Solutions Manual and Test Bank Intermediate Accounting Kieso Weygandt Warfield 14th edition  
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CHAPTER 6
CHAPTER 6
ACCOUNTING
AND THE TIME VALUE OF MONEY
MULTIPLE CHOICE—Conceptual
21. 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 subsequent to the signing of the lease
agreement.
c. A tenyear 8% bond is issued on January 2
with interest payable semiannually on July 1 and January 1 yielding 7%.
d. A tenyear 8% bond is issued on January 2
with interest payable semiannually on July 1 and January 1 yielding 9%.
22. 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.
23. Which
of the following situations does not base an accounting measure on present
values?
a. Pensions.
b. Prepaid insurance.
c. Leases.
d. Sinking funds.
24. What is
interest?
a. Payment for the use of money.
b. An equity investment.
c. Return on capital.
d. Loan.
25. What
is NOT a variable that is considered in interest computations?
a. Principal.
b. Interest rate.
c. Assets.
d. Time.
26. 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.
27. 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.
28. 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
29. 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
30. 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
31. 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
32. 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
33. 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
34. 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
^{S}35. 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.
^{S}36. On June 1, 2012, 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, 2012. 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.
^{S}37. 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.
^{P}38. 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.
^{P}39. In the time diagram below,
which concept is being depicted?
0

1
$1

2
$1

3
$1

4
$1


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
^{P}40. On December 1, 2012,
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, 2012, 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.
41. 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.
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.
43. 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.
^{P}44. 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, 2012,
the present value of that sum decreases as the date draws closer to December
31, 2012.
45. 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.
46. 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 n1 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
47. Peter
invests $100,000 in a 3year 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.
48. 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.
49. If
Jethro wanted to save a set amount each month in order to buy a new pickup
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.
50. Betty wants
to know how much she should begin saving each month to fund her retirement.
What kind of problem is this?
a. Present value of one.
b. Future value of an ordinary annuity.
c. Present value of an ordinary.
d. Future value of one.
^{P}51 If the interest rate is 10%, the factor
for the future value of annuity due of 1 for n = 5, i = 10% is equal to the
factor for the future value of an ordinary annuity of 1 for n = 5, i = 10%
a. plus 1.10.
b. minus 1.10.
c. multiplied by 1.10.
d. divided by 1.10.
52. 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.
53. 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.
54. Al
Darby 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 5year,
10% ordinary annuity of 1.
b. $20,000 divided by the future value of a
5year, 10% ordinary annuity of 1.
c. $20,000 times the present value of a 5year,
10% ordinary annuity of 1.
d. $20,000 divided by the present value of a
5year, 10% ordinary annuity of 1.
55. Sue
Gray 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 investment?
a. $40,000 times the future value of a 5year,
6% ordinary annuity of 1.
b. $40,000 divided by the future value of a
5year, 6% ordinary annuity of 1.
c. $40,000 times the present value of a 5year,
6% ordinary annuity of 1.
d. $40,000 divided by the present value of a
5year, 6% ordinary annuity of 1.
56. 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).
57. 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.
58. What
is the relationship between the present value factor of an ordinary annuity and
the present value factor of an annuity due for the same interest rate?
a. The ordinary annuity factor is not related to
the annuity due factor.
b. The annuity due factor equals one plus the
ordinary annuity factor for n1 periods.
c. The ordinary annuity factor equals one plus
the annuity due factor for n+1 periods.
d. The annuity due factor equals the ordinary annuity
factor for n+1 periods minus one.
59. Paula
purchased a house for $300,000. After providing a 20% down payment, she
borrowed the balance from the local savings and loan under a 30year 6% mortgage
loan requiring equal monthly installments at the end of each month. 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 ordinary annuity.
d. Future value of an ordinary annuity.
