Weygandt 8th Canadian Edition Exam Questions

APpendix PV: PRESENT VALUE CONCEPTS

TRUE-FALSE STATEMENTS

1. Interest is the payment for the use of money.

Difficulty: Easy

Learning Objective: Calculate simple and compound interest.

Section Reference: Simple and Compound Interest

CPA: Financial Reporting

AACSB: Analytic

2. The rate of interest is generally stated using a quarterly rate.

Difficulty: Easy

Learning Objective: Calculate simple and compound interest.

Section Reference: Simple and Compound Interest

CPA: Financial Reporting

AACSB: Analytic

3. Compounding calculates interest not only on the principal but also on the interest earned to date.

Difficulty: Easy

Learning Objective: Calculate simple and compound interest.

Section Reference: Simple and Compound Interest

CPA: Financial Reporting

AACSB: Analytic

4. Simple interest is used in most business transactions.

Difficulty: Easy

Learning Objective: Calculate simple and compound interest.

Section Reference: Simple and Compound Interest

CPA: Financial Reporting

AACSB: Analytic

5. Present value refers to the value of an investment at the end of a three-year period for a three-year investment.

Difficulty: Easy

Learning Objective: Calculate the present value of a single amount.

Section Reference: Prevent Value of a Single Amount

CPA: Financial Reporting

AACSB: Analytic

6. Present value is the value today of a given investment to be received in the future.

Difficulty: Easy

Learning Objective: Calculate the present value of a single amount.

Section Reference: Prevent Value of a Single Amount

CPA: Financial Reporting

AACSB: Analytic

7. The market price of a bond is determined using a present value calculation.

Difficulty: Easy

Learning Objective: Calculate the present value of a single amount.

Section Reference: Present Value of a Single Amount

CPA: Financial Reporting

AACSB: Analytic

8. A series of payments of equal dollar amounts to be paid periodically are referred to as an annuity.

Difficulty: Easy

Learning Objective: Calculate the present value of an annuity.

Section Reference: Present Value of a Series of Future Cash Flows (Annuities)

CPA: Financial Reporting

AACSB: Analytic

9. A series of receipts in varying amounts, to be received periodically, are referred to as an annuity.

Difficulty: Easy

Learning Objective: Calculate the present value of an annuity.

Section Reference: Present Value of a Series of Future Cash Flows (Annuities)

CPA: Financial Reporting

AACSB: Analytic

10. The present value of an annuity is the value in the future at a specified date of a series of future payments using a compound interest rate.

Difficulty: Easy

Learning Objective: Calculate the present value of an annuity.

Section Reference: Present Value of a Series of Future Cash Flows (Annuities)

CPA: Financial Reporting

AACSB: Analytic

11. The present value of an annuity is the value today of a series of future payments discounted using a compound interest rate.

Difficulty: Easy

Learning Objective: Calculate the present value of an annuity.

Section Reference: Present Value of a Series of Future Cash Flows (Annuities)

CPA: Financial Reporting

AACSB: Analytic

12. For an annuity due, it is assumed that the first payment starts at the end of the period.

Difficulty: Easy

Learning Objective: Calculate the present value of an annuity.

Section Reference: Present Value of a Series of Future Cash Flows (Annuities)

CPA: Financial Reporting

AACSB: Analytic

13. For an ordinary annuity, the payments are at the end of each period.

Difficulty: Easy

Learning Objective: Calculate the present value of an annuity.

Section Reference: Present Value of a Series of Future Cash Flows (Annuities)

CPA: Financial Reporting

AACSB: Analytic

14. When calculating the present value of an annuity you need to know the discount rate, the number of payments, and the amount of the periodic payment.

Difficulty: Easy

Learning Objective: Calculate the present value of an annuity.

Section Reference: Present Value of a Series of Future Cash Flows (Annuities)

CPA: Financial Reporting

AACSB: Analytic

15. In order to calculate the present value of an annuity, it can be done using the table entitled present value of $ 1.

Difficulty: Easy

Learning Objective: Calculate the present value of an annuity.

