.24646 & 4.31013 & 4.37462 \\\hline 5 & 5.30914 & 5.41632 & 5.52563 & 5.63709 \\\hline 6 & 6.46841 & 6.63298 & 6.80191 & 6.97532 \\\hline 7 & 7.66246 & 7.89829 & 8.14201 & 8.39384 \\\hline 8 & 8.89234 & 9.21423 & 9.54911 & 9.89747 \\\hline 9 & 10.15911 & 10.58280 & 11.02656 & 11.49132 \\\hline 10 & 11.46338 & 12.00611 & 12.57789 & 13.18079 \\\hline\end{array}$$

A) $871,915
B) $397,950
C) $435,958
D) $198,975

Question 77

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

A) the interest rate
B) annuity due only relates to future values
C) ordinary annuity only relates to future values
D) the timing of the periodic payment

Question 78

A specific present value of an ordinary annuity factor for a given number of periods and a specific discount rate is equal to the cumulative sum of the present value of a single sum factors over all the discount rates for that specific number of periods.

Question 79

Each quarter for the next 10 years, Carmen Lector will deposit $1,000 into an investment fund that pays 8% compounded quarterly. Use the formula approach.
a. How much will Carmen have at the end of 10 years if the first of 40 quarterly deposits are made at the end of each quarter?
b. How much will Carmen have at the end of 10 years if the first of 40 quarterly deposits are made at the beginning of each quarter?

Question 80

You are provided with two-time value of money tables. One table provides factors for the future value of an ordinary annuity and the other provides factors for the future value of an annuity due. How can you tell which table is which type?