60. Stemway
requires a new manufacturing facility. Management found three locations; all of
which would provide needed capacity, the only difference is the price. Location
A may be purchased for $500,000. Location B may be acquired with a down payment
of $100,000 and annual payments at the end of each of the next twenty years of
$50,000. Location C requires $40,000 payments at the beginning of each of the
next twentyfive years. Assuming Stemway's borrowing costs are 8% per annum,
which option is the least costly to the company?
a. Location A.
b. Location B.
c. Location C.
d. Location A and Location B.
61. 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.
Multiple Choice—Computational
62. Assume
ABC Company deposits $50,000 with First National Bank in an account earning
interest at 6% per annum, compounded semiannually. 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.
63. 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.
64. 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%.
Items 65 through 68
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 65 to 68
is based on 8% interest compounded annually.
Periods Future Value of 1 at 8%
1 1.080
2 1.166
3 1.260
4 1.360
5 1.469
65. 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
66. 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)
67. 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
68. 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 69 through 72 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 69 to 72 is based
on 10% interest compounded annually.
Present
Value of $1
Periods Discounted at 10% per
Period
1 0.909
2 0.826
3 0.751
4 0.683
5 0.621
69. 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
70. 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
71. 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
72. 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 oneyear 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
73. 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
74. Mordica Company will receive $250,000 in 7
years. If the appropriate interest rate is 10%, the present value of the $250,000
receipt is
a. $127,500.
b. $128,290.
c. $377,500.
d. $487,180.
75. 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
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.
77. Barber Company will receive $800,000 in 7
years. If the appropriate interest rate is 10%, the present value of the $800,000
receipt is
a. $408,000.
b. $410,528.
c. $1,208,000.
d. $1,558,976.
78. 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
79. 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. $670,145.
80. 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.
81. 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
semiannually?
a. $155,134.
b. $161,050.
c. $162,890.
d. $177,156.
82. 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. $145,337.
d. $151,497.
83. What interest rate (the nearest percent)
must Charlie earn on a $150,000 investment today so that he will have $380,000
after 12 years?
a. 6%.
b. 7%.
c. 8%.
d. 9%.
84. Ethan has $80,000 to invest today at an
annual interest rate of 4%. Approximately how many years will it take before
the investment grows to $162,000?
a. 18 years.
b. 20 years.
c. 16 years.
d. 11 years.
85. 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. $10,706.
86. Jane wants to set aside funds to take an
around the world cruise in four years. Jane expects that she will need $10,000
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. $2,219.
b. $13,604.
c. $7,350.
d. $6,806.
87. What would you pay for an investment that
pays you $3,000,000 after forty years? Assume that the relevant interest rate
for this type of investment is 6%.
a. $93,540.
b. $935,400.
c. $291,660.
d. $311,010.
88. 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.
89. 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.
90. Lucy and Fred want to begin saving for
their baby's college education. They estimate that they will need $200,000 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?
a. $6,471.
b. $6,105.
c. $11,111.
d. $5,924.
91. Lucy and Fred want to begin saving for
their baby's college education. They estimate that they will need $300,000 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?
a. $11,618.
b. $25,664.
c. $24,823.
d. $10,664.
92. Jane wants to set aside funds to take an
around the world cruise in four years. Jane expects that she will need $10,000
for her dream vacation. If she is able to earn 8% per annum on an investment,
how much will she need to set aside at the beginning of each year to accumulate
sufficient funds?
a. $2,219.
b. $13,604.
c. $7,350.
d. $2,055.
93. Pearson Corporation makes an investment
today (January 1, 2012). They will receive $6,000 every December 31st for the
next six years (2012 – 2017). If Pearson wants to earn 12% on the investment,
what is the most they should invest on January 1, 2012?
a. $24,668.
b. $27,629.
c. $48,691.
d. $54,534.
94. Garretson Corporation will receive $8,000
today (January 1, 2012), and also on each January 1st for the next five years (2013
– 2017). What is the present value of the six $8,000 receipts, assuming a 12%
interest rate?
a. $32,891.
b. $36,838.
c. $64,922.
d. $72,712.
95. Spencer Corporation will invest $15,000
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?
a. $61,671.
b. $69,072.
c. $121,728.
d. $136,335.