Section Reference: Present Value of a Series of Future Cash Flows (Annuities)

CPA: Financial Reporting

AACSB: Analytic

16. The calculation of the market price of a bond involves three variables: payment amount, market interest rate, and the length of time until the amounts are paid.

Difficulty: Easy

Learning Objective: Calculating the market price or present value of a bond.

Section Reference: Applying Present Value Concepts

CPA: Financial Reporting

AACSB: Analytic

17. Bond payments are made up of two components: the principal amount and a series of interest payments.

Difficulty: Easy

Learning Objective: Calculating the market price or present value of a bond.

Section Reference: Applying Present Value Concepts

CPA: Financial Reporting

AACSB: Analytic

18. When the market rate is equal to the contractual rate, the bond will be sold at its face value.

Difficulty: Easy

Learning Objective: Calculating the market price or present value of a bond.

Section Reference: Applying Present Value Concepts

CPA: Financial Reporting

AACSB: Analytic

19. When the contractual rate and market rates of interest are equal, a bond will be sold above its face value.

Difficulty: Easy

Learning Objective: Calculating the market price or present value of a bond.

Section Reference: Applying Present Value Concepts

CPA: Financial Reporting

AACSB: Analytic

20. If the market rate of interest is greater than the contractual rate the bond will sell at a discount.

Difficulty: Easy

Learning Objective: Calculating the market price or present value of a bond.

Section Reference: Applying Present Value Concepts

CPA: Financial Reporting

AACSB: Analytic

21. If the bond’s contractual rate is 8% and the market rate is 9%, the bond will sell at a discount.

Difficulty: Easy

Learning Objective: Calculating the market price or present value of a bond.

Section Reference: Applying Present Value Concepts

CPA: Financial Reporting

AACSB: Analytic

22. If the bond’s contractual rate is 10% and the market rate is 8%, the bond will sell above its face value.

Difficulty: Easy

Learning Objective: Calculating the market price or present value of a bond.

Section Reference: Applying Present Value Concepts

CPA: Financial Reporting

AACSB: Analytic

23. As a note payable will be paid using periodic payments, including both principal and interest, the future value of the note is zero.

Difficulty: Easy

Learning Objective: Applying present value concepts to notes payable to calculate the periodic payments, the interest rate, or the number of periods.

Section Reference: Using Present Value Concepts with Notes Payable

CPA: Financial Reporting

AACSB: Analytic

24. The present value of a note payable is the amount borrowed.

Difficulty: Easy

Learning Objective: Applying present value concepts to notes payable to calculate the periodic payments, the interest rate, or the number of periods.

Section Reference: Using Present Value Concepts with Notes Payable

CPA: Financial Reporting

AACSB: Analytic

25. The application of present value concepts includes determining the value in use of an asset.

Difficulty: Easy

Learning Objective: Estimate the value of an asset using future cash flows.

Section Reference: Assets: Estimating Value in Use using Future Cash Flows

CPA: Financial Reporting

AACSB: Analytic

26. The value in use calculation for an asset involves the estimate of future cash flows and calculating the present value of these cash flows

Difficulty: Easy

Learning Objective: Estimate the value of an asset using future cash flows.

Section Reference: Assets: Estimating Value in Use using Future Cash Flows

CPA: Financial Reporting

AACSB: Analytic

27. An asset is considered impaired if its carrying amount is less than its recoverable amount.

Difficulty: Easy

Learning Objective: Estimate the value of an asset using future cash flows.

Section Reference: Assets: Estimating Value in Use using Future Cash Flows

CPA: Financial Reporting

AACSB: Analytic

28. Value in use of an asset involves a single step calculating the asset’s future cash flows.

Difficulty: Easy

Learning Objective: Estimate the value of an asset using future cash flows.

Section Reference: Assets: Estimating Value in Use using Future Cash Flows

CPA: Financial Reporting

AACSB: Analytic

MULTIPLE CHOICE QUESTIONS

29. The amount of interest involved in a transaction is based upon

a) the principal.

b) interest rate.

c) time period.

d) a combination of all of the above.

Difficulty: Easy

Learning Objective: Calculate simple and compound interest.

