Test bank for financial accounting tools for business decision making 7th edition by kimmel weygandt by maryjen445

Test Bank for Financial Accounting Tools for Business Decision Making 7th Edition by Kimmel Weygandt and Kieso Link download full: https://testbankservice.com/download/test-bank-for-financial-accounting-toolsfor-business-decision-making-7th-edition-by-kimmel-weygandt-and-kieso/

APPENDIX D TIME VALUE OF MONEY SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOMâ&#x20AC;&#x2122;S TAXONOMY Item

Item

1. 2. 3. 4.

1 1 1 1

K K K K

5. 6. 7. 8.

2 2 3 3

21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32.

1 1 1 1 2 2 2,3 2 2 2 2 2

K K AP C AP AP AP K AP K K AP

33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

3 3 3 3 3 3 3 4 4 4 5 5

80. 81. 82. 83.

2 2 2,3 2,3

AP AP AP AP

84. 85. 86. 87.

3 3 5 5

98. 99.

1 2

K K

100. 101.

3 3

106.

1-6

Item

True-False Statements K 9. 4 K 13. K 10. 4 K 14. K 11. 5 K 15. K 12. 5 K 16. Multiple Choice Questions AP 45. 5 AP 57. AP 46. 5 AP 58. K 47. 5 K 59. AP 48. 5 AP 60. C 49. 5 AP 61. AP 50. 5 AP 62. K 51. 5 C 63. K 52. 5 AP 64. K 53. 5 AP 65. K 54. 5 AP 66. AP 55. 5 AP 67. AP 56. 5 AP 68. Brief Exercises AP 88. 5 AP 92. AP 89. 5 AP 93. AP 90. 6 AP 94. AP 91. 6 AP 95. Completion Statements K 102. 4 K 104. K 103. 5 K 105. Matching

Item

6 6 6 6

K K K K

17. 18. 19. 20.

7 7 7 7

K C K K

5 5 5 5 6 6 6 6 6 7 6 6

AP AP AP AP AP AP AP AP K AP AP AP

69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79.

6 7 7 7 7 7 7 7 7 7 7

AP AP AP K K K K AP AP AP AP

6,7 6,7 7 7

AP AP AP AP

96. 97.

7 7

AP AP

6 7

K K

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Learning Objective 1 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

1. 2.

TF TF

3. 4.

TF TF

21. 22.

MC MC

23. 24.

MC MC

98.

Learning Objective 2 FOR INSTRUCTOR USE ONLY

Item

Type

Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition

D-2 5. 6. 25.

TF TF MC

26. 27. 28.

MC MC MC

29. 30. 31.

MC MC MC

32. 80. 81.

MC Be Be

82.

83.

MC Be Be

84.

85.

100.

99.

101.

Learning Objective 3

7. 8. 27.

TF TF MC

33. 34. 35.

MC MC MC

36. 37. 38.

MC MC MC

39. 82. 83.

Learning Objective 4 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

10.

40.

41.

42.

102.

MC MC MC MC MC

86.

87. 88. 89. 103.

Be Be Be C

MC MC MC

69.

92.

90. 91.

Be Be

93.

MC MC Be Be

96.

97. 105.

Be C

Learning Objective 5

11. 12. 43. 44. 45.

TF TF MC MC MC

46. 47. 48. 49. 50.

MC MC MC MC MC

51. 52. 53. 54. 55.

MC MC MC MC MC

56. 57. 58. 59. 60.

Learning Objective 6

13. 14. 15.

TF TF TF

16. 61. 62.

TF MC MC

63. 64. 65.

MC MC MC

66. 67. 68.

Learning Objective 7

17. 18. 19. 20.

TF TF TF TF

70. 71. 72. 73.

MC MC MC MC

Note: TF = True-False MC = Multiple Choice Ma = Matching

74. 75. 76. 77.

MC MC MC MC

78. 79. 94. 95.

