Intermediate accounting 16th edition kieso test bank

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CHAPTER 6 ACCOUNTING AND THE TIME VALUE OF MONEY IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual Answer

No.

Description

F T F T T F F T T T F F F T T T F T F T

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7.

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Time value of money.

Definition of interest.

Simple interest.

Compound interest.

Compound interest.

Future value of an ordinary annuity.

Present value of an annuity due.

Compounding period interest rate.

Definition of present value.

Future value of a single sum.

Determining present value.

Present value of a single sum.

Annuity due and interest.

Annuity due and ordinary annuity.

Annuity due and ordinary annuity.

Number of compounding periods.

Future value of an annuity due factor.

Present value of an ordinary annuity.

Future value of a deferred annuity.

Expected cash flow approach.

MULTIPLE CHOICE—Conceptual Answer

No.

Description

a d b a c d b b a d c c b c c a

21.

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Appropriate use of an annuity due table.

Time value of money.

Present value situations.

Definition of interest.

Interest variables.

Identification of compounding approach.

Future value factor.

Understanding compound interest tables.

Identification of correct compound interest table.

Identification of correct compound interest table.

Identification of correct compound interest table.

Identification of correct compound interest table.

Identification of correct compound interest table.

Identification of present value of 1 table.

Identification of correct compound interest table.

Identification of correct compound interest table.

Test Bank for Intermediate Accounting, Sixteenth Edition

6-2

MULTIPLE CHOICE—Conceptual (cont.)

Answer

No.

Description

a c a d d a d c a c b d d b c c b c b b b b

37.

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c c d

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Present value of an annuity due table.

Definition of an annuity due.

Identification of compound interest concept.

Identification of compound interest concept.

Identification of number of compounding periods.

Adjust the interest rate for time periods.

Definition of present value.

Compound interest concepts.

Difference between ordinary annuity and annuity due.

Future value of 1 and present value of 1 relationship.

Identify future value of 1 concept.

Determine best bonus option Identify future value of an ordinary annuity Identify future value of an ordinary annuity Future value of an annuity due factor.

Determine the timing of rents of an annuity due.

Factors of an ordinary annuity and an annuity due.

Determine present value of an ordinary annuity.

Identification of a future value of an ordinary annuity of 1.

Present value of an ordinary annuity and an annuity due.

Difference between an ordinary annuity and an annuity due.

Present value of ordinary annuity and present value of annuity due relationship Identify present value of ordinary annuity concept.

Determine least costly option.

Definition of deferred annuities.

MULTIPLE CHOICE—Computational Answer

No.

Description

a d d c b a b c c d a d b c c

62.

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76.

Calculate the future value of 1.

Calculate amount of interest paid.

Interest compounded quarterly.

Calculate present value of a future amount.

Calculate a future value.

Calculate a future value of an annuity due.

Calculate a future value.

Calculate a future value.

Calculate present value of a future amount.

Calculate present value of a future amount.

Calculate present value of an annuity due.

Calculate the future value of 1.

Present value of a single sum.

Present value of a single sum, unknown number of periods.

Future value of a single sum.

Accounting and the Time Value of Money

6-3

MULTIPLE CHOICE—Computational (cont.)

Answer

No.

Description

b b c d c a c a b c c d d b d d a b c d a b c d a a d c d a b b c a b b b c d a b d b b c b a

77.

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Present value of a single sum.

Present value of a single sum, unknown number of periods.

Future value of a single sum.

Calculate the present value of 1.

Calculate the future value of 1.

Calculate the present value of 1.

Calculate interest rate.

Calculate number of years.

Calculate the future value of 1.

Calculate the present value of 1.

Calculate the present value of 1.

Calculate the present value of 1 and present value of an ordinary annuity.

Calculate number of years.

Calculate the amount of annual deposit.

Calculate the amount of annual deposit.

Calculate the amount of annual deposit.

Present value of an ordinary annuity.

Present value of an annuity due.

Future value of an ordinary annuity.

Future value of an annuity due.

Present value of an ordinary annuity.

Present value of an annuity due.

Future value of an ordinary annuity.

Future value of an annuity due.

Calculate future value of an annuity due.

Calculate future value of an ordinary annuity.

Calculate future value of an annuity due.

Calculate annual deposit for annuity due.

Calculate cost of machine purchased on installment.

Calculate present value of an ordinary annuity.

Calculate present value of an annuity due.

Calculate cost of machine purchased on installment.

Calculate cost of machine purchased on installment.

Calculate the annual rents of leased equipment.

Calculate present value of an investment in equipment.

Calculate proceeds from issuance of bonds.

Calculate proceeds from issuance of bonds.

Calculate present value of an ordinary annuity.

Calculate interest rate.

Calculate present value of an annuity due.

Calculate effective interest rate.

Calculate present value of an ordinary annuity.

Calculate present value of an annuity due.

Calculate annual interest rate.

Calculate interest rate.

Calculate annual lease payment.

Calculate selling price of bonds.

Test Bank for Intermediate Accounting, Sixteenth Edition

6-4

MULTIPLE CHOICE—CPA Adapted Answer

No.

Description

c d c a b a a d b

124.

125.

126.

127.

128.

129.

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131.

132.

Calculate interest expense of bonds.

Identification of correct compound interest table.

Calculate interest revenue of a zero-interest-bearing note.

Appropriate use of an ordinary annuity table.

Calculate annual deposit of annuity due.

Calculate the present value of a note.

Calculate the present value of a note.

Determine the issue price of a bond.

Determine the acquisition cost of a franchise.

BRIEF EXERCISES Item

Description

BE6-133 BE6-134 BE6-135

Present and future value concepts.

Compute loan payments.

Present value of an investment in equipment.

Item E6-136 E6-137 E6-138 E6-139 E6-140 E6-141 E6-142 E6-143 E6-144 E6-145

Description Future value of an annuity due.

Retirement of debt.

Future value of an annuity due.

Future value of an annuity.

Future value of an annuity.

Present value of an annuity due.

Compute the annual rent.

Calculate the market price of a bond.

Calculate the market price of a bond.

Present value and future value computations.

EXERCISES

PROBLEMS Item P6-146 P6-147 P6-148 P6-149 P6-150 P6-151

Description Present value and future value computations.

Annuity with change in interest rate.

Present value of ordinary annuity and annuity due.

Finding the implied interest rate.

Calculation of unknown rent and interest.

Deferred annuity.

6-5

Accounting and the Time Value of Money

CHAPTER LEARNING OBJECTIVES 1.

2.

3.

4.

5.

Describe the fundamentals concepts related to the time value of money.

Solve future and present value of 1 problems.

Solve future value of ordinary and annuity due problems.

Solve present value of ordinary and annuity due problems.

Solve present value problems related to deferred annuities, bonds, and expected cash flows

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item

LO

BT

Item

LO

BT

Item

LO

BT

Item

LO

BT

Item

LO

BT

3 3 4 3

K C C K

17.

18.

19.

20.

3 4 5 5

K K K K

3 3 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 5

AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP

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5 4 4 4 4 4 4 4 4 4 5 2 1 2 4 4 5 5 5 4

AP AP AP AP AP AP AP AP AP AP AP AP C AP C AP AP AP AP AP

4

AP

144.

5

AP

TRUE-FALSE STATEMENTS 1.

2.

3.

4.

1 1 1 1

K K K K

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1 1 1 1

K K K K

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1 2 2 2

K K K C

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MULTIPLE CHOICE QUESTIONS 21.

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3 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2

C K K K K C C C C C C C C C C AP AP K AN AP C K K

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2 2 2 2 2 3 3 3 3 4 4 4 4 4 4 4 4 5 1 1 1 2 2

C C C AP AP AP AP C C C AP AP AP C C AP AP C AP AP AP AP AP

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3 2 2 2 2 4 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 4 2

AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP

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BRIEF EXERCISES 133.

2

AN

134.

4

AP

135.

2

AP

EXERCISES 136.

3

AP

138.

3

AP

140.

3

AP

142.

6-6

Test Bank for Intermediate Accounting, Sixteenth Edition

137.

2, 3

AP

139.

3

AP

141.

4

AP

PROBLEMS 146.

147.

2, 4 3

AP AP

148.

149.

4 4

AP AP

150.

151.

4 5

AP AP

143.

5

AP

145.

