Intermediate Accounting J David Spiceland 10e - Test Bank

Intermediate Accounting J David Spiceland 10e – Test Bank

Instant Download – Complete Test Bank With Answers

Sample Questions Are Posted Below

Intermediate Accounting, 10e (Spiceland)

Chapter 5 Time Value of Money Concepts

1) An uncle asks to borrow $500 today and promises to repay you $1,210 two years from now. To find the annual interest rate you would be agreeing to, you would search the second row in the: (PV of $1)

A) future value of $1 table, for the factor closest to 1.21.
B) present value of $1 table, for the factor closest to 0.82645.
C) present value of $1 table, for the factor closest to 1.21.
D) present value of an ordinary annuity of $1 table, for the factor closest to 1.21.

Answer: B

Explanation: The interest rate is the rate that will provide a present value of $1,000 when determining the present value of the $1,210 to be received in two years:

$1,000 (present value) = $1,210 (future value) × ?*

* Present value of $1: n = 2, i = ?

Rearranging algebraically, we find that the present value table factor is 0.82645.

$1,000 (present value) ÷ $1,210 (future value) = 0.82645*

* Present value of $1: n = 2, i = ?

When you consult the present value table, Table 2, you search row two (n = 2) for this value and find it in the 10% column. So the effective interest rate is 10%.

Difficulty: 2 Medium

Topic: Solve for unknown amount

Learning Objective: 05-04 Solve for either the interest rate or the number of compounding periods when present value and future value of a single amount are known.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

2) You want to invest $20,000 today to accumulate $32,000 for graduate school. If you can invest at an interest rate of 10% compounded annually. To find how many years will it take to accumulate the required amount, you would search the 10% column in the:

A) present value of $1 table, for the factor closest to 0.625.
B) future value of $1 table, for the factor closest to 1.6.
C) present value of $1 table, for the factor closest to 1.6.
D) present value of an ordinary annuity of $1 table, for the factor closest to 1.6.

Answer: A

Explanation: The years it will take is the value of n that will provide a present value of $20,000 when finding the present value of $32,000 at a rate of 10%:

$20,000 (present value) = $32,000 (future value) × ?*

* Present value of $1; n = ?, i = 10%

Rearranging algebraically, we find that the present value table factor is 0.625:

$20,000 (present value) ÷ $32,000 (future value) = 0.625

When you consult the present value table, you search the 10% column (i = 10%) for this value and find 0.62092 in row five. So it would take approximately five years to accumulate $32,000 in the situation described.

Difficulty: 2 Medium

Topic: Solve for unknown amount

Learning Objective: 05-04 Solve for either the interest rate or the number of compounding periods when present value and future value of a single amount are known.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

3) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

You want to invest $20,000 today to accumulate $22,500 to buy a car. If you can invest at an interest rate of 3% compounded annually, how many years will it take to accumulate the required amount?

A) 3 years.
B) 4 years.
C) 5 years.
D) 6 years.

Answer: B

Explanation: The years it will take is the value of n that will provide a present value of $20,000 when finding the present value of $22,500 at a rate of 3%:

$20,000 (present value) = $22,500 (future value) × ?*

* Present value of $1; n = ?, i = 3%

Rearranging algebraically, we find that the present value table factor is 0.88889:

$20,000 (present value) ÷ $22,500 (future value) = 0.88889

When you consult the present value table (PV $1), you search the 3% column (i = 3%) for this value and find 0.88849 in row four. So it would take approximately four years to accumulate $22,500 in the situation described.

Difficulty: 3 Hard

Topic: Solve for unknown amount

Learning Objective: 05-04 Solve for either the interest rate or the number of compounding periods when present value and future value of a single amount are known.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

4) You want to invest $6,000 annually beginning now in order to accumulate $28,000 for a down payment on a house in five years. To find the annual interest rate you would need to receive to accomplish this goal, you would search the fifth row in the:

A) future value of a annuity due of $1 table, for the factor closest to 4.6667.
B) present value of an ordinary annuity of $1 table, for the factor closest to 0.2143.
C) present value of an annuity due of $1 table, for the factor closest to 4.6667.
D) future value of an ordinary annuity of $1 table, for the factor closest to 0.2143.

Answer: C

Explanation: The years it will take is the value of i that will equate an annual payment of $6,000 at the beginning of each year with a future value of $28,000 when finding the present value of an annuity due for five years.

$6,000 (payments) = $28,000 (future value) × ?*

* Present value of an annuity due of $1; n = 5, i = ?

Rearranging algebraically, we find that the present value table factor is 4.66667:

$6,000 (payments) = $28,000 (future value) = 4.66667

When you consult the present value table (PVAD $1), you search the fifth row (n = 5) for this value and find 4.67308 in the 3.5% column. So it would take a return of approximately 3.5% to accumulate $28,000 in the situation described.

Difficulty: 2 Medium

Topic: Solve for unknown amount

Learning Objective: 05-09 Solve for unknown values in annuity situations involving present value.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

5) Present and future value tables of $1 at 9% are presented below.

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.09000	0.91743	1.0000	1.0900	0.91743	1.00000
2	1.18810	0.84168	2.0900	2.2781	1.75911	1.91743
3	1.29503	0.77218	3.2781	3.5731	2.53129	2.75911
4	1.41158	0.70843	4.5731	4.9847	3.23972	3.53129
5	1.53862	0.64993	5.9847	6.5233	3.88965	4.23972
6	1.67710	0.59627	7.5233	8.2004	4.48592	4.88965

You want to invest $7,000 annually beginning now in order to accumulate $25,000 for a down payment on a house. If you can invest at an interest rate of 9% compounded annually, about how many years will it take to accumulate the required amount?

A) 3 years.
B) 4 years.
C) 5 years.
D) 6 years.

Answer: B

Explanation: The years it will take is the value of n that will equate an annual payment of $7,000 at the beginning of each year with a future value of $25,000 when finding the present value of an annuity due at a rate of 9%:

$7,000 (payments) = $25,000 (future value) × ?*

* Present value of an annuity due of $1; n = ?, i = 9%

Rearranging algebraically, we find that the present value table factor is 3.5714:

$7,000 (payments) = $25,000 (future value) = 3.57142

When you consult the present value table (PVAD $1), you search the 9% column (i = 9%) for this value and find 3.53129 in row four. So it would take approximately four years to accumulate $25,000 in the situation described.

Difficulty: 3 Hard

Topic: Solve for unknown amount

Learning Objective: 05-09 Solve for unknown values in annuity situations involving present value.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

6) Compound interest includes interest earned on interest.

Answer: TRUE

Difficulty: 1 Easy

Topic: Basics of interest―Simple versus compound

Learning Objective: 05-01 Explain the difference between simple and compound interest.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

7) When interest is compounded, the stated rate of interest exceeds the effective rate of interest.

Answer: FALSE

Difficulty: 2 Medium

Topic: Basics of interest―Simple versus compound

Learning Objective: 05-01 Explain the difference between simple and compound interest.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

8) The calculation of future value requires the removal of interest.

Answer: FALSE

Difficulty: 1 Easy

Topic: Future value of a single amount

Learning Objective: 05-02 Compute the future value of a single amount.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

9) The calculation of present value eliminates interest from future cash flows.

Answer: TRUE

Difficulty: 1 Easy

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

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

Answer: FALSE

Difficulty: 1 Easy

Topic: Basics of ordinary annuity and annuity due

Learning Objective: 05-06 Explain the difference between an ordinary annuity and an annuity due situation.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

11) In the future value of an ordinary annuity, the last cash payment will not earn any interest.

Answer: TRUE

Difficulty: 1 Easy

Topic: Basics of ordinary annuity and annuity due

Learning Objective: 05-06 Explain the difference between an ordinary annuity and an annuity due situation.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

12) An annuity consists of level principal payments plus interest on the unpaid balance.

Answer: FALSE

Difficulty: 1 Easy

Topic: Basics of ordinary annuity and annuity due

Learning Objective: 05-06 Explain the difference between an ordinary annuity and an annuity due situation.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

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

Answer: TRUE

Difficulty: 1 Easy

Topic: Basics of ordinary annuity and annuity due

Learning Objective: 05-06 Explain the difference between an ordinary annuity and an annuity due situation.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

14) An annuity is a series of equal periodic payments.

Answer: TRUE

Difficulty: 1 Easy

Topic: Basics of ordinary annuity and annuity due

Learning Objective: 05-06 Explain the difference between an ordinary annuity and an annuity due situation.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

15) Given identical current amounts owed and identical interest rates, annual payments of an ordinary annuity will be greater than annual payments of an annuity due.

Answer: TRUE

Difficulty: 2 Medium

Topic: Basics of ordinary annuity and annuity due

Learning Objective: 05-06 Explain the difference between an ordinary annuity and an annuity due situation.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

16) Other things being equal, the present value of an annuity due will be less than the present value of an ordinary annuity.

Answer: FALSE

Difficulty: 2 Medium

Topic: Present value of an ordinary annuity; Present value of an annuity due

Learning Objective: 05-08 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

17) A deferred annuity is one in which interest charges are deferred for a stated time period.

Answer: FALSE

Difficulty: 1 Easy

Topic: Present value of a deferred annuity

Learning Objective: 05-08 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

18) Monetary assets include only cash and cash equivalents.

Answer: FALSE

Difficulty: 1 Easy

Topic: Monetary assets and liabilities

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

19) Most, but not all, liabilities are monetary liabilities.

Answer: TRUE

Difficulty: 1 Easy

Topic: Monetary assets and liabilities

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

20) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

Today, Thomas deposited $100,000 in a three-year, 12% CD that compounds quarterly. What is the maturity value of the CD?

A) $109,270.
B) $119,410.
C) $142,576.
D) $309,090.

Answer: C

Explanation: FV = $100,000 × 1.42576* = $142,576

*FV of $1: n = 12; i = 3%

Difficulty: 2 Medium

Topic: Future value of a single amount

Learning Objective: 05-02 Compute the future value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

21) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

Carol wants to invest money in a 6% CD account that compounds semiannually. Carol would like the account to have a balance of $50,000 five years from now. How much must Carol deposit to accomplish her goal?

A) $35,069.
B) $43,131.
C) $37,205.
D) $35,000.

Answer: C

Explanation: PV = $50,000 × 0.74409* = $37,205

*PV of $1: n = 10; i = 3%

Difficulty: 3 Hard

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

22) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

Shane wants to invest money in a 6% CD account that compounds semiannually. Shane would like the account to have a balance of $100,000 four years from now. How much must Shane deposit to accomplish his goal?

A) $88,849.
B) $78,941.
C) $25,336.
D) $22,510.

Answer: B

Explanation: PV = $100,000 × 0.78941* = $78,941

*PV of $1: n = 8; i = 3%

Difficulty: 3 Hard

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

23) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

Bill wants to give Maria a $500,000 gift in seven years. If money is worth 6% compounded semiannually, what is Maria’s gift worth today?

A) $66,110.
B) $81,309.
C) $406,545.
D) $330,560.

Answer: D

Explanation: PV = $500,000 × 0.66112* = $330,560

*PV of $1: n = 14; i = 3%

Difficulty: 3 Hard

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

24) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

Monica wants to sell her share of an investment to Barney for $50,000 in three years. If money is worth 6% compounded semiannually, what would Monica accept today?

A) $8,375.
B) $41,874.
C) $11,941.
D) $41,000.

Answer: B

Explanation: PV = $50,000 × 0.83748* = $41,874

*PV of $1: n = 6; i = 3%

Difficulty: 3 Hard

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

25) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

At the end of the next four years, a new machine is expected to generate net cash flows of $8,000, $12,000, $10,000, and $15,000, respectively. What are the (rounded) cash flows worth today if a 3% interest rate properly reflects the time value of money in this situation?

A) $41,556.
B) $39,982.
C) $32,400.
D) $38,100.