Section Reference: Simple and Compound Interest

CPA: Financial Reporting

AACSB: Analytic

30. Simple interest is calculated by

a) principal x compound interest rate x time.

b) principal x interest rate x time.

c) payment due x interest x number of payments in a year.

d) payment due x compound interest x number of payments in a year.

Difficulty: Easy

Learning Objective: Calculate simple and compound interest.

Section Reference: Simple and Compound Interest

CPA: Financial Reporting

AACSB: Analytic

31. Assuming a simple rate of interest, how much interest in total would you pay if you borrowed $ 5,000 for three years at 8%?

a) $ 400

b) $ 800

c) $ 1,200

d) More information is need to complete the calculation.

Difficulty: Easy

Learning Objective: Calculate simple and compound interest.

Section Reference: Simple and Compound Interest

CPA: Financial Reporting

32. You decided to borrow $ 2,000 for two years at 5%. How much interest would you pay in the first year?

a) $ 200

b) $ 100

c) $ 50

d) $ 75

Difficulty: Easy

Learning Objective: Calculate simple and compound interest.

Section Reference: Simple and Compound Interest

CPA: Financial Reporting

AACSB: Analytic

33. You have two options 1) invest $ 1,000 at 5% simple interest for two years or 2) invest $ 900 for two years at 5% compounded annually. What is the total amount of interest to be received under each scenario?

a) 1 – $ 100; 2 – $ 90

b) 1 – $ 102.50; 2 – $ 92.25

c) 1 – $ 102.50; 2 – $ 90

d) 1 – $ 100; 2 – $ 92.25

Difficulty: Easy

Learning Objective: Calculate simple and compound interest.

Section Reference: Simple and Compound Interest

CPA: Financial Reporting

AACSB: Analytic

34. You have two options 1) invest $ 10,000 at 5% simple interest for two years or 2) invest $ 9,000 for two years at 5% compounded annually. What is the total amount of interest to be received under each scenario?

a) 1 – $ 1,000, 2 – $ 900

b) 1 – $ 1,025, 2 – $ 922.50

c) 1 – $ 1,025, 2 – $ 900

d) 1 – $ 1,000, 2 – $ 922.50

Difficulty: Easy

Learning Objective: Calculate simple and compound interest.

Section Reference: Simple and Compound Interest

CPA: Financial Reporting

AACSB: Analytic

35. Given an interest rate of 4%, what amount would you have to invest today to end up with $ 1,000 one year from now?

a) $ 250

b) $ 961.54

c) $ 925.93

d) Additional information is required to complete the calculation.

Difficulty: Easy

Learning Objective: Calculate the present value of a single amount.

Section Reference: Prevent Value of a Single Amount

CPA: Financial Reporting

AACSB: Analytic

36. If you want to have $ 2,000 in your pocket at the end of one year, what amount would you have to invest today given an interest rate of 5%?

a) $ 1,951.22

b) $ 1,818.18

c) $ 1,904.76

d) Additional information is required to complete the calculation.

Difficulty: Easy

Learning Objective: Calculate the present value of a single amount.

Section Reference: Prevent Value of a Single Amount

CPA: Financial Reporting

AACSB: Analytic

37. You have a target of having $ 5,000 at the end of 5 years. If interest rate is at 3% how much would you need to invest today?

a) $ 4,313.04

b) $ 4,854.36

c) $ 4,442.45

d) Additional information is required to complete the calculation.

Difficulty: Easy

Learning Objective: Calculate the present value of a single amount.

Section Reference: Prevent Value of a Single Amount

CPA: Financial Reporting

AACSB: Analytic

38. You’re planning a trip to Europe three years from now and would like to have $ 6,000 at that time. Given an interest rate of 5%, how much would you need to invest today?

a) $ 5,731.10

b) $ 5,714.28

c) $ 5,183.03

d) Additional information is needed.

Difficulty: Easy

Learning Objective: Calculate the present value of a single amount.

Section Reference: Prevent Value of a Single Amount

CPA: Financial Reporting

AACSB: Analytic

39. In calculating the present value of an annuity, it is required to know the

a) discount rate.

b) number of payments.

c) amount of each payment.

d) all of the above

Difficulty: Easy

Learning Objective: Calculate the present value of an annuity.