5

AP

Accounting and the Time Value of Money

6-7

TRUE-FALSE—Conceptual 1. The time value of money refers to the fact that a dollar received today is worth less than a dollar promised at some time in the future.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

2. Interest is the excess cash received or repaid over and above the amount lent or borrowed.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

3. Simple interest is computed on principal and on any interest earned that has not been withdrawn.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

4. Compound interest, rather than simple interest, must be used to properly evaluate longterm investment proposals.

Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

5. Compound interest uses the accumulated balance at each year end to compute interest in the succeeding year.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

6. The future value of an ordinary annuity table is used when payments are invested at the beginning of each period.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

7. The present value of an annuity due table is used when payments are made at the end of each period.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

8. If the compounding period is less than one year, the annual interest rate must be converted to the compounding period interest rate by dividing the annual rate by the number of compounding periods per year.

Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

9. Present value is the value now of a future sum or sums discounted assuming compound interest.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

10. The future value of a single sum is determined by multiplying the future value factor by its present value.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

11. In determining present value, a company moves backward in time using a process of accumulation.

Ans: F, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

6-8

Test Bank for Intermediate Accounting, Sixteenth Edition

12. The unknown present value is always a larger amount than the known future value because dollars received currently are worth more than dollars to be received in the future.

Ans: F, LO: 2, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

13. The rents that comprise an annuity due earn no interest during the period in which they are originally deposited.

Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

14. If two annuities have the same number of rents with the same dollar amount, but one is an annuity due and one is an ordinary annuity, the future value of the annuity due will be greater than the future value of the ordinary annuity.

Ans: T, LO: 3, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

15. If two annuities have the same number of rents with the same dollar amount, but one is an annuity due and one is an ordinary annuity, the present value of the annuity due will be greater than the present value of the ordinary annuity.

Ans: T, LO: 4, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

16. The number of compounding periods will always be one less than the number of rents when computing the future value of an ordinary annuity.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

17. The future value of an annuity due factor is found by multiplying the future value of an ordinary annuity factor by 1 minus the interest rate.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

18. The present value of an ordinary annuity is the present value of a series of equal rents withdrawn at equal intervals.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

19. The future value of a deferred annuity is less than the future value of an annuity not deferred.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

20. The expected cash flow approach uses a range of cash flows and incorporates the probabilities of those cash flows to provide a more relevant present value measurement.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

True False Answers—Conceptual Item 1.

2.

3.

4.

5.

Ans. F T F T T

Item 6.

7.

8.

9.

10.

Ans. F F T T T

Item 11.

12.

13.

14.

15.

Ans. F F F T T

Item 16.

17.

18.

19.

20.

Ans. T F T F T

Accounting and the Time Value of Money

6-9

MULTIPLE CHOICE—Conceptual 21.

Which of the following transactions 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. A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement. b. A capital lease is entered into with the initial lease payment due one month subsequent to the signing of the lease agreement. c. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 7%. d. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 9%.

Ans: a, LO: 3, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

22.

What best describes the time value of money? a. The interest rate charged on a loan. b. Accounts receivable that are determined uncollectible. c. An investment in a checking account. d. The relationship between time and money.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

23.

Which of the following situations does not base an accounting measure on present values? a. Pensions. b. Prepaid insurance. c. Leases. d. Sinking funds.

Ans: b, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

24.

What is interest? a. Payment for the use of money. b. An equity investment. c. Return on capital. d. Loan.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

25.

What is not a variable that is considered in interest computations? a. Principal. b. Interest rate. c. Assets. d. Time.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

6 - 10 26.

Test Bank for Intermediate Accounting, Sixteenth Edition If you invest $50,000 to earn 8% interest, which of the following compounding approaches would return the lowest amount after one year? a. Daily. b. Monthly. c. Quarterly. d. Annually.

Ans: d, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

27.

Which factor would be greater — the present value of $1 for 10 periods at 8% per period or the future value of $1 for 10 periods at 8% per period? a. Present value of $1 for 10 periods at 8% per period. b. Future value of $1 for 10 periods at 8% per period. c. The factors are the same. d. Need more information.

Ans: b, LO: 1, Bloom: C, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

28.

Which of the following tables would show the smallest value for an interest rate of 5% for six periods? a. Future value of 1 b. Present value of 1 c. Future value of an ordinary annuity of 1 d. Present value of an ordinary annuity of 1

Ans: b, LO: 1, Bloom: C, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

29.

Which table would you use to determine what amount was deposited three years ago to provide $1,000 today? a. Future value of 1 or present value of 1 b. Future value of an annuity due of 1 c. Future value of an ordinary annuity of 1 d. Present value of an ordinary annuity of 1

Ans: a, LO: 1, Bloom: C, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

30.

Which table would you use to determine how much must be deposited now in order to provide for 5 annual withdrawals at the beginning of each year, starting one year from the first deposit? a. Future value of an ordinary annuity of 1 b. Future value of an annuity due of 1 c. Present value of an annuity due of 1 d. Present value of an ordinary annuity of 1.

Ans: d, LO: 1, Bloom: C, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

31.

Which table has a factor of 1.00000 for 1 period at every interest rate? a. Future value of 1 b. Present value of 1 c. Future value of an ordinary annuity of 1 d. Present value of an ordinary annuity of 1

Ans: c, LO: 1, Bloom: C, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Accounting and the Time Value of Money 32.

6 - 11

Which table would show the largest factor for an interest rate of 8% for five periods? a. Future value of an ordinary annuity of 1 b. Present value of an ordinary annuity of 1 c. Future value of an annuity due of 1 d. Present value of an annuity due of 1

Ans: c, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

33.

Which of the following tables would show the smallest factor for an interest rate of 10% for six periods? a. Future value of an ordinary annuity of 1 b. Present value of an ordinary annuity of 1 c. Future value of an annuity due of 1 d. Present value of an annuity due of 1

Ans: b, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

34.

The figure .94232 is taken from the column marked 2% and the row marked three periods in a certain interest table. From what interest table is this figure taken? a. Future value of 1 b. Future value of annuity of 1 c. Present value of 1 d. Present value of annuity of 1

Ans: c, LO: 1, Bloom: C, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None S

35.

Which of the following tables would show the largest value for an interest rate of 10% for 8 periods? a. Future amount of 1 table. b. Present value of 1 table. c. Future amount of an ordinary annuity of 1 table. d. Present value of an ordinary annuity of 1 table.

Ans: c, LO: 1, Bloom: C, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None S

36.

On June 1, 2017, 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 8 equal annual payments with the first payment due on June 1, 2017. What type of compound interest table is appropriate for this situation? a. Present value of an annuity due of 1 table. b. Present value of an ordinary annuity of 1 table. c. Future amount of an ordinary annuity of 1 table. d. Future amount of 1 table.

Ans: a, LO: 1, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

6 - 12 S

37.

Test Bank for Intermediate Accounting, Sixteenth Edition Which of the following transactions would best use the present value of an annuity due of 1 table? a. Fernetti, Inc. rents a truck for 5 years with annual rental payments of $20,000 to be made at the beginning of each year. b. Edmiston Co. rents a warehouse for 7 years with annual rental payments of $120,000 to be made at the end of each year. c. Durant, Inc. borrows $20,000 and has agreed to pay back the principal plus interest in three years. d. Babbitt, Inc. wants to deposit a lump sum to accumulate $50,000 for the construction of a new parking lot in 4 years.

Ans: a, LO: 1, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None P

38.

A series of equal receipts at equal intervals of time when each receipt is received at the beginning of each time period is called an a. ordinary annuity. b. annuity in arrears. c. annuity due. d. unearned receipt.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None P

39.

In the time diagram below, which concept is being depicted?

0

1 $1

2 $1

3 $1

4 $1

PV a. b. c. d.

Present value of an ordinary annuity Present value of an annuity due Future value of an ordinary annuity Future value of an annuity due

Ans: a, LO: 1, Bloom: AN, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None P

40.

On December 1, 2017, Richards Company sold some machinery to Fleming Company.

The two companies entered into an installment sales contract at a predetermined interest rate. The contract required four equal annual payments with the first payment due on December 1, 2017, the date of the sale. What time value of money concept is appropriate for this situation? a. Future amount of an annuity of 1 for four periods b. Future amount of 1 for four periods c. Present value of an ordinary annuity of 1 for four periods d. Present value of an annuity due of 1 for four periods.

Ans: d, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Accounting and the Time Value of Money 41.

6 - 13

An amount is deposited for eight years at 8%. If compounding occurs quarterly, then the table value is found at a. 8% for eight periods. b. 2% for eight periods. c. 8% for 32 periods. d. 2% for 32 periods.