Answer: A

Explanation: ($8,000 × 0.97087) + ($12,000 × 0.94260) + ($10,000 × 0.91514) + ($15,000 × 0.88849) = $7,767 + $11,311 + $9,151 + $13,327 = $41,556

Difficulty: 3 Hard

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

26) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

At the end of each quarter, Patti deposits $500 into an account that pays 12% interest compounded quarterly. How much will Patti have in the account in three years?

A) $7,096.
B) $7,213.
C) $7,129.
D) $8,880.

Answer: A

Explanation: FVA = $500 × 14.1920* = $7,096

*FVA of $1: n = 12; i = 3%

Difficulty: 3 Hard

Topic: Future value of an ordinary annuity

Learning Objective: 05-07 Compute the future value of both an ordinary annuity and an annuity due.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

27) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

Sondra deposits $2,000 in an IRA account on April 15, 2021. Assume the account will earn 3% annually. If she repeats this for the next nine years, how much will she have on deposit on April 14, 2031?

A) $20,600.
B) $20,928.
C) $23,616.
D) $24,715.

Answer: C

Explanation: FVAD = $2,000 × 11.8078* = $23,616

*FVAD of $1: n = 10; i = 3%

Difficulty: 3 Hard

Topic: Future value of an annuity due

Learning Objective: 05-07 Compute the future value of both an ordinary annuity and an annuity due.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

28) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

Shelley wants to cash in her winning lottery ticket. She can either receive eight $100,000 semiannual payments starting today, or she can receive a single-amount payment today based on a 6% annual interest rate. What is the single-amount payment she can receive today?

A) $853,020.
B) $801,969.
C) $744,090.
D) $1,293,794.

Answer: D

Explanation: PVAD = $100,000 × 12.93794* = $1,293,794

*PVAD of $1: n = 16; i = 3%

Difficulty: 3 Hard

Topic: Present value of an annuity due

Learning Objective: 05-08 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

29) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

On January 1, 2021, you are considering making an investment that will pay three annual payments of $10,000. The first payment is not expected until December 31, 2023. You are eager to earn 3%. What is the present value of the investment on January 1, 2021?

A) $26,662.
B) $27,462.
C) $28,286.
D) $29,135.

Answer: A

Explanation: PVA = $10,000 × (4.57971* − 1.91347**) = $26,662

*PVA of $1: n = 5; i = 3% **PVA of $1: n = 2; i = 3%

Difficulty: 3 Hard

Topic: Present value of a deferred annuity

Learning Objective: 05-08 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

30) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

On January 1, 2021, you are considering making an investment that will pay three annual payments of $10,000. The first payment is not expected until December 31, 2024. You are eager to earn 3%. What is the present value of the investment on January 1, 2021?

A) $28,286.
B) $25,886.
C) $26,662.
D) $27,300.

Answer: B

Explanation: PVA = $10,000 × (5.41719* − 2.82861**) = $25,886

*PVA of $1: n = 6; i = 3% **PVA of $1: n = 3; i = 3%

Difficulty: 3 Hard

Topic: Present value of a deferred annuity

Learning Objective: 05-08 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

31) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

Rosie’s Florist borrows $300,000 to be paid off in six years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment?

A) $25,750.
B) $29,761.
C) $30,139.
D) $25,500.

Answer: C

Explanation: $300,000 ÷ 9.95400* = $30,139

*PVA of $1: n = 12; i = 3%

Difficulty: 3 Hard

Topic: Solve for unknown values–Annuity

Learning Objective: 05-09 Solve for unknown values in annuity situations involving present value.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

32) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

Jimmy has $255,906 accumulated in a 401K plan. The fund is earning a low, but safe, 3% per year. The withdrawals will take place at the end of each year starting a year from now. How soon will the fund be exhausted if Jimmy withdraws $30,000 each year?

A) 11 years.
B) 10 years.
C) 8.5 years.
D) 8.8 years.

Answer: B

Explanation: $255,906 ÷ $30,000 = 8.5302

For PVA of $1 factor of 8.5302 and i of 3%, n = 10

Difficulty: 3 Hard

Topic: Solve for unknown values–Annuity

Learning Objective: 05-09 Solve for unknown values in annuity situations involving present value.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

33) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

Debbie has $368,882 accumulated in a 401K plan. The fund is earning a low, but safe, 3% per year. The withdrawals will take place annually starting today. How soon will the fund be exhausted if Debbie withdraws $30,000 each year?

A) 15 years.
B) 16 years.
C) 14 years.
D) 12.3 years.

Answer: A

Explanation: $368,882 ÷ $30,000 = 12.29607

For PVAD of $1 factor of 12.29607 and i of 3%, n = 15

Difficulty: 3 Hard

Topic: Solve for unknown values–Annuity

Learning Objective: 05-09 Solve for unknown values in annuity situations involving present value.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

34) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

Jose wants to cash in his winning lottery ticket. He can either receive five $5,000 annual payments starting today, or he can receive one lump-sum payment today based on a 3% annual interest rate. What would be the lump-sum payment?

A) $23,586.
B) $22,899.
C) $21,565.
D) $23,000.

Answer: A

Explanation: PVAD = $5,000 × 4.71710* = $23,586

*PVAD of $1: n = 5; i = 3%

Difficulty: 2 Medium

Topic: Present value of an annuity due

Learning Objective: 05-08 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

35) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

Micro Brewery borrows $300,000 to be repaid in equal installments over a period of three years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment?

A) $55,379.
B) $106,059.
C) $30,138.
D) $60,276.

Answer: A

Explanation: $300,000 ÷ 5.41719* = $55,379

*PVA of $1: n = 6; i = 3%

Difficulty: 3 Hard

Topic: Solve for unknown values–Annuity

Learning Objective: 05-09 Solve for unknown values in annuity situations involving present value.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

36) Present and future value tables of $1 at 3% are presented below:

N	FV $1	PV $1	FVA $1	PVA $1	FVAD $1	PVAD $1
1	1.03000	0.97087	1.0000	0.97087	1.0300	1.00000
2	1.06090	0.94260	2.0300	1.91347	2.0909	1.97087
3	1.09273	0.91514	3.0909	2.82861	3.1836	2.91347
4	1.12551	0.88849	4.1836	3.71710	4.3091	3.82861
5	1.15927	0.86261	5.3091	4.57971	5.4684	4.71710
6	1.19405	0.83748	6.4684	5.41719	6.6625	5.57971
7	1.22987	0.81309	7.6625	6.23028	7.8923	6.41719
8	1.26677	0.78941	8.8923	7.01969	9.1591	7.23028
9	1.30477	0.76642	10.1591	7.78611	10.4639	8.01969
10	1.34392	0.74409	11.4639	8.53020	11.8078	8.78611
11	1.38423	0.72242	12.8078	9.25262	13.1920	9.53020
12	1.42576	0.70138	14.1920	9.95400	14.6178	10.25262
13	1.46853	0.68095	15.6178	10.63496	16.0863	10.95400
14	1.51259	0.66112	17.0863	11.29607	17.5989	11.63496
15	1.55797	0.64186	18.5989	11.93794	19.1569	12.29607
16	1.60471	0.62317	20.1569	12.56110	20.7616	12.93794

A firm leases equipment under a long-term finance lease (analogous to an installment purchase) that calls for 12 semiannual payments of $39,014.40. The first payment is due at the inception of the lease. The annual rate on the lease is 6%. What is the value of the leased asset at inception of the lease?

A) $388,349.
B) $400,000.
C) $454,128.
D) $440,082.

Answer: B

Explanation: PVAD = $39,014.40 × 10.25262 * = $400,000

*PVAD of $1: n = 12; i = 3%

Difficulty: 2 Medium

Topic: Present value application―Leases

Learning Objective: 05-10 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, installment notes, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

37) Below are excerpts from time value of money tables for the 8% rate.

	1	2	3	4	5	6
1	1.000	1.000	0.926	1.080	1.080	0.926
2	1.926	2.080	0.857	2.246	1.166	1.783
3	2.783	3.246	0.794	3.506	1.260	2.577
4	3.577	4.506	0.735	4.867	1.360	3.312

Column 1 is an interest table for the:

A) Present value of an ordinary annuity of $1.
B) Future value of an ordinary annuity of $1.
C) Present value of an annuity due of $1.
D) Future value of an annuity due of $1.

Answer: C

Difficulty: 3 Hard

Topic: Present value of an annuity due

Learning Objective: 05-08 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

38) Below are excerpts from time value of money tables for the 8% rate.

	1	2	3	4	5	6
1	1.000	1.000	0.926	1.080	1.080	0.926
2	1.926	2.080	0.857	2.246	1.166	1.783
3	2.783	3.246	0.794	3.506	1.260	2.577
4	3.577	4.506	0.735	4.867	1.360	3.312

Column 2 is an interest table for the:

A) Present value of an ordinary annuity of $1.
B) Future value of an ordinary annuity of $1.
C) Present value of an annuity due of $1.
D) Future value of an annuity due of $1.

Answer: B

Difficulty: 3 Hard

Topic: Future value of an ordinary annuity

Learning Objective: 05-07 Compute the future value of both an ordinary annuity and an annuity due.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

39) Below are excerpts from time value of money tables for the 8% rate.

	1	2	3	4	5	6
1	1.000	1.000	0.926	1.080	1.080	0.926
2	1.926	2.080	0.857	2.246	1.166	1.783
3	2.783	3.246	0.794	3.506	1.260	2.577
4	3.577	4.506	0.735	4.867	1.360	3.312

Column 3 is an interest table for the:

A) Present value of $1.
B) Future value of $1.
C) Present value of an ordinary annuity of $1.
D) Present value of an annuity due of $1.

Answer: A

Difficulty: 2 Medium

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

40) Below are excerpts from time value of money tables for the 8% rate.

	1	2	3	4	5	6
1	1.000	1.000	0.926	1.080	1.080	0.926
2	1.926	2.080	0.857	2.246	1.166	1.783
3	2.783	3.246	0.794	3.506	1.260	2.577
4	3.577	4.506	0.735	4.867	1.360	3.312

Column 4 is an interest table for the:

A) Present value of an ordinary annuity of $1.
B) Future value of an ordinary annuity of $1.
C) Present value of an annuity due of $1.
D) Future value of an annuity due of $1.

Answer: D

Difficulty: 3 Hard

Topic: Future value of an annuity due

Learning Objective: 05-07 Compute the future value of both an ordinary annuity and an annuity due.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

41) Below are excerpts from time value of money tables for the 8% rate.

	1	2	3	4	5	6
1	1.000	1.000	0.926	1.080	1.080	0.926
2	1.926	2.080	0.857	2.246	1.166	1.783
3	2.783	3.246	0.794	3.506	1.260	2.577
4	3.577	4.506	0.735	4.867	1.360	3.312

Column 5 is an interest table for the:

A) Present value of $1.
B) Future value of $1.
C) Present value of an ordinary annuity of $1.
D) Present value of an annuity due of $1.

Answer: B

Difficulty: 3 Hard

Topic: Future value of a single amount

Learning Objective: 05-02 Compute the future value of a single amount.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

42) Below are excerpts from time value of money tables for the 8% rate.

	1	2	3	4	5	6
1	1.000	1.000	0.926	1.080	1.080	0.926
2	1.926	2.080	0.857	2.246	1.166	1.783
3	2.783	3.246	0.794	3.506	1.260	2.577
4	3.577	4.506	0.735	4.867	1.360	3.312

Column 6 is an interest table for the:

A) Present value of an ordinary annuity of $1.
B) Future value of an ordinary annuity of $1.
C) Present value of an annuity due of $1.
D) Future value of an annuity due of $1.

