CHAPTER 6
ACCOUNTING AND THE TIME VALUE OF MONEY
TRUE-FALSE—Conceptual
Answer No. Description
MULTIPLE CHOICE—Conceptual
Answer No. Description
Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 2
MULTIPLE CHOICE—Conceptual (cont.)
Answer No. Description
MULTIPLE CHOICE—Computational
Accounting and the Time Value of Money
6 – 3
MULTIPLE CHOICE—Computational (cont.)
Answer No. Description
Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 4
MULTIPLE CHOICE—CPA Adapted
Answer No. Description
BRIEF EXERCISES
Item Description
BE6–133 Present and future value concepts.
BE6–134 Compute loan payments.
BE6–135 Present value of an investment in equipment.
EXERCISES
Item Description
E6–136 Future value of an annuity due.
E6–137 Retirement of debt.
E6–138 Future value of an annuity due.
E6–139 Future value of an annuity.
E6–140 Future value of an annuity.
E6–141 Present value of an annuity due.
E6–142 Compute the annual rent.
E6–143 Calculate the market price of a bond.
E6–144 Calculate the market price of a bond.
E6–145 Present value and future value computations.
PROBLEMS
Item Description
P6–146 Present value and future value computations.
P6–147 Annuity with change in interest rate.
P6–148 Present value of ordinary annuity and annuity due.
P6–149 Finding the implied interest rate.
P6-150 Calculation of unknown rent and interest.
P6-151 Deferred annuity.
Accounting and the Time Value of Money
6 – 5
CHAPTER LEARNING OBJECTIVES
1. Describe the fundamentals concepts related to the time value of money.
2. Solve future and present value of 1 problems.
3. Solve future value of ordinary and annuity due problems.
4. Solve present value of ordinary and annuity due problems.
5. Solve present value problems related to deferred annuities, bonds, and expected cash flows
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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TRUE-FALSE STATEMENTS
1
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3
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17.
3
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1
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1
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10.
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3
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1
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1
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11.
2
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4
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19.
5
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1
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1
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12.
2
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16.
3
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20.
5
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MULTIPLE CHOICE QUESTIONS
3
C
44.
2
C
67.
3
AP
90.
3
AP
113.
5
AP
1
K
45.
2
C
68.
2
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91.
3
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114.
4
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1
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46.
2
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69.
2
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92.
3
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115.
4
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47.
2
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70.
2
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93.
4
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116.
4
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1
K
48.
2
AP
71.
2
AP
94.
4
AP
117.
4
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1
C
49.
3
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72.
4
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95.
3
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118.
4
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1
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50.
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73.
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96.
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1
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51.
3
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97.
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120.
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1
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3
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75.
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98.
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121.
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99.
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77.
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100.
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123.
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1
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55.
3
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78.
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101.
3
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124.
2
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1
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56.
4
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79.
2
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102.
3
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125.
1
C
1
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57.
4
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80.
2
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103.
3
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126.
2
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1
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58.
4
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81.
2
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104.
3
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127.
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1
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59.
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82.
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105.
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128.
3
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1
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60.
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83.
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106.
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129.
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61.
5
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84.
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107.
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130.
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1
AN
62.
2
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85.
2
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108.
4
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131.
5
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1
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63.
1
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86.
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109.
4
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132.
4
AP
1
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64.
1
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87.
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110.
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1
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65.
2
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88.
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111.
4
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2
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66.
2
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89.
2
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112.
5
AP
BRIEF EXERCISES
2
AN
134.
4
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135.
2
AP
EXERCISES
3
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138.
3
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140.
3
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142.
4
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144.
5
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2, 3
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139.
3
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4
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143.
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145.
5
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Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 6
PROBLEMS
2, 4
AP
148.
4
AP
150.
4
AP
3
AP
149.
4
AP
151.
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.
2. Interest is the excess cash received or repaid over and above the amount lent or borrowed.
3. Simple interest is computed on principal and on any interest earned that has not been
withdrawn.
4. Compound interest, rather than simple interest, must be used to properly evaluate long–
term investment proposals.
5. Compound interest uses the accumulated balance at each year end to compute interest in
the succeeding year.
6. The future value of an ordinary annuity table is used when payments are invested at the
beginning of each period.
7. The present value of an annuity due table is used when payments are made at the end of
each period.
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.
9. Present value is the value now of a future sum or sums discounted assuming compound
interest.
10. The future value of a single sum is determined by multiplying the future value factor by its
present value.
11. In determining present value, a company moves backward in time using a process of
accumulation.
Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 8
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.
13. The rents that comprise an annuity due earn no interest during the period in which they are
originally deposited.
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.
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.
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.
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.
18. The present value of an ordinary annuity is the present value of a series of equal rents
withdrawn at equal intervals.
19. The future value of a deferred annuity is less than the future value of an annuity not
deferred.
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.
True False Answers—Conceptual
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%.
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.
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.
24. What is interest?
a. Payment for the use of money.
b. An equity investment.
c. Return on capital.
d. Loan.
25. What is not a variable that is considered in interest computations?
a. Principal.
b. Interest rate.
c. Assets.
d. Time.
Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 10
26. 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.
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.
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
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
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.
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
Accounting and the Time Value of Money
6 – 11
32. 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
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
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
S35. 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.
S36. On June 1, 2020, 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, 2020. 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.
Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 12
S37. 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.
P38. 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.
P39. In the time diagram below, which concept is being depicted?
0
1
$1
2
$1
3
$1
4
$1
PV
a. Present value of an ordinary annuity
b. Present value of an annuity due
c. Future value of an ordinary annuity
d. Future value of an annuity due
P40. On December 1, 2020, 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, 2020, 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.
Accounting and the Time Value of Money
6 – 13
41. 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.
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.
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.
P44. 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, 2020, the present value of that sum decreases
as the date draws closer to December 31, 2020.
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.
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
Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 14
47. 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.
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.
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.
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.
P51 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.
Accounting and the Time Value of Money
6 – 15
52. 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.
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.
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.
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.
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).
Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 16
57. 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.
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.
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.
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.
Accounting and the Time Value of Money
6 – 17
61. 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.
Multiple Choice Answers—Conceptual
Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 18
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.
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 payments 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.
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%.
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 Future Value of 1 at 8%
1 1.080
2 1.166
3 1.260
4 1.360
5 1.469
65. 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
Accounting and the Time Value of Money
6 – 19
66. 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)
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
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
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
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
Test Bank for Intermediate Accounting, Seventeenth Edition
6 – 20
71. 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
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
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
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.
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
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.