Ans: d, LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

42.

If the number of periods is known, the interest rate is determined by a. dividing the future value by the present value and looking for the quotient in the future value of 1 table. b. dividing the future value by the present value and looking for the quotient in the present value of 1 table. c. dividing the present value by the future value and looking for the quotient in the future value of 1 table. d. multiplying the present value by the future value and looking for the product in the present value of 1 table.

Ans: a, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

43.

Present value is not a. The value now of a future amount. b. The amount that must be invested now to produce a known future value. c. Always smaller than the future value. d. The sum of a series of payments.

Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None P

44.

Which of the following statements is true? a. The higher the discount rate, the higher the present value. b. The process of accumulating interest on interest is referred to as discounting. c. If money is worth 10% compounded annually, $1,100 due one year from today is equivalent to $1,000 today. d. If a single sum is due on December 31, 2017, the present value of that sum decreases as the date draws closer to December 31, 2017.

Ans: c, LO: 2, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

45.

What is the primary difference between an ordinary annuity and an annuity due? a. The timing of the periodic payment. b. The interest rate. c. Annuity due only relates to present values. d. Ordinary annuity only relates to present values.

Ans: a, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

46.

What is the relationship between the future value of one and the present value of one? a. The present value of one equals the future value of one plus one. b. The present value of one equals one plus future value factor for n-1 periods. c. The present value of one equals one divided by the future value of one. d. The present value of one equals one plus the future value factor for n+1 value

Ans: c, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

6 - 14 47.

Test Bank for Intermediate Accounting, Sixteenth Edition Peter invests $100,000 in a 3-year certificate of deposit earning 3.5% at his local bank.

Which time value concept would be used to determine the maturity value of the certificate? a. Present value of one. b. Future value of one. c. Present value of an annuity due. d. Future value of an ordinary annuity.

Ans: b, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

48.

Jerry recently was offered a position with a major accounting firm. The firm offered Jerry either a signing bonus of $23,000 payable on the first day of work or a signing bonus of $26,000 payable after one year of employment. Assuming that the relevant interest rate is 10%, which option should Jerry choose? a. The options are equivalent. b. Insufficient information to determine. c. The signing bonus of $23,000 payable on the first day of work. d. The signing bonus of $26,000 payable after one year of employment.

Ans: d, LO: 2, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

49.

If Jethro wanted to save a set amount each month in order to buy a new pick-up truck when the new models are next available, which time value concept would be used to determine the monthly payment? a. Present value of one. b. Future value of one. c. Present value of an annuity due. d. Future value of an ordinary annuity.

Ans: d, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

50.

Betty wants to know how much she should begin saving each month to fund her retirement. What kind of problem is this? a. Present value of one. b. Future value of an ordinary annuity. c. Present value of an ordinary annuity. d. Future value of one.

Ans: b, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None P

51

If the interest rate is 10%, the factor for the future value of an annuity due of 1 for n = 5, i = 10% is equal to the factor for the future value of an ordinary annuity of 1 for n = 5, i = 10% a. plus 1.10. b. minus 1.10. c. multiplied by 1.10. d. divided by 1.10.

Ans: c, LO: 3, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Accounting and the Time Value of Money 52.

6 - 15

Which of the following is true? a. Rents occur at the beginning of each period of an ordinary annuity. b. Rents occur at the end of each period of an annuity due. c. Rents occur at the beginning of each period of an annuity due. d. Rents occur at either the beginning or the end of an annuity due.

Ans: c, LO: 3, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

53.

Which of the following statements is false? a. The factor for the future value of an annuity due is found by multiplying the ordinary annuity table value by one plus the interest rate. b. The factor for the present value of an annuity due is found by multiplying the ordinary annuity table value by one minus the interest rate. c. The factor for the future value of an annuity due is found by subtracting one from the ordinary annuity table value for one more period. d. The factor for the present value of an annuity due is found by adding one to the ordinary annuity table value for one less period.

Ans: b, LO: 4, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

54.

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? a. $20,000 times the future value of a 5-year, 10% ordinary annuity of 1. b. $20,000 divided by the future value of a 5-year, 10% ordinary annuity of 1. c. $20,000 times the present value of a 5-year, 10% ordinary annuity of 1. d. $20,000 divided by the present value of a 5-year, 10% ordinary annuity of 1.

Ans: c, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

55.

Sue Gray wants to invest a certain sum of money at the end of each year for five years.

The investment will earn 6% compounded annually. At the end of five years, she will need a total of $40,000 accumulated. How should she compute her required annual investment? a. $40,000 times the future value of a 5-year, 6% ordinary annuity of 1. b. $40,000 divided by the future value of a 5-year, 6% ordinary annuity of 1. c. $40,000 times the present value of a 5-year, 6% ordinary annuity of 1. d. $40,000 divided by the present value of a 5-year, 6% ordinary annuity of 1.

Ans: b, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

56.

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, the accountant would use the present value factor in the 10% column for a. seven periods. b. eight periods and multiply by (1 + .10). c. eight periods. d. nine periods and multiply by (1 – .10).

Ans: b, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

6 - 16 57.

Test Bank for Intermediate Accounting, Sixteenth Edition If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates, then a. the present value of the annuity due is less than the present value of the ordinary annuity. b. the present value of the annuity due is greater than the present value of the ordinary annuity. c. the future value of the annuity due is equal to the future value of the ordinary annuity. d. the future value of the annuity due is less than the future value of the ordinary annuity.

Ans: b, LO: 4, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

58.

What is the relationship between the present value factor of an ordinary annuity and the present value factor of an annuity due for the same interest rate? a. The ordinary annuity factor is not related to the annuity due factor. b. The annuity due factor equals one plus the ordinary annuity factor for n1 periods. c. The ordinary annuity factor equals one plus the annuity due factor for n+1 periods. d. The annuity due factor equals the ordinary annuity factor for n+1 periods minus one.

Ans: b, LO: 4, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

59.

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? a. Present value of one. b. Future value of one. c. Present value of an ordinary annuity. d. Future value of an ordinary annuity.

Ans: c, LO: 4, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

60.

Stemway Company requires a new manufacturing facility. It found three locations; all of which would provide the needed capacity, the only difference is the price. Location A may be purchased for $500,000. Location B may be acquired with a down payment of $100,000 and annual payments at the end of each of the next twenty years of $50,000.

Location C requires $40,000 payments at the beginning of each of the next twenty-five years. Assuming Stemway's borrowing costs are 8% per annum, which option is the least costly to the company? a. Location A. b. Location B. c. Location C. d. Location A and Location B.

Ans: c, LO: 4, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Accounting and the Time Value of Money 61.

6 - 17

Which of the following is false? a. The future value of a deferred annuity is the same as the future value of an annuity not deferred. b. A deferred annuity is an annuity in which the rents begin after a specified number of periods. c. To compute the present value of a deferred annuity, we compute the present value of an ordinary annuity of 1 for the entire period and subtract the present value of the rents which were not received during the deferral period. d. If the first rent is received at the end of the sixth period, it means the ordinary annuity is deferred for six periods.

Ans: d, LO: 5, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Multiple Choice Answers—Conceptual Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

21.

22.

23.

24.

25.

26.

a d b a c d

27.

28.

29.

30.

31.

32.

b b a d c c

33.

34.

35.

36.

37.

38.

b c c a a c

39.

40.

41.

42.

43.

44.

a d d a d c

45.

46.

47.

48.

49.

50.

a c b d d b

51.

52.

53.

54.

55.

56.

c c b c b b

57.

58.

59.

60.

61.

b b c c d

6 - 18

Test Bank for Intermediate Accounting, Sixteenth Edition

MULTIPLE CHOICE—Computational 62.

Assume ABC Company deposits $90,000 with First National Bank in an account earning interest at 6% per annum, compounded semi-annually. How much will ABC have in the account after five years if interest is reinvested? a. $120,953. b. $90,000. c. $117,000. d. $120,442.

Ans: a, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

63.

Charlie Corp. is purchasing new equipment with a cash cost of $300,000 for an assembly line. The manufacturer has offered to accept $68,900 payment at the end of each of the next six years. How much interest will Charlie Corp. pay over the term of the loan? a. $68,900. b. $300,000. c. $413,400. d. $113,400.

Ans: d, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

64.

If a savings account pays interest at 4% compounded quarterly, then the amount of $1 left on deposit for 7 years would be found in a table using a. 7 periods at 4%. b. 7 periods at 1%. c. 28 periods at 4%. d. 28 periods at 1%.

