Question 1

Finley Company will receive $500,000 in 7 years. If the appropriate interest rate is 10%, the present value of the $500,000 receipt is

Accepted Answer

$500,000 × 0.51316 = $256,580

Question 2

Jasper Company will invest $300,000 today. The investment will earn 6% for 5 years, with no funds withdrawn. In 5 years, the amount in the investment fund is

Accepted Answer

$300,000 × 1.33823 = $401,469

Question 3

Schmitt Corporation will invest $10,000 every December 31st for the next six years (2008- 2013). If Schmitt will earn 12% on the investment, what amount will be in the investment fund on December 31, 2013?

Accepted Answer

$10,000 × 8.11519 = $81,152

Question 4

Linton Corporation will invest $10,000 every January 1st for the next six years (2008 - 2013). If Linton will earn 12% on the investment, what amount will be in the investment fund on December 31, 2013?

Accepted Answer

$10,000 × 8.11519 × 1.12 = $90,890.

Question 5

On January 1, 2007, Carly Company decided to begin accumulating a fund for asset replacement five years later. The company plans to make five annual deposits of $50,000 at 9% each January 1 beginning in 2007. What will be the balance in the fund, within $10, on January 1, 2012 (one year after the last deposit)? The following 9% interest factors may be used

Accepted Answer

$50,000 × (7.5233 - 1) = $326,166 or $50,000 × 5.9847 × 1.09

Question 6

How much must be invested now to receive $10,000 for 15 years if the first $10,000 is received today and the rate is 9%?

Accepted Answer

$10,000 × (7.78615 + 1) = $87,862 or $10,000 × 8.06069 × 1.09

Question 7

Find the present value of an investment in plant and equipment if it is expected to provide annual earnings of $21,000 for 15 years and to have a resale value of $40,000 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.

Accepted Answer

($21,000 × 7.60608) + ($40,000 × .23939) = $169,303

Question 8

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?

Accepted Answer

The present value of an ordinary annuity is used when payments are made at the end of each period. In option A, the lease payments start one month after the lease agreement, fitting the ordinary annuity model.

Question 9

On January 15, 2008, Flynn Corp. adopted a plan to accumulate funds for environmental improvements beginning July 1, 2012, at an estimated cost of $4,000,000. Flynn 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, 2008. Future value factors are as follows:
 Flynn should make four annual deposits of

Accepted Answer

5.11 × R = $4,000,000; R = $4,000,000 ÷ 5.11 = $782,779

Question 10

On January 1, 2008, Lex Co. sold goods to Eaton Company. Eaton signed a noninterest-bearing note requiring payment of $80,000 annually for seven years. The first payment was made on January 1, 2008. The prevailing rate of interest for this type of note at date of issuance was 10%. Information on present value factors is as follows:
 Lex should record sales revenue in January 2008 of

Accepted Answer

$80,000 × (4.8684 × 1.1) = $428,419

Question 11

On July 1, 2008, Ed Vance signed an agreement to operate as a franchisee of Kwik Foods, Inc., for an initial franchise fee of $180,000. Of this amount, $60,000 was paid when the agreement was signed and the balance is payable in four equal annual payments of $30,000 beginning July 1, 2009. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. Vance'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:
 Vance should record the acquisition cost of the franchise on July 1, 2008 at

Accepted Answer

($30,000 × 2.91) + $60,000 = $147,300

Quiz 19: Appendix A: Accounting and the Time Value of Money

Finley Company will receive $500,000 in 7 years. If the appropriate interest rate is 10%, the present value of the $500,000 receipt is

Jasper Company will invest $300,000 today. The investment will earn 6% for 5 years, with no funds withdrawn. In 5 years, the amount in the investment fund is

Schmitt Corporation will invest $10,000 every December 31st for the next six years (2008- 2013) . If Schmitt will earn 12% on the investment, what amount will be in the investment fund on December 31, 2013?

Linton Corporation will invest $10,000 every January 1st for the next six years (2008 - 2013) . If Linton will earn 12% on the investment, what amount will be in the investment fund on December 31, 2013?

How much must be invested now to receive $10,000 for 15 years if the first $10,000 is received today and the rate is 9%?

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?