303 Exam 2- CH. 5

Question 1

Time Value of Money

Answer 1

A dollar received today is worth more than a dollar promised sometime in the future because of the opportunity to invest today’s dollar and receive interest

Question 2

For many assets and Liabilities, market-based fair value information is not available. In these cases, fair value can be estimated based on the expected future cash flows related to the asset or liability

Answer 2

True

Question 3

Fair value estimates are generally considered Level 3 (most subjective) in the fair value hierarchy

Question 4

Present value techniques are used to convert expected cash flows into present values, which represent an estimate of fair value

Question 5

Present Value Based Accounting Measurements

Answer 5

Notes
Leases
Pensions and other post retirement benefits
Long-term assets
Stock-based compensation
Business combination - determining the value of receivables, payables, liabilities, and accruals assumed in a “purchase”
Disclosures
Environmental liabilities

Question 6

Simple Interest

Answer 6

the return on (or growth of) the principle for one time period

Question 7

Interest = Principle * Interest * Number of periods

Question 8

Compound Interest

Answer 8

the return on, or growth of, the principle for two or more time periods

Question 9

Fundamental Variables to all Compound Interest Problems

Answer 9

Rate of Interest
Number of periods
Future Value
Present Value

Question 10

Future Value of 1 Table

Answer 10

amounts to which 1 will accumulate if deposited now at a specified rate and left for a specified number of periods

Question 11

Present Value of 1 Table

Answer 11

the amounts that must be deposited now at a specified rate of interest to equal 1 at the end of a specified number of periods

Question 12

Future Value of an Ordinary Annuity of 1 Table

Answer 12

the amounts to which periodic rents of 1 will accumulate if the payments (rents) are invested at the end of each period at a specified rate of interest for a specific number of periods

Question 13

Present Value of an Ordinary Annuity of 1 Table

Answer 13

the amounts that must be deposited now at a specified rate of interest to permit withdrawals of 1 at the end of regular periodic intervals for the specified number of periods

Question 14

Present Value of an Annuity Due of 1 Table

Answer 14

the amounts that must be deposited now at a specified rate of interest to permit withdrawal of 1 at the beginning of regular periodic intervals for the specified number of periods

Question 15

Formula for Future Value Factor (FVF)

Answer 15

FVF (n,i)= (1+i)^n

Question 16

Interest Rate Per Compounding Period

Answer 16

Annual Interest Rate/Number of Compounding Periods

Question 17

Number of Compounding Periods

Answer 17

Number of years*Number of compounding periods

Question 18

With Compounding, the Effective Interest Rate will always exceed the stated rate

Question 19

Which of the following has an impact on the dollar amount of the interest related to any financial transaction?

Answer 19

Principle, Interest Rate, TIme

Question 20

The larger the dollar amount of principle, the larger the dollar amount of Interest

Question 21

All else equal, if a company borrows money it prefers to pay simple interest

Question 22

The table that would show the smallest value for 7 periods at 5% is

Answer 22

The present value of 1 table; it shows the smallest value for all periods and interest rates

Question 23

The amounts that must be deposited now at 6% interest to permit withdrawals of $10,000 at the end of each period for a specified number of periods are contained in

Answer 23

Present value of an ordinary annuity of 1 Table

Question 24

For an investment that earns 10.5% compounded monthly for two years, how many compounding periods are there?

Answer 24

24

Question 25

Which is not a fundamental variable to all compound interest problems?

Answer 25

Market Value

Question 26

Jan. 1, 2022, Crane Co. sold to Flay Co. $413,000 of its 9% bonds for $365,627 to yield 11%. Interest is payable semiannually on Jan 1 and July 1. What amount should Crane report as interest expense for the six months ended June 30, 2022?

Answer 26

Interest expense: $365,627*11%*6/12 = $20,110 Cash Interest Paid: $37,170*9%*6/12 = $18,585

Question 27

Accounting topics where present value-based accounting measurements are relevant include:

Answer 27

Environmental Liabilities; Taxes and Inventory DO NOT require the use of present value concepts

Question 28

Barbara Brown invests $54,000 at 9% annual interest. How much money has accumulated after 5 years, assuming simple interest?

Answer 28

Simple Interest: ($54,000*.09*5) = $24,300 added back to $54,000 = $78,300

Question 29

If a company LENDS money, they prefer compounding interest.

Question 30

To convert an annual interest rate into the "Compounding period interest rate", you divide that annual interest rate by the number of compounding periods per year

Question 31

An interest compounding period may be equal to or less than one year

Question 32

Which of the following is NOT a fundamental variable that is part of all compound interest problems?

Answer 32

Past Value

Question 33

The present value is always a smaller amount than the known future value, due to earned and accumulated interest.

Question 34

present value of any single sum

Answer 34

PV = FV (PVFn,i)

Question 35

The present value of a dollar is always less than 1

Question 36

Daniel's Uncle promised her $32,000 for graduation in four years. What is the equivalent amount stated in today's dollars? Given are the present value factors for 1 at 8% for one-three periods with interest compounded annually: 1 = .92593 2 = .85734 3 = .79383

Answer 36

$32,000 / 1.08 x .79383

Question 37

Annuity requires

Answer 37

1. Periodic payments or receipts (called rents) of the same amount. 2. The same-length interval between such rents. 3. Compounding of interest once each interval.

Question 38

Future value of an annuity

Answer 38

the sum of all the rents plus the accumulated compound interest on the rents.

Question 39

Ordinary Annuity

Answer 39

rents occur at the end of the period; earn no interest during the period they were deposited;

Question 40

Annuity Due

Answer 40

rents occur at the beginning of the period

Question 41

Future Value of an ordinary annuity

Answer 41

the number of compounding periods will always be one less than the number of rents

Question 42

Future value of a single sum

Answer 42

FV = PV * (FVFn,i)

Question 43

Future value of an ordinary annuity

Answer 43

FV-OA = R * (FVF-OAn,i)

Question 44

If rents occur at the beginning of the period (annuity due), there will be one additional interest period than if rents occur at the end of the period (ordinary annuity).

Question 45

To find the future value of an annuity due factor, multiply the future value of an ordinary annuity factor by 1 plus the interest rate

Question 46

Sally wants to invest a certain sum of money at the end of each year for 6 years. The investment will earn 6% compounded annually. At the end of the 6 years, she will need a total of $500,000 accumulated. How should she compute her required annual investment?

Answer 46

$500,000 / FV of a 6-year, 6% ordinary annuity of 1 factor

Question 47

The future value of an ordinary annuity will always

Answer 47

less than the future value of an annuity due

Question 48

The present value of an annuity is the single sum that, if invested at compound interest now, would provide for an annuity (a series of withdrawals) for a certain number of future periods

Question 49

The present value of an ordinary annuity

Answer 49

is the present value of a series of equal rents, to be withdrawn at equal intervals at the end of the period.

Question 50

Present value of any ordinary annuity

Answer 50

R (PVF-OAn,i)

Question 51

present value of an annuity due, there is always one discount period less.

Question 52

To find the present value of an annuity due factor

Answer 52

Multiply the present value of an ordinary annuity factor by 1 plus the interest rate (that is, 1 + i).

Question 53

When using the expected cash flow approach, which of the following interest rates is used to discount the cash flows?

Answer 53

the risk-free rate of return

Question 54

Which is true regarding a deferred annuity?

Answer 54

The future value of a deferred annuity is the same as the future value of an annuity not deferred

Question 55

To compute the present value of a deferred annuity

Answer 55

we compute the PV-OA for the entire period and subtract the present value of the rents which were not received during the deferral period

Question 56

Long term bond produces 2 cash flows

Answer 56

1. Periodic interest payments during the life of the bond (an annuity). 2. The principal (face value) paid at maturity.

Question 57

The current market value of the bonds

Answer 57

is the combined present values of the interest annuity and the principal amount.

Question 58

A deferred annuity does not begin to produce rents until two or more periods have expired.

Question 59

Expected cash flow approach

Answer 59

uses a range of cash flows and incorporates the probabilities of those cash flows to provide a more relevant measurement of present value

Question 60

The proper interest rate to discount the cash flows

Answer 60

1. Pure rate of interest (2%–4%). The amount a lender would charge if there were no possibilities of default and no expectation of inflation.  2. Expected inflation rate of interest (0%–?). Lenders recognize that in an inflationary economy, they are being paid back with less valuable dollars. As a result, they increase their interest rate to compensate for this loss in purchasing power. When inflationary expectations are higher, interest rates are higher. 3. Credit risk rate of interest (0%–5%). The government has little or no credit risk (i.e., risk of nonpayment) when it issues bonds. A business enterprise, however, depending upon its financial stability, profitability, etc., can have a low or a high credit risk.

Question 61

The FASB takes the position that after computing the expected cash flows, a company should discount those cash flows by the risk-free rate of return.

Answer 61

That rate is defined as the "pure rate of return" plus the expected inflation rate