C = Completion Ex = Exercise

CHAPTER LEARNING OBJECTIVES 1. Distinguish between simple and compound interest. Simple interest is computed on the principal only while compound interest is computed on the principal and any interest earned that has not been withdrawn. 2. Solve for future value of a single amount. Prepare a time diagram of the problem. Identify the principal amount, the number of compounding periods, and the interest rate. Using the future value of 1 table, multiply the principal amount by the future value factor specified at the intersection of the number of periods and the interest rate. 3. Solve for future value of an annuity. Prepare a time diagram of the problem. Identify the amount of the periodic payments, the number of compounding periods, and the interest rate. Using the future value of an annuity of 1 table, multiply the amount of the payments by the FOR INSTRUCTOR USE ONLY

future value factor specified at the intersection of the number of periods and the interest rate. 4. Identify the variables fundamental to solving present value problems. The following three variables are fundamental to solving present value problems: (1) the future amount, (2) the number of periods, and (3) the interest rate (the discount rate). 5. Solve for present value of a single amount. Prepare a time diagram of the problem. Identify the future amount, the number of discounting periods, and the discount (interest) rate. Using the present value of a single amount table, multiply the future amount by the present value factor specified at the intersection of the number of periods and the discount rate. 6. Solve for present value of an annuity. Prepare a time diagram of the problem. Identify the amount of future periodic receipts or payment (annuities), the number of discounting periods, and the discount (interest) rate. Using the present value of an annuity of 1 table, multiply the amount of the annuity by the present value factor specified at the intersection of the number of periods and the interest rate. 7. Compute the present value of notes and bonds. Determine the present value of the principal amount: Multiply the principal amount (a single future amount) by the present value factor (from the present value of 1 table) intersecting at the number of periods (number of interest payments) and the discount rate. Determine the present value of the series of interest payments: Multiply the amount of the interest payment by the present value factor (from the present value of an annuity of 1 table) intersecting at the number of periods (number of interest payments) and the discount rate. Add the present value of the principal amount to the present value of the interest payments to arrive at the present value of the note or bond.

TRUE-FALSE STATEMENTS 1.

Interest is the difference between the amount borrowed and the principal.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

Compound interest is computed on the principal and any interest earned that has not been withdrawn.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

The amount of interest involved in any financing transaction is based on two elements, principal and interest rate.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

Compound interest uses the accumulated balance—principal plus interest to date—at each year-end to compute interest in the succeeding year.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

The formula for the future value of a single amount is p × (1 + i)/n.

Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

The future value of a single amount is the value at a future date of a given amount invested assuming compound interest.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

FOR INSTRUCTOR USE ONLY

D-4 7.

Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition

When the periodic payments are not equal in each period, the future value can be computed by using a future value of an annuity of 1 table.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

In computing the future value of an annuity, it is necessary to know the interest rate, the number of compounding periods, and the amount of the periodic payments or receipts.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

The present value is based on two variablesâ&#x20AC;&#x201D;the dollar amount to be received and the length of time until the amount is received.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

10.

The process of determining the present value is referred to as discounting the future amount.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

11.

A higher discount rate produces a higher present value.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

12.

The formula for the present value of a single amount is FV / (1 + i)N.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

13.

In computing the present value of an annuity, it is necessary to know only the discount rate and the amount of the periodic receipts or payments.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

14.

A series of equal periodic receipts or payments are called annuities.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

15.

In computing the present value of an annuity, it is not necessary to know the number of discount periods.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

16.

Discounting may be done on an annual basis or over shorter periods of time such as semiannually.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

17.

The present value of a bond is a function of two variables: (1) the payment amounts and (2) the discount rate.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

18.

When the discount rate is equal to the contractual rate, the present value of the bonds will equal the bonds' face value.

Ans: T, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

FOR INSTRUCTOR USE ONLY

19.

The present value of a long-term note is based on the payment amounts, the length of time until the amounts are paid, and the discount rate.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

20.

To compute the present value of a bond, both the interest payments and the principal amount must be discounted using the bond’s contractual interest rate.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

Answers to True-False Statements 1. 2. 3.

F T F

4. 5. 6.

T F T

7. 8. 9.

F T F

10. 11. 12.

T F T

13. 14. 15.

F T F

16. 17. 18.

T F T

19. 20.

T F

MULTIPLE CHOICE QUESTIONS Note: Students will need time value of money tables for some questions. 21.

Compound interest is the return on principal a. only. b. for one or more periods. c. for two or more periods. d. for one period.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

22.

The difference between the amount borrowed (or invested) and the amount repaid (or collected) is commonly known as a. simple interest. b. an annuity. c. interest d. present value.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

23.