Ans: d, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Items 65 through 68 apply to the appropriate use of interest tables. Given below are the future value factors for 1 at 8% for one to five periods. Each of the items 65 to 68 is based on 8% interest compounded annually.

Periods 1 2 3 4 5 65.

Future Value of 1 at 8% 1.080 1.166 1.260 1.360 1.469

What amount should be deposited in a bank account today to grow to $25,000 three years from today? a. $25,000 × 1.260 b. $25,000 × 1.260 × 3 c. $25,000 ÷ 1.260 d. $25,000 ÷ 1.080 × 3

Ans: c, LO: 2, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Accounting and the Time Value of Money 66.

6 - 19

If $15,000 is deposited in a savings account today, what amount will be available three years from today? a. $15,000 ÷ 1.260 b. $15,000 × 1.260 c. $15,000 × 1.080 × 3 d. ($15,000 × 1.080) + ($15,000 × 1.166) + ($15,000 × 1.260)

Ans: b, LO: 2, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

67.

What amount will be in a bank account three years from now if $10,000 is invested each year for four years with the first investment to be made today? a. ($10,000 × 1.260) + ($10,000 × 1.166) + ($10,000 × 1.080) + $10,000 b. $10,000 × 1.360 × 4 c. ($10,000 × 1.080) + ($10,000 × 1.166) + ($10,000 × 1.260) + ($10,000 × 1.360) d. $10,000 × 1.080 × 4

Ans: a, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

68.

If $9,000 is deposited in a savings account today, what amount will be available six years from now? a. $9,000 × 1.080 × 6 b. $9,000 × 1.080 × 1.469 c. $9,000 × 1.166 × 3 d. $9,000 × 1.260 × 2

Ans: b, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Items 69 through 72 apply to the appropriate use of present value tables. Given below are the present value factors for $1.00 discounted at 10% for one to five periods. Each of the items 69 to 72 is based on 10% interest compounded annually.

Present Value of $1 Periods Discounted at 10% per Period 1 0.909 2 0.826 3 0.751 4 0.683 5 0.621 69.

If an individual deposits $20,000 in a savings account today, what amount of cash would be available two years from today? a. $20,000 × 0.826 b. $20,000 × 0.826 × 2 c. $20,000 ÷ 0.826 d. $20,000 ÷ 0.909 × 2

Ans: c, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

70.

What is the present value today of $15,000 to be received six years from today? a. $15,000 × 0.909 × 6 b. $15,000 × 0.751 × 2 c. $15,000 × 0.621 × 0.909 d. $15,000 × 0.683 × 3

Ans: c, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

6 - 20 71.

Test Bank for Intermediate Accounting, Sixteenth Edition What amount should be deposited in a bank today to grow to $10,000 three years from today? a. $10,000 ÷ 0.751 b. $10,000 × 0.909 × 3 c. ($10,000 × 0.909) + ($10,000 × 0.826) + ($10,000 × 0.751) d. $10,000 × 0.751

Ans: d, LO: 2, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

72.

What amount should an individual have in a bank account today before withdrawal if $9,000 is needed each year for four years with the first withdrawal to be made today and each subsequent withdrawal at one-year intervals? (The balance in the bank account should be zero after the fourth withdrawal.) a. $9,000 + ($9,000 × 0.909) + ($9,000 × 0.826) + ($9,000 × 0.751) b. $9,000 ÷ 0.683 × 4 c. ($9,000 × 0.909) + ($9,000 × 0.826) + ($9,000 × 0.751) + ($9,000 × 0.683) d. $9,000 ÷ 0.909 × 4

Ans: a, LO: 4, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

73.

At the end of two years, what will be the balance in a savings account paying 6% annually if $25,000 is deposited today? The future value of one at 6% for one period is 1.06. a. $25,000 b. $26,500 c. $28,000 d. $28,090

Ans: d, LO: 2, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

74.

Mordica Company will receive $400,000 in 7 years. If the appropriate interest rate is 10%, the present value of the $400,000 receipt is a. $204,000. b. $205,264. c. $604,000. d. $779,488.

Ans: b, LO: 2, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

75.

Dunston Company will receive $500,000 in a future year. If the future receipt is discounted at an interest rate of 10%, its present value is $256,580. In how many years is the $500,000 received? a. 5 years b. 6 years c. 7 years d. 8 years

Ans: c, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

76.

Milner Company will invest $800,000 today. The investment will earn 6% for 5 years, with no funds withdrawn. In 5 years, the amount in the investment fund is a. $800,000. b. $1,040,000. c. $1,070,584. d. $1,072,232.

Ans: c, LO: 2, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Accounting and the Time Value of Money 77.

6 - 21

Barber Company will receive $1,500,000 in 7 years. If the appropriate interest rate is 10%, the present value of the $1,500,000 receipt is a. $765,000. b. $769,740. c. $2,265,000. d. $2,923,080.

Ans: b, LO: 2, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

78.

Barkley Company will receive $800,000 in a future year. If the future receipt is discounted at an interest rate of 8%, its present value is $504,136. In how many years is the $800,000 received? a. 5 years b. 6 years c. 7 years d. 8 years

Ans: b, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

79.

Altman Company will invest $900,000 today. The investment will earn 6% for 5 years, with no funds withdrawn. In 5 years, the amount in the investment fund is a. $900,000. b. $1,170,000. c. $1,204,407. d. $1,206,261.

Ans: c, LO: 2, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

80.

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? a. $4,000,000. b. $10,613,200. c. $49,848,840. d. $1,507,560.

Ans: d, LO: 2, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

81.

Angie invested $250,000 she received from her grandmother today in a fund that is expected to earn 10% per annum. To what amount should the investment grow in five years if interest is compounded semi-annually? a. $387,835. b. $402,625. c. $407,223. d. $442,890.

Ans: c, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

6 - 22 82.

Test Bank for Intermediate Accounting, Sixteenth Edition Bella requires $240,000 in four years to purchase a new home. What amount must be invested today in an investment that earns 6% interest, compounded annually? a. $190,102. b. $197,448. c. $290,674. d. $302,994.

Ans: a, LO: 2, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

83.

What interest rate (the nearest percent) must Charlie earn on a $452,000 investment today so that he will have $1,140,000 after 12 years? a. 6%. b. 7%. c. 8%. d. 9%.

Ans: c, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

84.

Ethan has $240,000 to invest today at an annual interest rate of 4%. Approximately how many years will it take before the investment grows to $486,000? a. 18 years. b. 20 years. c. 16 years. d. 11 years.

Ans: a, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

85.

Jane wants to set aside funds to take an around the world cruise in four years. Assuming that Jane has $20,000 to invest today in an account expected to earn 6% per annum, how much will she have to spend on her vacation? a. $15,840. b. $25,250. c. $87,491. d. $26,765.

Ans: b, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

86.

Jane wants to set aside funds to take an around the world cruise in four years. Jane expects that she will need $20,000 for her dream vacation. If she is able to earn 8% per annum on an investment, how much will she have to set aside today so that she will have sufficient funds available? a. $4,438. b. $27,208. c. $14,701. d. $13,611.

Ans: c, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Accounting and the Time Value of Money 87.

6 - 23

What would you pay for an investment that pays you $4,000,000 after forty years?

Assume that the relevant interest rate for this type of investment is 6%. a. $124,720. b. $1,247,200. c. $388,880. d. $414,680.

Ans: c, LO: 2, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

88.

What would you pay for an investment that pays you $40,000 at the end of each year for the next ten years and then returns a maturity value of $600,000 after ten years? Assume that the relevant interest rate for this type of investment is 8%. a. $277,916. b. $268,404. c. $289,872. d. $546,317.

Ans: d, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

89.

Anna has $18,000 to invest. She requires $30,000 for a down payment for a house. If she is able to invest at 6%, how many years will it be before she will accumulate the desired balance? a. 6 years. b. 7 years. c. 8 years. d. 9 years.

Ans: d, LO: 2, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

90.

Lucy and Fred want to begin saving for their baby's college education. They estimate that they will need $200,000 in eighteen years. If they are able to earn 6% per annum, how much must be deposited at the beginning of each of the next eighteen years to fund the education? a. $6,470. b. $6,105. c. $11,110. d. $5,924.

Ans: b, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

91.

Lucy and Fred want to begin saving for their baby's college education. They estimate that they will need $120,000 in eighteen years. If they are able to earn 5% per annum, how much must be deposited at the end of each of the next eighteen years to fund the education? a. $4,648. b. $10,266. c. $9,929. d. $4,266.

