Unit 5 Quizzes (Time Value of Money)

What is the best definition of the time value of money?

An investment in a checking account over time

The relationship between time and money

The interest rate charged on a loan over time

Accounts receivable that are determined uncollectible and not valuable

The relationship between time and money

If you invest $50,000 to earn 8% interest, which compounding approach would return the lowest amount after one year?

Annually

Quarterly

Daily

Monthly

Annually

What is interest?

Payment for the use of money

Return on capital

Loan

An equity investment

Payment for the use of money

For an investment that earns 1% compounded monthly for two years, how many compounding periods are there?

2

8

24

12

24

Bella requires $240,000 in four years to purchase a new home. She can invest cash today that would earn 8%, compounded quarterly.

When determining how much money to deposit today, which factors should Bella use from the Present Value Tables?

16 periods, 2%

4 periods, 2%

4 periods, 8%

16 periods, 8%

16 periods, 2%

Bella's investment would compound a total of 16 times (4 periods per year for 4 years). The interest rate per compounding period is 2% (8% annual divided by 4 periods per year). The correct factor Bella should use is 16 periods, 2%.

Jerry recently was offered a position with a major accounting firm. The firm offered Jerry the option of a signing bonus of $23,000 payable on the first day of work, a signing bonus of $26,000 payable after one year of employment, a signing bonus of $25,000 payable after ten years, or a signing bonus of $5,000 per year for five years.

Assuming that the relevant interest rate is 10%, which option should Jerry choose?

A signing bonus of $25,000 payable after ten years

Jerry should choose the signing bonus of $23,000 payable on the first day of work.

Jerry should choose the signing bonus of $26,000 payable after one year of employment.

Jerry does not have sufficient information to determine the optimal choice.

Jerry should choose the signing bonus of $26,000 payable after one year of employment.

John Jones won a lottery that will pay him $4,000,000 after twenty years. Assuming an appropriate interest rate is 5% compounded annually, what is the present value of this amount?

$1,507,560 [PV of $4,000,000, 20 periods, 5%]

$4,049,848 [face amount + FV annuity, $4,000,000 pmt, 20 periods, 5%]

$49,848,840 [FV annuity, $4,000,000 pmt, 20 periods, 5%]

$4,000,000 [face amount]

$1,507,560 [PV of $4,000,000, 20 periods, 5%]

Which time value money concept would show the largest value of $1 at 12% for three periods?

Present value of an annuity due of $1.00

Present value of interest rates.

Present value of an ordinary annuity of $1.00

Present value of $1.00

Present value of an annuity due of $1.00

An accountant wishes to find the present value of an annuity of $1 payable at the beginning of each period at 10% for eight periods. The accountant has only one present value table which shows the present value of an annuity of $1 payable at the end of each period.

To compute the present value, which present value factor in the 10% column would the accountant would use?

Eight periods and multiply by (1 + .10)

Seven periods

Eight periods

Nine periods and multiply by (1 - .10)

Eight periods and multiply by (1 + .10)

Al Darby wants to withdraw $20,000 (including principal) from an investment fund at the end of each year for five years.

How should he compute his required initial investment at the beginning of the first year if the fund earns 10% compounded annually?

$20,000 divided by the present value of 1 (5-year, 10%)

$20,000 times the present value of 1 (5-year, 10%)

$20,000 times the present value of a 5-year, 10% ordinary annuity of 1

$20,000 divided by the present value of a 5-year, 10% annuity due of 1

$20,000 times the present value of a 5-year, 10% ordinary annuity of 1

If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates, what is true regarding the present values of each?

The present value of the annuity due is greater than the present value of the ordinary annuity.

The future value of the annuity due is less than the present value of the ordinary annuity.

The present value of the annuity due is equal to the present value of the ordinary annuity.

The future value of the annuity due is less than the present value of the ordinary annuity.

The present value of the annuity due is greater than the present value of the ordinary annuity.

Paula purchased a house for $300,000. After providing a 20% down payment, she borrowed the balance from the local savings and loan under a 30-year 6% mortgage loan requiring equal monthly installments at the end of each month.

Which time value concept would be used to determine the monthly payment?

Future value of an annuity due

Present value of an ordinary annuity

Present value of one

Future value of one

Present value of an ordinary annuity

For which accounting topic are present value-based accounting measurements relevant?

Taxes

Inventory

Environmental liabilities

Administration expenses

Environmental liabilities

Barber Company will receive $1,500,000 in 7 years.

If the appropriate interest rate is 10%, compounded annually, which table factor should be used to calculate the present value of the $1,500,000?

Present Value of 1, 7 periods at 5%

Present Value of Ordinary Annuity, 14 periods at 5%

Present Value of Ordinary Annuity, 7 periods at 10%

Present Value of 1, 7 periods at 10%

Present Value of 1, 7 periods at 10%

If a savings account pays interest at 4% compounded quarterly, then the amount of $1 left on deposit for 7 years would be found using which of the following table factors?