Ken Corsig invested $20,000 at 8% annual interest and left the money invested without withdrawing any of the interest for 15 years. At the end of the 15 years, Ken withdrew the accumulated amount of money. What amount did Ken withdraw, assuming the investment earns simple interest? a. $25,600 b. $44,000 c. $30,000 d. $24,000

Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: ($20,000  .08  15) + $20,000

FOR INSTRUCTOR USE ONLY

D-6 24.

Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition

Parks Blair invested $5,000 at 8% annual interest and left the money invested without withdrawing any of the interest for 15 years. At the end of the 15 years, Parks decided to withdraw the accumulated amount of money. Parks has found the following values in various tables related to the time value of money. Present value of 1 for 15 periods at 8% 0.31524 Future value of 1 for 15 periods at 8% 3.17217 Present value of an annuity of 1 for 15 periods at 8% 8.55948 Future value of an annuity of 1 for 15 periods at 8% 27.15211 Which factor would he use to compute the amount he would withdraw, assuming that the investment earns interest compounded annually? a. 0.31524 b. 3.17217 c. 8.55948 d. 27.15211

Ans: B, LO: 1, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

25.

Parks Blair invested $5,000 at 8% annual interest and left the money invested without withdrawing any of the interest for 15 years. At the end of the 15 years, Parks decided to withdraw the accumulated amount of money. Parks has found the following values in various tables related to the time value of money. Present value of 1 for 15 periods at 8% 0.31524 Future value of 1 for 15 periods at 8% 3.17217 Present value of an annuity of 1 for 15 periods at 8% 8.55948 Future value of an annuity of 1 for 15 periods at 8% 27.15211 To the closest dollar, which amount would he withdraw, assuming that the investment earns interest compounded annually? a. $42,797 b. $75,000 c. $1,576 d. $15,861

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: $5,000 ď&#x201A;´ 3.17218

26.

Brenda Draper borrowed $120,000 on June 1, 2013. This amount plus accrued interest at 8% compounded annually is to be repaid on June 1, 2026. Brenda has obtained the following values related to the time value of money to help her with her financing process and compounded interest decisions. Present value of 1 for 13 periods at 8% 0.36770 Future value of 1 for 13 periods at 8% 2.71962 Present value of an annuity of 1 for 13 periods at 8% 7.90378 Future value of an annuity of 1 for 13 periods at 8% 21.49530 To the closest dollar, how much will Brenda have to repay on June 1, 2026? a. $44,124 b. $948,454 c. $261,554 d. $326,354

FOR INSTRUCTOR USE ONLY

27.

Jim and Aneta O'Connor invested $12,000 in a savings account paying 5% annual interest when their son, Austin, was born. They also deposited $500 on each of his birthdays until he was 20 (including his 20th birthday). Jim and Aneta have obtained the following values related to the time value of money to help them with their planning process for their compounded interest decisions. Present value of 1 for 20 periods at 5% 0.37689 Future value of 1 for 20 periods at 5% 2.65330 Present value of an annuity of 1 for 20 periods at 5% 12.46221 Future value of an annuity of 1 for 20 periods at 5% 33.06595 To the closest dollar, how much was in the savings account on his 20th birthday (after the last deposit)? a. $33,166 b. $48,373 c. $22,000 d. $28,533

Ans: B, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: ($12,000 ď&#x201A;´ 2.65330) + ($500 ď&#x201A;´ 33.06595)

28.

The factor 1.08160 is taken from the 4% column and 2 periods row in a certain table. From what table is this factor taken? a. Future value of 1 b. Future value of an annuity of 1 c. Present value of 1 d. Present value of an annuity of 1

Ans: A, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

29.

If $30,000 is put in a savings account paying interest of 4% compounded annually, what amount will be in the account at the end of 5 years? a. $25,644 b. $36,000 c. $35,096 d. $36,500 Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. (30,000 X 1.21665 = $36,500).

30.

The future value of 1 factor will always be a. equal to 1. b. greater than 1. c. less than 1. d. equal to the interest rate.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

31.

All of the following are necessary to compute the future value of a single amount except the a. interest rate. b. number of periods. c. principal. d. maturity value.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

FOR INSTRUCTOR USE ONLY

D-8 32.

Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition

If $10,000 is put in a savings account paying interest of 4% compounded annually, what amount will be in the account at the end of 5 years? a. $8,220 b. $12,000 c. $12,155 d. $12,167

33.

