Question 1

A company sells merchandise on a deferred payment plan,ultimately receiving $5,000 on the account receivable.On the payment date,the company would

Accepted Answer

Since the customer made a payment on the account receivable, the company needs to reduce the balance in the Accounts Receivable account. Therefore, the company would credit Accounts Receivable for less than $5,000. The other options are not applicable in this scenario as there is no indication of interest income, a decrease in sales, or a need to debit the asset account for the full amount of $5,000.

Question 2

Which of the following phrases is not descriptive of an ordinary annuity?

Accepted Answer

An ordinary annuity is a series of equal payments made at the end of each period, not at the beginning. Therefore, payments made at the beginning of equal periods of time is not descriptive of an ordinary annuity.

Question 3

Use this information to answer the following question. $$\begin{array} { | c | c | c | } 
\hline \text { Periods } & \text { Present Value af } \$ 1 \text { at } 7 \text { Percent } & \text { Present Value af Ordinary Annuity of } \
&&\text { \$1 at } 7 \text { Percent } \
1 & 0.935 & 0.935 \
\hline 2 & 0.873 & 1.808 \
\hline 3 & 0.816 & 2.624 \
\hline
\end{array}$$
 If $100 is invested,how much will it grow to at the end of the three years?

Accepted Answer

The answer of Use this information to answer the following...

Question 4

A company places $10,000 into a money market account for four months.The account is expected to pay 9 percent annual interest,compounded monthly.After one month,the entry to record interest earned is:

Accepted Answer

The interest for one month is calculated as $10,000 * (0.09/12) = $75. The entry records the interest earned as an increase in Short-Term Investments and Interest Income.

Question 5

Compound interest is computed quarterly on $700 for seven years at 12 percent annual interest.The future value table is used by multiplying the $700 by which factor?

Accepted Answer

Compound interest calculated quarterly over seven years at an annual rate of 12% means the interest is compounded 4 times a year (quarterly) for 7 years, totaling 28 periods, and the interest rate per period is 12%/4 = 3%.

Question 6

A company enters into a contract to purchase a certain quantity of goods from another company during the following month.At this point,would a liability exist? Explain why or why not.

Accepted Answer

The answer of A company enters into a contract to...

Question 7

A company purchases an asset on a deferred payment plan,ultimately paying $10,000.On the payment date,the company would

Accepted Answer

The answer of A company purchases an asset on a...

Question 8

The closing entry that would be made at the yearend transferring the interest expense of $50 on a note is:

Accepted Answer

The closing entry for an expense account involves debiting the Income Summary and crediting the expense account to close it out.

Question 9

A company wishes to make annual contributions into a fund intended to retire $400,000 in debt five years from now.The amount to contribute each year equals $400,000

Accepted Answer

The answer of A company wishes to make annual contributions...

Question 10

The future value of an ordinary annuity table would not include the factor

Accepted Answer

The answer of The future value of an ordinary annuity...

Question 11

Heidi wishes to deposit an amount into her savings account that will enable her to withdraw $800 per year for the next four years.She should deposit $800,multiplied by the

Accepted Answer

Heidi wishes to withdraw a fixed amount ($800) for a fixed period (4 years), which is an annuity. Therefore, she needs to use the present value of an ordinary annuity factor to calculate the amount she needs to deposit today. This factor will take into account the interest rate and the number of years she wants to withdraw the money.

Question 12

Use this information to answer the following question. $$\begin{array} { | c | c | c | } 
\hline \text { Periods } & \text { Present Value af } \$ 1 \text { at } 7 \text { Percent } & \text { Present Value af Ordinary Annuity of } \
&&\text { \$1 at } 7 \text { Percent } \
1 & 0.935 & 0.935 \
\hline 2 & 0.873 & 1.808 \
\hline 3 & 0.816 & 2.624 \
\hline
\end{array}$$
 What is the present value of receiving $400 at the end of each year for three years?

Accepted Answer

The answer of Use this information to answer the following...

Question 13

Use this information to answer the following question. $$\begin{array} { | c | c | c | } 
\hline \text { Periods } & \text { Present Value af } \$ 1 \text { at } 7 \text { Percent } & \text { Present Value af Ordinary Annuity of } \
&&\text { \$1 at } 7 \text { Percent } \
1 & 0.935 & 0.935 \
\hline 2 & 0.873 & 1.808 \
\hline 3 & 0.816 & 2.624 \
\hline
\end{array}$$ What amount must be deposited today to grow to $450 in three years?

Accepted Answer

To solve this problem, we need to use the formula for compound interest: A = P(1 + r/n)^(nt), where A is the ending balance, P is the principal (or starting balance), r is the annual interest rate, n is the number of times the interest is compounded per year, and t is the number of years. We are given that A = $450, r = unknown, n = 1 (compounded annually), and t = 3. We want to solve for P.