Ans: d, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

6 - 24 92.

Test Bank for Intermediate Accounting, Sixteenth Edition Jane wants to set aside funds to take an around the world cruise in four years. Jane expects that she will need $20,000 for her dream vacation. If she is able to earn 8% per annum on an investment, how much will she need to set aside at the beginning of each year to accumulate sufficient funds? a. $4,438. b. $27,208. c. $14,700. d. $4,110.

Ans: d, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

93.

Pearson Corporation makes an investment today (January 1, 2017). They will receive $15,000 every December 31st for the next six years (2017 – 2022). If Pearson wants to earn 12% on the investment, what is the most they should invest on January 1, 2017? a. $61,671. b. $69,072. c. $130,060. d. $136,335.

Ans: a, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

94.

Garretson Corporation will receive $15,000 today (January 1, 2017), and also on each January 1st for the next five years (2018 – 2022). What is the present value of the six $15,000 receipts, assuming a 12% interest rate? a. $61,671. b. $69,072. c. $121,728. d. $136,335.

Ans: b, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

95.

Spencer Corporation will invest $25,000 every December 31st for the next six years (2017 – 2022). If Spencer will earn 12% on the investment, what amount will be in the investment fund on December 31, 2022? a. $102,785. b. $115,120. c. $202,880. d. $227,225.

Ans: c, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

96.

Tipson Corporation will invest $25,000 every January 1st for the next six years (2014 – 2022). If Tipson will earn 12% on the investment, what amount will be in the investment fund on December 31, 2022? a. $102,785 b. $115,120. c. $202,880. d. $227,225.

Ans: d, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Accounting and the Time Value of Money 97.

6 - 25

Hiller Corporation makes an investment today (January 1, 2017). They will receive $75,000 every December 31st for the next six years (2017 – 2022). If Hiller wants to earn 12% on the investment, what is the most they should invest on January 1, 2017? a. $308,356. b. $345,358. c. $698,640. d. $681,675.

Ans: a, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

98.

Sonata Corporation will receive $40,000 today (January 1, 2017), and also on each January 1st for the next five years (2018 – 2022). What is the present value of the six $40,000 receipts, assuming a 12% interest rate? a. $164,456. b. $184,191. c. $324,608. d. $363,560.

Ans: b, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

99.

Renfro Corporation will invest $90,000 every December 31st for the next six years (2017 – 2022). If Renfro will earn 12% on the investment, what amount will be in the investment fund on December 31, 2022? a. $370,026 b. $414,432. c. $730,367. d. $818,010.

Ans: c, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

100.

Vannoy Corporation will invest $80,000 every January 1st for the next six years (2017 – 2022). If Vannoy will earn 12% on the investment, what amount will be in the investment fund on December 31, 2022? a. $328,914. b. $368,384. c. $649,216. d. $727,121.

Ans: d, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

6 - 26 101.

Test Bank for Intermediate Accounting, Sixteenth Edition On January 1, 2017, Kline Company decided to begin accumulating a fund for asset replacement five years later. The company plans to make five annual deposits of $60,000 at 9% each January 1 beginning in 2017. What will be the balance in the fund, on January 1, 2022 (one year after the last deposit)? The following 9% interest factors may be used.

Present Value of Future Value of Ordinary Annuity Ordinary Annuity 4 periods 3.2397 4.5731 5 periods 3.8897 5.9847 6 periods 4.4859 7.5233 a. b. c. d.

$391,399 $359,082 $327,000 $300,000

Ans: a, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

7 periods 8 periods 9 periods 102.

Present Value of Ordinary Annuity 5.2064 5.7466 6.2469

Future Value of Ordinary Annuity 8.92280 10.63663 12.48756

What will be the balance on September 1, 2024 in a fund which is accumulated by making $30,000 annual deposits each September 1 beginning in 2017, with the last deposit being made on September 1, 2024? The fund pays interest at 8% compounded annually. a. $319,099 b. $267,687 c. $226,800 d. $172,398

Ans: a, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Present Value of 7 periods 8 periods 9 periods 103.

Future Value of Ordinary Annuity 5.2064 5.7466 6.2469

Ordinary Annuity 8.92280 10.63663 12.48756

If $12,000 is deposited annually starting on January 1, 2017 and it earns 8%, what will the balance be on December 31, 2024? a. $107,075 b. $115,640 c. $127,640 d. $137,851

Ans: d, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Present Value of 7 periods 8 periods 9 periods

Future Value of Ordinary Annuity 5.2064 5.7466 6.2469

Ordinary Annuity 8.92280 10.63663 12.48756

Accounting and the Time Value of Money 104.

6 - 27

Korman Company wishes to accumulate $1,000,000 by May 1, 2025 by making 8 equal annual deposits beginning May 1, 2017 to a fund paying 8% interest compounded annually. What is the required amount of each deposit? a. $174,016 b. $94,016 c. $87,051 d. $100,780

Ans: c, LO: 4, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Present Value of 7 periods 8 periods 9 periods 105.

Future Value of Ordinary Annuity 5.2064 5.7466 6.2469

Ordinary Annuity 8.92280 10.63663 12.48756

What amount should be recorded as the cost of a machine purchased December 31, 2017, which is to be financed by making 8 annual payments of $15,000 each beginning December 31, 2018? The applicable interest rate is 8%. a. $105,000 b. $93,703 c. $159,550 d. $86,200

Ans: d, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

106.

How much must be deposited on January 1, 2017 in a savings account paying 6% annually in order to make annual withdrawals of $40,000 at the end of the years 2017 and 2018? The present value of one at 6% for one period is .9434. a. $73,336 b. $75,480 c. $80,000 d. $35,600

Ans: a, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

107.

How much must be invested now to receive $50,000 for 15 years if the first $50,000 is received today and the rate is 9%?

a. b. c. d.

Periods 14 15 16 $403,035 $439,308 $750,000 $365,625

Present Value of Ordinary Annuity at 9% 7.78615 8.06069 8.31256

Ans: b, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

6 - 28 108.

Test Bank for Intermediate Accounting, Sixteenth Edition Jenks Company financed the purchase of a machine by making payments of $25,000 at the end of each of five years. The appropriate rate of interest was 8%. The future value of one for five periods at 8% is 1.46933. The future value of an ordinary annuity for five periods at 8% is 5.8666. The present value of an ordinary annuity for five periods at 8% is 3.99271. What was the cost of the machine to Jenks? a. $36,985 b. $99,818 c. $125,000 d. $146,668

Ans: b, LO: 4, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

109.

A machine is purchased by making payments of $16,000 at the beginning of each of the next five years. The interest rate was 10%. The future value of an ordinary annuity of 1 for five periods is 6.10510. The present value of an ordinary annuity of 1 for five periods is 3.79079. What was the cost of the machine? a. b. c. d.

$107,450 $97,682 $66,718 $60,654

Ans: c, LO: 4, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

110.

Lane Co. has a machine that cost $800,000. It is to be leased for 20 years with rent received at the beginning of each year. Lane wants a return of 10%. Calculate the amount of the annual rent.

Present Value of Period Ordinary Annuity 19 8.36492 20 8.51356 21 8.64869 a. $85,425 b. $95,636 c. $118,912 d. $93,968

Ans: a, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

111.

Find the present value of an investment in plant and equipment if it is expected to provide annual earnings of $65,000 for 15 years and to have a resale value of $125,000 at the end of that period. Assume a 10% rate and earnings at year end. The present value of 1 at 10% for 15 periods is .23939. The present value of an ordinary annuity at 10% for 15 periods is 7.60608. The future value of 1 at 10% for 15 periods is 4.17725. a. $494,395 b. $524,319 c. $619,395 d. $1,004,925

Ans: b, LO: 4, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Accounting and the Time Value of Money 112.

6 - 29

On January 2, 2017, Wine Corporation wishes to issue $6,000,000 (par value) of its 8%, 10-year bonds. The bonds pay interest annually on January 1. The current yield rate on such bonds is 10%. Using the interest factors below, compute the amount that Wine will realize from the sale (issuance) of the bonds.

Present value of 1 at 8% for 10 periods Present value of 1 at 10% for 10 periods Present value of an ordinary annuity at 8% for 10 periods Present value of an ordinary annuity at 10% for 10 periods a. b. c. d.

0.4632 0.3855 6.7101 6.1446

$6,000,000 $5,262,408 $6,000,036 $6,636,156

Ans: b, LO: 5, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

113.