28 periods at 4%

7 periods at 1%

7 periods at 4%

28 periods at 1%

28 periods at 1%

On June 1, 2020, Pitts Company sold some equipment to Gannon Company. The two companies entered into an installment sales contract at a rate of 8%. The contract required equal payments each quarter for 4 years with the first payment due on June 1, 2020.

Which compound interest table is appropriate for this situation?

Present value of an ordinary annuity of 1 (4 periods, 8%)

Present value of an annuity due of 1 (16 periods, 2%)

Present value of an annuity due of 1 (4 periods, 8%)

Present value of an ordinary annuity of 1 (16 periods, 2%)

Present value of an annuity due of 1 (16 periods, 2%)

Which transaction would require the use of the present value of an annuity due concept in order to calculate the present value of the asset obtained or liability owed at the date of incurrence?

A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 7%.

A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement.

A capital lease is entered into with the initial lease payment due one month subsequent to the signing of the lease agreement.

A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 9%.

A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement.

Company A sells land to Company B for $100,000. Company A takes a note from Company B that is due in two years. Assuming an annual interest rate of 5% is appropriate, the implied annual interest is $100,000 × 0.05 = $5,000, and the present value of the note is $100,000 × 0.90703 = $90,703.

Which amount should Company A record for the sale?

$90,000

$95,000

$90,703

$100,000

$90,703

A company will receive payments of $10,000 at the beginning of each year for the next three years under a subscription contract. Assuming an annual interest rate of 6% is appropriate, the present value of an ordinary annuity is 2.67301 × $10,000 = $26,730, and the present value of an annuity due is 2.83339 × $10,000 = $28,334.

Which amount must the company record for this sale in accordance with the generally accepted accounting principles (GAAP) if collection is reasonably assured?

$26,730

$28,334

$10,000

$30,000

$28,334

A company is leasing a machine for ten years. The annual payments of $5,000 are made at the end of the year. Assuming an annual interest rate of 5% is appropriate, the present value of 1 is 0.6139 × $5,000 = $3,070, the present value of an ordinary annuity is 7.7217 × $5,000 = $38,609, and the present value of an annuity due is 8.1078 × $5,000 = $40,539.

Which value should this company use to record the machine?

$50,000

$38,609

$40,539

$30,700

$38,609

A company receives payments on a note receivable of $1,000 at the end of every year for 10 years. Assuming an annual interest rate of 5% is appropriate, the present value of 1 is 0.6139 × $1,000 = $614, the present value of an ordinary annuity is 7.7217 × $1,000 = $7,722, and the present value of an annuity due is 8.108 × $1,000 = $8,108.

What is the present value of the note that should be recorded by the company, that includes the 10 annual payments of $1,000, according to the Financial Accounting Standards Board?

$10,000

$6,140

$7,722

$8,108

$7,722

U5A5 An employee will receive a $10,000 bonus at the end of each year for the next five years. Assuming an annual interest rate of 4% is appropriate, the present value of an ordinary annuity is 4.4518 × $10,000 = $44,518, and the present value of an annuity due is 4.6299 × $10,000 = $46,299.

What is the discounted present value of the bonus payments?

$44,518

$50,000

$46,299

$52,000

$44,518

A company will receive payments of $10,000 per year for the next three years under a subscription contract. The first payment will be made at the end of the first year of the contract. Assuming an annual interest rate of 5% is appropriate, the present value of an ordinary annuity is 2.72325 × $10,000 = $27,233, and the present value of an annuity due is 2.85941 × $10,000 = $28,594.

Which amount must the company record for this sale in accordance with generally accepted accounting principles (GAAP) if collection is reasonably assured?

$28,594

$31,500

$27,233

$30,000

$27,233

A company requires $8,000 cash in a savings account earning 2% interest at the end of the year. Assuming an annual interest rate of 2% is appropriate, the implied annual interest is $8,000 × 0.02 = $160, and the present value of the savings is $8,000 × 0.98039 = $7,843.

Which amount must be deposited in the savings account at the beginning of the year?

$8,160

$8,000

$7,840

$7,843

$7,843

1/1.02x8,000=7,843

A customer signs a noninterest-bearing note, promising to pay the company $11,664 in two years. The payment amount is based on an annual interest rate of 8%, which the company believes is appropriate, resulting in the present value of the note of $11,664 × 0.85734 = $10,000.

Which amount must the company record as sales revenue from this transaction in accordance with generally accepted accounting principles (GAAP)?

$11,664

$10,000

$13,328

$1,664

$10,000

A company expects to incur $1,000,000 in environmental remediation costs in 10 years to restore land at one of the production sites it is currently operating. Using an 8% interest rate, the implied annual interest is $1,000,000 × 0.08 = $80,000, and the present value of the remediation cost is $1,000,000 × 0.46319 = $463,190.