Answer: A

Difficulty: 2 Medium

Topic: Present value of an ordinary annuity

Learning Objective: 05-08 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

43) Reba wishes to know how much would be in her savings account if she deposits a given sum in an account and leaves it there at 6% interest for five years. She should use a table for the:

A) Future value of an ordinary annuity of $1.
B) Future value of $1.
C) Future value of an annuity of $1.
D) Present value of an annuity due of $1.

Answer: B

Difficulty: 2 Medium

Topic: Future value of a single amount

Learning Objective: 05-02 Compute the future value of a single amount.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

44) Present and future value tables of $1 at 9% are presented below.

	PV of $1	FV of $1	PVA of $1	FVAD of $1	FVA of $1
1	0.91743	1.09000	0.91743	1.0900	1.0000
2	0.84168	1.18810	1.75911	2.2781	2.0900
3	0.77218	1.29503	2.53129	3.5731	3.2781
4	0.70843	1.41158	3.23972	4.9847	4.5731
5	0.64993	1.53862	3.88965	6.5233	5.9847
6	0.59627	1.67710	4.48592	8.2004	7.5233

Ajax Company purchased a five-year certificate of deposit for its building fund in the amount of $220,000. How much should the certificate of deposit be worth at the end of five years if interest is compounded at an annual rate of 9%?

A) $855,723.
B) $142,985.
C) $319,000.
D) $338,496.

Answer: D

Explanation: FV = $220,000 × 1.53862* = $338,496

*FV of $1: n = 5; i = 9%

Difficulty: 2 Medium

Topic: Future value of a single amount

Learning Objective: 05-02 Compute the future value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

45) Present and future value tables of $1 at 9% are presented below.

	PV of $1	FV of $1	PVA of $1	FVAD of $1	FVA of $1
1	0.91743	1.09000	0.91743	1.0900	1.0000
2	0.84168	1.18810	1.75911	2.2781	2.0900
3	0.77218	1.29503	2.53129	3.5731	3.2781
4	0.70843	1.41158	3.23972	4.9847	4.5731
5	0.64993	1.53862	3.88965	6.5233	5.9847
6	0.59627	1.67710	4.48592	8.2004	7.5233

How much must be invested now at 9% interest to accumulate to $10,000 in five years?

A) $9,176.
B) $6,499.
C) $5,500.
D) $5,960.

Answer: B

Explanation: PV = $10,000 × 0.64993* = $6,499

*PV of $1: n = 5; i = 9%

Difficulty: 2 Medium

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

46) Present and future value tables of $1 at 9% are presented below.

	PV of $1	FV of $1	PVA of $1	FVAD of $1	FVA of $1
1	0.91743	1.09000	0.91743	1.0900	1.0000
2	0.84168	1.18810	1.75911	2.2781	2.0900
3	0.77218	1.29503	2.53129	3.5731	3.2781
4	0.70843	1.41158	3.23972	4.9847	4.5731
5	0.64993	1.53862	3.88965	6.5233	5.9847
6	0.59627	1.67710	4.48592	8.2004	7.5233

How much must be deposited at the beginning of each year to accumulate to $10,000 in four years if interest is at 9%?

A) $1,671.
B) $2,570.
C) $2,358.
D) $2,006.

Answer: D

Explanation: $10,000 ÷ 4.9847* = $2,006

*FVAD of $1: n = 4; i = 9%

Difficulty: 3 Hard

Topic: Future value of an annuity due

Learning Objective: 05-07 Compute the future value of both an ordinary annuity and an annuity due.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

47) Present and future value tables of $1 at 9% are presented below.

	PV of $1	FV of $1	PVA of $1	FVAD of $1	FVA of $1
1	0.91743	1.09000	0.91743	1.0900	1.0000
2	0.84168	1.18810	1.75911	2.2781	2.0900
3	0.77218	1.29503	2.53129	3.5731	3.2781
4	0.70843	1.41158	3.23972	4.9847	4.5731
5	0.64993	1.53862	3.88965	6.5233	5.9847
6	0.59627	1.67710	4.48592	8.2004	7.5233

Claudine Corporation will deposit $5,000 into a money market sinking fund at the end of each year for the next five years. How much will accumulate by the end of the fifth and final payment if the sinking fund earns 9% interest?

A) $32,617.
B) $29,924.
C) $27,250.
D) $26,800.

Answer: B

Explanation: FVA = $5,000 × 5.9847* = $29,924

*FVA of $1: n = 5; i = 9%

Difficulty: 2 Medium

Topic: Future value of an ordinary annuity

Learning Objective: 05-07 Compute the future value of both an ordinary annuity and an annuity due.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

48) Present and future value tables of $1 at 9% are presented below.

	PV of $1	FV of $1	PVA of $1	FVAD of $1	FVA of $1
1	0.91743	1.09000	0.91743	1.0900	1.0000
2	0.84168	1.18810	1.75911	2.2781	2.0900
3	0.77218	1.29503	2.53129	3.5731	3.2781
4	0.70843	1.41158	3.23972	4.9847	4.5731
5	0.64993	1.53862	3.88965	6.5233	5.9847
6	0.59627	1.67710	4.48592	8.2004	7.5233

Mustard’s Inc. sold the rights to use one of its patented processes that will result in cash receipts of $2,500 at the end of each of the next four years and a lump sum receipt of $4,000 at the end of the fifth year. The total present value of these payments if interest is at 9% is:

A) $10,699.
B) $11,468.
C) $12,100.
D) $14,000.

Answer: A

Explanation:

PVA = $2,500 × 3.23972 (n = 4)	=	$	8,099
PV = $4,000 × 0.64993 (n = 5)	=		2,600
		$	10,699

Difficulty: 3 Hard

Topic: Present value of an ordinary annuity; Present value of an annuity due

Learning Objective: 05-03 Compute the present value of a single amount.; 05-08 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

49) An investment product promises to pay $42,000 at the end of 10 years. If an investor feels this investment should produce a rate of return of 12%, compounded annually, what’s the most the investor should be willing to pay for the investment? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $15,146.
B) $13,523.
C) $42,000.
D) $130,446.

Answer: B

Explanation: $42,000 × 0.32197* = $13,523 (rounded)

*PV of $1: n = 10; i = 12%

Difficulty: 2 Medium

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

50) LeAnn wishes to know how much she should invest now at 7% interest in order to accumulate a sum of $5,000 in four years. She should use a table for the:

A) Present value of $1.
B) Future value of $1.
C) Present value of an ordinary annuity of $1.
D) Future value of an annuity due of $1.

Answer: A

Explanation: $5,000 × (PV of $1: n = 4, i = 7%) = Amount to Invest

Difficulty: 2 Medium

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

51) Present and future value tables of $1 at 11% are presented below.

	PV of $1	FV of $1	PVA of $1	FVA of $1
1	0.90090	1.11000	0.90090	1.0000
2	0.81162	1.23210	1.71252	2.1100
3	0.73119	1.36763	2.44371	3.3421
4	0.65873	1.51807	3.10245	4.7097
5	0.59345	1.68506	3.69590	6.2278
6	0.53464	1.87041	4.23054	7.9129

Spielberg Inc. signed a $200,000 noninterest-bearing note due in five years from a production company eager to do business. Comparable borrowings have carried an 11% interest rate. What is the value of this debt at its inception?

A) $200,000.
B) $178,000.
C) $118,690.
D) $222,000.

Answer: C

Explanation: PV = $200,000 × 0.59345* = $118,690

*PV of $1: n = 5; i = 11%

Difficulty: 2 Medium

Topic: Present value application―Notes

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

52) Present and future value tables of $1 at 11% are presented below.

	PV of $1	FV of $1	PVA of $1	FVA of $1
1	0.90090	1.11000	0.90090	1.0000
2	0.81162	1.23210	1.71252	2.1100
3	0.73119	1.36763	2.44371	3.3421
4	0.65873	1.51807	3.10245	4.7097
5	0.59345	1.68506	3.69590	6.2278
6	0.53464	1.87041	4.23054	7.9129

On October 1, 2021, Justine Company purchased equipment from Napa Inc. in exchange for a noninterest-bearing note payable in five equal annual payments of $500,000, beginning Oct 1, 2022. Similar borrowings have carried an 11% interest rate. The equipment would be recorded at:

A) $2,500,000.
B) $2,225,000.
C) $1,847,950.
D) $2,115,270.

Answer: C

Explanation: PVA = $500,000 × 3.69590* = $1,847,950

*PVA of $1: n = 5; i = 11%

Difficulty: 2 Medium

Topic: Present value of an ordinary annuity; Present value application–Notes

Learning Objective: 05-08 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.; 05-10 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, installment notes, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

53) Present and future value tables of $1 at 11% are presented below.

	PV of $1	FV of $1	PVA of $1	FVA of $1
1	0.90090	1.11000	0.90090	1.0000
2	0.81162	1.23210	1.71252	2.1100
3	0.73119	1.36763	2.44371	3.3421
4	0.65873	1.51807	3.10245	4.7097
5	0.59345	1.68506	3.69590	6.2278
6	0.53464	1.87041	4.23054	7.9129

Titanic Corporation leased executive limousines under terms of $20,000 to be paid at the inception of the lease, and four equal annual payments of $30,000 to each be paid thereafter on the anniversary date of the lease. The interest rate implicit in the lease is 11%. The first year’s interest expense would be:

A) $13,200.
B) $10,238.
C) $33,200.
D) $15,543.

Answer: B

Explanation: PVA = $30,000 × 3.10245* = $93,074

$93,074 × 11% = $10,238

*PVA of $1: n = 4; i = 11%

Difficulty: 3 Hard

Topic: Present value application―Leases

Learning Objective: 05-10 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, installment notes, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

54) Present and future value tables of 1 at 11% are presented below.

	PV of $1	FV of $1	PVA of $1	FVA of $1
1	0.90090	1.11000	0.90090	1.0000
2	0.81162	1.23210	1.71252	2.1100
3	0.73119	1.36763	2.44371	3.3421
4	0.65873	1.51807	3.10245	4.7097
5	0.59345	1.68506	3.69590	6.2278
6	0.53464	1.87041	4.23054	7.9129

Polo Publishers purchased a multi-color offset press with terms of $50,000 to be paid at the date of purchase, and a noninterest-bearing note requiring payment of $20,000 at the end of each year for five years. The interest rate implicit in the purchase contract is 11%. Polo would record the asset at:

A) $73,918.
B) $123,918.
C) $130,000.
D) $169,560.

Answer: B

Explanation: $50,000 + ($20,000 × 3.69590) = $123,918

*PVA of $1: n = 5; i = 11%

Difficulty: 3 Hard

Topic: Present value application―Notes

Learning Objective: 05-10 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, installment notes, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

55) Mary Alice just won the lottery and is trying to decide between the options of receiving the annual cash flow payment option of $250,000 per year for 25 years beginning today, or receiving one lump-sum amount today. Mary Alice can earn 6% investing this money. At what lump-sum payment amount would she be indifferent between the two alternatives? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $6,250,000.
B) $3,195,840.
C) $3,637,590.
D) $3,387,590.

Answer: D

Explanation: $250,000 × 13.55036* = $3,387,590

*PVAD of $1: n = 25; i = 6%

Difficulty: 3 Hard

Topic: Present value of an annuity due

Learning Objective: 05-08 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Resource Management / Keyboard Navigation

56) An investor purchases a 20-year, $1,000 par value bond that pays semiannual interest of $40. If the semiannual market rate of interest is 5%, what is the current market value of the bond? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $828.
B) $1,686.
C) $1,000.
D) $893.

Answer: A

Explanation:

$40 × 17.15909*	=	$	686
$1,000 × 0.14205**	=		142
		$	828

*PVA of $1: n = 40; i = 5%

**PV of $1: n = 40; i = 5%

Difficulty: 3 Hard

Topic: Present value application―Bonds

Learning Objective: 05-10 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, installment notes, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

57) A series of equal periodic payments that starts more than one period after the agreement is called:

A) An annuity due.
B) An ordinary annuity.
C) A future annuity.
D) A deferred annuity.