The market price of an $1,000,000, ten-year, 12% (pays interest semiannually) bond issue sold to yield an effective rate of 10% is a. $1,122,890. b. $1,124,623. c. $1,133,270. d. $1,872,360.

Ans: b, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

114.

John won a lottery that will pay him $500,000 at the end of each of the next twenty years.

Assuming an appropriate interest rate is 8% compounded annually, what is the present value of this amount? a. $5,301,800. b. $107,276. c. $4,909,075. d. $22,880,980.

Ans: c, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

115.

John won a lottery that will pay him $500,000 at the end of each of the next twenty years.

Zebra Finance has offered to purchase the payment stream for $6,795,000. What interest rate (to the nearest percent) was used to determine the amount of the payment? a. 7%. b. 6%. c. 5%. d. 4%.

Ans: d, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

116.

James leases a ski chalet to his best friend, Janet. The lease term is five years with $30,000 annual payments due at the beginning of each year. What is the present value of the payments discounted at 8% per annum? a. $129,364. b. $119,782. c. $114,519. d. $108,732.

Ans: a, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

6 - 30 117.

Test Bank for Intermediate Accounting, Sixteenth Edition Jeremy is in the process of purchasing a car. The list price of the car is $36,000. If Jeremy pays cash for the car, the dealer will reduce the price by 10%. Otherwise, the dealer will provide financing where Jeremy must pay $7,705 at the end of each of the next five years.

Compute the effective interest rate to the nearest percent that Jeremy would pay if he chooses to make the five annual payments? a. 5%. b. 6%. c. 7%. d. 8%.

Ans: b, LO: 4, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

118.

What would you pay for an investment that pays you $25,000 at the end of each year for the next twenty years? Assume that the relevant interest rate for this type of investment is 12%. a. $209,145. b. $1,801,310. c. $25,916. d. $186,736.

Ans: d, LO: 4, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

119.

What would you pay for an investment that pays you $40,000 at the beginning of each year for the next ten years? Assume that the relevant interest rate for this type of investment is 10%. a. $245,780. b. $270,361. c. $259,804. d. $285,784.

Ans: b, LO: 4, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

120.

Ziggy is considering purchasing a new car. The cash purchase price for the car is $43,100. What is the annual interest rate if Ziggy is required to make annual payments of $10,000 at the end of the next five years? a. 4%. b. 5%. c. 6%. d. 7%.

Ans: b, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

121.

Charlie Corp. is purchasing new equipment with a cash cost of $200,000 for the assembly line. The manufacturer has offered to accept $45,900 payments at the end of each of the next six years. What is the interest rate that Charlie Corp. will be paying? a. 8%. b. 9%. c. 10%. d. 11%.

Ans: c, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Accounting and the Time Value of Money 122.

6 - 31

Jeremy Leasing purchases and then leases small aircraft to interested parties. The company is currently determining the required rental for a small aircraft that cost $900,000. If the lease is for twenty years and annual lease payments are required to be made at the end of each year, what will be the annual rental if Jeremy wants to earn a return of 10%? a. $96,105. b. $105,714. c. $15,714. d. $45,471.

Ans: b, LO: 4, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

123.

Stech Co. is issuing $9 million 12% bonds in a private placement on July 1, 2017. Each $1,000 bond pays interest semi-annually on December 31 and June 30 of each year. The bonds mature in ten years. At the time of issuance, the market interest rate for similar types of bonds was 8%. What is the expected selling price of the bonds? a. b. c. d.

$11,446,288. $13,500,000. $11,415,597. $11,507,486.

Ans: a, LO: 5, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Multiple Choice Answers—Computational Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

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62.

63.

64.

65.

66.

67.

68.

69.

70.

a d d c b a b c c

71.

72.

73.

74.

75.

76.

77.

78.

79.

d a d b c c b b c

80.

81.

82.

83.

84.

85.

86.

87.

88.

d c a c a b c c d

89.

90.

91.

92.

93.

94.

95.

96.

97.

d b d d a b c d a

98.

99.

100.

101.

102.

103.

104.

105.

106.

b c d a a d c d a

107.

108.

109.

110.

111.

112.

113.

114.

115.

b b c a b b b c d

116.

117.

118.

119.

120.

121.

122.

123.

a b d b b c b a

6 - 32

Test Bank for Intermediate Accounting, Sixteenth Edition

MULTIPLE CHOICE—CPA Adapted 124.

On January 1, 2017, Gore Co. sold to Cey Corp. $900,000 of its 10% bonds for $796,766 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Gore report as interest expense for the six months ended June 30, 2017? a. $39,838 b. $45,000 c. $47,806 d. $54,000

Ans: c, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

125.

On May 1, 2017, a company purchased a new machine which it does not have to pay for until May 1, 2019. The total payment on May 1, 2019 will include both principal and interest. Assuming interest at a 10% rate, the cost of the machine would be the total payment multiplied by what time value of money factor? a. Future value of annuity of 1 b. Future value of 1 c. Present value of annuity of 1 d. Present value of 1

Ans: d, LO: 1, Bloom: C, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

126.

On January 1, 2017, Ball Co. exchanged equipment for a $600,000 zero-interest-bearing note due on January 1, 2020. The prevailing rate of interest for a note of this type at January 1, 2017 was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of interest revenue should be included in Ball's 2018 income statement? a. $0 b. $45,000 c. $49,500 d. $60,000

Ans: c, LO: 2, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

127.

For which of the following transactions would the use of the present value of an ordinary annuity concept be appropriate in calculating the present value of the asset obtained or the liability owed at the date of incurrence? a. A capital lease is entered into with the initial lease payment due one month subsequent to the signing of the lease agreement. b. A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement. c. A ten-year 8% bond is issued on January 2 with interest payable semiannually on January 2 and July 1 yielding 7%. d. A ten-year 8% bond is issued on January 2 with interest payable semiannually on January 2 and July 1 yielding 9%.

Ans: a, LO: 4, Bloom: C, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Accounting and the Time Value of Money 128.

6 - 33

On January 15, 2017, Dolan Corp. adopted a plan to accumulate funds for environmental improvements beginning July 1, 2021, at an estimated cost of $8,000,000. Dolan plans to make four equal annual deposits in a fund that will earn interest at 10% compounded annually. The first deposit was made on July 1, 2017. Future value factors are as follows: Future value of 1 at 10% for 5 periods Future value of ordinary annuity of 1 at 10% for 4 periods Future value of annuity due of 1 at 10% for 4 periods

1.61 4.64 5.11

Dolan should make four annual deposits of a. $1,423,234. b. $1,565,558. c. $1,724,137. d. $2,000,000.

Ans: b, LO: 4, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

129.

On December 30, 2017, AGH, Inc. purchased a machine from Grant Corp. in exchange for a zero-interest-bearing note requiring eight payments of $150,000. The first payment was made on December 30, 2017, and the others are due annually on December 30. At date of issuance, the prevailing rate of interest for this type of note was 11%. Present value factors are as follows: Present Value of Ordinary Present Value of Period Annuity of 1 at 11% Annuity Due of 1 at 11% 7 4.712 5.231 8 5.146 5.712 On AGH's December 31, 2017 balance sheet, the net note payable to Grant is a. $706,800. b. $771,900. c. $785,325. d. $856,800.

Ans: a, LO: 5, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

130.

On January 1, 2017, Ott Co. sold goods to Flynn Company. Flynn signed a zero-interestbearing note requiring payment of $200,000 annually for seven years. The first payment was made on January 1, 2017. The prevailing rate of interest for this type of note at date of issuance was 10%. Information on present value factors is as follows: Period 6 7

Present Value of 1 at 10% .5645 .5132

Present Value of Ordinary Annuity of 1 at 10% 4.3553 4.8684

Ott should record sales revenue in January 2017 of a. $1,071,048. b. $973,680. c. $871,060. d. $714,000.

Ans: a, LO: 5, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

6 - 34 131.

Test Bank for Intermediate Accounting, Sixteenth Edition On January 1, 2017, Haley Co. issued ten-year bonds with a face amount of $5,000,000 and a stated interest rate of 8% payable annually on January 1. The bonds were priced to yield 10%. Present value factors are as follows: At 8% At 10% Present value of 1 for 10 periods 0.463 0.386 Present value of an ordinary annuity of 1 for 10 periods 6.710 6.145 The total issue price of the bonds was a. $5,000,000. b. $4,900,000. c. $4,600,000. d. $4,388,000.

Ans: d, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

132.

