# Test bank with answers intermediate accounting 12e by kieso chapter 06

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To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER ACCOUNTING AND THE TIME VALUE OF MONEY TRUE-FALSE—Conceptual Answer F T F T T F F T T T F F F T T T F T F T No Description 10 11 12 13 14 15 16 17 18 19 20 Time value of money Definition of interest expense Simple interest Compound interest Compound interest Future value of an ordinary annuity Present value of an annuity due Compounding period interest rate Definition of present value Future value of a single sum Determining present value Present value of a single sum Annuity due and interest Annuity due and ordinary annuity Annuity due and ordinary annuity Number of compounding periods Future value of an annuity due factor Present value of an ordinary annuity Future value of a deferred annuity Determining present value of bonds MULTIPLE CHOICE—Conceptual Answer a b a d c c b c c a a c a d d a No 21 22 23 24 25 26 27 28 S 29 S 30 S 31 P 32 P 33 P 34 35 36 Description Appropriate use of an annuity due table Understanding compound interest tables Identification of correct compound interest table Identification of correct compound interest table Identification of correct compound interest table Identification of correct compound interest table Identification of correct compound interest table Identification of present value of table Identification of correct compound interest table Identification of correct compound interest table Present value of an annuity due table Definition of an annuity due Identification of compound interest concept Identification of compound interest concept Identification of number of compounding periods Adjust the interest rate for time periods To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Test Bank for Intermediate Accounting, Twelfth Edition 6-2 MULTIPLE CHOICE—Conceptual (cont.) Answer d c c c b c b b b d P S No 37 38 P 39 40 41 42 43 44 45 46 P Description Definition of present value Compound interest concepts Future value of an annuity due factor Determine the timing of rents of an annuity due Factors of an ordinary annuity and an annuity due Determine present value of an ordinary annuity Identification of a future value of an ordinary annuity of Present value of an ordinary annuity and an annuity due Difference between an ordinary annuity and an annuity due Definition of deferred annuities These questions also appear in the Problem-Solving Survival Guide These questions also appear in the Study Guide MULTIPLE CHOICE—Computational Answer d c b a b c c d a d b c c b b c a b c d a b c d a a d c No Description 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 Interest compounded quarterly Calculate present value of a future amount Calculate a future value Calculate a future value of an annuity due Calculate a future value Calculate a future value Calculate present value of a future amount Calculate present value of a future amount Calculate present value of an annuity due Calculate the future value of Present value of a single sum Present value of a single sum, unknown number of periods Future value of a single sum Present value of a single sum Present value of a single sum, unknown number of periods Future value of a single sum Present value of an ordinary annuity Present value of an annuity due Future value of an ordinary annuity Future value of a annuity due Present value of an ordinary annuity Present value of an annuity due Future value of an ordinary annuity Future value of an annuity due Calculate future value of an annuity due Calculate future value of an ordinary annuity Calculate future value of an annuity due Calculate annual deposit for annuity due To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting and the Time Value of Money MULTIPLE CHOICE—Computational (cont.) Answer d a b b c a b b b No Description 75 76 77 78 79 80 81 82 83 Calculate cost of machine purchased on installment Calculate present value of an ordinary annuity Calculate present value of an annuity due Calculate cost of machine purchased on installment Calculate cost of machine purchased on installment Calculate the annual rents of leased equipment Calculate present value of an investment in equipment Calculate proceeds from issuance of bonds Calculate proceeds from issuance of bonds MULTIPLE CHOICE—CPA Adapted Answer c d c a b a a d b No Description 84 85 86 87 88 89 90 91 92 Calculate interest