Intermediate Accounting Chapter 5

Kevin borrows $8,000 from Second National Bank at 10% interest. Kevin will repay the loan in six equal payments beginning at the end of year 1. What is the annual amount that Kevin will pay the bank each year? Round your answer to the nearest dollar. Multiple choice question. -$2,133 -$1,266 -$1,837 -$1,333

$1,837

Use the tables provided in the text or a financial calculator to compute the present value of the following annuity: Interest rate = 6% Number of periods = 20 Payment at the end of the period = $1,000 Round your answer to the nearest dollar. -$12,160 -$3,207 -$11,470 -$14,902

$11,470

On January 1, year 1, Dennis borrows $20,000 at 6% interest compounded semi-annually. What is the amount of interest Dennis will pay at the end of year 4? Round your answer to the nearest dollar.

$5,335

Simon borrows $7,000 from the bank and wants to repay the amount in equal installments of $950. Payments will be made at the end of each year. The bank wishes to earn interest on this loan at 6%. Approximately how many years will it take Simon to repay the loan? Multiple choice question. -7 years -10 years -8 years

-10 years

Simple interest is computed by multiplying which of the following? (Select all that apply.) -Initial investment -Accumulated interest -Period of time -Applicable interest rate

-initial investment -period of time -applicable interest rate

Given a 5 year investment with semiannual compounding at 10% interest, what is the n value? Multiple choice question. -12 -2 -5 -10

10

Which of the following is an example of an annuity? -Treasury stock purchase -Bond interest payments -Bond principal repayment -Dividend payments

Bond interest payments

The amount of money that a dollar will grow to at some point in the future is known as the

future value

In a(n) ___ ____ the series of equal payments are made at the end of each period. (Enter one word per blank.)

ordinary; due

Pedro invests $1,000 in a savings account earning 3% interest. At the end of the first year, Pedro has $1,030 in the account. The $1,000 Pedro initially put in the savings account is the _____ value.

present

Most monetary assets are valued at the ____ value of ____ cash flows. (Enter one word per blank.)

present; future

Multiplying an initial investment times both the applicable interest rate and the period of time for which the money is used is referred to as what? Multiple choice question. -Simple interest -Compound interest -Effective interest

simple interest

Assume you borrow $10,000 from the bank and promise to repay the amount in 5 equal installments beginning one year from today. The stated interest rate on the loan is 5%. What is the unknown variable in this problem?

the payment amount

Jean expects to receive $5,000 at the end of each year for 4 years. The annuity has an interest rate of 7%. The present value of this annuity at Time Zero, the inception of the annuity (rounded to the nearest dollar) is Multiple choice question. $16,936. $18,600. $20,000. $20,501. $15,000.

$16,936

Shirley borrows $10,000 from Second National Bank at 12% interest. Shirley will repay the loan in five equal payments beginning at the end of year 1. What is the annual amount that Shirley will pay the bank each year? Round your answer to the nearest dollar. -$1,333 -$1,266 -$2,774 -$2,133

$2,774

George will deposit $2,000 in a savings account at the beginning of each year for 8 years. Assuming the interest rate is 5%, how much money will George have in the account at the end of year 8? Round your answer to the nearest dollar. $16,000 $2,955 $20,053 $23,639

$20,053

Sperry Corp. signs a 2-year note payable for $100,000. The principal of the note and interest are due in 2 years, and the note bears interest at 10% compounded annually. What is the amount of interest that must be repaid at the end of year 2?

$21,000

Jennifer invested $20,000 in a savings account for 3 years at 6% compounded annually. What is the future value of Jennifer's investment?