We can rearrange the formula as follows: P = A / (1 + r/n)^(nt)

Plugging in the given values, we get:
P = $450 / (1 + r/1)^(1*3)
P = $450 / (1 + r)^3

Now, we need to solve for r. We can use algebra to isolate the variable:
P(1 + r)^3 = $450
1 + r = (450/P)^(1/3)
r = (450/P)^(1/3) - 1

We can now plug in the answer choices and see which one gives us the correct value of r.

A) $331.00:
r = (450/331)^(1/3) - 1
r ≈ 0.06

B) $367.20:
r = (450/367.2)^(1/3) - 1
r ≈ 0.04

C) $171.49:
r = (450/171.49)^(1/3) - 1
r ≈ 0.19

D) $420.75:
r = (450/420.75)^(1/3) - 1
r ≈ 0.02

The only answer choice that gives us a value of r that is reasonable (not too high or too low) is B. So, the answer is choice B: $367.20.

Question 14

The higher the interest rate assumed,the

Accepted Answer

The higher the interest rate, the lower the present value of a sum due in the future because a higher discount rate is used to calculate present value, reducing the value of future cash flows.

Question 15

Use this information to answer the following question. $$\begin{array} { | c | c | c | } 
\hline \text { Periods } & \text { Present Value af } \$ 1 \text { at } 7 \text { Percent } & \text { Present Value af Ordinary Annuity of } \
&&\text { \$1 at } 7 \text { Percent } \
1 & 0.935 & 0.935 \
\hline 2 & 0.873 & 1.808 \
\hline 3 & 0.816 & 2.624 \
\hline
\end{array}$$ What amount must be deposited today so that $600 may be withdrawn at the end of each year for three years?

Accepted Answer

The present value of an ordinary annuity of $1 at 7% for 3 years is 2.624. To find the amount to be deposited today, multiply $600 by 2.624, which equals $1,574.40.

Question 16

Use this information to answer the following question. $$\begin{array} { | c | c | c | } 
\hline \text { Periods } & \text { Future Value af } 11 \text { at } 12 \text { Percent } & \text { Future Value af Ordinary Annuity of } \
& & \text { \$1 at } 12 \text { Percent } \
\hline 1 & 1.120 & 1.000 \
\hline 2 & 1.254 & 2.120 \
\hline 3 & 1.405 & 3.374 \
\hline
\end{array}$$ A deposit of $2,700 made at the end of each year for three years would grow to how much?

Accepted Answer

The future value of an ordinary annuity is calculated by multiplying the annuity payment by the future value factor for the annuity. Here, $2,700 * 3.374 = $9,109.80.

Question 17

First City Bank computes interest semiannually.If the interest rate is currently 6 percent per annum,the amount deposited today should be multiplied by which future value factor to calculate the amount that will accumulate by the end of 10 years?

Accepted Answer

Since interest is computed semiannually, there are 20 periods in 10 years (2 periods per year for 10 years).

The interest rate is 6% per annum, which means the semiannual interest rate is 3% (6% divided by 2).

To calculate the future value factor for 20 periods at 3%, we use the formula:

Future value factor = (1 + r)^n
where r is the interest rate per period and n is the number of periods.

Plugging in the values, we get: 
Future value factor = (1 + 0.03)^20 = 1.8061

Therefore, to calculate the amount that will accumulate by the end of 10 years, we need to multiply the amount deposited today by the future value factor of 1.8061.

Question 18

Fabian Company is considering the purchase of a machine that will save the company $2,000 per year in operating costs for a period of seven years.The most it should pay for the machine is equal to

Accepted Answer

To determine the most Fabian Company should pay for the machine, we need to calculate the present value of the savings over the seven-year period. Using the formula for the present value of an ordinary annuity, which is PV = PMT x ((1 - (1 / (1 + r)^n)) / r), where PMT is the annual savings, r is the discount rate, and n is the number of periods, we can calculate that the present value of the savings is $12,814.25. Therefore, the most Fabian Company should pay for the machine is $12,814.25, which is equal to $2,000 times the present value of an ordinary annuity for 7 periods. Choice A is therefore the correct answer.

Choice B is incorrect because it does not take into account the present value of the savings and assumes that the machine will save exactly $2,000 per year, every year for the next seven years.

Choice C is incorrect because it calculates the value of the savings at the end of the seven-year period, not the present value of those savings.

Choice D is incorrect because it assumes that the $2,000 savings will be received at the end of each year for the seven-year period, rather than being received evenly throughout the year.

Question 19

Assume that a company received $1,200 in advance for one year membership fee in the fitness center.The entry that would be made to record the recognition of revenue at the end of first month is:

Accepted Answer

The company initially records the $1,200 as unearned revenue. At the end of the first month, $100 is recognized as earned revenue, reducing unearned revenue by $100.

Question 20

Meggie's Fitness center received $720 from a customer in advance for one year membership in the fitness center.The entry that would be made to record the fee receipt is:

Accepted Answer

The entry to record the fee receipt would be a debit to Cash for $720 (as cash is being received) and a credit to Unearned Revenue for $720 (as the revenue has not yet been earned and is therefore considered a liability). Choice B is the only option that has both of these accounts being affected.

Quiz 8: Current Liabilities and Fair Value Accounting