expense of bonds Identification of correct compound interest table Calculate interest revenue of a noninterest-bearing note Appropriate use of an ordinary annuity table Calculate annual deposit of annuity due Calculate the present value of a note Calculate the present value of a note Determine the issue price of a bond Determine the acquisition cost of a franchise EXERCISES Item E6-93 E6-94 E6-95 E6-96 E6-97 E6-98 E6-99 E6-100 Description Present and future value concepts Compute estimated goodwill Present value of an investment in equipment Future value of an annuity due Present value of an annuity due Compute the annual rent Calculate the market price of a bond Calculate the market price of a bond PROBLEMS Item P6-101 P6-102 P6-103 P6-104 P6-105 P6-106 Description Present value and future value computations Annuity with change in interest rate Present value of ordinary annuity and annuity due Finding the implied interest rate Calculation of unknown rent and interest Deferred annuity 6-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-4 Test Bank for Intermediate Accounting, Twelfth Edition CHAPTER LEARNING OBJECTIVES Identify accounting topics where the time value of money is relevant Distinguish between simple and compound interest Use appropriate compound interest tables Identify variables fundamental to solving interest problems Solve future and present value of problems Solve future value of ordinary and annuity due problems Solve present value of ordinary and annuity due problems Solve present value problems related to deferred annuities and bonds SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item Type Item Type Item TF TF 21 TF TF TF TF TF 22 23 24 MC MC MC 25 26 27 TF P 33 MC 10 11 12 37 TF TF TF MC P 38 48 49 51 MC MC MC MC 52 53 54 56 13 14 16 TF TF TF 17 39 40 TF MC NC 41 50 63 15 18 41 42 43 TF TF MC MC MC 44 45 55 74 75 MC MC MC MC MC 76 77 78 79 80 19 TF 20 TF 46 Note: P P TF = True-False MC = Multiple Choice 34 Type Item Type Item Learning Objective MC Learning Objective TF 84 MC Learning Objective S MC 28 MC 31 S P MC 29 MC 32 S MC 30 MC 47 Learning Objective MC 35 MC 36 Learning Objective MC 57 MC 61 MC 58 MC 62 MC 59 MC 84 MC 60 MC 86 Learning Objective MC 64 MC 67 MC 65 MC 68 MC 66 MC 69 Learning Objective MC 81 MC 89 MC 82 MC 90 MC 83 MC 91 MC 87 MC 92 MC 88 MC 97 Learning Objective MC 106 P E = Exercise P = Problem Type MC MC MC Item Type Item Type 85 MC MC MC MC MC 93 94 95 101 E E E P MC MC MC 70 71 72 MC MC MC 73 96 102 MC E P MC MC MC MC E 98 99 100 101 103 E E E P P 104 105 P P MC To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting and the Time Value of Money 6-5 TRUE-FALSE—Conceptual 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 Interest is the excess cash received or repaid over and above the amount lent or borrowed Simple interest is computed on principal and on any interest earned that has not been withdrawn Compound interest, rather than simple interest, must be used to properly evaluate longterm investment proposals Compound interest uses the accumulated balance at each year end to compute interest in the succeeding year The future value of an ordinary annuity table is used when payments are invested at the beginning of each period The present value of an annuity due table is used when payments are made at the end of each period 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 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 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 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Test Bank for Intermediate Accounting, Twelfth Edition 6-6 17 The future value of an annuity due factor is found by multiplying the future value of an ordinary annuity factor by 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 At the date of issue, bond buyers determine the present value of the bonds’ cash flows using the market interest rate True False Answers—Conceptual Item Ans F T F T T Item 10 Ans F F T T T Item 11 12 13 14 15 Ans F F F T T Item 16 17 18 19 20 Ans T F T F T 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 with interest payable semiannually on July and January yielding 7% d A ten-year 8% bond is issued on January with interest payable semiannually on July and January yielding 9% 22 Which of the following tables would show the smallest value for an interest rate of 5% for six periods? a Future value of b Present value of c Future value of an ordinary annuity of d Present value of