Common Ground Corporation issued $8,000,000, 10-year bonds and agreed to make annual sinking fund deposits of $620,000. The deposits are made at the end of each year into an account paying 6% annual interest. Common Ground has the following values related to the time value of money and compounded interest decisions. Present value of 1 for 10 periods at 6% 0.55839 Future value of 1 for 10 periods at 6% 1.79085 Present value of an annuity of 1 for 10 periods at 6% 7.36009 Future value of an annuity of 1 for 10 periods at 6% 13.18079 To the closest dollar, what amount will be in the sinking fund at the end of 10 years? a. $4,467,120 b. $4,563,256 c. $8,172,090 d. $12,800,000

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: $620,000  13.18079

34.

If $13,000 is deposited in a savings account at the end of each year and the account pays interest of 5% compound annually, what will be the balance of the account at the end of 10 years? a. $13,650 b. $211,757 c. $163,512 d. $136,500

35.

Which table has a factor of 1.00000 for 1 period at every interest rate? a. Future value of 1 b. Future value of an annuity of 1 c. Present value of 1 d. Present value of an annuity of 1

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

FOR INSTRUCTOR USE ONLY

36.

SCI Company deposits $15,000 in a fund at the end of each year for 7 years. The fund pays interest of 3% compounded annually. The balance in the fund at the end of 7 years is computed by multiplying a. $15,000 by the future value of 1 factor. b. $75,000 by 1.07. c. $75,000 by 1.70. d. $15,000 by the future value of an annuity factor.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

37.

The future value of an annuity factor for 2 periods is equal to a. 1 plus the interest rate. b. 2 plus the interest rate. c. 2 minus the interest rate. d. 2.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions.

38.

If $22,000 is deposited in a savings account at the end of each year and the account pays interest of 5% compounded annually, what will be the balance of the account at the end of 10 years? a. $23,100 b. $231,000 c. $276,714 d. $303,600

39.

Which of the following is not necessary to know in computing the future value of an annuity? a. Amount of the periodic payments b. Interest rate c. Number of compounding periods d. Year the payments begin

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

40.

In present value calculations, the process of determining the present value is called a. allocating. b. pricing. c. negotiating. d. discounting.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

41.

Present value is based on a. the dollar amount to be received. b. the length of time until the amount is received. c. the interest rate. d. all of these answer choices are correct.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

FOR INSTRUCTOR USE ONLY

D - 10 42.

Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition

Which of the following accounting problems does not involve a present value calculation? a. The determination of the market price of a bond b. The determination of the declining-balance depreciation expense c. The determination of the amount to report for long-term notes payable d. The determination of the amount to report for lease liability

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

43.

If you are able to earn a 6% rate of return, what amount would you need to invest to have $6,500 one year from now? a. $6,011.79 b. $6,132.10 c. $5,817.50 d. $6,190.47

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: $6,500  .94340

44.

If you are able to earn a 15% rate of return, what amount would you need to invest to have $6,500 one year from now? a. $6,435.65 b. $5,687.50 c. $5,525.00 d. $5,652.20

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: $6,500  .86957

45.

If the single amount of $12,500 is to be received in 2 years and discounted at 11%, its present value is a. $11,363.75. b. $10,145.25. c. $11,261.25. d. $10,330.63.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: $12,500  .81162

46.

If the single amount of $5,000 is to be received in 3 years and discounted at 6%, its present value is a. $4,198.10. b. $4,717.30. c. $4,450.00. d. $4,395.45.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: $5,000  .83962

FOR INSTRUCTOR USE ONLY

47.

Which of the following discount rates will produce the smallest present value? a. 6% b. 7% c. 8% d. 3%

Ans: C, LO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions.

48.

Suppose you have a winning lottery ticket and you are given the option of accepting $3,000,000 three years from now or taking the present value of the $3,000,000 now. The sponsor of the prize uses a 5% discount rate. If you elect to receive the present value of the prize now, the amount you will receive is a. $2,591,520. b. $2,518,860. c. $2,670,000. d. $3,000,000.

49.

The amount you must deposit now in your savings account paying 6% interest, in order to accumulate $2,000 for a down payment 5 years from now on a new Vintage Convertible Mustang is a. $400. b. $1,494.52. c. $1,492.44. d. $1,400.00.

