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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
D - 14
60. Dodd Company is considering an investment, which will return a lump sum of $675,000
four years from now. Below is some of the time value of money information that Dodd has
compiled that might help in planning compounded interest decisions.
Present value of 1 for 4 periods at 10% 0.68301
Future value of 1 for 4 periods at 10% 1.46410
Present value of an annuity of 1 for 4 periods at 10% 3.16986
Future value of an annuity of 1 for 4 periods at 10% 4.64100
To the closest dollar, what amount should Dodd Company pay for this investment to earn
a 10% return?
a. $405,000
b. $270,000
c. $461,032
d. $534,914
61. Montz Company is considering investing in an annuity contract that will return $80,000
annually at the end of each year for 12 years. Montz has obtained the following values
related to the time value of money to help in its planning process and compounded
interest decisions.
Present value of 1 for 12 periods at 9% 0.35554
Future value of 1 for 12 periods at 9% 2.81267
Present value of an annuity of 1 for 12 periods at 9% 7.16073
Future value of an annuity of 1 for 12 periods at 9% 20.14072
To the closest dollar, what amount should Montz Company pay for this investment if it
earns a 9% return?
a. $994,132
b. $1,185,014
c. $1,611,258
d. $572,858
62. Ando Company earns 11% on an investment that pays back $660,000 at the end of each
of the next 5 years. Ando finance department has the following values related to the time
value of money to help in its planning process and compounded interest decisions.
Present value of 1 for 5 periods at 11% 0.59345
Future value of 1 for 5 periods at 11% 1.68506
Present value of an annuity of 1 for 5 periods at 11% 3.69590
Future value of an annuity of 1 for 5 periods at 11% 6.22780
To the closest dollar, what is the amount Ando invested to earn the 11% rate of return?
a. $1,112,139
b. $391,677
c. $2,439,294
d. $178,577
Time Value of Money
D - 15
63. Wiggins Company is considering purchasing equipment. The equipment will produce the
following cash flows: Year 1, $50,000; Year 2, $90,000; Year 3, $130,000. Below is some
of the time value of money information that Wiggins has compiled that might help them in
their planning and compounded interest decisions.
1 period, 11%
2 periods, 11%
3 periods, 11%
Present value of 1
0.90090
0.81162
0.73119
Future value of 1
1.11000
1.23210
1.36763
Present value of an annuity of 1
0.90090
1.71252
2.44371
Future value of an annuity of 1
1.00000
2.12000
3.37440
Wiggins requires a minimum rate of return of 11%. To the closest dollar, what is the
maximum price Wiggins should pay for the equipment?
a. $219,137
b. $213,146
c. $218,099
d. $208,499
64. Travis Tucker invests $10,655.04 now for a series of $1,500 annual returns beginning one
year from now. Travis will earn 10% on the initial investment. How many annual payments
will Travis receive?
a. 10
b. 12
c. 13
d. 15
65. In order to compute the present value of an annuity, it is necessary to know the
1. discount rate.
2. number of discount periods and the amount of the periodic payments or receipts.
a. 1.
b. 2.
c. Both 1 and 2.
d. Something in addition to 1 and 2.
66. A $30,000, 8%, 10-year note payable that pays interest quarterly would be discounted
back to its present value by using tables that would indicate which one of the following
period-interest combinations?
a. 10 interest periods, 8% interest
b. 40 interest periods, 8% interest
c. 40 interest periods, 2% interest
d. 10 interest periods, 2% interest
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
D - 16
67. Porter Company has just purchased equipment that requires annual payments of $22,500
to be paid at the end of each of the next 4 years. The appropriate discount rate is 15%.