an ordinary annuity of 23 Which table would you use to determine how much you would need to have deposited three years ago at 10% compounded annually in order to have \$1,000 today? a Future value of or present value of b Future value of an annuity due of c Future value of an ordinary annuity of d Present value of an ordinary annuity of To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting and the Time Value of Money 6-7 24 Which table would you use to determine how much must be deposited now in order to provide for annual withdrawals at the beginning of each year, starting one year hence? a Future value of an ordinary annuity of b Future value of an annuity due of c Present value of an annuity due of d None of these 25 Which table has a factor of 1.00000 for period at every interest rate? a Future value of b Present value of c Future value of an ordinary annuity of d Present value of an ordinary annuity of 26 Which table would show the largest factor for an interest rate of 8% for five periods? a Future value of an ordinary annuity of b Present value of an ordinary annuity of c Future value of an annuity due of d Present value of an annuity due of 27 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 b Present value of an ordinary annuity of c Future value of an annuity due of d Present value of an annuity due of 28 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 b Future value of annuity of c Present value of d Present value of annuity of S Which of the following tables would show the largest value for an interest rate of 10% for periods? a Future amount of table b Present value of table c Future amount of an ordinary annuity of table d Present value of an ordinary annuity of table S On June 1, 2006, Walsh Company sold some equipment to Fischer Company The two companies entered into an installment sales contract at a rate of 8% The contract required equal annual payments with the first payment due on June 1, 2006 What type of compound interest table is appropriate for this situation? a Present value of an annuity due of table b Present value of an ordinary annuity of table c Future amount of an ordinary annuity of table d Future amount of table 29 30 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-8 Test Bank for Intermediate Accounting, Twelfth Edition S Which of the following transactions would best use the present value of an annuity due of table? a Diamond Bar, Inc rents a truck for years with annual rental payments of \$20,000 to be made at the beginning of each year b Michener Co rents a warehouse for 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 years P 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 P In the time diagram below, which concept is being depicted? 31 32 33 \$1 \$1 \$1 \$1 PV a b c d P Present value of an ordinary annuity Present value of an annuity due Future value of an ordinary annuity Future value of an annuity due 34 On December 1, 2007, Michael Hess Company sold some machinery to Shawn Keling 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, 2007, the date of the sale What present value concept is appropriate for this situation? a Future amount of an annuity of for four periods b Future amount of for four periods c Present value of an ordinary annuity of for four periods d Present value of an annuity due of for four periods 35 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 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting and the Time Value of Money 6-9 36 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 table b dividing the future value by the present value and looking for the quotient in the present value of table c dividing the present value by the future value and looking for the quotient in the future value of table d multiplying the present value by the future value and looking for the product in the present value of table 37 Present value is 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 all of these P 38 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, 2010, the present value of that sum decreases as the date draws closer to December 31, 2010 P 39 If the interest rate is 10%, the factor for the future value of annuity due of for n = 5, i = 10% is equal to the factor for the future value of an ordinary annuity of for n = 5, i = 10% a plus 1.10 b minus 1.10 c multiplied by 1.10 d divided by 1.10 40 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 None of these 41 Which statement 