Intermediate Accounting I - TVM

21. The future value of an annuity due is determined one period after the first cash flow in the series. a. True b. False

ANSWER: False

22. The future value of an annuity due is lower if the discount rate is higher. a. True b. False

ANSWER: False

26. The present value of an annuity due is determined on the date of the last cash flow in the series. a. True b. False

ANSWER: False

3. Compounding is the conversion of future cash flow amounts to their present value. a. True b. False

ANSWER: False

4. Discounting is the conversion of future cash flow amounts to their present value. a. True b. False

ANSWER: True

72. Jessie's Dry Cleaner began making $2,000 equal, annual deposits in a fund starting on January 2, 2020. The fund earns 10% compounded annually, and the last deposit is made on January 2, 2024. How much will be in the fund on January 2, 2025, one year after the final deposit? a. $15,000 b. $13,431 c. $12,105 d. $10,641

ANSWER: b

39. Interest compounded monthly on a $10,000 principal amount at 18% for two years is a. $1,800. b. $3,600. c. $3,924. d. $4,295.

ANSWER: d

24. To calculate the present value of four annual installments of $1,000 at an 8% interest rate beginning on January 1, 2020 and payments due on December 31 of each year, one would use the present value of an ordinary annuity table. a. True b. False

ANSWER: True

25. The formula to calculate the present value of an ordinary annuity is: a. True b. False

ANSWER: True

28. The present value of a deferred annuity is determined on today's date, because the annuity payments begin some period after today's date. a. True b. False

ANSWER: True

29. The formula to calculate a present value of a deferred annuity is: PVdeferred = C × (Converted Factor for Present Value of Deferred Annuity of 1) a. True b. False

ANSWER: True

30. The amount of future cash flows is an accounting measurement that is considered relevant for decisions made by financial statement users. a. True b. False

ANSWER: True

32. FASB's Statement of Financial Accounting Concepts No. 7 provides general principles governing the use of present value and the objectives of present value accounting measurements. a. True b. False

ANSWER: True

5. The interest that accrues on both the principal and the past unpaid accrued interest is called compound interest. a. True b. False

ANSWER: True

6. The future value grows more quickly when interest is compounded monthly than when interest is compounded annually. a. True b. False

ANSWER: True

36. Compound interest is a. calculated by multiplying the principal times the rate times the period of time. b. interest on the original principal plus any past unpaid accrued interest to date. c. interest on the original principal paid or received. d. interest on any past unpaid interest accrued to date.

ANSWER: b

40. Interest compounded quarterly on a $100,000 principal amount at 12% for one year is a. $11,151. b. $12,000. c. $12,551. d. $12,683.

ANSWER: b

44. The future value of $50,000 deposited today and compounded quarterly at an 8% annual interest rate for seven years is a. $57,434. b. $87,051. c. $85,691. d. $78,000.

ANSWER: b

49. The present value of $500,000 received at the end of five years discounted at 10% is a. $805,255. b. $310,461. c. $306,957. d. none of these

ANSWER: b

50. Marco needs $175,000 six years from today. How much should Marco deposit today into an investment account that provides a 12% annual return in order to accomplish his goals? a. $89,523 b. $88,660 c. $85,487 d. $62,500

ANSWER: b

56. Table factors for present values a. decrease as the interest rate decreases b. decrease as the number of periods increases c. increase as the interest rate increases d. increase as the number of periods increases

ANSWER: b

63. Georgia deposits $4,000 every three months for five years. The first deposit is made on March 31, 2020, and the last deposit is made on December 31, 2024. The fund earns 16% and interest is compounded quarterly. How much money will Georgia have on December 31, 2024, immediately after her last deposit? Factors for future value of an annuity of $1 are a. $123,876 b. $119,112 c. $110,034 d. $107,508

ANSWER: b

64. At the beginning of 2021, Laura Company issued 10-year bonds with a face value of $4,000,000 due on December 31, 2026. 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, 2021. How much must the company deposit each year, assuming that it will earn 12% interest compounded annually? a. $363,636.36 b. $227,936.65 c. $226,008.92 d. $203,514.87

ANSWER: b

80. Savannah has just won the state lottery. She will receive ten equal annual payments of $15,000, beginning one year from today. Assuming an 8% interest rate compounded annually, the present value of those receipts today is a. $80,913. b. $100,651. c. $108,703. d. $102,000.