What is the present value of the payments?
a. $64,237
b. $90,000
c. $35,404
d. $81,107
68. Potter Company has purchased a patent that requires annual payments of $31,250 to be
paid at the end of each of the next 6 years. The appropriate discount rate is 12%. What
amount will be used to record the patent?
a. $187,500
b. $128,482
c. $172,679
d. $120,469
69. Mergenthaler Company has just purchased machinery that requires annual payments of
$50,000 to be paid at the end of each of the next 4 years. The appropriate discount rate is
15%. What is the present value of the payments?
a. $142,749
b. $200,000
c. $58,719
d. $225,201
70. Glover Company is about to issue $3,000,000 of 5-year bonds, with a contract rate of
interest of 8%, payable semiannually. The discount rate for such securities is 10%. How
much can Glover expect to receive from the sale of these bonds?
a. $2,768,338
b. $3,000,000
c. $3,243,315
d. $3,231,660
71. Valente Company is about to issue $3,000,000 of 5-year bonds, with a contract rate of
interest of 10%, payable semiannually. The discount rate for such securities is 8%. How
much can Valente expect to receive from the sale of these bonds?
a. $2,768,338
b. $3,000,000
c. $3,243,315
d. $3,231,660
Time Value of Money
D - 17
72. If a bond has a contract rate of interest of 6%, but the discount rate of interest is 8%, the
bond
a. will sell at a discount (less than face value).
b. will sell at a premium (more than face value).
c. may sell at either a premium or a discount.
d. will sell at its face value.
73. When determining the proceeds received when issuing a bond, the factor applied to the
amount of the interest payments is determined from the table of the
a. present value of 1.
b. present value of an annuity of 1.
c. future value of 1.
d. future value of an annuity of 1.
74. When determining the proceeds received when issuing a bond, the factor applied to the
amount of the bond principal is determined from the table of the
a. present value of 1.
b. present value of an annuity 1.
c. future value of 1.
d. future value of an annuity 1.
75. If a bond has a contract rate of 10% and is discounted at 10%, then the proceeds received
at issuance will be
a. equal to the face value of the bonds.
b. greater than the face value of the bonds.
c. less than the face value of the bonds.
d. zero.
76. Rhode Company is about to issue $4,000,000 of 5-year bonds, with a contract rate of
interest of 8%, payable semiannually. The discount rate for such securities is 10%. How
much can Rhode expect to receive from the sale of these bonds?
a. $3,691,117
b. $4,000,000
c. $4,324,440
d. $3,308,880
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
D - 18
77. Hale Corporation issues an 8%, 9-year mortgage note on January 1 2014, to obtain
financing for new equipment. The terms provide for semiannual installment payments of
$32,900. The following values related to the time value of money were available to Hale to
help them with their planning process and compounded interest decisions.
Present value of 1 for 9 periods at 8% 0.50025
Present value of 1 for 18 periods at 4% 0.49363
Future value of 1 for 9 periods at 8% 1.99900
Future value of 1 for 18 periods at 4% 2.02582
Present value of an annuity of 1 for 9 periods at 8% 6.24689
Present value of an annuity of 1 for 18 periods at 4% 12.65930
Future value of an annuity of 1 for 9 periods at 8% 12.48756
Future value of an annuity of 1 for 18 periods at 4% 25.64541
To the closest dollar, what were the cash proceeds received from the issuance of the
note?
a. $205,523
b. $236,880
c. $416,491
d. $410,841
78. Chenard Company is about to issue $3,000,000 of 8-year bonds paying a 12% interest
rate with interest payable semiannually. The discount rate for such securities is 10%.
Below are time value of money factors that Chenard uses to calculate compounded
interest.
8 periods,
10%
16 periods,
5%
8 periods,
12%
16 periods,
6%
Present value 1
0.46651
0.45811
0.40388
0.39365
Future value 1
2.14359
2.18287
2.47596
2.54035
Present value of an annuity of 1
5.33493
10.83777
4.96764
10.10590
Future value of an annuity of 1
11.43589
23.65749
12.29969
25.67253
To the closest dollar, how much can Chenard expect to receive for the sale of these
bonds?
a. $3,193,390
b. $2,293,710
c. $3,325,130
d. $5,400,000
Time Value of Money
FOR INSTRUCTOR USE ONLY
D - 19
79. Patterson Company is about to issue $8,000,000 of 10-year bonds paying an 8% interest
rate with interest payable semiannually. The discount rate for such securities is 10%.