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 1.00000 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 1.00000 to the ordinary annuity table value for one less period 42 Ed Sloan 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? To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com - 10 Test Bank for Intermediate Accounting, Twelfth Edition a b c d \$20,000 times the future value of a 5-year, 10% ordinary annuity of \$20,000 divided by the future value of a 5-year, 10% ordinary annuity of \$20,000 times the present value of a 5-year, 10% ordinary annuity of \$20,000 divided by the present value of a 5-year, 10% ordinary annuity of 43 Ann Ruth 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 b \$40,000 divided by the future value of a 5-year, 6% ordinary annuity of c \$40,000 times the present value of a 5-year, 6% ordinary annuity of d \$40,000 divided by the present value of a 5-year, 6% ordinary annuity of 44 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) 45 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 46 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 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 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting and the Time Value of Money a b c d - 15 \$123,342 \$138,144 \$243,456 \$272,670 70 Wagner Corporation will invest \$25,000 every January 1st for the next six years (2006 – 2011) If Wagner will earn 12% on the investment, what amount will be in the investment fund on December 31, 2011? a \$102,785 b \$115,120 c \$202,880 d \$227,225 71 On January 1, 2007, Carly Company decided to begin accumulating a fund for asset replacement five years later The company plans to make five annual deposits of \$50,000 at 9% each January beginning in 2007 What will be the balance in the fund, within \$10, on January 1, 2012 (one year after the last deposit)? The following 9% interest factors may be used Present Value of Future Value of Ordinary Annuity Ordinary Annuity periods 3.2397 4.5731 periods 3.8897 5.9847 periods 4.4859 7.5233 a b c d \$326,166 \$299,235 \$272,500 \$250,000 Use the following 8% interest factors for questions 72 through 75 periods periods periods Present Value of Ordinary Annuity 5.2064 5.7466 6.2469 Future Value of Ordinary Annuity 8.92280 10.63663 12.48756 72 What will be the balance on September 1, 2013 in a fund which is accumulated by making \$8,000 annual deposits each September beginning in 2006, with the last deposit being made on September 1, 2013? The fund pays interest at 8% compounded annually a \$85,093 b \$71,383 c \$60,480 d \$45,973 73 If \$5,000 is deposited annually starting on January 1, 2007 and it earns 8%, what will the balance be on December 31, 2014? a \$44,614 b \$48,183 c \$53,183 d \$57,438 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com - 16 Test Bank for Intermediate Accounting, Twelfth Edition 74 Henson Company wishes to accumulate \$300,000 by May 1, 2015 by making equal annual deposits beginning May 1, 2007 to a fund paying 8% interest compounded annually What is the required amount of each deposit? a \$52,205 b \$28,204 c \$26,115 d \$30,234 75 What amount should be recorded as the cost of a machine purchased December 31, 2006, which is to be financed by making annual payments of \$6,000 each beginning December 31, 2007? The applicable interest rate is 8% a \$42,000 b \$37,481 c \$63,820 d \$34,480 76 How much must be deposited on January 1, 2007 in a savings account paying 6% annually in order to make annual withdrawals of \$20,000 at the end of the years 2007 and 2008? The present value of one at 6% for one period is 9434 a \$36,668 b \$37,740 c \$40,000 d \$17,800 77 How much must be invested now to receive \$10,000 for 15 years if the first \$10,000 is received today and the rate is 9%? Present Value of Ordinary Annuity at 9% Periods 14 7.78615 15 8.06069 16 8.31256 a \$80,607 b \$87,862 c \$150,000 d \$73,125 78 Foley Company financed the purchase of a machine by making payments of \$18,000 at the end of each of five years The appropriate rate of interest was 8% The future value of one for five periods at 8% is 1.46933 The future value of an ordinary annuity for five periods at 8% is 5.8666 The present value of an ordinary annuity for five periods at 8% is 3.99271 What was the cost of the machine to Foley? a \$26,448 b \$71,869 c \$90,000 d \$105,600 79 A machine is purchased by making payments of \$5,000 at the beginning of each of the next five years The