Thomas Ch.5 Full Test Bank Time Value Of Money Concepts

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.

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.

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:

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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:

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.

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:

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.

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:

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.

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:

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.

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:

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.

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:

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.

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:

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.

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:

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, 2028?

A) $20,600.

B) $20,928.

C) $23,616.

D) $24,715.

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:

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.

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:

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.

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:

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.

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:

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.

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:

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.

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:

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.

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:

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.

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:

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.

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:

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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

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.

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.

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?

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?

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?

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.

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.

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.

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.

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:

a. How much has accumulated in Hardaway's deferred compensation account?

b. How much will Hardaway be able to withdraw at the beginning of each year if he elects to receive payments for 15 years?

c. 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?

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.

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:

a. Compute the amount of the annual lease payment and the gross amount (total payments) due under the lease.

b. Compute the amount of interest income earned by Taylor's for the first year of the lease.

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:

a. What will be the present value of the pension obligation at the time of the employee's retirement?

b. What is the present value of the pension obligation at the current time?

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.

Difficulty: 3 Hard

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

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

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

Maturity Interest Paid Stated Rate Effective Rate

1. 10 years annually 10% 12%

2. 10 years semiannually 10% 12%

3. 20 years semiannually 12% 12%

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

1. 10 years annually 10% 12%

2. 10 years semiannually 10% 12%

3. 20 years semiannually 12% 10%

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.

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.

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.

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.

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.

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.

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: