Multiple Choice Practice Flashcards
(29 cards)
The Sanchez Company purchased a delivery truck on February 1, 2021. The purchase agreement required Sanchez to pay the total amount due of $15,000 on February 1, 2022. Assuming an 8% rate of interest, the calculation of the price of the truck would involve multiplying $15,000 by the:
a. future value of an ordinary annuity of $1
b. present value of $1
c. present value of an ordinary annuity of $1
d. future value of $1
b. present value of $1
the calculation is for the present value OF THE $15,000 to be received one year from now.
Sandra wants to calculate how much money she needs to deposit today into a savings account that earns 5% in order to be able to withdraw $3,000 at the end of each of the next 6 years. She should use which present value concept?
a. present value of $1 for 6 periods
b. present value of an annuity due of $1 for 6 periods
c. present value of an ordinary annuity of $1 for 6 periods
d. future value of $1 for 6 periods
c. present value of an ordinary annuity of $1 for 6 periods
The calculation is how much needs to be deposited today, the present value, so that equal amounts can be withdrawn over the next six years at the end of the year (ordinary annuity).
A series of equal periodic payments in which the first payment is made on the date of the contract is:
a. a deferred annuity
b. an ordinary annuity
c. an annuity due
d. a delayed annuity
c. an annuity due
A series of equal periodic payments in which the first payment is made one compounding period after the date of the contract is:
a. a deferred annuity
b. an ordinary annuity
c. an annuity due
d. a delayed annuity
b. an ordinary annuity
Loan A has the same original principal, interest rate, and payment amount as Loan B. However, loan A is structured as an annuity due, while Loan B is structured as an ordinary annuity. The present value of Loan A will be:
a. higher than Loan B
b. lower than Loan B
c. the same as Loan B
d. intermediate with respect to Loan B
a. higher than Loan B
Since payments from an annuity due are received sooner, its value is higher than if the payments are received later.
Danielle wants to know how much she should invest now at 5% interest in order to accumulate a sum of $45,000 in four years. She should use a table for the:
a. present value of $1
b. future value of $1
c. present value of an ordinary annuity of $1
d. future value of an annuity due of $1
a. present value of $1
$45,000 × (PV of $1: n = 4, i = 5%) = Amount to Invest
The Richards Company purchased a machine for $5,000 down and $300 a month payable at the end of each of the next 36 months. How would the cash price of the machine be calculated, assuming the annual interest rate is given?
a. $5,000 plus the present value of $10,800 ($300 x 36)
b. $5,000 plus the present value of an annuity due of $300 for 36 periods
c. $15,800
d. $5,000 plus the present value of an ordinary annuity of $300 for 36 periods
d. $5,000 plus the present value of an ordinary annuity of $300 for 36 periods
The cash price is equal to the present value of the future cash outflows. This includes the $5,000 today plus the value today, present value, of the $300 payments made at the end of each month (ordinary annuity).
Given a set of present value tables, an annual interest rate, the dollar amount of equal payments made, and the number of semiannual payments, what other information is necessary to calculate the present value of the series of payments?
a. the future value of the annuity
b. the timing of the payments (whether they are at the end or the beginning of each period)
c. the rate of inflation
d. no other information is needed
b. the timing of the payments (whether they are at the end or the beginning of each period)
Wellman Company is considering investing in a two year project. Wellman’s required rate of return is 10%. The present value of $1 for one period at 10% is 0/909 and for two periods at 10% is 0.826. The project is expected to create cash flows, net of taxes, of $80,000 in the first year, and $100,000 in the second year. Wellman should invest in the project if the projects’ cost is less than or equal to:
a.. $180,000
b. $163,620
c. $155,320
d. $148,680
c. $155,320
$155,320: ($80,000 × 0.909) + ($100,000 × 0.826).
The Bello Corporation wishes to accumulate $2,000,000 for plant expansion. the funds are required on January 1, 2026. Bello intends to make five annual deposits in a fund that will earn interest at 7% compounded annually. the first deposit is made on January 1, 2021. Present value and future values are as follows:
PV of $1 at 7% for 5 periods = 0.713
PV of an ordinary annuity at $1 at 7% for 5 periods = 4.1
FV of an ordinary annuity of $1 at 7% for 5 periods = 5.75
FV of an annuity due of $1 at 7% for 5 periods = 6.15
What is the amount of the required annual deposit?
a. $325,203
b. $347,826
c. $487,805
d. $426,000
a. $325,203
$325,203. $2,000,000 ÷ 6.15 (Future value of an annuity due of $1 at 7% for 5 periods).
The Jamison Co./ agrees to pay an employee $10,000 a year for five years, beginning three years from today, and decides to fund the payments by depositing one lump sum into a savings account today. The company should use which present value concept to determine the required deposit?
a. FV of $1
b. PV of a deferred annuity
c. FV of a deferred annuity
d. none of these choices are correct
b. PV of a deferred annuity
The calculation is the amount to be deposited today, the present value, of five equal payments (an annuity), that doesn’t start for three years (deferred annuity).
Harry Morgan plans to make 30 quarterly deposits of $200 into a savings account. The first deposit will be made immediately. The savings account pays interest at an annual rate of 8%, compounded quarterly. How much will Harry have accumulated in the savings account at the end of the seven and a half-year period?
a. $8,114
b. $24,469
c. $6,000
d. $8,276
d. $8,276
$8,276: $200 × 41.3794 (future value of an annuity due for 30 periods at 2%).