Answer: D

Difficulty: 1 Easy

Topic: Present value of a deferred annuity

Learning Objective: 05-08 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

58) A series of equal periodic payments in which the first payment is made one compounding period after the date of the contract is:

A) A deferred annuity.
B) An ordinary annuity.
C) An annuity due.
D) A delayed annuity.

Answer: B

Difficulty: 1 Easy

Topic: Basics of ordinary annuity and annuity due

Learning Objective: 05-06 Explain the difference between an ordinary annuity and an annuity due situation.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

59) Loan A has the same original principal, interest rate, and payment amount as Loan B. However, Loan A is structured as an annuity due, while Loan B is structured as an ordinary annuity. The maturity date of Loan A will be:

A) Earlier than Loan B.
B) Later than Loan B.
C) The same as Loan B.
D) Indeterminate with respect to Loan B.

Answer: A

Difficulty: 2 Medium

Topic: Basics of ordinary annuity and annuity due

Learning Objective: 05-06 Explain the difference between an ordinary annuity and an annuity due situation.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

60) To determine the future value factor for an annuity due for period n when given tables only for an ordinary annuity:

A) Obtain the FVA factor for n + 1 and deduct 1.
B) Obtain the FVA factor for n and deduct 1.
C) Obtain the FVA factor for n – 1 and add 1.
D) Obtain the FVA factor for n + 1 and add 1.

Answer: A

Difficulty: 3 Hard

Topic: Basics of ordinary annuity and annuity due

Learning Objective: 05-06 Explain the difference between an ordinary annuity and an annuity due situation.

Bloom’s: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

61) Yamaha Inc. hires a new chief financial officer and promises to pay him a lump-sum bonus four years after he joins the company. The new CFO insists that the company invest an amount of money at the beginning of each year in a 7% fixed rate investment fund to insure the bonus will be available. To determine the amount that must be invested each year, a computation must be made using the formula for:

A) The future value of a deferred annuity.
B) The future value of an ordinary annuity.
C) The future value of an annuity due.
D) None of these answer choices are correct.

Answer: C

Difficulty: 2 Medium

Topic: Future value of an annuity due

Learning Objective: 05-07 Compute the future value of both an ordinary annuity and an annuity due.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

62) Zulu Corporation hires a new chief executive officer and promises to pay her a signing bonus of $2 million per year for 10 years, starting five years after she joins the company. The liability for this bonus when the CEO is hired:

A) Is the present value of a deferred annuity.
B) Is the present value of an annuity due.
C) Is $20 million.
D) Is zero because no cash is owed for five years.

Answer: A

Difficulty: 2 Medium

Topic: Present value of a deferred annuity

Learning Objective: 05-08 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

63) Which of the following must be known in order to compute the interest rate when financing an asset purchase with an annuity?

A) Fair value of the asset purchased, number and dollar amount of the annuity payments.
B) Present value of the annuity, dollar amount and timing of the annuity payments.
C) Fair value of the asset and timing of the annuity payments.
D) Number of annuity payments and future value of the annuity.

Answer: B

Difficulty: 2 Medium

Topic: Solve for unknown values–Annuity

Learning Objective: 05-09 Solve for unknown values in annuity situations involving present value.

Bloom’s: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

64) Davenport Inc. offers a new employee a single-sum signing bonus at the date of employment. Alternatively, the employee can receive $30,000 at the date of employment and another $50,000 two years later. Assuming the employee’s time value of money is 8% annually, what single sum at the employment date would make her indifferent between the two options? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $60,000.
B) $62,867.
C) $72,867.
D) $80,000.

Answer: C

Explanation: The single-sum equivalent would be $30,000 + the present value of $50,000 where n = 2 and i = 8%. That is, $30,000 + ($50,000 × 0.85734 from PV of $1 table) = $72,867.

Difficulty: 3 Hard

Topic: Present value of a deferred annuity

Learning Objective: 05-08 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Decision Making / Keyboard Navigation

65) Quaker State Inc. offers a new employee a single-sum signing bonus at the date of employment. Alternatively, the employee can receive $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service. Assuming the employee’s time value of money is 10% annually, what lump sum at employment date would make him indifferent between the two options? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $23,026.
B) $57,737.
C) $62,711.
D) None of these answer choices are correct.

Answer: B

Explanation: The single-sum equivalent would be $8,000 + the present value of a $20,000 ordinary annuity where n = 3 and i = 10%. That is,

$8,000 + ($20,000 × 2.48685 from PVA of $1 table) = $57,737.

Difficulty: 3 Hard

Topic: Present value of a deferred annuity

Learning Objective: 05-08 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Decision Making / Keyboard Navigation

66) Garland Inc. offers a new employee a single-sum signing bonus at the date of employment, June 1, 2021. Alternatively, the employee can receive $39,000 at the date of employment plus $10,000 each June 1 for five years, beginning in 2025. Assuming the employee’s time value of money is 9% annually, what single amount at the employment date would make the options equally desirable? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $44,035.
B) $40,855.
C) $69,035.
D) $65,855.

Answer: C

Explanation: The single-sum equivalent would be $39,000 + the present value of a $10,000 deferred annuity. The present value of the deferred annuity on June 1, 2025, is an annuity due with n = 5 and i = 9%. That is, ($10,000 × 4.23972 from PVAD of $1 table) = $42,397. To compute the equivalent of that amount at employment date, we take the present value of $42,397 where n = 4 and i = 9% from PV of $1 table, which is $42,397 × 0.70843 = $30,035. Therefore, the single-sum equivalent would be $39,000 + $30,035 = $69,035.

Difficulty: 3 Hard

Topic: Present value of a deferred annuity

Learning Objective: 05-08 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Decision Making / Keyboard Navigation

67) On January 1, 2021, Glanville Company sold goods to Otter Corporation. Otter signed an installment note requiring payment of $15,000 annually for six years. The first payment was made on January 1, 2021. The prevailing rate of interest for this type of note at date of issuance was 8%.

Glanville should record sales revenue in January 2021 of: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $90,000.
B) $69,343.
C) $74,891.
D) None of these answer choices are correct.

Answer: C

Explanation: $15,000 × 4.99271* = $74,891 (rounded)

*PVAD of $1: n = 6; i = 8%

Difficulty: 2 Medium

Topic: Present value of an annuity due; Present value application–Notes

Learning Objective: 05-10 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, installment notes, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

68) Loan C has the same principal amount, payment amount, and maturity date as Loan D. However, Loan C is structured as an annuity due, while Loan D is structured as an ordinary annuity. Loan C’s interest rate is:

A) Higher than Loan D.
B) Less than Loan D.
C) The same as Loan D.
D) Indeterminate compared to Loan D.

Answer: A

Difficulty: 3 Hard

Topic: Basics of ordinary annuity and annuity due

Learning Objective: 05-06 Explain the difference between an ordinary annuity and an annuity due situation.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

69) Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments, which will be made at the first of the month, with interest of 12% on the unpaid balance. She should use a table for the:

A) Present value of $1.
B) Present value of an ordinary annuity of $1.
C) Present value of an annuity due of $1.
D) Future value of an annuity due of $1.

Answer: C

Difficulty: 1 Easy

Topic: Solve for unknown values–Annuity

Learning Objective: 05-09 Solve for unknown values in annuity situations involving present value.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

70) George Jones is planning on a cruise for his 70th birthday party. He wants to know how much he should set aside at the beginning of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the:

A) Future value of an ordinary annuity of $1.
B) Future value of an annuity due of $1.
C) Future value of $1.
D) Present value of an annuity due of $1.

Answer: B

Difficulty: 1 Easy

Topic: Solve for unknown values–Annuity

Learning Objective: 05-09 Solve for unknown values in annuity situations involving present value.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

71) Sandra won $5,000,000 in the state lottery, which she has elected to receive at the end of each month over the next 30 years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the:

A) Present value of an annuity due of $1.
B) Future value of an annuity due of $1.
C) Present value of an ordinary annuity of $1.
D) Future value of an ordinary annuity of $1.

Answer: C

Difficulty: 2 Medium

Topic: Solve for unknown values–Annuity

Learning Objective: 05-09 Solve for unknown values in annuity situations involving present value.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

72) First Financial Auto Loan Department wishes to know the payment required at the first of each month on a $10,500, 48-month, 11% auto loan. To determine this amount, First Financial would:

A) Multiply $10,500 by the present value of $1.
B) Divide $10,500 by the future value of an ordinary annuity of $1.
C) Divide $10,500 by the present value of an annuity due of $1.
D) Multiply $10,500 by the present value of an ordinary annuity of $1.

Answer: C

Difficulty: 3 Hard

Topic: Solve for unknown values–Annuity

Learning Objective: 05-09 Solve for unknown values in annuity situations involving present value.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

73) Koko Company pays $10 million at the beginning of each year for 10 years to Mocha Inc. in exchange for a building that now has a fair value of $75 million. What interest rate is Mocha earning on financing this land sale? (PV of $1 and PVAD of $1)

A) Between 13% and 14%.
B) Between 7% and 8%.
C) Between 5.5% and 6%.
D) Cannot be determined from the given information.

Answer: B

Explanation: The interest rate is the rate that will provide a present value of $75 million when finding the amount of the annuity. That is, the present value of a 10-year annuity due of $10 million is $75 million, when the present value factor (from Table 6) equals 7.5000. That point is between 7% and 8% in the table.

Difficulty: 3 Hard

Topic: Solve for unknown values–Annuity

Learning Objective: 05-09 Solve for unknown values in annuity situations involving present value.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

74) Kunkle Company wishes to earn 20% annually on its investments. If Kunkle makes an investment that equals or exceeds that rate, it considers it a success. Assume that Kunkle invests $2 million and gets $500,000 in return at the end of each year for X years. What is the minimum value of X (number of years) for which Kunkle will consider the investment a success? Assume that Kunkle can’t invest for fractional parts of a year. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) 4 years.
B) 6 years.
C) 7 years.
D) 9 years.

Answer: D

Explanation: The investment is successful when the present value of the ordinary annuity at 20% will be $2 million. This is when the PV factor (from PVA of $1 table) is at least 4.0, so that when the PV factor is multiplied by the $500,000 annual amount received, the result is at least $2 million. In PVA of $1 table, at i = 20%, the factor passes the 4.0 level in year 9.

Difficulty: 3 Hard

Topic: Solve for unknown values–Annuity

Learning Objective: 05-09 Solve for unknown values in annuity situations involving present value.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

75) Chancellor Ltd. sells an asset with a $1 million fair value to Sophie Inc. Sophie agrees to make six equal payments, each to be paid one year apart, commencing on the date of sale. The payments include principal and 6% annual interest. Compute the annual payments. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $166,651.
B) $135,252.
C) $203,351.
D) $191,852.

Answer: D

Explanation: We compute the annual payments in the present value of an annuity due formula, where the present value is $1 million, n = 6 and i = 6%. The present value factor (from PVAD of $1 table) is 5.21236. Dividing $1 million by this factor gives payments of $191,852.

Difficulty: 3 Hard

Topic: Solve for unknown values–Annuity

Learning Objective: 05-09 Solve for unknown values in annuity situations involving present value.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

76) You borrow $20,000 to buy a boat. The loan is to be paid off in monthly installments over one year at 18% interest annually. The first payment is due one month from today. What is the amount of each monthly payment? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $1,667.
B) $1,511.
C) $1,834.
D) None of these answer choices are correct.

Answer: C

Explanation: $20,000 ÷ 10.90751* = $1,834 (rounded)

*PVA of $1: n = 12; i = 1.5%

Difficulty: 3 Hard

Topic: Solve for unknown values–Annuity

Learning Objective: 05-09 Solve for unknown values in annuity situations involving present value.

