Deck 7: Accounting and the Time Value of Money

Question 1

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

Answer 1

False

Question 2

Which of the following situations does not use an accounting measure based on present values?

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

Answer 2

A

Question 3

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

Answer 3

True

Question 4

The value of a dollar in the future is greater than the value of a dollar today because interest is added.

Question 5

The parents of a recent high school graduate decides to invest the $5,000 he received for her high school graduation in a fund earning 10% annual interest.At the end of the four-year period,she expects to withdraw the money to pay for accumulated college tuition loans.What is the approximate amount that would be available for withdrawal after five years if interest is compounded monthly?

A)$5,500
B)$7,500
C)$8,050
D)$8,225

Question 6

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

Question 7

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

Question 8

What is the effective interest rate for an investment fund that pays 8% interest compounded semiannually?

A)4)00%
B)8)16%
C)8)40%
D)8)64%

Question 9

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

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

Question 10

Bob Marby purchased a TV from Tryton Sales and signed a 2-year,6% promissory note for $1,200.What is the amount required to pay off the note if it accrues simple interest?

A)$1,212
B)$1,272
C)$1,344
D)$1,348

Question 11

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

Question 12

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

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

Question 13

Simple interest on a $25,000,8%,18-month note is ________.

A)$1,200
B)$2,000
C)$2,500
D)$3,000

Question 14

Compound interest includes interest earned on interest.

Question 15

The present value of an asset is the opposite of the present value of a liability.

Question 16

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

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

Question 17

What is the effective interest rate for an investment fund that pays 12% interest compounded monthly?

A)1)00%
B)12.12%
C)12.68%
D)14.40%

Question 18

When payments take place at the beginning of the period,the series of cash flows is called ________.

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

Question 19

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

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

Question 20

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

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

Question 21

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

A)length of compounding period
B)number of compounding periods
C)interest rate per compounding period
D)type based on timing of payment at the beginning or end of the compounding period

Question 22

What is the relationship between the future value of one and the present value of one?

A)The present value of one equals one divided by the future value of one.
B)The present value of one equals one plus the future value factor for n + 1 value.
C)The present value of one equals one plus future value factor for n - 1 periods.
D)The present value of one equals the future value of one divided by one plus the interest rate.

Question 23

The relationship between a future value and its corresponding present value is determined by two variables.What are those two variables?

A)discount rate; length of compounding periods
B)discount rate; number of compounding periods
C)conversion rate; length of compounding periods
D)conversion rate; number of compounding periods

Question 24

You decide to deposit $3,000 at a local bank for three years at a 6% rate of interest compounded semiannually.The future value of your investment is most nearly equal to ________.

A)$3,270
B)$3,540
C)$3,580
D)$3,618

Question 25

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

Question 26

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

Question 27

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

Question 28

The relationship between a future value and its corresponding present value is determined by the discount rate and ________.

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

Question 29

Which of the following equations is consistent with the relationship between the future value (FV)and the present value (PV)given a discount rate (R)and the number (N)of compounding periods?

A) = (1 + R)^N
B) = (1 + R)^N
C) = (1 + N)^R
D) = (1 + N)^R

Question 30

$10,000 is put in a investment account today.The investment account compounds interest at a rate of 1% per month.What amount will be available five years from today?

A)$10,510
B)$16,000
C)$17,623
D)$18,167

Question 31

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

Question 32

What is the time value of money?

Question 33

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

Question 34

Which of the following statements is true?

A)The process of accumulating interest on interest is referred to as discounting.
B)The higher the discount rate,the higher the present value.
C)If interest is 12% compounded annually,$1,200 due one year from today is equivalent to $1,000 today.
D)If interest is 10% compounded annually,$1,100 due one year from today is equivalent to $1,000 today.

Question 35

Which of the following equations is consistent with the relationship between the future value (FV)and the present value (PV)given a discount rate (R)and the number (N)of compounding periods?

A) =
B) =
C) =
D) =

Question 36

How is the effective interest rate determined?

Question 37

You decide to deposit $5,000 at a local bank for three years at a 8% rate of interest compounded quarterly.The future value of your investment is most nearly equal to ________.

A)$6,200
B)$6,340
C)$6,430
D)$6,800

Question 38

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

Question 39

You decide to deposit $2,000 at a local bank for two years at a 7% rate of interest compounded annually.What is the future value of your investment?