ANSWER: b

82. Charlie's Construction Co. acquired a new $800,000 backhoe on April 1, 2018. Charlie's will make six annual payments based upon 8% interest compounded annually, starting on March 31, 2019. How much will each payment be? a. $504,136 b. $173,052 c. $160,234 d. $109,052

ANSWER: b

92. On June 1, 2020, Molser Company acquired a new machine by agreeing to pay five equal annual payments of $20,000, with the first payment due that day. Assuming an interest rate of 14% compounded annually, Molser should record the acquisition cost of the machine as a. $68,662. b. $78,274. c. $87,719. d. $100,000.

ANSWER: b

94. Raymond's Leasing Company signed an agreement to lease an asset that has a fair value of $800,000 on December 31, 2020. The lease will be paid in seven equal annual payments of $138,730, beginning on December 31, 2020. The interest rate included in the lease agreement is most nearly equal to a. 8%. b. 7%. c. 6%. d. 5%.

ANSWER: b

95. When the present value of an annuity is calculated as of two or more periods before the payment of the first cash flow, the annuity is a. an ordinary annuity. b. a deferred ordinary annuity. c. a compound annuity due. d. a compound ordinary annuity.

ANSWER: b

52. Margaret will receive an insurance settlement of $3,000,000 in five years. Randall is willing to give her a lump sum today in return for the payment in five years. If current interest rates are 12% per year, how much will Margaret receive today? a. $960,637 b. $1,702,281 c. $1,116,790 d. $1,800,000

ANSWER: b 53. Tessa won the lottery for $2,500,000 but due to a change in state laws she will not be able to collect it for three years. Ralph is willing to give her a lump sum today in return for the payment in three years. If current interest rates are 14% per year, how much will Tessa receive today? a. $1,687,430 b. $5,804,080 c. $2,500,000 d. $3,703,860` ANSWER: a

37. Simple interest on a $25,000, 8%, 18-month note is a. $22,000. b. $23,000. c. $3,000. d. $2,000.

ANSWER: c

38. Simple interest on a $1,250,000, 9%, 15-month note is a. $ 90,000. b. $112,500. c. $140,625. d. $168,750.

ANSWER: c

54. Each of the following compound interest factors has the same number of periods (n) at the same interest rate (i). Which one is the table factor for the present value of a single sum? a. 1.500730 b. 7.153291 c. 0.666342 d. 4.766540

ANSWER: c

58. All of the following are conditions for an ordinary annuity due except a. periodic cash flows must be equal in amount. b. the time periods between the cash flows are the same length. c. the future value is equal to the present value. d. interest is compounded at the end of each time period.

ANSWER: c

62. Jacob Sawyer will deposit $3,000 into a special account each year beginning December 31, 2020, with the last deposit being made on December 31, 2023. Jacob wants to know how much will be in his account on December 31, 2019, immediately after the final deposit, if the account earns 10% compounded annually. To solve the problem, Jacob must find the future value of a. a single sum. b. a deferred annuity. c. an ordinary annuity. d. an annuity due.

ANSWER: c

65. Currently (in August, 2021), Abby wants to have $20,000 available in August 2025 to make a college tuition payment. To be able to have this amount available, Abby will make equal annual deposits in an investment account earning 12% annually in August 2021,2022,2023,2024, and 2025. What is the annual amount to be deposited? a. $5,548 b. $4,000 c. $3,148 d. $2,270

ANSWER: c

66. Currently (on January 1, 2021), Nolan wants to have $45,000 available on December 31 2026 to purchase a luxury car. To be able to have this amount available, Nolan will make equal quarterly deposits for the next six years in an investment account earning a 16% annual return compounded quarterly. Nolan will make these deposits at the end of March, June, September, and December. What is the amount to be deposited quarterly for the next six years that will provide for a $45,000 balance at the end of 2026? a. $1,875 b. $1,253 c. $1,151 d. $210

ANSWER: c

67. Jackie's parents loaned her $80,000 to fund her college education. Her parents are not charging interest. They desire to be paid one lump sum of $80,000 when Jackie can accumulate that amount. Jackie established a savings plan that earns 8% compounded annually. Her new job promises to pay an annual holiday bonus that will enable her to make equal annual, year-end deposits of $6,400. Approximately how many years will it take Jackie to accumulate the $80,000? a. 8 years b. 8.5 years c. 9 years d. 12.5 years

ANSWER: c

68. Jeff desires to accumulate $13,603.83 by December 1, 2022. To accumulate that sum, he will make six equal semiannual deposits of $2,000, beginning on June 1, 2020, into a fund that earns interest compounded semiannually. What annual rate of interest must the fund provide to yield the desired sum? a. 5% b. 6% c. 10% d. 12%

ANSWER: c

69. Anne wants to accumulate $25,000 by December 31, 2023. To accumulate that sum, she will make twelve equal quarterly deposits of $1,616.66 at the end of March, June, September, and December, beginning on March 31, 2020, into a fund that earns interest compounded quarterly. What annual rate of interest must the fund provide to yield the desired sum? a. 4.5% b. 6.5% c. 18% d. 26%

ANSWER: c

76. You would like to deposit a sum of money today that would enable you to withdraw $2,000 a year for ten years. If the interest paid on the amount deposited is 10% compounded annually and if the first withdrawal is made one year from today, the formula you would use to determine the amount of the initial deposit is the a. present value of a deferred annuity. b. present value of an annuity due. c. present value of an ordinary annuity. d. future value of an ordinary annuity.

ANSWER: c

81. On January 31, 2020, Manning Company acquired a new machine by paying $40,000 cash and agreeing to pay $20,000 annually for four years, beginning on January 31, 2021. Assuming an interest rate of 10%, Manning should record the acquisition cost of the machine on January 31, 2020, at a. $120,000. b. $109,737. c. $103,397. d. $102,092.

ANSWER: c

83. Stacey has $5,000,000 on deposit in a fund that earns 9% interest compounded annually. How much can Stacey withdraw annually from the fund in ten equal annual withdrawals to completely deplete the fund after the tenth draw, assuming the first withdrawal occurs one year from today? a. $450,000 b. $714,771 c. $779,100 d. $555,555

ANSWER: c

84. On September 1, 2018, Watson Company received a loan of $44,940 from One Finance Company. To pay off this loan, Watson Company will have to pay One Finance $10,000 each year for ten years. The first payment is due September 1, 2019. Which interest rate compounded annually is Watson paying on this loan? a. 12% b. 15% c. 18% d. 24%

ANSWER: c

85. David Company borrowed $550,000 on December 31, 2018. The loan will be paid with six equal annual payments of $115,388, beginning on December 31, 2019. The rate of interest compounded annually for the loan is most nearly equal to a. 9%. b. 8%. c. 7%. d. 6%.

ANSWER: c

91. Samuel just inherited an annuity. He will receive six equal annual payments of $18,000, beginning today. Assuming a 10% interest rate compounded annually, the present value today of all receipts is a. $64,886. b. $78,395. c. $86,234. d. $75,058.

ANSWER: c

93. Norah has $2,000,000 in her retirement account. She wants to make 20 equal withdrawals, beginning today and each year thereafter. The investment plan earns 8%. What is the amount of annual withdrawals that would completely deplete the fund after the 20th withdrawal? a. $181,541 b. $184,875 c. $188,615 d. $203,704

ANSWER: c

98. Marcus Jones wants to invest $10,000 on January 1, 2020, so that he may withdraw 10 annual payments of equal amounts beginning January 1, 2035. If the fund earns 10% annual interest over its life, what will be the amount of each of the withdrawals? a. $10,000 b. $14,709 c. $16,181 d. $28,402

ANSWER: c

100. Balance sheet values are calculated using compound interest (present value) calculations for all of the following except a. bonds payable. b. long-term notes receivable. c. long-term lease liabilities. d. deferred income taxes.

ANSWER: d

101. FASB financial accounting concepts on using estimated future cash flow information in accounting measurements to value various assets and liabilities identified each of the following elements except a. an estimate of the future cash flows and the timing of those cash flows. b. an increase in the interest for any expected risk. c. estimates about variations in the amount or timing of those cash flows. d. that estimated cash flows should reflect a single most likely minimum or maximum possible amount, rather than a range of possible cash flows.

ANSWER: d

45. The future value of $7,000 deposited today and compounded quarterly at a 16% annual interest rate for five years is a. $14,724. b. $14,702. c. $8,517. d. $15,338.

ANSWER: d

51. On April 1, 2020, Meyers Company purchased a bulldozer. Payment, totaling $70,000, is not due until April 1, 2022. Assuming interest at a 12% annual rate, Meyers should debit Machinery on April 1, 2020, in the amount of a. $70,000. b. $62,500. c. $61,600. d. $55,804.

ANSWER: d

55. Bruno deposited $7,500 into an investment account and seven years later, the balance in the account was $10,910. What is the rate of return on this investment if interest is compounded annually? a. 45.5% b. 6.5% c. 6.0% d. 5.5%

ANSWER: d

57. All of the following are conditions for an ordinary annuity except a. periodic cash flows must be equal in amount b. the time periods between the cash flows are the same length c. the interest rate is constant for each time period d. interest is compounded in the middle of each time period

ANSWER: d

59. All of the following are conditions for an annuity due except a. periodic cash flows must be equal in amount. b. the time periods between the cash flows are the same length. c. the interest rate is constant for each time period. d. interest is compounded at the end of each time period.