Bloom’s: Apply

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

77) Fenland Co. plans to retire $100 million in bonds in five years, so it wishes to fund a savings account at the beginning of each year during that period for which it expects to earn 8% annually. At the end of the five years, there will be enough money in the account to pay off the bonds. What amount does Fenland need to invest each year? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $15,783,077.
B) $17,045,650.
C) $23,190,400.
D) Cannot be determined from the given information.

Answer: A

Explanation:

This is the amount in the future value of an annuity due formula, where $100 million = investment amount × factor from FVAD of $1 table where n = 5 and i = 8%. Thus, Investment amount = $100 million ÷ 6.3359 = $15,783,077.

Difficulty: 3 Hard

Topic: Future value of an annuity due

Learning Objective: 05-09 Solve for unknown values in annuity situations involving present value.; 05-07 Compute the future value of both an ordinary annuity and an annuity due.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

78) Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

TERM	PHRASE	NUMBER
1. Future value	A dollar now is worth more than a dollar later.	___
2. Future value of an annuity due	A series of equal periodic payments.	___
3. Annuity	Accumulation of a series of equal payments with the last payment accruing interest.	___
4. Future value of an ordinary annuity	Accumulation of a series of equal payments with the last payment accruing no interest.	___
5. Time value of money	Accumulation of an amount with interest.	___

Answer:

TERM	PHRASE	NUMBER
1. Future value	A dollar now is worth more than a dollar later.	5
2. Future value of an annuity due	A series of equal periodic payments.	3
3. Annuity	Accumulation of a series of equal payments with the last payment accruing interest.	2
4. Future value of an ordinary annuity	Accumulation of a series of equal payments with the last payment accruing no interest.	4
5. Time value of money	Accumulation of an amount with interest.	1

Difficulty: 1 Easy

Topic: Basics of interest―Simple versus compound; Basics of ordinary annuity and annuity due

Learning Objective: 05-01 Explain the difference between simple and compound interest.; 05-05 Explain the difference between an ordinary annuity and an annuity due situation.

Bloom’s: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking

79) Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

TERM	PHRASE	NUMBER
1. Monetary asset	Amount today equivalent to a specified future amount.	___
2. Present value of an annuity due	Its amount is not fixed or determinable.	___
3. Present value of a single amount	Based on initial investment only.	___
4. Simple interest	Claim to a fixed amount of cash.	___
5. Nonmonetary asset	Current worth of a series of equal payments received at the beginning of a period.	___

Answer:

TERM	PHRASE	NUMBER
1. Monetary asset	Amount today equivalent to a specified future amount.	3
2. Present value of an annuity due	Its amount is not fixed or determinable.	5
3. Present value of a single amount	Based on initial investment only.	4
4. Simple interest	Claim to a fixed amount of cash.	1
5. Nonmonetary asset	Current worth of a series of equal payments received at the beginning of a period.	2

Difficulty: 1 Easy

Topic: Basics of interest―Simple versus compound; Basics of ordinary annuity and annuity due; Monetary assets and liabilities

Learning Objective: 05-01 Explain the difference between simple and compound interest.; 05-03 Compute the present value of a single amount.; 05-05 Explain the difference between an ordinary annuity and an annuity due situation.

Bloom’s: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking

80) Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

TERM	PHRASE	NUMBER
1. Present value of an ordinary annuity	Current worth of a series of equal payments received at the end of a period.	___
2. Effective yield	Current worth of future cash flow(s).	___
3. Monetary liability	Fixed obligation to pay an amount in cash.	___
4. Compound interest	Interest accumulates on interest.	___
5. Present value	The rate at which money will actually grow.	___

Answer:

TERM	PHRASE	NUMBER
1. Present value of an ordinary annuity	Current worth of a series of equal payments received at the end of a period.	1
2. Effective yield	Current worth of future cash flow(s).	5
3. Monetary liability	Fixed obligation to pay an amount in cash.	3
4. Compound interest	Interest accumulates on interest.	4
5. Present value	The rate at which money will actually grow.	2

Difficulty: 1 Easy

Topic: Basics of interest―Simple versus compound; Basics of ordinary annuity and annuity due; Monetary assets and liabilities

Bloom’s: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking

81) Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

TERM	PHRASE	NUMBER
1. Future value of a single amount	Rent paid or received for the use of money.	___
2. Annuity due	Series of equal cash payments received at the beginning of each period.	___
3. Interest	Series of equal cash payments received at the end of each period.	___
4. Ordinary annuity	Series of equal cash payments with the first cash payment more than one period after the contract date.	___
5. Deferred annuity	The money to which an amount invested will grow over time.	___

Answer:

TERM	PHRASE	NUMBER
1. Future value of a single amount	Rent paid or received for the use of money.	3
2. Annuity due	Series of equal cash payments received at the beginning of each period.	2
3. Interest	Series of equal cash payments received at the end of each period.	4
4. Ordinary annuity	Series of equal cash payments with the first cash payment more than one period after the contract date.	5
5. Deferred annuity	The money to which an amount invested will grow over time.	1

Difficulty: 1 Easy

Topic: Basics of interest―Simple versus compound; Future value of a single amount; Basics of ordinary annuity and annuity due; Present value of a deferred annuity

Learning Objective: 05-01 Explain the difference between simple and compound interest.; 05-02 Compute the future value of a single amount.; 05-05 Explain the difference between an ordinary annuity and an annuity due situation.; 05-07 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking

82) Listed below are columns of time value of money tables for a 9% rate, followed by labels for five of the columns. Match the columns with their appropriate labels by placing the letter designating the column in the space provided by the label.

A B C D E F

1 1.090 0.917 1.000 0.917 1.000 1.090

2 1.188 1.759 1.917 0.842 2.090 2.278

3 1.295 2.531 2.759 0.772 3.278 3.573

________ Present value of an annuity due of $1

________ Future value of an annuity due of $1

________ Present value of $1

________ Future value of $1

________ Present value of an ordinary annuity of $1

Answer:

C_ Present value of an annuity due of $1

F Future value of an annuity due of $1

D Present value of $1

A Future value of $1

B Present value of an ordinary annuity of $1

Difficulty: 3 Hard

Topic: Future value of a single amount; Present value of a single amount; Basics of ordinary annuity and annuity due; Future value of an annuity due; Present value of an ordinary annuity; Present value of an annuity due

Learning Objective: 05-02 Compute the future value of a single amount.; 05-03 Compute the present value of a single amount.; 05-05 Explain the difference between an ordinary annuity and an annuity due situation.; 05-06 Compute the future value of both an ordinary annuity and an annuity due.; 05-07 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking

83) Listed below are 10 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the number for the correct term.

TERM	PHRASE	NUMBER
1. Deferred annuity	Amount of money required today that is equivalent to a given future amount.	____
2. Future value of an annuity due	The amount of money that a dollar will grow to.	____
3. Annuity	First cash flow occurs on the first day of the agreement.	____
4. Monetary asset	Claim to a fixed amount of cash.	____
5. Expected cash flow approach	Present value of equal-sized cash flows beginning at the end of the period.	____
6. Present value of a single amount	The first cash flow occurs more than one period after the date of the agreement.	____
7. Future value of a single amount	The rate to use is the risk-free rate of interest.	____
8. Annuity due	A series of equal-sized cash flows.	____
9. Present value of an ordinary annuity	Future value of equal-sized cash flows starting at the beginning of the period.	____
10. Interest	Amount of money paid/received in excess of the amount borrowed/lent.	____

Answer:

TERM	PHRASE	NUMBER
1. Deferred annuity	Amount of money required today that is equivalent to a given future amount.	6
2. Future value of an annuity due	The amount of money that a dollar will grow to.	7
3. Annuity	First cash flow occurs on the first day of the agreement.	8
4. Monetary asset	Claim to a fixed amount of cash.	4
5. Expected cash flow approach	Present value of equal-sized cash flows beginning at the end of the period.	9
6. Present value of a single amount	The first cash flow occurs more than one period after the date of the agreement.	1
7. Future value of a single amount	The rate to use is the risk-free rate of interest.	5
8. Annuity due	A series of equal-sized cash flows.	3
9. Present value of an ordinary annuity	Future value of equal-sized cash flows starting at the beginning of the period.	2
10. Interest	Amount of money paid/received in excess of the amount borrowed/lent.	10

Difficulty: 1 Easy

Topic: Basics of interest―Simple versus compound; Future value of a single amount; Basics of ordinary annuity and annuity due; Monetary assets and liabilities; Present value of an ordinary annuity; Present value of a deferred annuity; Present value application―Bonds; Present value application―Leases; Present value application―Pensions

Learning Objective: 05-01 Explain the difference between simple and compound interest.; 05-02 Compute the future value of a single amount.; 05-03 Compute the present value of a single amount.; 05-05 Explain the difference between an ordinary annuity and an annuity due situation.; 05-07 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.; 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking

Use this information to answer the following questions:

The note about debt included in the financial statements of Healdsburg Company for the year ended December 31, 2020 disclosed the following:

Debt. The following table summarizes the long-term debt of the Company at December 31, 2020. All of the notes were originally issued at their face (maturity) value and have been gradually repaid over time so that these amounts are the remaining balances at this date.

7.25% notes due 2021 $201,335,000

7.75% notes due 2028 $345,154,000

8% notes due 2035 $225,000,000

7.63% notes due 2040 $200,000,000

6.55% notes due 2022 $ 25,000,000

Required: Assuming that the notes pay interest annually and mature on December 31 of the respective years, compute the following:

84) The total cash interest payments in 2021 for these notes.

Answer: ($201,335,000 × 0.0725) + ($345,154,000 × 0.0775) + ($225,000,000 × 0.08) + ($200,000,000 × 0.0763) + ($25,000,000 × 0.0655) = $76, 243,723

Difficulty: 3 Hard

Topic: Basics of interest―Simple versus compound

Learning Objective: 05-01 Explain the difference between simple and compound interest.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

85) Suppose that Healdsburg wants to pay off the 7.75% notes on December 31, 2021, (i.e., five years early) when the going interest rate is 6%, thereby retiring the $345,154,000 in debt. How much would Healdsburg have to pay for the notes (principal only) on this date in order to satisfy the noteholders?

Answer:

Compute the PV of $345,154,000, where n = 5 and i = 6%.

PV = $345,154,000 × 0.74726 = $257,919,778

Difficulty: 3 Hard

Topic: Present value application―Notes

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

86) Suppose that Healdsburg renegotiates the 8% notes on December 31, 2026, when the going interest rate is 8%. Healdsburg agrees to make 12 equal annual installments, commencing on December 31, 2027, rather than pay the annual interest payments and the $225 million in a single amount at maturity. What would the annual payments be?

Answer:

$225 million would be the PVA; n = 12 and i = 8%. Therefore, the payments would be

$225 million ÷ 7.53608 = $29,856,371.

Difficulty: 3 Hard

Topic: Solve for unknown values―Annuity; Present value application―Notes

Learning Objective: 05-08 Solve for unknown values in annuity situations involving present value.; 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

87) Suppose that Healdsburg enters into a sales contract with an auto manufacturer on January 1, 2021, to provide tires that cost Healdsburg $18 million to produce. The buyer offers Healdsburg $6 million in cash and agrees to take over only the principal payment on Healdsburg’s 6.55% debt notes. Assume that the going market interest is 7% at the time. What would Healdsburg’s gross profit be on the sale?

Answer:

The revenue would be $6 million + the PV of the 6.55% note principal, where n = 2 and i = 7%. Revenue = $6 million + ($25 million × 0.87344) = $27,836,000. Therefore, Healdsburg’s gross profit on the sale would be $27,836,000 — $18,000,000 = $9,836,000.

Difficulty: 3 Hard

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

88) Touche Manufacturing is considering a rearrangement of its manufacturing operations. A consultant estimates that the rearrangement should result in cash savings of $6,000 the first year, $10,000 for the next two years, and $12,000 for the next two years. Interest is at 12%. Assume cash flows occur at the end of the year.