96. Tipson Corporation will invest $15,000
every January 1st for the next six years (2012 – 2017). If Linton will earn 12%
on the investment, what amount will be in the investment fund on December 31, 2017?
a. $61,671
b. $69,072.
c. $121,728.
d. $136,335.
97. Hiller Corporation makes an investment
today (January 1, 2012). They will receive $40,000 every December 31st for the
next six years (2012 – 2017). If Hiller wants to earn 12% on the investment,
what is the most they should invest on January 1, 2012?
a. $164,456.
b. $184,191.
c. $324,608.
d. $363,560.
98. Sonata Corporation will receive $20,000
today (January 1, 2012), and also on each January 1st for the next five years (2013
– 2017). What is the present value of the six $40,000 receipts, assuming a 12%
interest rate?
a. $164,456.
b. $184,191.
c. $324,608.
d. $363,560.
99. Renfro Corporation will invest $50,000
every December 31st for the next six years (2012 – 2017). If Renfro will earn
12% on the investment, what amount will be in the investment fund on December
31, 2017?
a. $205,570
b. $230,240.
c. $405,760.
d. $454,450.
100. Vannoy Corporation will invest $30,000
every January 1st for the next six years (2012 – 2017). If Wagner will earn 12%
on the investment, what amount will be in the investment fund on December 31, 2017?
a. $123,342.
b. $138,144.
c. $243,456.
d. $272,670.
101. 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
$40,000 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.
Present
Value of Future Value of
Ordinary
Annuity Ordinary Annuity
4 periods 3.2397 4.5731
5 periods 3.8897 5.9847
6 periods 4.4859 7.5233
a. $260,932
b. $239,388
c. $218,000
d. $200,000
Use the following 8%
interest factors for questions 102 through 105.
Present
Value of Future Value of
Ordinary
Annuity Ordinary Annuity
7 periods 5.2064 8.92280
8 periods 5.7466 10.63663
9 periods 6.2469 12.48756
102. What
will be the balance on September 1, 2018 in a fund which is accumulated by
making $10,000 annual deposits each September 1 beginning in 2011, with the
last deposit being made on September 1, 2018? The fund pays interest at 8%
compounded annually.
a. $106,366
b. $89,229
c. $75,600
d. $57,466
103. If
$6,000 is deposited annually starting on January 1, 2012 and it earns 8%, what
will the balance be on December 31, 2019?
a. $53,537
b. $57,820
c. $63,820
d. $68,925
104. Korman
Company wishes to accumulate $400,000 by May 1, 2020 by making 8 equal annual
deposits beginning May 1, 2012 to a fund paying 8% interest compounded
annually. What is the required amount of each deposit?
a. $69,606
b. $37,606
c. $34,820
d. $40,312
105. What
amount should be recorded as the cost of a machine purchased December 31, 2012,
which is to be financed by making 8 annual payments of $8,000 each beginning
December 31, 2013? The applicable interest rate is 8%.
a. $56,000
b. $49,975
c. $85,093
d. $45,973
106. How
much must be deposited on January 1, 2012 in a savings account paying 6%
annually in order to make annual withdrawals of $25,000 at the end of the years
2012 and 2013? The present value of one at 6% for one period is .9434.
a. $45,835
b. $47,175
c. $50,000
d. $22,250
107. How
much must be invested now to receive $20,000 for 15 years if the first $20,000
is received today and the rate is 9%?
Present
Value of
Periods Ordinary Annuity at 9%
14 7.78615
15 8.06069
16 8.31256
a. $161,214
b. $175,723
c. $300,000
d. $146,250
108. Jenks
Company financed the purchase of a machine by making payments of $10,000 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
Jenks?
a. $14,794
b. $39,927
c. $50,000
d. $58,667
109. A
machine is purchased by making payments of $6,000 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. $40,294
b. $36,631
c. $25,019
d. $22,745
110. Lane Co.
has a machine that cost $300,000. 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.
