Deck 6: Accounting and the Time Value of Money

Question 1

The number of compounding periods will always be one less than the number of rents when computing the future value of an ordinary annuity.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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 5

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

Question 6

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

Question 7

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 8

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 9

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 10

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

Question 11

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 12

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

Question 13

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

Question 14

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

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

Simple interest is computed on principal and on any interest earned that has not been withdrawn.

Question 17

The present value of an ordinary annuity is the present value of a series of equal rents withdrawn at equal intervals.

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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 23

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 24

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 25

On June 1, 2006, Walsh Company sold some equipment to Fischer 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, 2006.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

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 27

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

A)Diamond Bar, Inc.rents a truck for 5 years with annual rental payments of $20,000 to be made at the beginning of each year.
B)Michener 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 28

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 29

On December 1, 2007, Michael Hess Company sold some machinery to Shawn Keling 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, 2007, 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 30

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 31

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 32

Ed Sloan 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 33

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 34

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.

Question 35

Which statement 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 1.00000 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 1.00000 to the ordinary annuity table value for one less period.

Question 36

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 37

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 38

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.

Question 39

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

Question 40

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 41

What amount should an individual have in a 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.)

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 42

At the end of two years, what will be the balance in a savings account paying 6% annually if $5,000 is deposited today? The future value of one at 6% for one period is 1.06.

A)$5,000
B)$5,300
C)$5,600
D)$5,618

Question 43

If a savings account pays interest at 4% compounded quarterly, then the amount of $1 left on deposit for 8 years would be found in a table using

A)8 periods at 4%.
B)8 periods at 1%.
C)32 periods at 4%.
D)32 periods at 1%.

Question 44

What amount will be in a bank account three years from now if $6,000 is invested each year for four years with the first investment to be made today?

A)($6,000 × 1.260) + ($6,000 × 1.166) + ($6,000 × 1.080) + $6,000
B)$6,000 × 1.360 × 4
C)($6,000 × 1.080) + ($6,000 × 1.166) + ($6,000 × 1.260) + ($6,000 × 1.360)
D)$6,000 × 1.080 × 4

Question 45

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 46

Swanson Company will receive $100,000 in a future year.If the future receipt is discounted at an interest rate of 8%, its present value is $63,017.In how many years is the $100,000 received?

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

Question 47

Ann Ruth 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 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

Finley Company will receive $500,000 in 7 years.If the appropriate interest rate is 10%, the present value of the $500,000 receipt is

A)$255,000.
B)$256,580.
C)$755,000.
D)$974,360.

Question 50

Present value of an Ordinary Annuity of 1. Multiple Choice-Computational

Question 51

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 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

Sheeley Company will receive $100,000 in a future year.If the future receipt is discounted at an interest rate of 10%, its present value is $51,316.In how many years is the $100,000 received?

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

Question 54

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 55

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 56

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

Question 57

Windsor Company will receive $100,000 in 7 years.If the appropriate interest rate is 10%, the present value of the $100,000 receipt is

A)$51,000.
B)$51,316.
C)$151,000.
D)$194,872.

Question 58

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 59

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 60

Jensen Company will invest $200,000 today.The investment will earn 6% for 5 years, with no funds withdrawn.In 5 years, the amount in the investment fund is

A)$200,000.
B)$260,000.
C)$267,646.
D)$268,058.

Question 61

Use the following 8% interest factors for questions . $\begin{array}{lll}&\text { Present Value of}&\text {Future Value of }\\&\text {Ordinary Annuity }&\text {Ordinary Annuity }\\\hline 7 \text { periods } & 5.2064 & 8.92280 \\8 \text { periods } & 5.7466 & 10.63663 \\9 \text { periods } & 6.2469 & 12.48756\end{array}$

-Henson Company wishes to accumulate $300,000 by May 1, 2015 by making 8 equal annual deposits beginning May 1, 2007 to a fund paying 8% interest compounded annually.What is the required amount of each deposit?

A)$52,205
B)$28,204
C)$26,115
D)$30,234

Question 62

Jasper Company will invest $300,000 today.The investment will earn 6% for 5 years, with no funds withdrawn.In 5 years, the amount in the investment fund is

A)$300,000.
B)$390,000.
C)$401,469.
D)$402,087.

Question 63

How much must be invested now to receive $10,000 for 15 years if the first $10,000 is received today and the rate is 9%? $$\begin{array}{l}\begin{array} { c c } &\text { Present Value of }\\\text { Periods } & \text { Ordinary Annuity at } 9 \% \\\hline 14 & 7.78615 \\15 & 8.06069 \\16 & 8.31256\end{array}\end{array}$$

A)$80,607
B)$87,862
C)$150,000
D)$73,125

Question 64

Use the following 8% interest factors for questions . $\begin{array}{lll}&\text { Present Value of}&\text {Future Value of }\\&\text {Ordinary Annuity }&\text {Ordinary Annuity }\\\hline 7 \text { periods } & 5.2064 & 8.92280 \\8 \text { periods } & 5.7466 & 10.63663 \\9 \text { periods } & 6.2469 & 12.48756\end{array}$

-If $5,000 is deposited annually starting on January 1, 2007 and it earns 8%, what will the balance be on December 31, 2014?