Required: Calculate the total present value of the cash flows.

Answer: PV of future cash flows:

Year Cash Flow PV Present Value

1 $ 6,000 0.89286 $ 5,357

2 10,000 0.79719 7,972

3 10,000 0.71178 7,118

4 12,000 0.63552 7,626

5 12,000 0.56743 6,809

$34,882 Total PV of cash flows

Difficulty: 3 Hard

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

89) Price Mart is considering outsourcing its billing operations. A consultant estimates that outsourcing should result in cash savings of $9,000 the first year, $15,000 for the next two years, and $18,000 for the next two years. Interest is at 12%. Assume cash flows occur at the end of the year.

Required: Calculate the total present value of the cash flows.

Answer: PV of future cash flows

Year Cash Flow PV Present Value

1 $ 9,000 0.89286 $ 8,036

2 15,000 0.79719 11,958

3 15,000 0.71178 10,677

4 18,000 0.63552 11,439

5 18,000 0.56743 10,214

$52,324 Total PV of cash savings

Difficulty: 3 Hard

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

90) Baird Bros. Construction is considering the purchase of a machine at a cost of $125,000. The machine is expected to generate cash flows of $20,000 per year for 10 years and can be sold at the end of 10 years for $10,000. Interest is at 10%. Assume the machine purchase would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations.

Required: Determine whether Baird should purchase the machine.

Answer:

Present value of cash inflows:

Annual cash flows: $20,000 × 6.14457 $122,891

Residual value: $10,000 × 0.38554 3,855 $126,746

Present value of cash outflows 125,000

Net present value of cash flows $ 1,746

Based on present value considerations, Baird Bros. Construction should buy the machine.

Difficulty: 3 Hard

Topic: Present value of a single amount; Present value of an ordinary annuity

Learning Objective: 05-03 Compute the present value of a single amount.; 05-07 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Evaluate

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement; FN Decision Making

91) Incognito Company is contemplating the purchase of a machine that provides it with cash savings of $80,000 per year for five years. Interest is 8%. Assume the cash savings occur at the end of each year.

Required: Calculate the present value of the cash savings.

Answer: PVA = $80,000 × 3.99271 = $319,417

Difficulty: 2 Medium

Topic: Present value of an ordinary annuity

Learning Objective: 05-07 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

92) Under the NBA deferred compensation plan, payments made at the end of each year accumulate up to retirement and then retirees are given two options. Option 1 allows the retiree to select the amount of the annual payment to be received, and option 2 allows the retiree to specify over how many years payments are to be received. Assume Hardaway has had $6,000 deposited at the end of each year for 30 years, and that the long-term interest rate has been 8%.

Required:

How much has accumulated in Hardaway’s deferred compensation account?
How much will Hardaway be able to withdraw at the beginning of each year if he elects to receive payments for 15 years?
How many years will Hardaway be able to receive payments if he chooses to receive $65,000 per year at the beginning of each year?

Answer:

Balance in fund = FVA = $6,000 × 113.2832 = $679,699
Option 2: $679,699 ÷ 9.24424* = $73,527

*PVAD of $1: n = 15; i = 8%

Option 1: $679,699 ÷ $65,000 = 10.45691

Interpolation:

PVAD n = 20, i = 8% 10.60360

PVAD n = 19, i = 8% 10.37189

Difference 0.23171

PVAD n = ?, i = 8% 10.45691

PVAD n = 19, i = 8% 10.37189

Difference 0.08502

0.08502 ÷ 0.23171 = .37

So Hardaway will be able to receive $65,000 per year for 19 years, with a partial payment in year 20 of approximately $65,000 × 37% = $24,050.

Difficulty: 3 Hard

Topic: Future value of an ordinary annuity; Present value of a deferred annuity; Solve for unknown values―Annuity

Learning Objective: 05-06 Compute the future value of both an ordinary annuity and an annuity due.; 05-07 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.; 05-08 Solve for unknown values in annuity situations involving present value.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

93) ABC Company will issue $5,000,000 in 6%, 10-year bonds when the market rate of interest is 8%. Interest is paid semiannually.

Required: Determine how much cash ABC Company will realize from the bond issue.

Answer: $5,000,000 × 3% = $150,000

n= 20; i = 4%

PV: $5,000,000 × 0.45639 $2,281,950

PVA: $150,000 × 13.59033 2,038,550

Bond issue price $4,320,500

Difficulty: 3 Hard

Topic: Present value application―Bonds

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

94) Taylor’s tractor-trailer rigs sell for $150,000. A customer wishes to buy a rig on a lease purchase plan over seven years, with the first payment to be made at the inception of the lease. Interest is at 12%.

Required:

Compute the amount of the annual lease payment and the gross amount (total payments) due under the lease.
Compute the amount of interest income earned by Taylor’s for the first year of the lease.

Answer:

Annual lease payment = $150,000 ÷ 5.11141* = $29,346

*PVAD of $1: n = 7; i = 12%

Gross amount due = $29,346 × 7 years = $205,422

Principal amount $150,000

Payment on signing lease 29,346

Unpaid balance 120,654

Interest rate 12%

Interest income first year of lease $ 14,478

Difficulty: 3 Hard

Topic: Present value application―Leases

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

95) Titan Corporation has a defined benefit pension plan. One of its employees has vested benefits under the plan, which will pay her $30,000 annually for life starting with the first $30,000 payment on the day she retires at the age of 65. The employee has just reached the age of 45. Titan consulted standard mortality tables to come up with a life expectancy of 80 for this employee. The implicit interest rate under the plan is 9%.

Required:

What will be the present value of the pension obligation at the time of the employee’s retirement?
What is the present value of the pension obligation at the current time?

Answer:

30,000 × 8.78615* = $263,585

*PVAD of $1: n = 15; i = 9%

263,585 × .17843** = $47,031

**PV of $1: n = 20; i = 9%

Difficulty: 3 Hard

Topic: Present value application―Pensions

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

96) On September 30, 2021, Truckee Garbage leased equipment from a supplier and agreed to pay $125,000 annually for 15 years beginning September 30, 2022. Generally accepted accounting principles require that a liability be recorded for this lease agreement for the present value of scheduled payments. Accordingly, at inception of the lease, Truckee recorded a $1,214,031 lease liability

Required:

Determine the interest rate implicit in the lease agreement.

Answer: PVA factor = = 9.71225*

* Present value of an ordinary annuity of $1: n = 15, i = ? (from PVA of $1, i = 6%)

Difficulty: 3 Hard

Topic: Solve for unknown values―Annuity; Present value application―Leases

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

97) Determine the price of a $200,000 bond issue under each of the following independent assumptions:

Maturity Interest Paid Stated Rate Effective Rate

10 years annually 10% 12%
10 years semiannually 10% 12%
20 years semiannually 12% 12%

Answer:

Interest $ 20,000 × 5.65022 = $113,004

Principal 200,000 × 0.32197 = 64,394

$177,398

Interest $ 10,000 × 11.46992 = $114,699

Principal 200,000 × 0.31180 = 62,360

$177,059

Since the stated rate and the effective rate are the same, the price is equal to the face amount $200,000.

Difficulty: 3 Hard

Topic: Present value application―Bonds

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

98) Determine the price of a $500,000 bond issue under each of the following independent assumptions:

Maturity Interest Paid Stated Rate Effective Rate

10 years annually 10% 12%
10 years semiannually 10% 12%
20 years semiannually 12% 10%

Answer:

Interest $ 50,000 × 5.65022 = $282,511

Principal 500,000 × 0.32197 = 160,985

$443,496

Interest $25,000 × 11.46992 = $286,748

Principal 500,000 × 0.31180 = 155,900

$442,648

Interest $30,000 × 12.46221 = $373,866

Principal 500,000 × 0.37689 = 188,445

$562,311

Difficulty: 3 Hard

Topic: Present value application―Bonds

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

99) On January 1, 2021, Bishop Company issued 10% bonds dated January 1, 2021, with a face amount of $20 million. The bonds mature in 2033 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.

Required: Determine the price of the bonds at January 1, 2021.

Answer:

Interest $ 1,000,000 × 11.46992 = $11,469,920

Principal $20,000,000 × 0.31180 = 6,236,000

$17,705,920

Difficulty: 2 Medium

Topic: Present value application―Bonds

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

100) On January 1, 2021, Mania Enterprises issued 12% bonds dated January 1, 2021, with a face amount of $20 million. The bonds mature in 2033 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.

Required: Determine the price of the bonds at January 1, 2021.

Answer:

Interest $ 1,200,000 × 12.46221 = $14,954,652

Principal $20,000,000 × 0.37689 = 7,537,800

$22,492,452

Difficulty: 2 Medium

Topic: Present value application―Bonds

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

101) On January 1, 2021, Shirley Corporation purchased 10% bonds dated January 1, 2021, with a face amount of $10 million. The bonds mature in 2033 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.

Required: Determine the price of the bonds at January 1, 2021.

Answer:

Interest $ 500,000 × 11.46992 = $5,734,960

Principal $10,000,000 × 0.31180 = 3,118,000

$8,852,960

Difficulty: 2 Medium

Topic: Present value application―Bonds

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

102) On January 1, 2021, Rare Bird Ltd. purchased 12% bonds dated January 1, 2021, with a face amount of $20 million. The bonds mature in 2033 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.

Required: Determine the price of the bonds at January 1, 2021.

Answer:

Interest $ 1,200,000 × 12.46221 = $14,954,652

Principal $20,000,000 × 0.37689 = 7,537,800

$22,492,452

Difficulty: 2 Medium

Topic: Present value application―Bonds

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

103) Pockets lent $20,000 to Lego Construction on January 1, 2021. Lego signed a three-year, 5% installment note to be paid in three equal payments at the end of each year.

Required: Calculate the amount of one installment payment.

Answer:

Installment payment calculation

$20,000 ÷ 2.72325 = $7,344

amount (from PVA of $1) installment

of loan n = 3, i = 5% payment

Difficulty: 2 Medium

Topic: Present value application―Notes

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

104) Adam Baum Company borrowed $48,000 from B. A. Ware on January 1, 2021, and signed a three-year, 6% installment note to be paid in three equal payments at the end of each year. The present value of an ordinary annuity of $1 for 3 periods at 6% is 2.67301.

Required: Calculate the amount of one installment payment.

Answer:

Installment payment calculation

$48,000 ÷ 2.67301 = $17,957

amount (from PVA of $1) installment

of loan n = 3, i = 6% payment

Difficulty: 2 Medium

Topic: Present value application―Notes

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

105) Each of the independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor’s implicit interest rate.

Situation

1 2

Lease term 10 yrs 20 yrs

Lessor’s desired

rate of return 10% 12%

Lessee’s incremental

borrowing rate 12% 10%

Fair value of asset $600,000 $400,000

For convenience, here are some table values:

Periods; int. rate PV, ordinary annuity PV, annuity due

10 periods, 10% 6.1446 6.7590

10 periods, 12% 5.6502 6.3283

20 periods, 10% 8.5136 9.3649

20 periods, 12% 7.4694 8.3658

Required: For each situation determine the amount of the annual lease payment, as calculated by the lessor.

Answer:

Situation 1:

$600,000/6.7590 = $88,771

PVAD of $1, n = 10, i =10%

Situation 2:

$400,000/8.3658 = $47,814

PV of an annuity due of $1, n = 20, i = 12%

Difficulty: 3 Hard

Topic: Present value application―Leases

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

106) Diablo Company leased a machine from Juniper Corporation on January 1, 2021. The machine has a fair value of $20,000,000. The lease agreement calls for four equal payments at the end of each year. The useful life of the machine was expected to be four years with no residual value. The appropriate interest rate for this lease is 10%.

Other information:

PV of an ordinary annuity @10% for 4 periods: 3.16987

PV of an annuity due @ 10% for 4 periods: 3.48685

Required: Determine the amount of each lease payment.