Present
Value of
Period Ordinary Annuity
19 8.36492
20 8.51356
21 8.64869
a. $32,034
b. $35,864
c. $44,592
d. $35,238
111. Find
the present value of an investment in plant and equipment if it is expected to
provide annual earnings of $26,000 for 15 years and to have a resale value of $50,000
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. $197,758
b. $209,728
c. $247,758
d. $401,970
112. On
January 2, 2012, Wine Corporation wishes to issue $3,000,000 (par value) of its
8%, 10year bonds. The bonds pay interest annually on January 1. The current
yield rate on such bonds is 10%. Using the interest factors below, compute the
amount that Wine will realize from the sale (issuance) of the bonds.
Present value of 1 at 8% for 10 periods 0.4632
Present value of 1 at 10% for 10 periods 0.3855
Present value of an ordinary annuity at 8% for 10
periods 6.7101
Present
value of an ordinary annuity at 10% for 10 periods 6.1446
a. $3,000,000
b. $2,631,204
c. $3,000,018
d. $3,318,078
113. The
market price of a $500,000, tenyear, 12% (pays interest semiannually) bond
issue sold to yield an effective rate of 10% is
a. $561,445.
b. $562,311.
c. $566,635.
d. $936,180.
114. John won a lottery that will pay him $150,000
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?
a. $1,590,540.
b. $32,183.
c. $1,472,723.
d. $6,864,294.
115. Jonas won a lottery that will pay him $200,000
at the end of each of the next twenty years. Zebra Finance has offered to
purchase the payment stream for $2,718,000. What interest rate (to the nearest
percent) was used to determine the amount of the payment?
a. 7%.
b. 6%.
c. 5%.
d. 4%.
116. James leases a ski chalet to his best
friend, Janet. The lease term is five years with $16,000 annual payments due at
the beginning of each year. What is the present value of the payments
discounted at 8% per annum?
a. $68,994.
b. $63,884.
c. $61,077.
d. $57,990.
117. Jeremy is in the process of purchasing a
car. The list price of the car is $36,000. If Jeremy pays cash for the car, the
dealer will reduce the price by 10%. Otherwise, the dealer will provide
financing where Jeremy must pay $7,706 at the end of each of the next five
years. Compute the effective interest rate to the nearest percent that Jeremy
would pay if he chooses to make the five annual payments?
a. 5%.
b. 6%.
c. 7%.
d. 8%.
118. What would you pay for an investment that
pays you $15,000 at the end of each year for the next twenty years? Assume that
the relevant interest rate for this type of investment is 12%.
a. $125,487.
b. $1,080,786.
c. $15,550.
d. $112,042.
119. What would you pay for an investment that
pays you $20,000 at the beginning of each year for the next ten years? Assume
that the relevant interest rate for this type of investment is 10%.
a. $122,890.
b. $135,180.
c. $129,902.
d. $142,892.
120. Ziggy is considering purchasing a new car.
The cash purchase price for the car is $33,600. What is the annual interest
rate if Ziggy is required to make annual payments of $7,800 at the end of the
next five years?
a. 4%.
b. 5%.
c. 6%.
d. 7%.
121. Charlie Corp. is purchasing new equipment
with a cash cost of $200,000 for the assembly line. The manufacturer has
offered to accept $45,920 payments at the end of each of the next six years.
What is the interest rate that Charlie Corp. will be paying?
a. 8%.
b. 9%.
c. 10%.
d. 11%.
122. Jeremy Leasing purchases and then leases
small aircraft to interested parties. The company is currently determining the
required rental for a small aircraft that cost them $600,000. If the lease is
for twenty years and annual lease payments are required to be made at the end of
each year, what will be the annual rental if Jeremy wants to earn a return of
10%?
a. $64,070.
b. $70,476.
c. $10,476.
d. $30,314.
123. Stech Co. is issuing $6.5 million 12% bonds
in a private placement on July 1, 2012. Each $1,000 bond pays interest
semiannually on December 31 and June 30 of each year. The bonds mature in ten
years. At the time of issuance, the market interest rate for similar types of
bonds was 8%. What is the expected selling price of the bonds?
a. $8,266,764.
b. $13,566,992.
c. $8,244,598.
d. $8,310,962.