interest rate was 10% The future value of an ordinary annuity of for five periods is 6.10510 The present value of an ordinary annuity of for five periods is 3.79079 What was the cost of the machine? To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting and the Time Value of Money a b c d - 17 \$33,578 \$30,526 \$20,849 \$18,954 80 Catt Co has a machine that cost \$200,000 It is to be leased for 20 years with rent received at the beginning of each year Catt wants a return of 10% Calculate the amount of the annual rent Present Value of Ordinary Annuity Period 19 8.36492 20 8.51356 21 8.64869 a \$21,356 b \$23,909 c \$29,728 d \$23,492 81 Find the present value of an investment in plant and equipment if it is expected to provide annual earnings of \$21,000 for 15 years and to have a resale value of \$40,000 at the end of that period Assume a 10% rate and earnings at year end The present value of at 10% for 15 periods is 23939 The present value of an ordinary annuity at 10% for 15 periods is 7.60608 The future value of at 10% for 15 periods is 4.17725 a \$159,728 b \$169,303 c \$185,276 d \$324,576 82 On January 2, 2007, Yenn Corporation wishes to issue \$2,000,000 (par value) of its 8%, 10-year bonds The bonds pay interest annually on January The current yield rate on such bonds is 10% Using the interest factors below, compute the amount that Yenn will realize from the sale (issuance) of the bonds Present value of at 8% for 10 periods Present value of at 10% for 10 periods Present value of an ordinary annuity at 8% for 10 periods Present value of an ordinary annuity at 10% for 10 periods a b c d 0.4632 0.3855 6.7101 6.1446 \$2,000,000 \$1,754,136 \$2,000,012 \$2,212,052 Note: Students must be given interest tables for question 83 83 The market price of a \$200,000, ten-year, 12% (pays interest semiannually) bond issue sold to yield an effective rate of 10% is a \$224,578 b \$224,925 c \$226,654 d \$374,472 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com - 18 Test Bank for Intermediate Accounting, Twelfth Edition Multiple Choice Answers—Computational Item 47 48 49 50 51 52 Ans d c b a b c Item 53 54 55 56 57 58 Ans c d a d b c Item 59 60 61 62 63 64 Ans c b b c a b Item 65 66 67 68 69 70 Ans c d a b c d Item 71 72 73 74 75 76 Ans a a d c d a Item 77 78 79 80 81 82 Ans Item Ans b b c a b b 83 b MULTIPLE CHOICE—CPA Adapted 84 On January 1, 2007, Nott Co sold to Day Corp \$400,000 of its 10% bonds for \$354,118 to yield 12% Interest is payable semiannually on January and July What amount should Nott report as interest expense for the six months ended June 30, 2007? a \$17,706 b \$20,000 c \$21,247 d \$24,000 85 On May 1, 2007, a company purchased a new machine which it does not have to pay for until May 1, 2009 The total payment on May 1, 2009 will include both principal and interest Assuming interest at a 10% rate, the cost of the machine would be the total payment multiplied by what time value of money factor? a Future value of annuity of b Future value of c Present value of annuity of d Present value of 86 On January 1, 2007, Abel Co exchanged equipment for a \$160,000 noninterest-bearing note due on January 1, 2010 The prevailing rate of interest for a note of this type at January 1, 2007 was 10% The present value of \$1 at 10% for three periods is 0.75 What amount of interest revenue should be included in Abel's 2008 income statement? a \$0 b \$12,000 c \$13,200 d \$16,000 87 For which of the following transactions would the use of the present value of an ordinary annuity concept be appropriate in calculating the present value of the asset obtained or the liability owed at the date of incurrence? a A capital lease is entered into with the initial lease payment due one month subsequent to the signing of the lease agreement b A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement c A ten-year 8% bond is issued on January with interest payable semiannually on January and July yielding 7% d A ten-year 8% bond is issued on January with interest payable semiannually on January and July yielding 9% To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting and the Time Value of Money 88 - 19 On January 15, 2007, Flynn Corp adopted a plan to accumulate funds for environmental improvements beginning July 1, 2011, at an estimated cost of \$4,000,000 Flynn plans to make four equal annual deposits in a fund that will earn interest at 10% compounded annually The first deposit was made on July 1, 