Answer: $20,000,000/3.16987 = $6,309,407

Difficulty: 2 Medium

Topic: Present value application―Leases

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

107) Each of the independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor’s implicit interest rate.

Situation 1 Situation 2

Lease term 10 yrs 20 yrs

Lessor’s desired rate of return 10% 12%

For convenience, here are some table values:

Periods; int. rate PV, ordinary annuity PV, annuity due

10 periods, 10% 6.1446 6.7590

10 periods, 12% 5.6502 6.3283

20 periods, 10% 8.5136 9.3649

20 periods, 12% 7.4694 8.3658

Required: For each situation determine the amount recorded as a liability by the lessee at the beginning of the lease.

Answer:

Situation 1:

PV of an annuity due of $1, n = 10, i = 10%

$600,000/6.7590 = $88,770 (rounded down)

$88,770 × 6.7590 = $600,000 (rounded up)

Asset and liability are recorded at fair value of $600,000.

Situation 2:

PV of an annuity due of $1, n = 20, i = 12%

$400,000/8.3658 = $47,814. Then $47,814 × 9.3649 = $447,773

Asset and liability recorded at fair value of $447,773

Difficulty: 3 Hard

Topic: Present value application―Leases

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

108) Compute the future value of the following invested amounts at the specified periods and interest rates.

Invested Interest Number of

Item Amount Rate Periods

$20,000 8% 10
$30,000 4% 8
$10,000 12% 15

Answer:

FV = $20,000 × 2.15892 = $43,178
FV = 30,000 × 1.36857 = 41,057
FV = 10,000 × 5.47357 = 54,736

Difficulty: 2 Medium

Topic: Future value of a single amount

Learning Objective: 05-02 Compute the future value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

109) Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate.

Invested Interest Number of

Item Amount Rate Periods

$40,000 7% 20
$20,000 6% 25
$50,000 11% 10

Answer:

PV = $40,000 × 0.25842 = $10,337
PV = $20,000 × 0.23300 = $4,660
PV = $50,000 × 0.35218 = $17,609

Difficulty: 2 Medium

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

110) DON Corp. is contemplating the purchase of a machine that will produce cash savings of $20,000 per year for five years. At the end of five years, the machine can be sold to realize cash flows of $5,000. Interest is 12%. Assume the cash flows occur at the end of each year.

Required: Calculate the total present value of the cash savings.

Answer:

PVA = $20,000 × 3.60478 = $72,096

PF = 5,000 × 0.56743 = 2,837

PV of cash savings $74,933

Difficulty: 3 Hard

Topic: Present value of a single amount; Present value of an ordinary annuity

Learning Objective: 05-03 Compute the present value of a single amount.; 05-07 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

111) Dobson Contractors is considering buying equipment at a cost of $75,000. The equipment is expected to generate cash flows of $15,000 per year for eight years and can be sold at the end of eight years for $5,000. Interest is at 12%. Assume the equipment purchase would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations.

Required: Determine whether Dobson should purchase the machine.

Answer:

Present value of cash inflows:

Annual cash flows: $15,000 × 4.96764 $74,515

Residual value: $5,000 × 0.40388 2,019 $76,534

Present value of cash outflows 75,000

Net present value of cash flows $ 1,534

Based on present value considerations, Dobson Construction should buy the machine.

Difficulty: 3 Hard

Topic: Present value of a single amount; Present value of an ordinary annuity

Learning Objective: 05-03 Compute the present value of a single amount.; 05-07 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Evaluate

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement; FN Decision Making

112) Hillsdale is considering two options for comparable computer software. Option A will cost $25,000 plus annual license renewals of $1,000 for three years, which includes technical support. Option B will cost $20,000 with technical support being an add-on charge. The estimated cost of technical support is $4,000 the first year, $3,000 the second year, and $2,000 the third year. Assume the software is purchased and paid for at the beginning of year one, but that technical support is paid for at the end of each year. Interest is at 8%. Ignore income taxes.

Required: Determine which option should be chosen based on present value considerations.

Answer:

Option A.

Year Cash Flow PV Present Value

0 $25,000 1.00000 $25,000

1 1,000 0.92593 926

2 1,000 0.85734 857

3 1,000 0.79383 794

$27,577

Option B.

Year Cash Flow PV Present Value

0 $20,000 1.00000 $20,000

1 4,000 0.92593 3,704

2 3,000 0.85734 2,572

3 2,000 0.79383 1,588

$27,864

Option A should be chosen because it has the lower cost based on present value considerations.

Difficulty: 3 Hard

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Evaluate

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement; FN Decision Making

113) Bison Mfg. is considering two options for purchasing comparable machinery. Machine 1 will cost $27,500 plus an annual maintenance fee of $1,500 per year for four years. Machine 2 will cost $25,000 with maintenance being an add-on charge. The estimated cost of maintenance is $1,000 the first year, $3,000 the second year, and $4,000 the third year and the fourth year. Assume the purchase cost is paid the same day as buying the machinery, but that maintenance is paid for at the end of each year. Interest is at 10%. Ignore income taxes and residual values.

Required: Determine which machine should be chosen based on present value considerations.

Answer:

Option A.

Year Cash Flow PV Present Value

0 $27,500 1.00000 $27,500

1 1,500 0.90909 1,364

2 1,500 0.82645 1,240

3 1,500 0.75131 1,127

4 1,500 0.68301 1,025

$32,256

Option B.

Year Cash Flow PV Present Value

0 $25,000 1.00000 $25,000

1 1,000 0.90909 909

2 3,000 0.82645 2,479

3 4,000 0.75131 3,005

4 4,000 0.68301 2,732

$34,125

Option A should be chosen because it has the lower cost based on present value considerations.

Difficulty: 3 Hard

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Evaluate

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement; FN Decision Making

114) On May 1, 2021, Bo Smith, proud father of newborn son Bobo, purchased $200,000 in zero-coupon bonds that mature on May 1, 2038. The bonds pay no interest during the period of time they are outstanding. The interest rate for such borrowings is at 9%. Interest compounds annually.

Required: Calculate the price Bo paid for the bonds.

Answer:

$200,000 × 0.17843* = $35,686

*PV of $1: n = 20; i = 9%

Difficulty: 2 Medium

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

115) On February 1, 2021, Lynda Brown, proud mother of newborn daughter Goldie, purchased $600,000 in zero-coupon bonds that mature on February 1, 2038. The bonds pay no interest during the period of time they are outstanding. The interest rate for such borrowings is at 12%.

Required: Calculate the price Lynda paid for the bonds.

Answer:

$600,000 × 0.10367* = $62,202

*PV of $1: n = 20; i = 12%

Difficulty: 2 Medium

Topic: Present value of a single amount

Learning Objective: 05-03 Compute the present value of a single amount.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

116) On the last day of its fiscal year ending December 31, 2021, the Boatright Ship Builders completed two financing arrangements. The funds provided by these initiatives will allow the company to expand its operations.

Boatright issued 6% stated rate bonds with a face amount of $200 million. The bonds mature on December 31, 2038 (20 years). The market rate of interest for similar bond issues was 8% (4% semiannual rate). Interest is paid semiannually (3%) on June 30 and December 31, beginning on June 30, 2022.

The company leased two manufacturing facilities. Lease A requires 10 annual lease payments of $50,000 beginning on January 1, 2022. Lease B also is for 10 years, beginning January 1, 2022. Terms of the lease require seven annual lease payments of $60,000 beginning on

January 1, 2025. Accounting standards require both leases to be recorded as liabilities for the present value of the scheduled payments. Assume that an 8% interest rate properly reflects the time value of money for the lease obligations.

Required:

What amounts will appear in Boatright’s December 31, 2021, balance sheet for the bonds and for the leases?

Answer:

Bond liability:

PV = $6,000,0001 (19.79277*) + $200,000,000 (0.20829**)

PV = $118,756,620 + 41,658,000 = $160,414,620 = initial bond liability

1 $200,000,000 × 3% = $6,000,000

*Present value of an ordinary annuity of $1: n = 40, i = 4% (from PVA of $1)

**Present value of $1: n = 40, i = 4% (from PV of $1)

Lease liability:

Lease A:

PVAD = $50,000 (7.24689*) = $362,345 = Liability

*Present value of an annuity due of $1: n = 10, i = 8% (from PVAD of $1)

Lease B:

PVAD = $60,000 × 5.62288* = $337,373

*Present value of an annuity due of $1: n = 7, i = 8% (from PVAD of $1)

PV = $337,373 × 0.79383** = $267,817

**Present value of $1: n = 3, i = 8% (from PV of $1)

Or, alternatively for Lease B:

PVA = $60,000 × 5.20637* = $312,382

*Present value of an ordinary annuity of $1: n = 7, i = 8% (from PVA of $1)

PV = $312,382 × 0.85734** = $267,818 (difference due to rounding)

**Present value of $1: n = 2, i = 8% (from PV of $1)

Or, alternatively for Lease B:

PV = $60,000 (4.46363*) = $267,818 (difference due to rounding)

From Table 4 (PVA of $1),

PVA factor, n = 9, i = 8% = 6.24689

— PVA factor, n = 2, i = 8% = 1.78326

= PV factor for deferred annuity = 4.46363*

The company’s balance sheet would include a liability for bonds of $160,414,620 and a liability for leases of $630,162 ($362,345 + $267,817).

Difficulty: 3 Hard

Topic: Present value of a single amount; Present value of an ordinary annuity; Present value of an annuity due; Present value of a deferred annuity; Present value application―Bonds; Present value application―Leases

Learning Objective: 05-03 Compute the present value of a single amount.; 05-07 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.; 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

117) White & Decker Corporation’s 2021 financial statements included the following information in the long-term debt disclosure note:

($ in millions)

2021

Zero-coupon subordinated debentures, due 2033: $275

The disclosure note stated the debenture bonds were issued late in 2013 and have a maturity value of $500 million. The maturity value indicates the amount that White & Decker will pay bondholders in 2033. Each individual bond has a maturity value (face amount) of $1,000. Zero-coupon bonds pay no cash interest during the term to maturity. The company is “accreting” (gradually increasing) the issue price to maturity value using the bonds’ effective interest rate computed on an annual basis.

Required:

Determine the effective interest rate on the bonds.
Determine the issue price in late 2013 of a single, $1,000 maturity-value bond.

Answer:

The effective interest rate can be determined by solving for the unknown present value of $1 factor for 15 annual periods (2021—2033):

PV of $1 factor = = 0.55*

*Present value of $1: n = 15, i = ? (from PV of $1, i = approximately 4%)

In row 15 of Table 2 (PV of $1), the value 0.55526 is in the 4% column. So, 4% is the approximate effective semiannual interest rate. A financial calculator or Excel will produce the same rate.

Using a 4% effective annual rate and 20 periods:

PV = $1,000 × 0.45639* = $456.39

*Present value of $1: n = 20, i = 4% (from PV of $1)

The issue price of one, $1,000 maturity-value bond was $456.39.

Difficulty: 3 Hard

Topic: Present value of a single amount; Solve for interest rate―Single amount; Present value application―Bonds

Learning Objective: 05-03 Compute the present value of a single amount.; 05-04; 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

118) Samson Inc. is contemplating the purchase of a machine that will provide it with cash savings of $100,000 per year for eight years. Interest is 10%. Assume the cash savings occur at the end of each year.

Required: Calculate the present value of the cash savings.

Answer: PVA = $100,000 × 5.33493 = $533,493

Difficulty: 2 Medium

Topic: Present value of an ordinary annuity

Learning Objective: 05-07 Compute the present value of an ordinary annuity, an annuity due, and a deferred annuity.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

119) Under the MLB deferred compensation plan, payments made at the end of each year accumulate up to retirement and then retirees are given two options. Option 1 allows the retiree to select the amount of the annual payment to be received, and option 2 allows the retiree to specify over how many years payments are to be received. Assume Sosa has had $5,000 deposited at the end of each year for 40 years, and that the long-term interest rate has been 7%.