Section Reference: Present Value of a Series of Cash Flows (Annuities)

CPA: Financial Reporting

AACSB: Analytic

40. An annuity is

a) a series of equal dollar amounts to be received or paid periodically.

b) a series of dollar amounts to be paid each month.

c) a series of dollar amounts to be received each month.

d) a one-time payment or receipt.

Difficulty: Easy

Learning Objective: Calculate the present value of an annuity.

Section Reference: Present Value of a Series of Cash Flows (Annuities)

CPA: Financial Reporting

AACSB: Analytic

41. You have won the local lottery and will receive $ 1,000 cash each year for three years. If the discounted rate is 5%, what is the present value of this award?

a) $ 2,590.92

b) $ 2,723.25

c) $ 4,579.71

d) $ 3,150.00

Difficulty: Easy

Learning Objective: Calculate the present value of an annuity.

Section Reference: Present Value of a Series of Cash Flows (Annuities)

CPA: Financial Reporting

42. You are scheduled to receive a bonus of $ 1,000 cash each year for three years. Assuming a discount rate of 3%, what is the present value of this bonus?

a) $ 3,090.00

b) $ 2,912.62

c) $ 2,828.61

d) $ 2,745.42

Difficulty: Easy

Learning Objective: Calculate the present value of an annuity.

Section Reference: Present Value of a Series of Cash Flows (Annuities)

CPA: Financial Reporting

AACSB: Analytic

43. Assume that you will receive $ 5,000 cash each year for four years. Considering a discount rate of 2%, what is the present value of this annuity?

a) $ 19,038.64

b) $ 9,430.45

c) $ 20,400.00

d) $ 16,236.40

Difficulty: Easy

Learning Objective: Calculate the present value of an annuity.

Section Reference: Present Value of a Series of Cash Flows (Annuities)

CPA: Financial

AACSB: Analytic

44. What is the present value of $ 2,000 of cash received each year for 5 years at a 6% discount rate?

a) $ 11,144.65

b) $ 8,424.73

c) $ 7,472.60

d) $ 10,600.00

Difficulty: Easy

Learning Objective: Calculate the present value of an annuity.

Section Reference: Present Value of a Series of Cash Flows (Annuities)

CPA: Financial Reporting

AACSB: Analytic

45. A $ 100,000, 5-year bond with an interest rate of 5% is for sale when the market interest is at 5%. This bond will sell at

a) a discount.

b) a premium.

c) neither a discount or a premium.

d) more information is needed.

Difficulty: Easy

Learning Objective: Calculate the market price or present value of a bond.

Section Reference: Applying Present Value Concepts

CPA: Financial Reporting

AACSB: Analytic

46. A $ 500,000, 4-year bond with an interest rate of 6% is for sale when the market interest is at 5%. This bond will sell at

a) a discount.

b) a premium.

c) neither a discount or a premium.

d) more information is needed.

Difficulty: Easy

Learning Objective: Calculate the market price or present value of a bond.

Section Reference: Applying Present Value Concepts

CPA: Financial Reporting

AACSB: Analytic

47. Your company is getting to ready to market their $ 1,000 bonds which have an interest rate of 4.5% and a five-year term. Current markets estimate interest rates at 5%. What will your bonds likely sell for?

a) $ 1,000

b) > $ 1,000

c) < $ 1,000

d) You will be unable to sell them at this rate.

Difficulty: Easy

Learning Objective: Calculate the present value of a bond.

Section Reference: Applying Present Value Concepts

CPA: Financial

AACSB: Analytic

48. What is the present value of a $ 25,000 bond, 5 year with a contractual rate of 5% and a market rate of 6% with semi-annual interest payments?

a) $ 23,946.91

b) $ 23,933.72

c) $ 25,000.00

d) $ 24,375.00

Difficulty: Easy

Learning Objective: Calculate the market price or present value of a bond.