ANSWER: d

60. An annuity is a series of a. equal payments with interest compounded annually. b. payments made at regular intervals in the future with interest compounded yearly. c. payments made at points in the future earning simple interest on a regular basis. d. equal payments made at regular intervals in the future with interest compounded at the end of each time period.

ANSWER: d

73. You deposit in a fund 10 annual payments of $2,500 each beginning January 1, 2020, with the last deposit being made on January 1, 2031. How much will be in the fund on December 31, 2031, one year after the final payment, if the fund earns interest at 4% compounded annually? a. $21,088 b. $28,957 c. $30,015 d. $31,216

ANSWER: d

79. In the present value of an annuity table, the factors. a. increase as the interest rates increase. b. decrease as the periods increase. c. increase as the periods decrease. d. decrease as the interest rates increase.

ANSWER: d

87. To determine the converted table factor for the present value of an annuity due, one must find the factor for the present value of an ordinary annuity for a. n + 1 and then subtract 1. b. n − 1 and then subtract 1. c. n + 1 and then add 1. d. n − 1 and then add 1.

ANSWER: d

96. Parker Posie wants to determine how much she must deposit today at 14% interest to provide four withdrawals of $26,000 at the end of each year, beginning five years from now. This is an example of the present value of a. an ordinary annuity. b. an annuity due. c. a compound annuity due. d. a deferred ordinary annuity.

ANSWER: d

2. One type of compensation provided by the time value of money is compensation for risk. a. True b. False

ANSWER: True

20. The future value of an ordinary annuity is higher if the discount rate is higher. a. True b. False

ANSWER: True

23. The present value of an annuity is the present value of a series of equal cash flows that occur in the future. a. True b. False

ANSWER: True

1. One type of compensation provided by the time value of money is compensation for expected consumption. a. True b. False

ANSWER: False

13. The present value factors for any discount rate increase as the number of periods increases. a. True b. False

ANSWER: False

14. To determine an unstated interest rate, divide the future amount by the present value then divide by the number of periods. a. True b. False

ANSWER: False

16. An ordinary annuity is if the cash flows occur on the first day of each period. a. True b. False

ANSWER: False

19. The formula for the future value of an ordinary annuity of any amount is: a. True b. False

ANSWER: False

27. To calculate the present value of an annuity due the formula is: a. True b. False

ANSWER: False

31. FASB's Statement of Financial Accounting Concepts No. 7 specifies when fair value should be based on present value. a. True b. False

ANSWER: False

7. The formula to compute the future value of a single sum is: a. True b. False

ANSWER: False

8. The formula to compute the future value of a single sum is a. True b. False

ANSWER: False

9. The future value of an amount depends on two variables: the interest rate and the number of payments a. True b. False

ANSWER: False

10. The present value of a future amount depends on two variables: the interest rate and the number of periods. a. True b. False

ANSWER: True

11. The formula to compute the present value of a dollar is a. True b. False

ANSWER: True

12. The present value of an amount decreases as the discount rate increases. a. True b. False

ANSWER: True

15. An annuity is the same amount at the same time every period a. True b. False

ANSWER: True

17. An annuity due is an annuity for which the cash flows occur on the first day of each period. a. True b. False

ANSWER: True

18. The future value of an ordinary annuity is determined immediately after the last cash flow in the series occurs. a. True b. False

ANSWER: True

102. Bunsen Company is involved in a consumer liability lawsuit. Company attorneys have assessed the contingent outcomes of the lawsuit. Because the attorneys think the company will probably lose the lawsuit, To prepare for this loss, Bunsen management has decided to set aside funds in an investment account that earns a 9% return rate. Furthermore, there is general agreement that there is a 60% probability the company will have to pay the defendants $6 million four years from now; a 30% probability the company will need to pay $10 million eight years from now, and a 10% probability the company will pay nothing. What amount should Bunsen accrue as a contingent liability? a. $4,055,928 b. $6,179,473 c. $6,600,000 d. $9,269,210

ANSWER: a

33. To compare the value of amounts received at different times in the future, dollar amounts a. may be restated to their present value through discounting or restated to their future value by compounding. b. must be converted to a single sum. c. must be restated to their future value by adding the compound interest to date. d. must be restated to their present value by removing the interest from the amount to be received in the future.