Multiple Choice—CPA
Adapted
124. On
January 1, 2012, Gore Co. sold to Cey Corp. $600,000 of its 10% bonds for $531,177
to yield 12%. Interest is payable semiannually on January 1 and July 1. What
amount should Gore report as interest expense for the six months ended June 30,
2012?
a. $26,559
b. $30,000
c. $31,871
d. $36,000
125. On
May 1, 2012, a company purchased a new machine which it does not have to pay for
until May 1, 2014. The total payment on May 1, 2014 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
126. On
January 1, 2012, Ball Co. exchanged equipment for a $200,000
zerointerestbearing 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 Abel's 2013 income statement?
a. $0
b. $15,000
c. $16,500
d. $20,000
127. 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?
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 tenyear 8% bond is issued on January 2
with interest payable semiannually on January 2 and July 1 yielding 7%.
d. A tenyear 8% bond is issued on January 2
with interest payable semiannually on January 2 and July 1 yielding 9%.
128. On January 15, 2012, Dolan Corp. adopted a
plan to accumulate funds for environmental improvements beginning July 1, 2016,
at an estimated cost of $5,000,000. Dolan plans to make four equal annual
deposits in a fund that will earn interest at 10% compounded annually. The
first deposit was made on July 1, 2012. Future value factors are as follows:
Future value of 1 at 10% for 5 periods 1.61
Future value of ordinary annuity of 1 at 10% for
4 periods 4.64
Future value of annuity due of 1 at 10% for 4
periods 5.11
Dolan should make four annual deposits of
a. $889,522.
b. $978,474.
c. $1,077,586.
d. $1,250,000.
129. On
December 30, 2012, AGH, Inc. purchased a machine from Grant Corp. in exchange
for a zerointerestbearing note requiring eight payments of $70,000. The first
payment was made on December 30, 2012, and the others are due annually on
December 30. At date of issuance, the prevailing rate of interest for this type
of note was 11%. Present value factors are as follows:
Present
Value of Ordinary Present
Value of
Period Annuity of 1 at 11% Annuity Due of 1 at 11%
7 4.712 5.231
8 5.146 5.712
On AGH's December 31, 2012 balance
sheet, the net note payable to Grant is
a. $329,840.
b. $360,220.
c. $366,485.
d. $399,840.
130. On January 1, 2012, Ott Co. sold goods to
Flynn Company. Flynn signed a zerointerestbearing note requiring payment of $90,000
annually for seven years. The first payment was made on January 1, 2012. The
prevailing rate of interest for this type of note at date of issuance was 10%.
Information on present value factors is as follows:
Present
Value Present Value of
Ordinary
Period of 1 at 10% Annuity of 1 at 10%
6 .5645 4.3553
7 .5132 4.8684
Ott should record sales revenue in January 2012 of
a. $481,972.
b. $438,156.
c. $391,977.
d. $321,300.
131. On January 1, 2012, Haley Co. issued
tenyear bonds with a face amount of $3,000,000 and a stated interest rate of
8% payable annually on January 1. The bonds were priced to yield 10%. Present
value factors are as follows:
At
8% At 10%
Present value of 1 for 10 periods 0.463 0.386
Present value of an ordinary annuity of 1 for 10
periods 6.710 6.145
The total issue price of the bonds was
a. $3,000,000.
b. $2,940,000.
c. $2,760,000.
d. $2,632,800.
132. On July
1, 2012, Ed Wynne signed an agreement to operate as a franchisee of Kwik Foods,
Inc., for an initial franchise fee of $240,000. Of this amount, $80,000 was
paid when the agreement was signed and the balance is payable in four equal
annual payments of $40,000 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:
Present value of 1 at 14% for 4 periods 0.59
Future value of 1 at 14% for 4 periods 1.69
Present value of an ordinary annuity of 1 at 14% for 4
periods 2.91
Wynne should record the acquisition cost of the franchise on July 1, 2012
at
a. $174,400.
b. $196,400.
c. $240,000.
d. $270,400.