Harry Morgan plants to make 30 quarterly deposits at the end of each quarter. The savings account pays interest at an annual rate of 8% compounded quarterly. What is the value of the savings account after the 30 quarterly deposits?
a. $8,114
b. $24,469
c. $6,000
d. $8,276
a. $8,114
$8,114: $200 × 40.5681 (future value of an ordinary annuity for 30 periods at 2%).
Laura won $5,000,000 in the state lottery, which she has elected to receive at the end of each month over the next 30 years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the:
a. Present value of an annuity due of $1.
b. Future value of an annuity due of $1.
c. Present value of an ordinary annuity of $1.
d. Future value of an ordinary annuity of $1.
c. Present value of an ordinary annuity of $1.
In an ordinary annuity, cash flows occur at the end of each period. In an annuity due, cash flows occur at the beginning of each period.
Hailey wants to cash in her winning lottery ticket. She can either receive eight $200,000 semiannual payments starting today, based on a 6% annual interest rate, or she can receive a single-amount payment today. What is the single-amount payment she can receive today that would be equivalent to the eight-payment option except that she would not have to wait for years to collect her prize money?
a. $1,403,938.
b. $1,283,438.
c. b$1,578,80
d. $1,446,056.
d. $1,446,056.
PVAD = $200,000 × 7.23028* = $1,446,056
*PVAD of $1: n = 8; i = 3%
The Strug Company purchased office furniture and equipment for $8,600 and agreed to pay for the purchase by making five annual installment payments beginning one year from today. The installment payments include interest at 8%. What is the required annual installment payment?
a. $1,720
b. $2,154
c. $1,994
d. $1,466
b. $2,154
$8,600 ÷ 3.99271 (Present value of an ordinary annuity of $1 at 8% for 5 years) = $2,154
The Strug Company purchased office furniture and equipment for $8,600 and agreed to pay for the purchase by making five annual installment payments beginning immediately. The installment payments include interest at 8%. What is the required annual installment payment?
a. $1,720
b. $2,154
c. $1,994
d. $1,466
c. $1,994
A company issued a 20-year, $1,000 par value bond that pays semiannual interest of $40. If the semiannual market rate of interest is 5%, at what amount did the bond sell?
a. $828.
b. $1,686.
c. $1,000.
d. $893.
a. $828.
686 + 142 = 828
*PVA of $1: n = 40; i = 5%
**PV of $1: n = 40; i = 5%
On March 31, 2021, the Freeman Company leased a machine. The lease agreement requires Freeman to pay 10 annual payments of $6,000 on each March 31, with the first payment due on March 31, 2021. Assuming an interest rate of 10% and that this lease is treated as an installment sale, Freeman will initially value the machine by multiplying $6,000 by which of the following factors?
a. Present value of $1 at 10% for 10 periods.
b. Present value of an ordinary annuity of $1 at 10% for 10 periods.
c. Present value of an annuity due of $1 at 10% for 10 periods.
d. Future value of an annuity due of $1 at 10% for 10 periods
c. Present value of an annuity due of $1 at 10% for 10 periods.
Present value of an annuity due of $1 at 10% for 10 periods. The calculation is how much is recorded today, the present value of equal payments that start today (annuity due).
A series of equal periodic payments that starts more than one period after the agreement is called:
a. an annuity due
b. an ordinary annuity
c. a future annuity
d. a deferred annuity
d. a deferred annuity
The price of a corporate bond is the present value of its face amount at the market or effective rate of interest:
a. plus the present value of all future interest payments at the market or effective rate of interest
b. plus the present value of all future interest payments at the stated rate of interest
c. reduced by the present value of all future interest payments at the market or effective rate of interest
c. reduced by the present value of all future interest payments at the stated rate of interest
a. plus the present value of all future interest payments at the market or effective rate of interest
The price of a bond is equal to the present value of all future cash outflows, principal and interest, using the market or effective rate.
When a bond issue sells for less than its face value, the market rate of interest is:
a. dependent on the stated rate of interest
b. equal to the stated rate of interest
c. higher than the stated rate of interest
d. less than the stated rate of interest
c. higher than the stated rate of interest
On June 30, 2021, Mabry Corporation issued $5 million of its 8% bonds for $4.6 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2021. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the 6 months ended December 31, 2021?
a. $16,000
b. $20,000
c. $23,000
d. $30,000
d. $30,000
$30,000: Under the effective interest method, the interest expense is computed as the beginning book value of the debt times the yield interest rate. The difference between the interest expense and the interest payment represents the amortization of the discount. Here, the interest expense is $230,000 ($4,600,000 × 0.10 × 6/12) and the interest payment is $200,000 ($5,000,000 × 0.08 × 6/12).
A discount on bonds should be reported in the balance sheet:
a. at the present value of the future addition to bond interest expense due to the discount
b. as a reduction of the face amount of the bond
c. as a reduction in bond issue costs
d. as a deferred credit
b. as a reduction of the face amount of the bond
A discount on bonds is a contra liability account and therefore deducted from the face amount when presented on the balance sheet.