On July 1, 2017, Ed Wynne signed an agreement to operate as a franchisee of Kwik Foods, Inc., for an initial franchise fee of $900,000. Of this amount, $300,000 was paid when the agreement was signed and the balance is payable in four equal annual payments of $150,000 beginning July 1, 2018. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. Wynne's credit rating indicates that he can borrow money at 14% for a loan of this type. Information on present and future value factors is as follows: Present value of 1 at 14% for 4 periods Future value of 1 at 14% for 4 periods Present value of an ordinary annuity of 1 at 14% for 4 periods

0.59 1.69 2.91

Wynne should record the acquisition cost of the franchise on July 1, 2017 at a. $654,000. b. $736,500. c. $900,000. d. $1,014,000.

Ans: b, LO: 4, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Multiple Choice Answers—CPA Adapted Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

124.

125.

c d

126.

127.

c a

128.

129.

b a

130.

131.

a d

132.

b

Accounting and the Time Value of Money

6 - 35

DERIVATIONS — Computational No.

Answer

Derivation

62.

a

$90,000 × 1.34392 = $120,953.

63.

d

($68,900 × 6)  $300,000 = $113,400.

64.

d

4 × 7 = 28 periods; 4% ÷ 4 = 1%.

65.

c

1.260 × PV = $25,000; PV = $25,000 ÷ 1.260.

66.

b

1.260 × $15,000.

67.

a

($10,000 × 1.260) + ($10,000 × 1.166) + ($10,000 × 1.080) + $10,000.

68.

b

$9,000 × (1.080)6 or $9,000 × 1.469 × 1.080.

69.

c

0.826 × FV = $20,000; FV = $20,000 ÷ 0.826.

70.

c

$15,000 × 0.621 × 0.909.

71.

d

$10,000 × 0.751.

72.

a

$9,000 + ($9,000 × 0.909) + ($9,000 × 0.826) + ($9,000 × 0.751).

73.

d

$25,000 × (1.06)2 = $28,090.

74.

b

$400,000 × 0.51316 = $205,264.

75.

c

$256,580 ÷ $500,000 = 0.51316; 0.51316 is PV factor for 7 years.

76.

c

$800,000 × 1.33823 = $1,070,584.

77.

b

$1,500,000 × 0.51316 = $769,740.

78.

b

$504,136 ÷ $800,000 = 0.63017; 0.63017 is PV factor for 6 years.

79.

c

$900,000 × 1.33823 = $1,204,407.

80.

d

$4,000,000 × .37689 = $1,507,560.

81.

c

$250,000 × 1.62889 = $407,223.

82.

a

$240,000 × .79209 = $190,102.

83.

c

$452,000 ÷ $1,140,000 = .39649; .39711 is PV factor for 8%.

84.

a

$486,000 ÷ $240,000 = 2.025; 2.02582 is FV factor for 18 years.

85.

b

$20,000 × 1.26248 = $25,250.

6 - 36

Test Bank for Intermediate Accounting, Sixteenth Edition

DERIVATIONS — Computational (cont.)

No.

Answer

Derivation

86.

c

$20,000 × .73503 = $14,701.

87.

c

$4,000,000 × .09722 = $388,880.

88.

d

($40,000 × 6.71008) + ($600,000 × .46319) = $546,317.

89.

d

$30,000 ÷ $18,000 = 1.66667; 1.68948 is FV factor for 9 years.

90.

b

$200,000 ÷ (30.90565 × 1.06) = $6,105.

91.

d

$120,000 ÷ 28.13238 = $4,266.

92.

d

$20,000 ÷ (4.50611 × 1.08) = $4,110.

93.

a

$15,000 × 4.11141 = $61,671.

94.

b

$15,000 × 4.60478 = $69,072.

95.

c

$25,000 × 8.11519 = $202,880.

96.

d

$25,000 × 8.11519 × 1.12 = $227,225.

97.

a

$75,000 × 4.11141 = $308,356.

98.

b

$40,000 × 4.60478 = $184,191.

99.

c

$90,000 × 8.11519 = $730,367.

100.

d

$80,000 × 8.11519 × 1.12 = $727,121.

101.

a

$60,000 × (7.5233 – 1) = $391,399 or $60,000 × 5.9847 × 1.09.

102.

a

$30,000 × 10.63663 = $319,099.

103.

d

$12,000 × (12.48756 – 1) = $137,851 or $12,000 × 10.63663 × 1.08.

104.

c

(10.63663 × 1.08) × R = $1,000,000; R = $1,000,000 ÷ 11.48756 = $87,051.

105.

d

$15,000 × 5.74664 = $86,200.

106.

a

($40,000 × 0.9434) + [$40,000 × (0.9434)2] = $73,336.

107.

b

$50,000 × (7.78615 + 1) = $439,308 or $50,000 × 8.06069 × 1.09.

108.

b

$50,000 × 3.99271 = $99,818.

109.

c

$16,000 × (3.79079 × 1.10) = $16,000 × 4.16987 = $66,718.

Accounting and the Time Value of Money

6 - 37

DERIVATIONS — Computational (cont.)

No.

Answer

Derivation

110.

a

$800,000 = R × (8.51356 × 1.10); R = $800,000 ÷ 9.36492 = $85,425.

111.

b

($65,000 × 7.60608) + ($125,000 × .23939) = $524,319.

112.

b

$6,000,000 × .08 = $480,000 (annual interest payment) ($480,000 × 6.1446) + ($6,000,000 × 0.3855) = $5,262,408.

113.

b

$1,000,000 × .06 = $60,000 (semiannual interest payment) ($60,000 × 12.46221) + ($1,000,000 × .37689) = $1,124,623.

114.

c

$500,000 × 9.81815 = $4,909,075.

115.

d

$6,795,000 ÷ $500,000 = 13.59; 13.59033 is PV factor for 4%.

116.

a

$30,000 × 4.31213 = $129,364.

117.

b

($36,000 × .90) ÷ $7,705 = 4.20506, 4.21236 is PV factor for 6%.

118.

d

$25,000 × 7.46944 = $186,736.

119.

b

$40,000 × 6.75902 = $270,361.

120.

b

$43,100 ÷ $10,000 = 4.31; 4.32948 is PV factor for 5%.

121.

c

$200,000 ÷ $45,900 = 4.35730; 4.35526 is PV factor for 10%.

122.

b

$900,000 ÷ 8.51356 = $105,714.

123.

a

($9,000,000 × .45639) + ($540,000 × 13.59033) = $11,446,288.

6 - 38

Test Bank for Intermediate Accounting, Sixteenth Edition

DERIVATIONS — CPA Adapted No.

Answer

124.

c

Derivation $796,766 × .06 = $47,806.

125.

d

Conceptual.

126.

c

$600,000 × .75 = $450,000 (present value of note) $450,000 × 1.10 = $495,000; $495,000 × 0.10 = $49,500.

127.

a

Conceptual.

128.

b

5.11 × R = $8,000,000; R = $8,000,000 ÷ 5.11 = $1,565,558.

129.

a

$150,000 × 4.712 = $706,800 or ($150,000 × 5.712) – $150,000 = $706,800.

130.

a

$200,000 × (4.8684 × 1.1) = $1,071,048.

131.

d

$5,000,000 × .08 = $400,000 ($400,000 × 6.145) + ($5,000,000 × 0.386) = $4,388,000.

132.

b

($150,000 × 2.91) + $300,000 = $736,500.

Accounting and the Time Value of Money

6 - 39

BRIEF EXERCISES BE. 6-133—Present and future value concepts.

On the right are six diagrams representing six different present and future value concepts stated on the left. Identify the diagrams with the concepts by writing the identifying letter of the diagram on the blank line at the left. Assume n = 4 and i = 8%.

Concept _____ 1.

Future value of 1.

_____ 2.

Present value of 1.

_____ 3.

Future value of an annuity

Diagram of Concept ? a.

due of 1. _____ 4.

b.

Future value of an ordinary annuity of 1.

_____ 5.

Present value of an ordinary annuity of 1.

_____ 6.

Present value of an annuity

c.

due of 1.

d.

$1

|

|

|

|

|

$1

$1

$1

? $1

|- - - - |

|

|

|

? $1

$1

$1

$1

|

|

|

|- - - - |

?

$1

$1

$1

$1

|

|

|

|

|

$1 e.

f.