ANSWER: a

34. The method of converting a future dollar amount into its present dollar value by removing the time value of money is called a. discounting b. compounding c. amortizing d. interpolation

ANSWER: a

42. The future value of $7,000 deposited today and compounded semiannually at an 9% annual interest rate for four years is a. $9,955. b. $9,520. c. $8,100. d. $7,920.

ANSWER: a

43. Maxine has $1,000 to invest today. How much will her money be worth in 15 years if she earns 9% compounded semiannually on her money? a. $3,745 b. $13,268 c. $3,642 d. $1,935

ANSWER: a

46. Mildred desires to have $7,049 on deposit five years from today. If she has $4,000 to deposit, what rate of interest, compounded annually, must be obtained to accumulate the desired $7,049 in five years? a. 12% b. 10% c. 9% d. 8%

ANSWER: a

47. If $100,000 is invested on December 31, 2020 to earn compound interest semiannually, and if the future value on December 31, 2026, is $225,219 what is the semiannual interest rate on the investment? a. 7% b. 6% c. 5% d. 8%

ANSWER: a

70. Using the table approach, the future amount of an annuity due may be calculated by finding the table factor for the future amount of an ordinary annuity of a. n + 1 and then subtract 1. b. n + 1 and then add 1. c. n 1 and then add 1. d. n 1 and then subtract 1.

ANSWER: a

71. The future amount of an annuity due is determined a. one period after the last cash flow in the series. b. one period before the last cash flow in the series. c. at the same time as the last cash flow in the series. d. one period after the next cash flow in the series.

ANSWER: a

74. On January 2, 2020, Christopher inherited a trust fund that he could use for college tuition. Christopher hopes to make five equal withdrawals of $40,000 each year for the next five years from the fund that will earn 10% compounded annually. The first withdrawal will be made on January 2, 2021. How much does he need to have invested in the fund on January 2, 2020, to be able to withdraw the needed amounts each year? a. $151,631 b. $200,000 c. $244,204 d. $268,624

ANSWER: a

75. Stephen Michaels wants to know how much he must deposit today at 12% interest to provide three equal annual withdrawals of $10,000, beginning one year from now. This is an example of the present value of a. an ordinary annuity. b. an annuity due. c. a single sum. d. a deferred annuity.

ANSWER: a

77. In order to measure the carrying value of investments in bonds, which of the following time value of money concepts is used? a. the present value of an ordinary annuity b. the future value of a single sum c. the future value of an ordinary annuity d. all of these

ANSWER: a

88. For which of the following transactions would the present value of an annuity due concept be most appropriate for calculating the present value of the asset acquired or liability assumed? a. A rental agreement is entered into with the initial payment due immediately. b. A rental agreement is entered into with the initial payment due one month from the signing of the agreement. c. A note payable is obtained from a bank requiring monthly payments for six years, beginning at the end of the current month. d. A machine is acquired by paying $20,000 cash and agreeing to pay equal annual amounts of $10,000 each at the end of the next three years.

ANSWER: a

89. On July 7, 2020, Lawrence Company sold some machinery to Johnson Construction Company. The sales contract requires Johnson to pay five equal annual payments of $75,000 each, beginning on July 7, 2020. What present value concept is most appropriate for this situation? a. present value of an annuity due of $1 for five periods b. present value of an ordinary annuity of $1 for five periods c. future value of an annuity of $1 for five periods d. future value of $1 for five periods

ANSWER: a

90. Stacey has $5,000,000 on deposit in a fund that earns 9% interest compounded annually. How much can Stacey withdraw annually from the fund in ten equal annual withdrawals to completely deplete the fund after the tenth draw, assuming the first withdrawal occurs today? a. $714,771 b. $779,100 c. $861,298 d. $922,908

ANSWER: a

97. Joshua desires to purchase an annuity on January 1, 2020, that yields him five annual cash flows of $10,000 each, with the first cash flow to be received on January 1, 2023. The interest rate is 10% compounded annually. The cost (present value) of the annuity on January 1, 2020, is a. $31,328.81. b. $34,461.70. c. $37,907.87. d. $48,684.19.

ANSWER: a

99. Suppose you borrow money from your parents for college tuition on January 1, 2013. Your parents require four annual payments of $1,000 each, with the first payment due on January 1, 2017. They are charging you 6% annual interest. What is the cost of the college tuition? a. $2,909.37 b. $1,593.85 c. $4,000.00 d. $2,744.69

ANSWER: a

35. Interest calculated on the original principal regardless of the number of time periods that have passed or the amount of interest that has been paid or accrued in the past is a. compound interest. b. simple interest. c. present value of future cash flows. d. future value of a single sum.

ANSWER: b