Section Reference: Applying Present Value Concepts

CPA: Financial

AACSB: Analytic

49. Calculate the market price of a $ 10,000, 5-year bond when the market is at 4% and the contractual rate is 6%. Bond interest is paid semi-annually.

a) $ 10,000.00

b) $ 9,146.94

c) $ 10,898.26

d) $ 10,900.59

Difficulty: Easy

Learning Objective: Calculate the market price or present value of a bond.

Section Reference: Applying Present Value Concepts

CPA: Financial

AACSB: Analytic

50. We are considering a note payable of $ 10,000 with an interest rate of 5% for five years. Determine the blended annual payment amount.

a) $ 2,152.47

b) $ 2,309.75

c) $ 2,000.00

d) $ 2,100.00

Difficulty: Easy

Learning Objective: Applying present value concepts to notes payable to calculate the periodic payments, the interest rate or the number of periods.

Section Reference: Using Present Value Concepts with Notes Payable

CPA: Financial Reporting

AACSB: Analytic

51. KPop estimates their embossing machine will last another three years and will generate the following cash flows:

Year 1 2 3

$ 5,000 $ 6,000 $ 6,500

Using a rate of 6% what would the equipment’s value in use?

a) $ 15,514

b) $ 16,458

c) $ 16,700

d) $ 33,111

Difficulty: Easy

Learning Objective: Estimate the value of an asset using future cash flows.

Section Reference: Assets: Estimating Value in Use Using Future Cash Flows

CPA: Financial Reporting

AACSB: Analytic

52. T-Mall has a piece of equipment on their production line that they think will last another 6 years and is expected to generate $ 6,500 of annual cash flows. Using a discount rate of 5%, what is the value in use of this equipment?

a) $ 31,962

b) $ 32,992

c) $ 29,102

d) $ 39,000

Difficulty: Easy

Learning Objective: Estimate the value of an asset using future cash flows.

Section Reference: Assets: Estimating Value in Use Using Future Cash Flows

CPA: Financial Reporting

AACSB: Analytic

MATCHING QUESTIONS

53. Match the items below by entering the appropriate code letter in the space provided:

A. Compound interest F. Ordinary annuity

B. Discount rate G. Discount

C. Annuity H. Present value

D. Simple interest

E. Annuity due

1. A series of equal payments or receipts

2. Calculated by taking the principal x interest rate x time

3. Also referred to as the effective rate

4. One where the first payment starts at the beginning of the period

5. Calculated based upon interest not only on the principal but also on interest earned

6. One where the first payment is at the end of each period

7. If the bond’s contractual rate is less than the market, it will be sold at a ___

8. The discounting of future cash flows is often referred to as the process of determining the ___

Difficulty: Easy

Learning Objective: Calculate simple and compound interest.

Learning Objective: Calculate the present value of a single amount.

Learning Objective: Calculate the present value of an annuity.

Learning Objective: Calculating the market price or present value of a bond.

Section Reference: Simple and Compound Interest

Section Reference: Present Value of a Single Amount

Section Reference: Present Value of a Series of Future Cash Flows (Annuities)

Section Reference: Applying Present Value Concepts

CPA: Financial Reporting

AACSB: Analytic

54. Match the items below by entering the appropriate code letter in the space provided:

A. Discount F. Principal

B. Premium G. Compound

C. Blended H. Simple

D. Present value

E. Zero

1. The future value of an instalment note payable

2. Amount borrowed

3. Interest calculated on the principal only

4. Determining an asset’s value in use requires the application of ____

5. ____ interest is used most in business transactions

6. If the bond’s contractual rate is greater than the market, it will be sold at a ___

7. If the bond’s contractual rate is less than the market, it will be sold at a ___

8. A payment made up of both principal and interest

Difficulty: Easy

Learning Objective: Calculate the present value of a single amount.

Learning Objective: Calculate the market price or present value of a bond.

Learning Objective: Apply present value concepts to notes payable to calculate the periodic payments, the interest rate, or the number of periods.

Learning Objective: Estimate the value of an asset using future cash flows.

Section Reference: Present Value of a Single Amount

Section Reference: Applying Present Value Concepts

Section Reference: Using Present Value Concepts with Notes Payable

Section Reference: Assets: Estimating Value in Use Using Future Cash Flows

CPA: Financial Reporting

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