$23,820

Use the tables provided in the text or a financial calculator to compute the present value of the following annuity: Interest rate per compounding period = 8% Number of periods = 12 Payment at the end of the period = $500 Round your answer to the nearest dollar. -$11,506 -$4,069 -$2,483 -$3,768

$3,768

Rhonda expects to receive an annuity that pays $500 at the beginning of each year for 10 years. Assuming the interest rate is 6%, what is the present value of this annuity? Round your answer to the nearest dollar. -$3,680 -$6,591 -$5,300 -$3,901

$3,901

Morgan Co. signs a $50,000 noninterest-bearing 5-year note payable for goods purchased from Xelco Industries. The appropriate rate of interest for this type of note is 10%. At the time the note is signed, what is the present value of the note on Morgan's records? -$50,000 -$34,151 -$31,046 -$40,000

$31,046

Beth will deposit $1,000 at the end of each year for 4 years. Assuming an 8% rate of interest, how much will Beth have in the bank at the end of year 4? Round your answer to the nearest dollar. Multiple choice question. -$4,800 -$4,320 -$4,506 -$1,320

$4,506

Kate expects to receive an annuity that pays $5,000 at the beginning of each year for 10 years. Assuming the interest rate is 5%, what is the present value of this annuity? Round your answer to the nearest dollar. Multiple choice question. $66,034 $62,890 $40,539 $38,609

$40,539

Ilsa will deposit $1,000 at the end of each year for 6 years. Assuming a 10% rate of interest, how much will Ilsa have in the bank at the end of year 6? Round your answer to the nearest dollar. $1,772 $7,772 $7,716 $6,600

$7,716

First County Bank loans $100,000 to a customer. At the end of the year, the customer is required to repay the $100,000 loan with 8% interest. What is the amount of interest First County Bank earns on this loan?

$8,000

Karel sells goods to customers in exchange for a $100,000 noninterest-bearing note due in 2 years. The interest rate on this type of loan is 8%. What is the present value of the note? -$84,000 -$85,734 -$100,000 -$92,593

$85,734

Time value of money calculations are required for which topics? (Select all that apply.) -pensions -inventory -leases -long-term notes payable

-leases -pensions -long-term notes payable

Which of the following are the four variables in present value annuity problems? The interest rate The future value The payment amount The present value The number of periods The total of all payments

-the interest rate -the payment amount -the present value -the number of periods

If the future value of an amount is $40,000 at the end of 4 years, the present value today is $27,320, and the interest is compounded annually, what is the annual interest rate? -8% -10% -9% -7%

10%

Assuming an interest rate of 12% with quarterly compounding, what is the interest rate per compounding period? Multiple choice question. -4% -12% -3% -6%

3%

Jean borrows $2,540 from her friend, Sam. Jean will repay the loan in six equal payments of $500 each beginning at the end of year 1. What is the annual interest rate implicit in this agreement? Multiple choice question. 7% 3% 5%

5%

If you invest $1,000 in a savings account with semiannual compounding at 12%, what is the interest rate per compounding period? Multiple choice question. -4% -12% -6% -3% -1%

6%

Cindy would like to deposit enough money in a savings account to have $10,000 at the end of year 4. Assuming the investment will earn 5% compounded annually, what amount should Cindy deposit in the savings account today? Round your answer to the nearest dollar.

8,227

Paul borrows $5,000 from the bank and wishes to repay the amount in equal installments of $800 per year over a period of years. The payments will be made at the end of each year. The bank wishes to earn interest on this loan at 8%. Approximately how many years will it take for Paul to repay the loan? Multiple choice question. 9 years 7 years 8 years 6 years

9 years

The ____ ____of money concept means that money invested today will grow to a larger amount in the future. (Enter one word per blank.)

Time value

The difference between the present value of an investment and its future value represents the ____ ____ of money. (Enter one word per blank.)

Time value

Unless otherwise specified in a problem, interest rates are always stated as what type of rate?

annual

Interest is typically stated as a(n)____ rate regardless of the compounding period involved. (Enter only one word.)

annual or yearly

A series of payments in the same amount is referred to as -maturity value. -future value. -present value. -annuity.

annuity

Susan signs a lease to rent a building for three years and the first payment is due at lease signing. This is an example of which type of annuity? -Simple annuity -Annuity due -Ordinary annuity

annuity due

Tom signs a contract to rent a car for 3 years. The first payment is due the day the agreement is signed. This type of annuity is an -up front annuity -ordinary annuity -annuity due

annuity due

In a(n) ____ ____ , the payment is received or made at the beginning of the period, whereas in a(n) ____ ____ , the payment is received at the end of each period. (Enter one word per blank.)

annuity; due; ordinary; annuity

Which of the following are common annuity examples? (Select all that apply.) -Bonds -Common stock -Dividends -Leases -Loans

bonds loans leases

Interest on the initial investment plus interest calculated on the previously earned interest is called ____ interest. (Enter only one word.)

compound

Sandra borrows $1,000 at an interest rate of 12%. If Sandra pays $133 interest at year-end, the interest rate is ______ interest.

compound

Lenny borrowed $10,000 on a 5-year interest bearing note with an interest rate of 10%. At the end of 5 years, Lenny must repay the bank $16,105. Based on the amount that must be repaid, interest was calculated with what type of interest rate?

compound interest simple interest would have yielded total interest of $10,000x10%=$1,000 x 5 years = $5,000

An annuity due and an ordinary annuity have payments that begin in the first period after the date of the agreement, whereas a(n) ____ annuity has cash flows that begin more than one period after the date of the agreement. (Enter only one word.)

deferred

The ____ interest rate is the amount at which money will actually grow per year with compounding interest. (Enter only one word.)

effective

The rate at which money actually grows during a year is called the ______ rate.

effective

The interest rate at which money will actually grow during a full year is called what? -simple interest rate -compound interest rate -effective interest rate

effective interest rate

True or false: The formula to calculate future value 2 years in the future is the amount invested times the interest rate.

false

Which of the following is a deferred annuity?

first payment begins at the beginning of year 3

Clara invests $1,000 in a savings account earning 3% interest. At the end of the first year, Clara has $1,030 in the account. The $1,030 Clara has at the end of year 1 is the _____ value. -present -future -absolute

future

The amount of money paid or received in excess of the amount of money borrowed or lent is referred to as what? -equity -dividends -interest -investment

interest

Munchen Company prepays $89,000 for inventory to be delivered in two years. The applicable interest rate is 6%. One year after the prepayment, Muchen should recognize: -interest expense of $11,000 -interest revenue of $5,340 -interest revenue of $11,000 -interest expense of $5,340

interest revenue of $5,340

The first cash flow of an ordinary annuity occurs when? -On the last day of the agreement. -One compounding period after the agreement begins. -On the first day of the agreement

one compounding period after the agreement begins

Brooke signs a contract to rent a car for 3 years. The first payment is due at the end of the first month after signing the agreement. This type of annuity is an -annuity due. -ordinary annuity. -annuity in advance.

ordinary annuity

The ____ value is the amount an item is worth today, whereas the ____ value is the amount it is worth at some later date

present; future

____ interest is calculated by multiplying an initial investment times the applicable interest rate and the period of time the money is used, whereas ____ interest involves earning interest on the interest. (Enter one word per blank.)

simple; compound

The _____ rate of interest on a bond is the interest rate printed on the bond; the ______ rate of interest is the current rate of interest being paid on investments with similar characteristics. (Enter one word per blank)

stated; market

The i value in present and future value tables refers to what? -The annual interest rate divided by total number of compounding periods. -The annual interest rate. -The annual interest rate divided by number of compounding periods per year.

the annual interest rate divided by number of compounding periods per year.

The future value of an ordinary annuity table is used when calculating -the present value of a single amount. -the present value of a series of payments. -the future value of a series of payments.

the future value of a series of payments

In a deferred annuity, a two-step process can be used to calculate the present value of the annuity. The first step requires the calculation of the present value of the annuity at the beginning of the annuity period. The second step involves discounting the amount calculated in step 1 -to its future value at maturity -to its present value at maturity -to its future value as of today -to its present value as of today

to its present value as of today