Below are time value of money factors that Patterson uses to calculate compounded
interest.
10 periods,
8%
20 periods,
4%
10 periods,
10%
20 periods,
5%
Present value 1
0.46319
0.45639
0.38554
0.37689
Future value 1
2.15892
2.19112
2.59374
2.65330
Present value of an annuity of 1
6.71008
13.59033
6.14457
12.46221
Future value of an annuity of 1
14.48656
29.77808
15.93743
33.06595
To the closest dollar, how much can Patterson expect to receive for the sale of these
bonds?
a. $7,003,027
b. $5,852,740
c. $16,000,000
d. $28,110,060
Answers to Multiple Choice Questions
BRIEF EXERCISES
Be. 80
David Jones deposited $6,500 in an account paying interest of 5% compounded annually. What
amount would be in the account at the end of 4 years?
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: Investment Decisions
Solution 80 (5 min.)
Be. 81
Balentyne Company borrowed $95,000 on January 2, 2014. This amount plus accrued interest of
5% compounded annually will be repaid at the end of 3 years. What amount will Balentyne repay
at the end of the third year?
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
D - 20
Solution 81 (5 min.)
Be. 82
Fischer Company has decided to begin accumulating a fund for plant expansion. The company
deposited $20,000 in a fund on January 2, 2012. Fischer will also deposit $60,000 annually at the
end of each year, starting in 2012. The fund pays interest at 5% compounded annually. What is
the balance of the fund at the end of 2016 (after the 2016 deposit)?
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: Investment Decisions
Solution 82 (8 min.)
Be. 83
Gwen and Steve Jones Jeter invested $10,000 in a savings account paying 4% annual interest
when their daughter, Larrisa was born. They also deposited $5,000 on each of her birthdays until
she was 18 (including her 18th birthday). How much was in the savings account on her 18th
birthday (after the last deposit)?
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: Investment Decisions
Solution 83 (8 min.)
Be. 84
Winek Company deposited $12,500 annually for 6 years in an account paying 5% interest
compounded annually. What is the balance of the account at the end of the 6th year?
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: Investment Decisions
Solution 84 (5 min.)
Be. 85
Toub Company issued $4,000,000, 10-year bonds and agreed to make annual deposits of
$303,500 to a fund. The deposits are made at the end of each year to a fund paying 6% interest
compounded annually. What amount will be in the fund at the end of the 10 years?
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: Investment Decisions
Time Value of Money
FOR INSTRUCTOR USE ONLY
D - 21
Solution 85 (5 min.)
Be. 86
(a) What is the present value of $32,000 due 7 years from now, discounted at 8%?
(b) What is the present value of $70,000 due 5 years from now, discounted at 15%?
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: Investment Decisions
Solution 86 (8 min.)
Be. 87
Sauls Company is considering an investment that will return a lump sum of $1,250,000 six years
from now. What amount should Sauls Company pay for this investment to earn a 12% return?
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: Investment Decisions
Solution 87 (5 min.)
Be. 88
Lewis Company earns 12% on an investment that will return $500,000 eleven years from now.
What is the amount that Lewis Company should invest now to earn this rate of return?
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: Investment Decisions
Solution 88 (5 min.)
Be. 89
If Claude Summers invests $14,962.50 now, she will receive $50,000 at the end of 14 years.
What annual rate of return will Claude earn on his investment?
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: Investment Decisions
Solution 89 (5 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
D - 22
Be. 90
Wando Company is considering investing in an annuity contract that will return $55,000 annually
at the end of each year for 20 years. What amount should Wando Company pay for this
investment if it earns a 6% return?