A)$2,014
B)$2,028
C)$2,280
D)$2,290

Question 40

Dover Company deposits $50,000 with Second National Bank in an account earning interest at 8% per annum,compounded semi-annually.How much will Dover have in the account after five years if interest is reinvested?

A)$60,833
B)$70,000
C)$73,467
D)$74,012

Question 41

You have discovered an investment opportunity that earns a 6% rate of interest compounded semiannually.What amount should you deposit today to have $5,000 in three years?

A)$3,832
B)$4,100
C)$4,187
D)$4,237

Question 42

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

Question 43

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

Question 44

You have discovered an investment opportunity that earns a 9% rate of interest compounded annually.What amount should you deposit today to have $3,000 in two years?

A)$2,460
B)$2,525
C)$2,542
D)$2,752

Question 45

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

Question 46

A zero-interest bond pays $600,000 in 10 years.What amount would you be willing to pay to acquire the bond today if you want to earn a return of approximately 8%?

A)$450,000
B)$333 300
C)$279,900
D)$277,900

Question 47

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

Question 48

For any discount rate,the future value of an annuity due factor for n periods is equal to the future value of an ordinary annuity factor for n + 1 periods minus 1.

Question 49

Fanagi Corp.borrowed $58,000 from its bank at a 6% annual interest rate and will repay $250,000.Assume annual compounding.In approximately how many years will Fanagi repay the loan?

A)5 years
B)19 years
C)23 years
D)25 years

Question 50

Paula Poser will receive $80,000 on December 31,2022,from a trust fund established by her mother.Assuming the appropriate interest rate for discounting is 12% (compounded semiannually),what is the present value of this amount as of January 1,2017 (5 years earlier)?

Question 51

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

Question 52

Punjab Company borrowed $114,000 from its bank.Punjab will repay $150,000 in 7 years.What is the approximate interest rate that Punjab will incur on this loan,assuming annual compounding?

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

Question 53

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

Question 54

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

Question 55

List the variables in a single-sum problem.

Question 56

For any discount rate,the future value of an annuity due factor for n periods is equal to the future value of an ordinary annuity factor for n - 1 periods plus 1.

Question 57

Como Company borrowed $4,550 from its bank.Como will repay $7,000 in five years.What is the approximate interest rate that Como will incur on this loan,assuming annual compounding?

A)9%
B)11%
C)13%
D)65%

Question 58

You have discovered an investment opportunity that earns a 8% rate of interest compounded quarterly.Which of the following amounts is most nearly equal to the amount you should deposit today to have $7,000 in five years?

A)$5,300
B)$5,240
C)$4,760
D)$4,710

Question 59

A zero-interest bond pays $200,000 in seven years.What amount would you be willing to pay to acquire the bond today if you want to earn a return of approximately 10%?

A)$151,500
B)$117,600
C)$102,600
D)$60,000

Question 60

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

Question 61

The future amount of an annuity due is determined ________.

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

Question 62

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

Question 63

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

Question 64

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

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

Question 65

Anne wants to accumulate $25,000 by December 31,2019.To accumulate that sum,she will make twelve equal quarterly deposits of $1,761.55 at the end of March,June,September,and December for the next three years,beginning on March 31,2016,into a fund that earns interest compounded quarterly.What annual rate of interest must the fund provide to yield the desired sum?

A)3%
B)7%
C)12%
D)14%

Question 66

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

Question 67

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

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

Question 68

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

Question 69

At the beginning of 2017,Denero Company issued 10-year bonds with a face value of $4,000,000 due on December 31,2027.The company will accumulate a fund to retire these bonds at maturity.It will make ten annual deposits to the fund beginning on December 31,2017.How much must Denero deposit each year to achieve this investment goal,assuming that it will earn 12% interest compounded annually?

A)$203,515
B)$226,009
C)$227,937
D)$363,636

Question 70

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

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

Question 71

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

Question 72

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

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

Question 73

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

A)12.5 years
B)10 years
C)9 years
D)8 years

Question 74

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

Question 75

Zendor Company wants to have $200,000 available in August 2021 to make an equipment purchase.To be able to have this amount available,Zendor will make equal annual deposits in an investment account earning 12% annually in June 2017,2018,2019,2020,and 2021.What is the dollar amount that must be deposited each of those years to achieve this objective?

A)$22,700
B)$31,480
C)$40,000
D)$55,480

Question 76

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

Question 77

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

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

Question 78

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

Question 79

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

Question 80

For any discount rate,the future value of an ordinary annuity factor for n periods is equal to the future value of an annuity due factor for n - 1 periods plus 1.