2007 Future value factors are as follows: Future value of at 10% for periods Future value of ordinary annuity of at 10% for periods Future value of annuity due of at 10% for periods 1.61 4.64 5.11 Flynn should make four annual deposits of a \$711,618 b \$782,779 c \$862,069 d \$1,000,000 89 On December 30, 2007, Cey, Inc purchased a machine from Frank Corp in exchange for a noninterest-bearing note requiring eight payments of \$50,000 The first payment was made on December 30, 2007, and the others are due annually on December 30 At date of issuance, the prevailing rate of interest for this type of note was 11% Present value factors are as follows: Present Value of Ordinary Present Value of Annuity of at 11% Annuity Due of at 11% Period 4.712 5.231 5.146 5.712 On Cey's December 31, 2007 balance sheet, the net note payable to Frank is a \$235,600 b \$257,300 c \$261,775 d \$285,600 90 On January 1, 2007, Lex Co sold goods to Eaton Company Eaton signed a noninterestbearing note requiring payment of \$80,000 annually for seven years The first payment was made on January 1, 2007 The prevailing rate of interest for this type of note at date of issuance was 10% Information on present value factors is as follows: Period Present Value of at 10% 5645 5132 Present Value of Ordinary Annuity of at 10% 4.3553 4.8684 Lex should record sales revenue in January 2007 of a \$428,419 b \$389,472 c \$348,424 d \$285,600 91 On January 1, 2007, Grant Co issued ten-year bonds with a face amount of \$2,000,000 and a stated interest rate of 8% payable annually on January The bonds were priced to yield 10% Present value factors are as follows: At 10% At 8% Present value of for 10 periods 0.463 0.386 Present value of an ordinary annuity of for 10 periods 6.710 6.145 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com - 20 Test Bank for Intermediate Accounting, Twelfth Edition The total issue price of the bonds was a \$2,000,000 b \$1,960,000 c \$1,840,000 d \$1,755,200 92 On July 1, 2007, Ed Vance signed an agreement to operate as a franchisee of Kwik Foods, Inc., for an initial franchise fee of \$180,000 Of this amount, \$60,000 was paid when the agreement was signed and the balance is payable in four equal annual payments of \$30,000 beginning July 1, 2008 The agreement provides that the down payment is not refundable and no future services are required of the franchisor Vance's credit rating indicates that he can borrow money at 14% for a loan of this type Information on present and future value factors is as follows: Present value of at 14% for periods Future value of at 14% for periods Present value of an ordinary annuity of at 14% for periods 0.59 1.69 2.91 Vance should record the acquisition cost of the franchise on July 1, 2007 at a \$130,800 b \$147,300 c \$180,000 d \$202,800 Multiple Choice Answers—CPA Adapted Item 84 85 Ans c d Item 86 87 Ans c a Item 88 89 Ans b a Item 90 91 Ans Item Ans a d 92 b DERIVATIONS — Computational No Answer Derivation 47 d × = 32 periods; 4% ÷ = 1% 48 c 1.260 × PV = \$10,000; PV = \$10,000 ÷ 1.260 49 b 1.260 × \$3,000 50 a (\$6,000 × 1.260) + (\$6,000 × 1.166) + (\$6,000 × 1.080) + \$6,000 51 b \$4,000 × (1.080)6 or \$4,000 × 1.469 × 1.080 52 c 0.826 × PV = \$4,000; PV = \$4,000 ÷ 0.826 53 c \$6,000 × 0.621 × 0.909 54 d \$3,000 × 0.751 55 a \$5,000 + (\$5,000 × 0.909) + (\$5,000 × 0.826) + (\$5,000 × 0.751) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting and the Time Value of Money - 21 No Answer 56 d \$5,000 × (1.06)2 = \$5,618 Derivation 57 b \$100,000 × 0.51316 = \$51,316 58 c \$51,316 ÷ \$100,000 = 0.51316; 0,51316 is PV factor for years 59 c \$200,000 × 1.33823 = \$267,646 60 b \$500,000 × 0.51316 = \$256,580 61 c \$63,017 ÷ \$100,000 = 0.63017; 0.63017 is PV factor for years 62 c \$300,000 × 1.33823 = \$401,469 63 a \$10,000 × 4.11141 = \$41,114 64 b \$10,000 × 4.60478 = \$46,048 65 c \$10,000 × 8.11519 = \$81,152 66 d \$10,000 × 8.11519 × 1.12 = \$90,890 67 a \$20,000 × 4.11141 = \$82,228 68 b \$20,000 × 4.60478 = \$92,096 69 c \$30,000 × 8.11519 = \$243,456 70 d \$25,000 × 8.11519 × 1.12 = \$227,225 71 a \$50,000 × (7.5233 – 1) = \$326,166 or \$50,000 × 5.9847 × 1.09 72 a \$8,000 × 10.63663 = \$85,093 73 d \$5,000 × (12.48756 – 1) = \$57,438 or \$5,000 × 10.63663 × 1.08 74 c (10.63663 × 1.08) × R = \$300,000; R = \$300,000 ÷ 11.48756 = \$26,115 75 d \$6,000 × 5.7466 = \$34,480 76 a (\$20,000 × 0.9434) + [\$20,000 × (0.9434)2] = \$36,668 77 b \$10,000 × (7.78615 + 1) = \$87,862 