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: Investment Decisions
Solution 90 (5 min.)
Be. 91
Kenny Corsig purchased an investment for $9,818.15. From this investment, he will receive
$1,000 annually for the next 20 years starting one year from now. What rate of interest will Kenny
be earning on his investment?
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: Investment Decisions
Solution 91 (5 min.)
Be. 92
Sebastian Hale owns a garage and is contemplating purchasing a tire retreading machine for
$18,150. After estimating costs and revenues, Sebastian projects a net cash flow from the
retreading machine of $3,300 annually for 8 years. Sebastian hopes to earn a return of 10
percent on such investments. What is the present value of the retreading operation? Should
Sebastian purchase the retreading machine?
Ans: N/A, LO: 6,7, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: Investment Decisions
Solution 92 (8 min.)
Time Value of Money
FOR INSTRUCTOR USE ONLY
D - 23
Be. 93
Appalachian Company is considering purchasing equipment. The equipment will produce the
following cash flows: Year 1, $50,000; Year 2, $60,000; Year 3, $75,000. Appalachian requires a
minimum rate of return of 10%. What is the maximum price Appalachian should pay for this
equipment?
Ans: N/A, LO: 6,7, Bloom: AP, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Investment Decisions
Solution 93 (8 min.)
Be. 94
Tweetsie Railroad Co. is about to issue $800,000 of 10-year bonds paying a 9% interest rate,
with interest payable semianually. The discount rate for such securities is 10%. How much can
Tweetsie expect to receive for the sale of these bonds?
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Investment Decisions
Solution 94 (8 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
D - 24
Be. 95
The Chocolate Tree Company receives a $150,000, 6-year note bearing interest of 6% (paid
annually) from a customer at a time when the discount rate is 8%. What is the present value of
the note received by The Chocolate Tree?
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Investment Decisions
Solution 95 (8 min.)
Be. 96
Beaufort Company issued $400,000, 10%, 2-year bonds that pay interest semiannually. Compute
the amount at which the bonds would sell if investors required a rate of return of 8%.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Investment Decisions
Solution 96 (8 min.)
Time Value of Money
D - 25
Be. 97
SBB Company issued 11%, 5-year, $600,000 face value bonds that pay interest semi-annually on
October 1 and April 1. The bonds are dated April 1, 2014, and are issued on that date. The
discount rate of interest for such bonds on April 1, 2014, is 10%. What cash proceeds did SBB
Company receive from issuance of the bonds?
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Investment Decisions
Solution 97 (8 min.)
COMPLETION STATEMENTS
98. Compound interest is computed on the_____________ and on any _______________
earned that has not been paid or withdrawn.
99. The future value of a ________________ is the value at the future date of a given amount
invested, assuming compound interest.
100. Payments or receipts of equal dollar amounts are referred to as __________________.
101. The _____________________ of an annuity is the sum of all the payments plus the
accumulated compound interest on them.
102. The process of determining the present value is referred to as _________________ the
future amount.
103. The further removed from the present the future value is, the smaller the ____________.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
D - 26
104. In computing the present value of an annuity, it is necessary to know the _____________
rate and the _____________ of discount periods.
105. To compute the present value of a bond, both the _______________ payments and the
________________ amount must be discounted.
Answers to Completion Statements
MATCHING
106. Match the items below by entering the appropriate code letter in the space provided.
A. Compound interest D. Present value of a single amount
B. Future value of a single amount E. Present value of an annuity
C. Future value of an annuity
_____ 1. The value today of a future amount to be received or paid.
_____ 2. The value at a future date of a given amount invested.
_____ 3. Return on principal for two or more periods.
_____ 4. Value today of a series of future amounts to be received or paid.
_____ 5. The sum of all the payments or receipts plus the accumulated compound interest on
them.
Ans: N/A, LO: 1-7, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
None, IMA: Investment Decisions
Answers to Matching