50.

The amount you must deposit now in your savings account paying 5% interest, in order to accumulate $15,000 for your first tuition payment when you start college in 3 years is a. $13,350. b. $12,957.60. c. $12,594.30. d. $13,289.40.

51.

The present value of $10,000 to be received in 5 years will be smaller if the discount rate is a. increased. b. decreased. c. not changed. d. equal to the stated rate of interest.

Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

FOR INSTRUCTOR USE ONLY

D - 12 52.

Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition

Mango Madness Company is considering purchasing equipment. The equipment will produce the following cash flows: Year 1 $40,000 Year 2 $30,000 Mango Madness requires a minimum rate of return of 10%. What is the maximum price Mango Madness should pay for this equipment? a. $61,157.10 b. $36,363.60 c. $70,000 d. $35,000

53.

If Jane Key invests $15,501.28 now and she will receive $40,000 at the end of 11 years, what annual rate of interest will she be earning on her investment? a. 8% b. 8.5% c. 9% d. 10%

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. (FINANCIAL CALCULATOR INPUTS: N =11, I= ?, PV = -7,750.64, FV = 20,000, PMT = 0). Solution: (financial calculator inputs): N  11, I ?, PV  15,501.28, FV  40,000, PMT  0.

54.

Patrick Mazzeo has been offered the opportunity of investing $89,278.45 now. The investment will earn 8% per year and at the end of its life will return $250,000 to Patrick. How many years must Patrick wait to receive the $250,000? a. 1011 b. 1112 c. 1213 d. 1314

55.

Suppose you have a winning lottery ticket and you are given the option of accepting $7,000,000 three years from now or taking the present value of the $7,000,000 now. The sponsor of the prize uses a 6% discount rate. If you elect to receive the present value of the prize now, the amount you will receive is a. $5,877,340. b. $6,046,880. c. $6,230,000. d. $7,000,000.

FOR INSTRUCTOR USE ONLY

56.

The amount you must deposit now in your savings account paying 6% interest, in order to accumulate $20,000 for a down payment 5 years from now on a new Ferrari 458 is a. $4,000.00. b. $14,945.20. c. $14,924.40. d. $14,000.00.

57.

The amount you must deposit now in your savings account paying 5% interest, in order to accumulate $18,000 for your first tuition payment when you start law school in 3 years is a. $15,300.00. b. $14,094.00. c. $15,549.12. d. $15,947.28.

58.

Akers Company is considering purchasing a machine. The machine will produce the following cash flows: Year 1 $30,000 Year 2 $45,000 Akers requires a minimum rate of return of 10%. What is the maximum price Akers should pay for this machine? a. $64,462.95 b. $27,272.70 c. $75,000.00 d. $37,500.00

59.

Koppernaes Corporation earns 12% on an investment that will return $1,350,000, 7 years from now. Below is some of the time value of money information that Koppernaes has compiled that might help in planning compounded interest decisions. Present value of 1 for 7 periods at 12% 0.45235 Future value of 1 for 7 periods at 12% 2.21068 Present value of an annuity of 1 for 7 periods at 12% 4.56376 Future value of an annuity of 1 for 7 periods at 12% 10.08901 To the closest dollar, what is the amount Koppernaes should invest now to earn this rate of return? a. $298,442 b. $610,673 c. $1,134,,000 d. $616,107

FOR INSTRUCTOR USE ONLY

D - 14 60.

Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition

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

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. (40,000  7.16073  $286,429). Solution: $80,000  7.16073

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

FOR INSTRUCTOR USE ONLY

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. Present value of 1 Future value of 1 Present value of an annuity of 1 Future value of an annuity of 1

1 period, 11% 0.90090 1.11000 0.90090 1.00000

2 periods, 11% 0.81162 1.23210 1.71252 2.12000

3 periods, 11% 0.73119 1.36763 2.44371 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 Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions.((50,000  .90090) + (90,000  .81162) + (120,000  0.73119)  $205,834). Solution: ($50,000  .90090) + ($90,000  .81162) + ($130,000  .73119)

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

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. (CALCULATOR INPUTS: N  ?, I  10%, PV  21,310.08, PMT  3,000, FV  0). Solution: (financial calculator inputs): N  ?, I 10%, PV  10,655.04, PMT  1,500, FV  0.

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.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions.

