Accounting and the Time Value of Money
6 – 21
77. 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.
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
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no funds withdrawn.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.
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.
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.
Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 22
82. 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.
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%.
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.
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.
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.
Accounting and the Time Value of Money
6 – 23
87. 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.
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.
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.
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.
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.
Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 24
92. 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.
93. Pearson Corporation makes an investment today (January 1, 2020). They will receive
$15,000 every December 31st for the next six years (2020 – 2025). If Pearson wants to
earn 12% on the investment, what is the most they should invest on January 1, 2020?
a. $61,671.
b. $69,072.
c. $130,060.
d. $136,335.
94. Garretson Corporation will receive $15,000 today (January 1, 2020), and also on each
January 1st for the next five years (2021 – 2025). 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.
95. Spencer Corporation will invest $25,000 every December 31st for the next six years (2020
– 2025). If Spencer will earn 12% on the investment, what amount will be in the
investment fund on December 31, 2025?
a. $102,785.
b. $115,120.
c. $202,880.
d. $227,225.
96. Tipson Corporation will invest $25,000 every January 1st for the next six years (2020 –
2025). If Tipson will earn 12% on the investment, what amount will be in the investment
fund on December 31, 2025?
a. $102,785
b. $115,120.
c. $202,880.
d. $227,225.
Accounting and the Time Value of Money
6 – 25
97. Hiller Corporation makes an investment today (January 1, 2020). They will receive
$75,000 every December 31st for the next six years (2020 – 2025). If Hiller wants to earn
12% on the investment, what is the most they should invest on January 1, 2020?
a. $308,356.
b. $345,358.
c. $698,640.
d. $681,675.
98. Sonata Corporation will receive $40,000 today (January 1, 2020), and also on each
January 1st for the next five years (2021 – 2025). 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.
99. Renfro Corporation will invest $90,000 every December 31st for the next six years (2020 –
2025). If Renfro will earn 12% on the investment, what amount will be in the investment
fund on December 31, 2025?
a. $370,026
b. $414,432.
c. $730,367.
d. $818,010.
100. Vannoy Corporation will invest $80,000 every January 1st for the next six years (2020 –
2025). If Vannoy will earn 12% on the investment, what amount will be in the investment
fund on December 31, 2025?
a. $328,914.
b. $368,384.
c. $649,216.
d. $727,121.
Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 26
101. On January 1, 2020, 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 2020. What will be the balance in the fund, on January
1, 2025 (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. $391,399
b. $359,082
c. $327,000
d. $300,000
Use the following 8% interest factors for questions 102 through 105.
Present Value of Future Value of
Ordinary Annuity Ordinary Annuity
7 periods 5.2064 8.92280
8 periods 5.7466 10.63663
9 periods 6.2469 12.48756
102. What will be the balance on September 1, 2027 in a fund which is accumulated by making
$30,000 annual deposits each September 1 beginning in 2020, with the last deposit being
made on September 1, 2027? The fund pays interest at 8% compounded annually.
a. $319,099
b. $267,687
c. $226,800
d. $172,398
103. If $12,000 is deposited annually starting on January 1, 2020 and it earns 8%, what will the
balance be on December 31, 2027?
a. $107,075
b. $115,640
c. $127,640
d. $137,851
104. Korman Company wishes to accumulate $1,000,000 by May 1, 2028 by making 8 equal
annual deposits beginning May 1, 2020 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
Accounting and the Time Value of Money
6 – 27
105. What amount should be recorded as the cost of a machine purchased December 31,
2020, which is to be financed by making 8 annual payments of $15,000 each beginning
December 31, 2021? The applicable interest rate is 8%.
a. $105,000
b. $93,703
c. $159,550
d. $86,200
106. How much must be deposited on January 1, 2020 in a savings account paying 6%
annually in order to make annual withdrawals of $40,000 at the end of the years 2020 and
2021? The present value of one at 6% for one period is .9434.
a. $73,336
b. $75,480
c. $80,000
d. $35,600
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%?
Present Value of
Periods Ordinary Annuity at 9%
14 7.78615
15 8.06069
16 8.31256
a. $403,035
b. $439,308
c. $750,000
d. $365,625
108. 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
Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 28
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. $107,450
b. $97,682
c. $66,718
d. $60,654
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
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
112. On January 2, 2020, 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 0.4632
Present value of 1 at 10% for 10 periods 0.3855
Present value of an ordinary annuity at 8% for 10 periods 6.7101
Present value of an ordinary annuity at 10% for 10 periods 6.1446
a. $6,000,000
b. $5,262,408
c. $6,000,036
d. $6,636,156
Accounting and the Time Value of Money
6 – 29
113. The market price of a $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.
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.
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%.
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.
117. 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%.
Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 30
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.
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.
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%.
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%.
122. 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.
Accounting and the Time Value of Money
6 – 31
123. Stech Co. is issuing $9 million 12% bonds in a private placement on July 1, 2020. 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. $11,446,288.
b. $13,500,000.
c. $11,415,597.
d. $11,507,486.
Multiple Choice Answers—Computational
Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 32
MULTIPLE CHOICE—CPA Adapted
124. On January 1, 2020, 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, 2020?
a. $39,838
b. $45,000
c. $47,806
d. $54,000
125. On May 1, 2020, a company purchased a new machine which it does not have to pay for
until May 1, 2022. The total payment on May 1, 2022 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
126. On January 1, 2020, Ball Co. exchanged equipment for a $600,000 zero-interest-bearing
note due on January 1, 2023. The prevailing rate of interest for a note of this type at
January 1, 2020 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 2021 income statement?
a. $0
b. $45,000
c. $49,500
d. $60,000
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%.
Accounting and the Time Value of Money
6 – 33
128. On January 15, 2020, Dolan Corp. adopted a plan to accumulate funds for environmental
improvements beginning July 1, 2024, 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, 2020. Future value factors are as follows:
Future value of 1 at 10% for 5 periods 1.61
Future value of ordinary annuity of 1 at 10% for 4 periods 4.64
Future value of annuity due of 1 at 10% for 4 periods 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.
129. On December 30, 2020, 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, 2020, 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, 2020 balance sheet, the net note payable to Grant is
a. $706,800.
b. $771,900.
c. $785,325.
d. $856,800.
130. On January 1, 2020, Ott Co. sold goods to Flynn Company. Flynn signed a zero-interest-
bearing note requiring payment of $200,000 annually for seven years. The first payment
was made on January 1, 2020. The prevailing rate of interest for this type of note at date
of issuance was 10%. Information on present value factors is as follows:
Present Value Present Value of Ordinary
Period of 1 at 10% Annuity of 1 at 10%
6 .5645 4.3553
7 .5132 4.8684
Ott should record sales revenue in January 2020 of
a. $1,071,048.
b. $973,680.
c. $871,060.
d. $714,000.
Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 34
131. On January 1, 2020, 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.
132. On July 1, 2020, 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, 2021. 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 0.59
Future value of 1 at 14% for 4 periods 1.69
Present value of an ordinary annuity of 1 at 14% for 4 periods 2.91
Wynne should record the acquisition cost of the franchise on July 1, 2020 at
a. $654,000.
b. $736,500.
c. $900,000.
d. $1,014,000.
Multiple Choice Answers—CPA Adapted
Accounting and the Time Value of Money
6 – 35
DERIVATIONS — Computational
No. Answer Derivation