Required:

How much has accumulated in Sosa’s deferred compensation account?
How much will Sosa be able to withdraw at the beginning of each year if he elects to receive payments for 20 years?
For how many years will Sosa be able to receive payments if he chooses to receive $115,000 per year at the beginning of each year?

Answer:

Balance in fund = FVA = $5,000 × 199.6351 = $998,176

Option 2: $998,176 ÷ 11.33560* = $88,057

*PVAD of $1: n = 20; i = 7%

Option 1: $998,176 ÷ $115,000 = 8.67979

Interpolation:

PVAD n = 13, i = 7% 8.94269

PVAD n = 12, i = 7% 8.49867

Difference 0.44402

PVAD n = ?, I = 7% 8.67979

PVAD n = 12, i = 7% 8.49867

Difference 0.18112

0.18112 ÷ 0.44402 = 0.41

So Sosa will be able to receive payments of $115,000 for 12 years, with a partial payment in year 13 of approximately $115,000 × 41% = $47,150.

Difficulty: 3 Hard

Topic: Future value of an ordinary annuity; Present value of a deferred annuity; Solve for unknown values―Annuity

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

120) DEF Company will issue $2,000,000 in 10%, 10-year bonds when the market rate of interest is 12%. Interest is paid semiannually.

Required: Determine how much cash DEF Company should realize from the bond issue.

Answer:

$2,000,000 × 5% = $100,000

n = 20; i = 6%

PV: $2,000,000 × 0.31180 $ 623,600

PVA: $100,000 × 11.46992 1,146,992

Bond issue price $1,770,592

Difficulty: 3 Hard

Topic: Present value application―Bonds

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

121) GHI Company will issue $2,000,000 in 8%, 10-year bonds when the market rate of interest is 6%. Interest is paid semiannually.

Required: Determine how much cash GHI Company should realize from the bond issue.

Answer:

$2,000,000 × 4% = $80,000

n = 20; i = 3%

$2,000,000 × 0.55368 $1,107,360

$80,000 × 14.87747 1,190,198

Bond issue price $2,297,558

Difficulty: 3 Hard

Topic: Present value application―Bonds

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

122) JKL Company will issue $2,000,000 in 12%, 10-year bonds when the market rate of interest is 10%. Interest is paid semiannually.

Required: Determine how much cash JKL Company should realize from the bond issue.

Answer:

$2,000,000 × 6% = $120,000

n = 20; i = 5%

PV: $2,000,000 × 0.37689 $ 753,780

PVA: $120,000 × 12.46221 1,495,465

Bond issue price $2,249,245

Difficulty: 3 Hard

Topic: Present value application―Bonds

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

123) MBI Company’s largest computer has a cash selling price of $200,000. A customer wishes to buy the computer on a lease purchase plan over five years, with the first payment to be made at the inception of the lease. Interest is at 10%.

Required:

Compute the amount of the annual lease payment and the gross amount due (total payments) under the lease.
Compute the amount of interest income earned by MBI for the first year of the lease.

Answer:

Annual lease payment = $200,000 ÷ 4.16987* = $47,963

*PVAD of $1: n = 5; i =10%

Gross amount due = $47,963 × 5 years = $239,815

Principal amount $200,000

Payment on signing lease 47,963

Unpaid balance 152,037

Interest rate 10%

Interest income first year of lease $ 15,204

Difficulty: 3 Hard

Topic: Present value application―Leases

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

124) King Corporation has a defined benefit pension plan. One of its employees has vested benefits under the plan, which will pay him $40,000 annually for life starting with the first payment of $40,000 on the day he retires at the age of 65. The employee has just reached the age of 50. King consulted standard mortality tables to come up with a life expectancy of 80 for this employee. The implicit interest rate under the plan is 9%.

Required:

What will be the present value of the pension obligation at the time of the employee’s retirement?
What is the present value of the pension obligation at the current time?

Answer:

30,000 × 8.78615* = $263,585

*PVAD of $1: n = 15; i = 9%

263,585 × .17843** = $47,031

**PV of $1: n = 20; i = 9%

Difficulty: 3 Hard

Topic: Present value application―Pensions

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

125) On June 30, 2021, Gunderson Electronics issued 8% stated rate bonds with a face amount of $300 million. The bonds mature on June 30, 2038 (20 years). The market rate of interest for similar bond issues was 10% (5% semiannual rate). Interest is paid semiannually (4%) on June 30 and December 31, beginning on December 31, 2021.

Required:

Determine the price of the bonds on June 30, 2021.
Calculate the interest expense Gunderson reports in 2021 for these bonds.

Answer:

To determine the price of the bonds, we calculate the present value of the 40-period annuity (40 semiannual interest payments of $12 million) and the lump-sum payment of 300 million paid at maturity using the semiannual market rate of interest of 5%. In equation form,

PV = $12,000,0001 (17.15909*) + $300,000,000 (0.14205**)

PV = $205,909,080 + $42,615,000 = $248,524,080 = price of the bonds

1 $300,000,000 × 4 % = $12,000,000

* Present value of an ordinary annuity of $1: n = 40, i = 5% (from PVA of $)

** Present value of $1: n = 40, i = 5% (from PV of $1)

$248,524,080 × 5% = $12,426,204

Because the bonds were outstanding only for six months of the year, Gunderson reports only a half year’s interest in 2021.

Difficulty: 3 Hard

Topic: Present value application―Bonds

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

126) Briefly describe the difference between simple interest and compound interest.

Answer: Simple interest is computed only on the initial principal amount. Compound interest includes not only interest on the initial principal, but also interest on the accumulated interest to date.

Difficulty: 2 Medium

Topic: Basics of interest―Simple versus compound

Learning Objective: 05-01 Explain the difference between simple and compound interest.

Bloom’s: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking

127) Explain how you would compute the imputed interest on cash borrowed at 0% interest when the market rate of interest is 8%.

Answer: Imputed interest on a 0% interest loan is a two-step process. First, compute the present value of the loan repayments by using an appropriate market rate of interest, 8% in this situation. Second, compare the loan amount to the lower present value computed in step one; the difference is the amount of imputed interest to be recognized over the term of the loan.

Difficulty: 3 Hard

Topic: Present value of a single amount; Solve for interest rate―Single amount

Learning Objective: 05-03 Compute the present value of a single amount.; 05-04

Bloom’s: Remember

AACSB: Communication

AICPA/Accessibility: BB Critical Thinking

128) Two banks each have annual CD rates of 12%. Bank A compounds quarterly and Bank B compounds semiannually. Explain which bank offers the better CD.

Answer: The yield on a CD increases with more frequent compounding periods. Therefore, since both CDs have the same stated rate of 12%, Bank A, which compounds quarterly, offers a better yield than Bank B with semiannual compounding.

Difficulty: 3 Hard

Topic: Basics of interest―Simple versus compound

Learning Objective: 05-01 Explain the difference between simple and compound interest.

Bloom’s: Understand

AACSB: Communication

AICPA/Accessibility: BB Critical Thinking

129) Briefly describe the differences between an ordinary annuity, an annuity due, and a deferred annuity.

Answer: An annuity is a series of equal cash flows occurring over equal periods. In an ordinary annuity, cash flows occur at the end of each period; in an annuity due, cash flows occur at the beginning of each period; and in a deferred annuity, cash flows begin more than one period beyond the date of the agreement.

Difficulty: 2 Medium

Topic: Basics of ordinary annuity and annuity due

Learning Objective: 05-05 Explain the difference between an ordinary annuity and an annuity due situation.

Bloom’s: Understand

AACSB: Communication

AICPA/Accessibility: BB Critical Thinking

130) Prepare a time diagram for the future value of an ordinary annuity with three payments of $300. Be sure to indicate the periods in which interest is added.

Answer: TIME DIAGRAM FOR THE FUTURE VALUE OF AN ORDINARY ANNUITY WITH THREE PAYMENTS OF $300

PERIOD 1 PERIOD 2 PERIOD 3

1st $300 pmt 2nd $300 pmt 3rd $300 pmt FVA

No interest 1st of 2 interest periods 2nd of 2 interest periods

Difficulty: 2 Medium

Topic: Future value of an ordinary annuity

Learning Objective: 05-06 Compute the future value of both an ordinary annuity and an annuity due.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking

131) Prepare a time diagram for the future value of an annuity due with three payments of $400. Be sure to indicate the periods in which interest is added.

Answer:

TIME DIAGRAM FOR THE FUTURE VALUE OF AN ANNUITY DUE WITH THREE PAYMENTS OF $400

PERIOD 1 PERIOD 2 PERIOD 3

1st $400 pmt 2nd $400 pmt 3rd $400 pmt FVAD

1st of 3 interest 2nd of 3 interest 3rd of 3 interest

periods periods periods

Difficulty: 2 Medium

Topic: Future value of an annuity due

Learning Objective: 05-06 Compute the future value of both an ordinary annuity and an annuity due.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking

132) Briefly explain how you would arrive at the monthly payment for a 48-month loan where the first payment is due one month from the loan date. In your explanation, include the use of present or future value tables.

Answer: The 48-month loan described is an ordinary annuity. Therefore, the appropriate table would be for the present value of an ordinary annuity (PVA). The annual stated interest rate would be divided by 12 to arrive at the periodic rate. Thus, an 18% annual rate yields a periodic rate of $1.5%. You would arrive at the monthly payment by dividing the known loan amount by the PVA factor at 1.5% for 48 periods.

Difficulty: 3 Hard

Topic: Solve for unknown values―Annuity

Learning Objective: 05-08 Solve for unknown values in annuity situations involving present value.

Bloom’s: Understand

AACSB: Communication

AICPA/Accessibility: BB Critical Thinking

133) Provide two examples of the use of present value techniques in accounting.

Answer: This question asks for only two examples of the use of present value techniques in accounting. The chapter previews the use of PV techniques in accounting for long-term leases, installment notes, and in computing the pension obligation for defined benefit plans. The major emphasis in the chapter is accounting for interest-bearing obligations, such as determining the selling price of bonds, solving for the payment on an installment loan, and determining both future and present value amounts.

Difficulty: 2 Medium

Topic: Present value application―Bonds; Present value application―Leases; Present value application―Notes; Present value application―Pensions

Learning Objective: 05-09 Briefly describe how the concept of the time value of money is incorporated into the valuation of bonds, long-term leases, and pension obligations.

Bloom’s: Create

AACSB: Communication

Intermediate Accounting J David Spiceland 10e - Test Bank

Description

Additional Information

Reviews

Additional information

Add Review Cancel reply

Health Assessment In Nursing 6th By Janet R. Weber

Bates’ Guide To Physical Examination And History Taking 12th Edition

Pharmacotherapeutics for Advanced Practice 4th Edition By Virginia

Advanced Health Assessment & Clinical Diagnosis in Primary Care 5th Edition by Joyce E. Dains

Bates’ Guide To Physical Examination and History Taking 13th Edition by Bickley

Community & Public Health Nursing Promoting the Public's Health 9th Edition by Cherie Rector

Quick Links

Contact Information

Intermediate Accounting J David Spiceland 10e - Test Bank

Description

Additional Information

Reviews

Additional information

Add Review Cancel reply

Related Products

Health Assessment In Nursing 6th By Janet R. Weber

Bates’ Guide To Physical Examination And History Taking 12th Edition

Pharmacotherapeutics for Advanced Practice 4th Edition By Virginia

Advanced Health Assessment & Clinical Diagnosis in Primary Care 5th Edition by Joyce E. Dains

Bates’ Guide To Physical Examination and History Taking 13th Edition by Bickley

Community & Public Health Nursing Promoting the Public's Health 9th Edition by Cherie Rector

Quick Links

Contact Information