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

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

FOR INSTRUCTOR USE ONLY

D - 16 67.

Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition

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

Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: $22,500  2.85498

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

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: $31,250  4.11141

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

Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: ($3,000,000  .61391) + ($120,000  7.72173)

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

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: ($3,000,000  .67556) + ($150,000  8.11090)

FOR INSTRUCTOR USE ONLY

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.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions.

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.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

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.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

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.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

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

FOR INSTRUCTOR USE ONLY

D - 18 77.

Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition

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% 0.46651 2.14359 5.33493 11.43589

Present value 1 Future value 1 Present value of an annuity of 1 Future value of an annuity of 1

16 periods, 5% 0.45811 2.18287 10.83777 23.65749

8 periods, 12% 0.40388 2.47596 4.96764 12.29969

16 periods, 6% 0.39365 2.54035 10.10590 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 Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: ($3,000,000  .45811) + ($180,000  10.83777)

FOR INSTRUCTOR USE ONLY

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% 0.46319 2.15892 6.71008 14.48656

Present value 1 Future value 1 Present value of an annuity of 1 Future value of an annuity of 1

20 periods, 4% 0.45639 2.19112 13.59033 29.77808

10 periods, 10% 0.38554 2.59374 6.14457 15.93743

20 periods, 5% 0.37689 2.65330 12.46221 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 Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: ($8,000,000  .37689) + ($320,000  12.46221)

Answers to Multiple Choice Questions 21. 22. 23. 24. 25. 26. 27. 28. 29.

c c b b d d b a d

30. 31. 32. 33. 34. 35. 36. 37. 38.

b d d c c b d b c

39. 40. 41. 42. 43. 44. 45. 46. 47.

d d d b b d b a c

48. 49. 50. 51. 52. 53. 54. 55.

a b b a a c d a

56. 57. 58. 59. 60. 61. 62. 63.

b c a b c d c b

64. 65. 66. 67. 68. 69. 70. 71.

c c c a b a a c

72. 73. 74. 75. 76. 77. 78. 79.

a b a a a c c a

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.)

Use future value of 1 table data. $6,500 × 1.21551 (4 periods and 5%) = $7,900.82 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? 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

FOR INSTRUCTOR USE ONLY

D - 20

Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition

Solution 81

(5 min.)

Use future value of 1 table data. $95,000 × 1.15763 (3 periods and 5%) = $109,974.85 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.)

Use future value of 1 table data and future value of an annuity of 1 table data. $20,000 × 1.27628 (5 periods and 5%; future value of 1) = $25,525.60 $60,000 × 5.52563 (5 periods and 5%; Use future value of an annuity of 1 table) = $331,537.80 Fund Balance at 12-31-16 $357,063.40 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.)

FV = p  FV of 1 factor + (p  FV of an annuity factor) = ($10,000  2.02582) + ($5,000  25.64541) = $20,258.20 + $128,227.05 = $148,485.25 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.)

Use future value of an annuity of 1 table data. $12,500 × 6.80191 (6 periods and 5%) = $85,023.88 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

FOR INSTRUCTOR USE ONLY

Solution 85

(5 min.)

Use future value of an annuity of 1 table data. $303,500 × 13.18079 (10 periods and 6%) = $4,000,369.70 Be. 86 (a) (b)

What is the present value of $32,000 due 7 years from now, discounted at 8%? 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.)

Use present value of 1 table data. (a) $32,000 × 0.58349 (7 periods and 8%) = $18,671.68 (b) $70,000 × 0.49718 (5 periods and 15%) = $34,802.60 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.)

Use present value of 1 table data. $1,250,000 × 0.50663 (6 periods and 12%) = $633,288 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.)

Use present value of 1 table data. $500,000 × 0.28748 (11 periods and 12%) = $143,740 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.)

Use present value of 1 table data. Answer: 9% $14,962.50 ÷ $50,000 = 0.29925 Read across the 14-period row in the present value of 1 table to find 0.29925 in the 9% column.

FOR INSTRUCTOR USE ONLY

D - 22

Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition

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.)

Use present value of an annuity of 1 table data. $55,000 × 11.46992 (20 periods and 6%) = $630,846 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.)