or \$10,000 × 8.06069 × 1.09 78 b \$18,000 × 3.99271 = \$71,869 79 c \$5,000 × (3.79079 × 1.10) = \$5,000 × 4.16987 = \$20,849 80 a \$200,000 = R × (8.51356 × 1.10); R = \$200,000 ÷ 9.36492 = \$21,356 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com - 22 Test Bank for Intermediate Accounting, Twelfth Edition No Answer 81 b (\$21,000 × 7.60608) + (\$40,000 × 23939) = \$169,303 Derivation 82 b \$2,000,000 × 08 = \$160,000 (annual interest payment) (\$160,000 × 6.1446) + (\$2,000,000 × 0.3855) = \$1,754,136 83 b \$200,000 × 06 = \$12,000 (semiannual interest payment) (\$12,000 × 12.46221) + (\$200,000 × 37689) = \$224,925 DERIVATIONS — CPA Adapted No Answer 84 c \$354,118 × 06 = \$21,247 Derivation 85 d Conceptual 86 c \$160,000 × 75 = \$120,000 (present value of note) \$120,000 × 1.10 = \$132,000; \$132,000 × 0.10 = \$13,200 87 a Conceptual 88 b 5.11 × R = \$4,000,000; R = \$4,000,000 ÷ 5.11 = \$782,779 89 a \$50,000 × 4.712 = \$235,600 or (\$50,000 × 5.712) – \$50,000 = \$235,600 90 a \$80,000 × (4.8684 × 1.1) = \$428,419 91 d \$2,000,000 × 08 = \$160,000 (\$160,000 × 6.145) + (\$2,000,000 × 0.386) = \$1,755,200 92 b (\$30,000 × 2.91) + \$60,000 = \$147,300 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting and the Time Value of Money - 23 EXERCISES Ex 6-93—Present and future value concepts On the right are six diagrams representing six different present and future value concepts stated on the left Identify the diagrams with the concepts by writing the identifying letter of the diagram on the blank line at the left Assume n = and i = 8% Diagram of Concept Concept _ Future value of _ Present value of _ Future value of an annuity ? a due of _ b Future value of an ordinary annuity of _ Present value of an ordinary annuity of _ Present value of an annuity c due of d \$1 | | | | | \$1 \$1 \$1 ? \$1 |- - - - | | | | ? \$1 \$1 \$1 \$1 | | | |- - - - | ? \$1 \$1 \$1 \$1 | | | | | \$1 e f ? | | | | | \$1 \$1 \$1 \$1 ? | | | | | Solution 6-93 e a f b d c Ex 6-94—Compute estimated goodwill (Tables needed.) Compute estimated goodwill if it is found by discounting excess earnings at 12% compounded quarterly Excess annual earnings of \$12,000 are expected for years Solution 6-94 Present value of \$3,000 for 32 periods at 3% (\$3,000 × 20.38877) = \$61,166 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com - 24 Test Bank for Intermediate Accounting, Twelfth Edition Ex 6-95—Present value of an investment in equipment (Tables needed.) Find the present value of an investment in equipment if it is expected to provide annual savings of \$10,000 for 10 years and to have a resale value of \$25,000 at the end of that period Assume an interest rate of 9% and that savings are realized at year end Solution 6-95 Present value of \$10,000 for 10 periods at 9% (6.41766 × \$10,000) = Present value of \$25,000 discounted for 10 periods at 9% (.42241 × \$25,000) = Present value of investment in equipment \$64,177 10,560 \$74,737 Ex 6-96—Future value of an annuity due (Tables needed.) If \$4,000 is deposited annually starting on January 1, 2007 and it earns 9%, how much will accumulate by December 31, 2016? Solution 6-96 Future value of an annuity due of \$4,000 for 10 periods at 9% (\$4,000 × 15.19293 × 1.09) = \$66,241 Ex 6-97—Present value of an annuity due (Tables needed.) How much must be invested now to receive \$20,000 for ten years if the first \$20,000 is received today and the rate is 8%? Solution 6-97 Present value of an annuity due of \$20,000 for ten periods at 8% (\$20,000 × 7.24689) = \$144,938 Ex 6-98—Compute the annual rent (Tables needed.) Aaron Co has machinery that cost \$80,000 It is to be leased for 15 years with rent received at the beginning of each year Aaron wants a return of 10% Compute the amount of the annual rent Solution 6-98 Present value factor for an annuity due for 15 periods at 10% (1.10 × 7.60608) = 8.36669 \$80,000 ÷ 8.36669 = \$9,562 Ex 6-99—Calculate market price of a bond (Tables needed.) Determine the market price of a \$200,000, ten-year, 10% (pays interest semiannually) bond issue sold to yield an effective rate of 12% To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting and the Time Value of Money - 25 Solution 6-99 Present value of \$10,000 for 20 periods at 6% (\$10,000 × 11.46992) = Present value of \$200,000 discounted for 20 periods at 6% (\$200,000 × 31180) = Market price of the bond issue \$114,699 62,360 \$177,059 Ex 6-100—Calculate market price of a