?

|

|

|

|

|

$1

$1

$1

$1

?

|

|

|

|

|

Ans: NA, LO: 2, Bloom: AN, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Solution 6-133 1. e

2. a

3. f

4. b

5. d

6. c

BE. 6-134—Compute loan payments. (Tables needed.)

On January 2, 2017, Jensen Company borrowed $150,000 from Lyon Country Bank. The terms of the loan agreement specified 4 equal annual payments at 6% annual interest. Compute the amount of each of these payments, assuming they begin on December 31, 2017.

Ans: NA, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

6 - 40

Test Bank for Intermediate Accounting, Sixteenth Edition

Solution 6-134 Periodic payments = $150,000 ÷ 3.46511 (Tab. 4, 6%, per.) = $43,289.

BE. 6-135—Present value of an investment in equipment. (Tables needed.)

Find the present value of an investment in equipment if it is expected to provide annual savings of $50,000 for 10 years and to have a resale value of $125,000 at the end of that period. Assume an interest rate of 9% and that savings are realized at year end.

Ans: NA, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Solution 6-135 Present value of $50,000 for 10 periods at 9% (6.41766 × $50,000) = $320,883 Present value of $125,000 discounted for 10 periods at 9% (.42241 × $125,000) = 52,801 Present value of investment in equipment $373,684

Accounting and the Time Value of Money

6 - 41

EXERCISES Ex. 6-136—Future value of an annuity due. (Tables needed.)

If $12,000 is deposited annually starting on January 1, 2017 and it earns 9%, how much will accumulate by December 31, 2026?

Ans: NA, LO: 3, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Solution 6-136 Future value of an annuity due of $12,000 for 10 periods at 9% ($12,000 × 15.19293 × 1.09) = $198,724.

Ex. 6-137—Retirement of debt. (Tables needed.)

Steve Milner borrowed $120,000 on July 1, 2017. This amount plus accrued interest at 8% compounded semiannually is to be repaid in total on July 1, 2027. To retire this debt, Milner plans to contribute to a debt retirement fund five equal amounts starting on July 1, 2022 and continuing for the next four years. The fund is expected to earn 6% per annum.

Instructions Compute how much must be contributed each year by Steve Milner to provide a fund sufficient to retire the debt on July 1, 2027?

Ans: NA, LO: 2, 3, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Solution 6-137 Amount to be repaid on July 1, 2027: Future Value = $120 × FVFn, i Future Value = $120,000 × 2.19112 Future Value = $262,934.40 Amount of annual contribution to retirement fund: Future value of ordinary annuity of 1 for 5 periods at 6% (Multiplied by (1+i) Future value of annuity due of 1 for 5 periods at 6% Future value of an annuity due = Rent × FVF-ADn, i $262,934.40 = Rent × 5.97532 $262,934.40 ÷ 5.97532 = Rent Rent = $44,003.40

5.63709 × 1.06 5.97532

6 - 42

Test Bank for Intermediate Accounting, Sixteenth Edition

Ex. 6-138—Future value of annuity due. (Tables needed.)

Andrea is 40 years old today and she wishes to accumulate $2,000,000 by her sixty fifth birthday so she can retire to a beach in Florida. She wishes to accumulate this amount by making equal deposits on her fortieth through her sixty fourth birthdays. Compute the annual deposit Andrea must make if the fund will earn 6% interest compounded annually.

Ans: NA, LO: 3, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Solution 6-138 1.

2.

3.

4.

Future value of an ordinary annuity of 1 for 25 periods at 6% ............

Factor (1 + 0.06) ................................................................................

Future value of an annuity due of 1 for 25 periods at 6% ...................

Periodic rent ($2,000,000 ÷ 58.15638) ...............................................

54.86451 × 1.0600 58.15638 $34,390

Ex. 6-139—Future value of annuity. (Tables needed.)

Linda Ogleby wants to accumulate $40,000 to use for an around the world trip. She plans to accumulate the desired amount by depositing $5,500 annual-year-end payments into an account at the National Bank which pays 4% interest, compounded annually.

1. Compute the account balance at the end of the sixth year.

2. Compute the amount of each payment that Linda must make at the end of each of the six years to accumulate the $40,000.

Ans: NA, LO: 3, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Solution 6-139 1.

2.

$5,500 × 6.63298 (Tab. 6-3, 4%, 6 per.) = $36,481.39 $40,000 ÷ 6.63298 = $6,030.47

Ex. 6-140—Future value of annuity. (Tables needed.)

Pearson Corporation having recently issued a $25 million, 10-year bond issue, is required to make annual year end sinking fund deposits of $1,800,000. The deposits are made on the last day of each year and yield a return of 5%.

1. Compute the fund balance at the end of the 10 years.

2. Compute the additional annual deposit amount that should have been made at the end of each of the 10 years to accumulate the $25 million.

Ans: NA, LO: 3, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Solution 6-140 1.

2.

Future value of an ordinary annuity of $1,800,000 at 5% for 15 years ($1,800,000 × 12.57789) Required annual deposit: $25,000,000 ÷ 12.57789 = $1,987,615 Annual deposit made 1,800,000 Additional annual deposit $ 187,615

$22,640,202

Accounting and the Time Value of Money

6 - 43

Ex. 6-141—Present value of an annuity due.(Tables needed.)

How much must be invested now to receive $60,000 for ten years if the first $60,000 is received today and the rate is 8%?

Ans: NA, LO: 4, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Solution 6-141 Present value of an annuity due of $60,000 for ten periods at 8% ($60,000 × 7.24689) = $434,813.

Ex. 6-142—Compute the annual rent. (Tables needed.)

Crone Co. has machinery that cost $150,000. It is to be leased for 15 years with rent received at the beginning of each year. Crone wants a return of 10%. Compute the amount of the annual rent.

Ans: NA, LO: 4, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Solution 6-142 Present value factor for an annuity due for 15 periods at 10% = 8.36669 $150,000 ÷ 8.36669 = $17,928.

Ex. 6-143—Calculate market price of a bond. (Tables needed.)

Determine the market price of a $750,000, ten-year, 10% (pays interest semiannually) bond issue sold to yield an effective rate of 12%.

Ans: NA, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Solution 6-143 Present value of $37,500 for 20 periods at 6% ($37,500 × 11.46992) = $430,122 Present value of $1,000,000 discounted for 20 periods at 6% ($750,000 × .31180) = 233,850 Market price of the bond issue $663,972 Ex. 6-144—Calculate market price of a bond.

On January 1, 2017 Lance Co. issued five-year bonds with a face value of $700,000 and a stated interest rate of 12% payable semiannually on July 1 and January 1. The bonds were sold to yield 10%. Present value table factors are: Present value of 1 for 5 periods at 10% .62092 Present value of 1 for 5 periods at 12% .56743 Present value of 1 for 10 periods at 5% .61391 Present value of 1 for 10 periods at 6% .55839 Present value of an ordinary annuity of 1 for 5 periods at 10% 3.79079 Present value of an ordinary annuity of 1 for 5 periods at 12% 3.60478 Present value of an ordinary annuity of 1 for 10 periods at 5% 7.72173 Present value of an ordinary annuity of 1 for 10 periods at 6% 7.36009 Calculate the issue price of the bonds.

Ans: NA, LO: 5, Bloom: AP, Difficulty: Difficult, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

6 - 44

Test Bank for Intermediate Accounting, Sixteenth Edition

Solution 6-144 Present value of $1,000,000 discounted for 10 periods at 5% ($1,000,000 × .61391) = $613,910 Present value of $60,000 for 10 periods at 5% ($60,000 × 7.72173) = 463,304 Issue price of the bonds $1,077,214 Ex. 6-145—Present value and future value computations. (Tables needed.)

John Rich, an executive VP contemplating retirement on his sixty fifth birthday, decides to create a fund on a 6% basis that will enable him to withdraw $90,000 per year on July 31, beginning in 2022 and continuing through 2026. To develop this fund, Rich intends to make equal contributions on July 31 of each of the years 2017–2021.

Instructions (a) Compute how much the balance of the fund must equal on July 31, 2021, in order for Rich to satisfy his objective. (b) Compute the amount of Rich’s contributions to the fund.

Ans: NA, LO: 5, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions, IFRS: None

Solution 6-145 (a) Present value of an ordinary annuity of 1 for 5 periods @6% Annual withdrawal Required fund balance on July 31, 2021 (b) Fund balance at July 31, 2021 Future value of ordinary annuity at 6% for 5 years Amount of each of five contributions is $67,253.21.

4.21236 × $90,000 $379,112,40

$379,112.40 = $67,253.21 5.63709