Exercises
Ex.
6133—Present
and future value concepts.
On the right are six diagrams representing six different present and
future value concepts stated on the left. Identify the diagrams with the
concepts by writing the identifying letter of the diagram on the blank line at
the left. Assume n = 4 and i = 8%.
Concept Diagram of
Concept
_____ 1. Future value of 1. ? $1
a.     
_____ 2. Present value of 1.
?
_____ 3. Future value of an annuity $1 $1 $1 $1
due
of 1. b. 
      
_____ 4. Future value of an ordinary
annuity of 1. ?
$1 $1 $1 $1
_____ 5. Present
value of an ordinary c.        
annuity of 1.
_____ 6. Present value of an annuity ? $1 $1 $1 $1
due
of 1. d.     
$1 ?
e.     
$1 $1 $1 $1 ?
f.     
Ex.
6134—Compute
estimated goodwill. (Tables needed.)
Compute estimated
goodwill if it is found by discounting excess earnings at 12% compounded
quarterly. Excess annual earnings of $16,000 are expected for 8 years.
Ex.
6135—Present
value of an investment in equipment.
(Tables needed.)
Find the present
value of an investment in equipment if it is expected to provide annual savings
of $20,000 for 10 years and to have a resale value of $50,000 at the end of
that period. Assume an interest rate of 9% and that savings are realized at
year end.
Ex.
6136—Future
value of an annuity due. (Tables
needed.)
If $6,000 is
deposited annually starting on January 1, 2012 and it earns 9%, how much will
accumulate by December 31, 2021?
Ex.
6137—Present
value of an annuity due.(Tables needed.)
How much must be
invested now to receive $25,000 for ten years if the first $25,000 is received
today and the rate is 8%?
Ex.
6138—Compute
the annual rent. (Tables needed.)
Crone Co. has
machinery that cost $90,000. It is to be leased for 15 years with rent received
at the beginning of each year. Crone wants a return of 10%. Compute the amount
of the annual rent.
Ex.
6139—Calculate
market price of a bond. (Tables needed.)
Determine the market
price of a $300,000, tenyear, 10% (pays interest semiannually) bond issue sold
to yield an effective rate of 12%.
Ex.
6140—Calculate
market price of a bond.
On January 1, 2012 Lance
Co. issued fiveyear bonds with a face value of $500,000 and a stated interest
rate of 12% payable semiannually on July 1 and January 1. The bonds were sold
to yield 10%. Present value table factors are:
Present value of 1 for 5 periods at 10% .62092
Present
value of 1 for 5 periods at 12% .56743
Present
value of 1 for 10 periods at 5% .61391
Present
value of 1 for 10 periods at 6% .55839
Present
value of an ordinary annuity of 1 for 5 periods at 10% 3.79079
Present
value of an ordinary annuity of 1 for 5 periods at 12% 3.60478
Present
value of an ordinary annuity of 1 for 10 periods at 5% 7.72173
Present
value of an ordinary annuity of 1 for 10 periods at 6% 7.36009
Calculate the issue price of the
bonds.
PROBLEMS
Pr.
6141—Present
value and future value computations.
Part (a) Compute the amount that a $30,000 investment today would
accumulate at 10% (compound interest) by the end of 6 years.
Part (b) Tom wants to retire at the end of this year (2012). His life
expectancy is 20 years from his retirement. Tom has come to you, his CPA, to
learn how much he should deposit on December 31, 2012 to be able to withdraw $50,000
at the end of each year for the next 20 years, assuming the amount on deposit
will earn 8% interest annually.
Part (c) Judy Thomas has a $1,800
overdue debt for medical books and supplies at Joe's Bookstore. She has only $600
in her checking account and doesn't want her parents to know about this debt.
Joe's tells her that she may settle the account in one of two ways since she
can't pay it all now:
1. Pay $600 now and $1,500 when she completes
her residency, two years from today.