Use present value of an annuity of 1 table data. Answer: 8% ($9,818.15 ÷ $1,000) = 9.81815 Read across the 20-period row in present value of an annuity of 1 to find 9.81815 in the 8% column. 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.) i = 10% ? $3,300 $3,300 $3,300 $3,300 $3,300 $3,300 $3,300 $3,300

Discount rate from present value of an annuity of 1 table is 5.33493. Present value of 8 payments of 3,300 each discounted at 10% is therefore $17,605.27 ($3,300  5.33493). Sebastian Hale should not purchase the tire retreading machine because the present value of the future cash flows is less than the $18,150 purchase price of the retreading machine.

FOR INSTRUCTOR USE ONLY

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.) i = 10% ?

$50,000

$60,000 $75,000

To determine the present value of the future cash flows, discount the future cash flows at 10%, using present value of 1 table data. Year 1 ($50,000  0.90909) = Year 2 ($60,000  0.82645) = Year 3 ($75,000  0.75132) = Present value of future cash flows

$45,454.50 49,587.00 56,349.00 $151,390.50

To achieve a minimum rate of return of 10%, Appalachian Company should pay no more than $151,390.50. If Appalachian pays less than $151,390.50 its rate of return will be greater than 10%. 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.)

The bonds will set at a discount (for less than $800,000). This may be proven as follows: Present value of principal to be received at maturity: $800,000 × 0.37689 (PV of $1 due in 20 periods at 5% from present value of 1 table data) ..........................................

$301,512

Present value of interest to be received periodically over the term of the bonds: $36,000 × 12.46221 (PV of $1 due each period for 20 periods at 5% from present value of an annuity of 1 table) .......................................

448,640

Present value of bonds .............................................................................

$750,152*

*Rounded.

FOR INSTRUCTOR USE ONLY

D - 24

Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition

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.) i = 8% ? Diagram for Principal

$150,000

i = 8% ? $9,000 $9,000 $9,000 $9,000 $9,000 $9,000 Diagram for Interest 0

Present value of principal to be received at maturity: $150,000 × 0.63017 (PV of $1 due in 6 periods at 8% from present value of 1 table) ..................................................

$94,525.50

Present value of interest to be received annually over the term of the note: $9,000 × 4.62288 (PV of $1 due each period for 6 periods at 8% from present value of an annuity of 1 table) .......................................

41,605.92

Present value of note received ..................................................................

$136,131.42

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.)

Present value of the principal: $400,000 × 0.85480 (Present value of 1, 4 periods - 4%) Present value of the interest payments: $400,000 × 0.05 = $20,000 $20,000 × 3.62990 (Present value of an annuity of 1, 4 periods - 4%) Proceeds from issuance of bonds

FOR INSTRUCTOR USE ONLY

$341,920

72,598 $414,518

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.)

Present value of the interest payments: $600,000 × 11% x 6/12 = $33,000 $33,000 × PV of 1 due periodically for 10 periods at 5% $33,000 × 7.72173 (Present value of an annuity of 1) = $254,817.09 Present value of the principal: $600,000 × PV of 1 due in 10 periods at 5% $600,000 × 0.61391 (Present value of 1) = $368,346 Proceeds = $254,817.09 + $368,346.00 = $623,163.09

COMPLETION STATEMENTS 98.

Compound interest is computed on the_____________ and on any _______________ earned that has not been paid or withdrawn.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

99.

The future value of a ________________ is the value at the future date of a given amount invested, assuming compound interest.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

100.

Payments or receipts of equal dollar amounts are referred to as __________________.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

101.

The _____________________ of an annuity is the sum of all the payments plus the accumulated compound interest on them.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

102.

The process of determining the present value is referred to as _________________ the future amount.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

103.

The further removed from the present the future value is, the smaller the ____________.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

FOR INSTRUCTOR USE ONLY

Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition

D - 26 104.

In computing the present value of an annuity, it is necessary to know the _____________ rate and the _____________ of discount periods.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

105.

To compute the present value of a bond, both the _______________ payments and the ________________ amount must be discounted.

Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

Answers to Completion Statements 98. 99. 100. 101.

principal, interest single amount annuities future value

102. 103. 104. 105.

discounting present value discount, number interest, principal

MATCHING 106.

Match the items below by entering the appropriate code letter in the space provided. A. Compound interest B. Future value of a single amount C. Future value of an annuity

D. Present value of a single amount E. Present 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 1. 2. 3.

D B A

4. E 5. C

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