A)$44,614
B)$48,183
C)$53,183
D)$57,438

Question 65

Catt 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.Catt wants a return of 10%.Calculate the amount of the annual rent. $$\begin{array}{l}\begin{array} { c c } &\text { Present Value of }\\\text { Period } & \text { Ordinary Annuity } \\19 & 8.36492 \\20 & 8.51356 \\21 & 8.64869\end{array}\end{array}$$

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

Question 66

Use the following 8% interest factors for questions . $\begin{array}{lll}&\text { Present Value of}&\text {Future Value of }\\&\text {Ordinary Annuity }&\text {Ordinary Annuity }\\\hline 7 \text { periods } & 5.2064 & 8.92280 \\8 \text { periods } & 5.7466 & 10.63663 \\9 \text { periods } & 6.2469 & 12.48756\end{array}$

-What amount should be recorded as the cost of a machine purchased December 31, 2006, which is to be financed by making 8 annual payments of $6,000 each beginning December 31, 2007? The applicable interest rate is 8%.

A)$42,000
B)$37,481
C)$63,820
D)$34,480

Question 67

Renfro Corporation will receive $20,000 today (January 1, 2006), and also on each January 1st for the next five years (2007 - 2011).What is the present value of the six $20,000 receipts, assuming a 12% interest rate.?

A)$82,228.
B)$92,096.
C)$162,304.
D)$181,780.

Question 68

Linton Corporation will invest $10,000 every January 1st for the next six years (2006 - 2011).If Linton will earn 12% on the investment, what amount will be in the investment fund on December 31, 2011?

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

Question 69

Schmitt Corporation will invest $10,000 every December 31st for the next six years (2006 - 2011).If Schmitt will earn 12% on the investment, what amount will be in the investment fund on December 31, 2011?

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

Question 70

Pedigo Corporation will invest $30,000 every December 31st for the next six years (2006 - 2011).If Pedigo will earn 12% on the investment, what amount will be in the investment fund on December 31, 2011?

A)$123,342
B)$138,144.
C)$243,456.
D)$272,670.

Question 71

Wagner Corporation will invest $25,000 every January 1st for the next six years (2006 - 2011).If Wagner will earn 12% on the investment, what amount will be in the investment fund on December 31, 2011?

A)$102,785.
B)$115,120.
C)$202,880.
D)$227,225.

Question 72

Craig Rusch Corporation will receive $10,000 today (January 1, 2006), and also on each January 1st for the next five years (2007 - 2011).What is the present value of the six $10,000 receipts, assuming a 12% interest rate?

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

Question 73

Gorman Corporation makes an investment today (January 1, 2006).They will receive $20,000 every December 31st for the next six years (2006 - 2011).If Gorman wants to earn 12% on the investment, what is the most they should invest on January 1, 2006?

A)$82,228.
B)$92,096.
C)$162,304.
D)$181,780.

Question 74

A machine is purchased by making payments of $5,000 at the beginning of each of the next five years.The interest rate was 10%.The future value of an ordinary annuity of 1 for five periods is 6.10510.The present value of an ordinary annuity of 1 for five periods is 3.79079.What was the cost of the machine?

A)$33,578
B)$30,526
C)$20,849
D)$18,954

Question 75

On January 1, 2007, Carly 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 2007.What will be the balance in the fund, within $10, on January 1, 2012 (one year after the last deposit)? The following 9% interest factors may be used. $\begin{array}{lll}&\text { Present Value of}&\text {Future Value of }\\&\text {Ordinary Annuity }&\text {Ordinary Annuity }\\\hline 4 \text { periods } & 3.2397 & 4.5731 \\5 \text { periods } & 3.8897 & 5.9847 \\6 \text { periods } & 4.4859 & 7.5233\end{array}$

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

Question 76

Quincey Corporation makes an investment today (January 1, 2006).They will receive $10,000 every December 31st for the next six years (2006 - 2011).If Quincey wants to earn 12% on the investment, what is the most they should invest on January 1, 2006?

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

Question 77

Foley Company financed the purchase of a machine by making payments of $18,000 at the end of each of five years.The appropriate rate of interest was 8%.The future value of one for five periods at 8% is 1.46933.The future value of an ordinary annuity for five periods at 8% is 5.8666.The present value of an ordinary annuity for five periods at 8% is 3.99271.What was the cost of the machine to Foley?

A)$26,448
B)$71,869
C)$90,000
D)$105,600

Question 78

Find the present value of an investment in plant and equipment if it is expected to provide annual earnings of $21,000 for 15 years and to have a resale value of $40,000 at the end of that period.Assume a 10% rate and earnings at year end.The present value of 1 at 10% for 15 periods is .23939.The present value of an ordinary annuity at 10% for 15 periods is 7.60608.The future value of 1 at 10% for 15 periods is 4.17725.

A)$159,728
B)$169,303
C)$185,276
D)$324,576

Question 79

How much must be deposited on January 1, 2007 in a savings account paying 6% annually in order to make annual withdrawals of $20,000 at the end of the years 2007 and 2008? The present value of one at 6% for one period is .9434.

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

Question 80

Use the following 8% interest factors for questions . $\begin{array}{lll}&\text { Present Value of}&\text {Future Value of }\\&\text {Ordinary Annuity }&\text {Ordinary Annuity }\\\hline 7 \text { periods } & 5.2064 & 8.92280 \\8 \text { periods } & 5.7466 & 10.63663 \\9 \text { periods } & 6.2469 & 12.48756\end{array}$

-What will be the balance on September 1, 2013 in a fund which is accumulated by making $8,000 annual deposits each September 1 beginning in 2006, with the last deposit being made on September 1, 2013? The fund pays interest at 8% compounded annually.

A)$85,093
B)$71,383
C)$60,480
D)$45,973