2. Pay $2,400 one year after completion of
residency, three years from today.
Assuming that the
cost of money is the only factor in Judy's decision and that the cost of money
to her is 8%, which alternative should she choose? Your answer must be
supported with calculations.
Pr. 6142—Annuity with change in interest rate.
Jan Green established
a savings account for her son's college education by making annual deposits of
$8,000 at the beginning of each of six years to a savings account paying 8%. At
the end of the sixth year, the account balance was transferred to a bank paying
10%, and annual deposits of $8,000 were made at the end of each year from the
seventh through the tenth years. What was the account balance at the end of the
tenth year?
Pr.
6143—Present
value of an ordinary annuity due.
Jill Morris is
presently leasing a small business computer from Eller Office Equipment
Company. The lease requires 10 annual payments of $8,000 at the end of each
year and provides the lessor (Eller) with an 8% return on its investment. You
may use the following 8% interest factors:
9
Periods 10 Periods 11 Periods
Future Value of 1 1.99900 2.15892 2.33164
Present Value of 1 .50025 .46319 .42888
Future Value of
Ordinary Annuity of 1 12.48756 14.48656 16.64549
Present Value of
Ordinary Annuity of 1 6.24689 6.71008 7.13896
Present Value of
Annuity Due of 1 6.74664 7.24689 7.71008
Pr. 6143 (cont.)
Instructions
(a) Assuming the
computer has a tenyear life and will have no salvage value at the expiration
of the lease, what was the original cost of the computer to Eller?
(b) What amount
would each payment be if the ten annual payments are to be made at the beginning of each period?
Pr. 6144—Finding the implied interest rate.
Bates Company has
entered into two lease agreements. In each case the cash equivalent purchase
price of the asset acquired is known and you wish to find the interest rate
which is applicable to the lease payments.
Instructions
Calculate the implied interest rate for the lease payments.
Lease A — Lease A covers
office equipment which could be purchased for $108,144. Bates Company has,
however, chosen to lease the equipment for $30,000 per year, payable at the end
of each of the next 5 years.
Lease B — Lease B applies to
a machine which can be purchased for $114,978. Bates Company has chosen to
lease the machine for $24,000 per year on a 6year lease. Payments are due at
the start of each year.
Pr. 6145—Calculation of unknown rent and interest.
Pine Leasing Company
purchased specialized equipment from Wayne Company on December 31, 2011 for $600,000.
On the same date, it leased this equipment to Sears Company for 5 years, the
useful life of the equipment. The lease payments begin January 1, 2012 and are
made every 6 months until July 1, 2016. Pine Leasing wants to earn 10% annually
on its investment.
Various Factors at
10%
Periods Future Present Future Value of an Present Value of an
or Rents Value of $1 Value of $1 Ordinary Annuity Ordinary Annuity
9 2.35795 .42410 13.57948 5.75902
10 2.59374 .38554 15.93743 6.14457
11 2.85312 .35049 18.53117 6.49506
Various Factors at 5%
Periods Future Present Future Value of an Present Value of an
or Rents Value of $1 Value of $1 Ordinary Annuity Ordinary Annuity
9 1.55133 .64461 11.02656 7.10782
10 1.62889 .61391 12.57789 7.72173
11 1.71034 .58468 14.20679 8.30641
Instructions
(a) Calculate
the amount of each rent.
(b) How much interest revenue will Pine earn in 2012?
Pr. 6146—Deferred annuity.
Carey Company owns a
plot of land on which buried toxic wastes have been discovered. Since it will
require several years and a considerable sum of money before the property is
fully detoxified and capable of generating revenues, Carey wishes to sell the
land now. It has located two potential buyers: Buyer A, who is willing to pay $480,000
for the land now, and Buyer B, who is willing to make 20 annual payments of $75,000
each, with the first payment to be made 5 years from today. Assuming that the
appropriate rate of interest is 9%, to whom should Carey sell the land? Show
calculations.