Which amount must the company record currently as an asset retirement obligation (ARO) in accordance with generally accepted accounting principles (GAAP)?

$1,800,000

$1,000,000

$463,190

$536,810

463,190

An investment of $1 for 8 years at 8% annual interest is compounded quarterly.

What is the interest rate per compounding period?

8%

4%

0.67%

2%

2%

Equipment is exchanged for a noninterest-bearing note. Payment of $20,000 on the note is to be made in one year. The market rate of notes of similar risk is 5%. Assuming an annual interest rate of 5% is appropriate, the present value of the principal is $20,000 × 0.95238 = $19,048. Assuming that a semiannual interest rate of 2.5% is appropriate, the present value of the principal is ($20,000/2) × 1.92742 = $19,274.

What is the cost that should be recorded with the purchase of this equipment?

$19,274

$21,000

$20,000

$19,048

20,000

A company collects $1,500 of rent from a tenant at the end of the year. The company invests the rent money in an investment earning 4% interest per year. Assuming a 4% annual interest rate is appropriate, the implied annual interest is $1,500 × 0.04 = $60, and the present value of the rent is $1,500 × 0.96154 = $1,442.

What is the discounted value of this rent at the beginning of Year 1?

$1,442

$1,560

$1,440

$1,500

$1,442

A company is leasing a machine for ten years. The annual payments of $5,000 are made at the beginning of the year. Assuming an annual interest rate of 5% is appropriate, the present value of 1 is 0.6139 × $5,000 = $3,070, the present value of an ordinary annuity is 7.7217 × $5,000 = $38,609, and the present value of an annuity due is 8.1078 × $5,000 = $40,539.

Which value should this company use to record the machine?

$30,700

$38,609

$50,000

$40,539

$40,539

An investment of $1 for 12 years at 12% annual interest is compounded monthly.

What is the interest rate per compounding period?

6%

12%

1%

3%

1%

A landlord receives $1,000 in rent payments at the beginning of every month for ten periods. Assuming an annual interest rate of 5% is appropriate, the present value of 1 is 0.6139 × $1,000 = 614, the present value of an ordinary annuity is 7.7217 × $1,000 = $7,722, and the present value of an annuity due is 8.20178 × $1,000 = $8,108.

What is the fair value of the ten rent payments, according to the Financial Accounting Standards Board (FASB)?

$6,140

$6,000

$8,108

$7,722

$8,108

An individual recently won a lottery and has the opportunity to receive $100,000 per year at the end of the year for the next 25 years. Assuming an annual interest rate of 5% is appropriate, the present value of 1 is 0.29530 × $100,000 = $29,530, the present value of an ordinary annuity is 14.09394 × $100,000 = $1,409,394, and the present value of an annuity due is 14.79864 × $100,000 = $1,479,864.

What is the fair value of the lottery payments, according to the Financial Accounting Standards Board (FASB)?

$738,250

$2,500,000

$1,409,394

$1,479,864

$1,409,394

A company requires $8,000 cash in a savings account earning 2% interest at the end of the year. Assuming an annual interest rate of 2% is appropriate, the implied annual interest is $8,000 × 0.02 = $160, and the present value of the savings is $8,000 × 0.98039 = $7,843

.Which amount must be deposited in the savings account at the beginning of the year?

$7,840

$7,843

$8,160

$8,000

7,843

U5B8 A company expects to incur $1,000,000 in environmental remediation costs in 10 years to restore land at one of the production sites it is currently operating. Using an 8% interest rate, the implied annual interest is $1,000,000 × 0.08 = $80,000, and the present value of the remediation cost is $1,000,000 × 0.46319 = $463,190.

Which amount must the company record currently as an asset retirement obligation (ARO) in accordance with generally accepted accounting principles (GAAP)?

$463,190

$1,000,000

$536,810

$1,800,000

$463,190

Company A has agreed to pay Company B $100,000 at the beginning of each year for the next three years for rights to a patent. Assuming an annual interest rate of 4% is appropriate, the present value of an ordinary annuity is 2.77509 × $100,000 = $277,509, and the present value of an annuity due is 2.88609 × $100,000 = $288,609.

What is the present obligation that Company A should record in accordance with generally accepted accounting principles (GAAP)?

$312,000

$288,609

$300,000

$277,509

$288,609

A company issues a five-year zero-interest-bearing note for a new lathe it purchased for $25,000. The market rate of interest at the time the note was issued is 4%. Assuming an annual interest rate of 4% for five years is appropriate, the present value of the principal is $25,000 × 0.82193 = $20,548. Assuming an annual interest rate of 5% for 4 years is appropriate, the present value of the principal is $25,000 × 0.82270 = $20,568.

Which amount should be recorded for the cost of the lathe?

25,000