bond On January 1, 2007 Kiner Co issued five-year bonds with a face value of \$400,000 and a stated interest rate of 12% payable semiannually on July and January The bonds were sold to yield 10% Present value table factors are: Present value of for periods at 10% 62092 Present value of for periods at 12% 56743 Present value of for 10 periods at 5% 61391 Present value of for 10 periods at 6% 55839 Present value of an ordinary annuity of for periods at 10% 3.79079 Present value of an ordinary annuity of for periods at 12% 3.60478 Present value of an ordinary annuity of for 10 periods at 5% 7.72173 Present value of an ordinary annuity of for 10 periods at 6% 7.36009 Calculate the issue price of the bonds Solution 6-100 Present value of \$400,000 discounted for 10 periods at 5% (\$400,000 × 61391) = Present value of \$24,000 for 10 periods at 5% (\$24,000 × 7.72173) = Issue price of the bonds \$245,564 185,322 \$430,886 PROBLEMS Pr 6-101—Present value and future value computations Part (a) Compute the amount that a \$20,000 investment today would accumulate at 10% (compound interest) by the end of years Part (b) Don wants to retire at the end of this year (2007) His life expectancy is 20 years from his retirement Don has come to you, his CPA, to learn how much he should deposit on December 31, 2007 to be able to withdraw \$40,000 at the end of each year for the next 20 years, assuming the amount on deposit will earn 8% interest annually Part (c) Mary Houser has a \$1,200 overdue debt for medical books and supplies at Ken's Bookstore She has only \$400 in her checking account and doesn't want her parents to know about this debt Ken's tells her that she may settle the account in one of two ways since she can't pay it all now: Pay \$400 now and \$1,000 when she completes her residency, two years from today Pay \$1,600 one year after completion of residency, three years from today Assuming that the cost of money is the only factor in Mary's decision and that the cost of money to her is 8%, which alternative should she choose? Your answer must be supported with calculations To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com - 26 Test Bank for Intermediate Accounting, Twelfth Edition Solution 6-101 Part (a) Future value of \$20,000 compounded @ 10% for years (\$20,000 × 1.77156) = \$35,431 Part (b) Present value of a \$40,000 ordinary annuity discounted @ 8% for 20 years (\$40,000 × 9.81815) = \$392,726 Part (c) Alternative Present value of \$1,000 discounted @ 8% for years (\$1,000 × 85734) = Present value of \$1,000 now = Present value of \$400 now = Present value of Alternative \$ 857 400 \$1,257 Alternative Present value of \$1,600 discounted @ 8% for years (\$1,600 × 79383) \$1,270 On the present value basis, Alternative is preferable Pr 6-102—Annuity with change in interest rate Meg Sloan established a savings account for her son's college education by making annual deposits of \$6,000 at the beginning of each of six years to a savings account paying 8% At the end of the sixth year, the account balance was transferred to a bank paying 10%, and annual deposits of \$6,000 were made at the end of each year from the seventh through the tenth years What was the account balance at the end of the tenth year? Solution 6-102 Years 1-6: Future value of annuity due of \$6,000 for periods at 8%: (7.33592 × 1.08) × \$6,000 = \$47,537 Years 7-10: Future value of \$47,537 for periods at 10%: 1.4641 × \$47,537 = \$69,599 Future value of ordinary annuity of \$6,000 for periods at 10%: 4.6410 × \$6,000 = \$27,846 Sum in bank at end of tenth year: \$27,846 + \$69,599 = \$97,445 Pr 6-103—Present value of an ordinary annuity due Jill Norris is presently leasing a small business computer from Darby Office Equipment Company The lease requires 10 annual payments of \$4,000 at the end of each year and provides the lessor (Darby) with an 8% return on its investment You may use the following 8% interest factors: Future Value of Present Value of Future Value of Ordinary Annuity of Present Value of Ordinary Annuity of Present Value of Annuity Due of Periods 1.99900 50025 12.48756 6.24689 6.74664 10 Periods 2.15892 46319 14.48656 6.71008 7.24689 11 Periods 2.33164 42888 16.64549 7.13896 7.71008 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting and the Time Value of Money - 27 Pr 6-103 (cont.) Instructions (a) Assuming the computer has a ten-year life and will have no salvage value at the expiration of the lease, what was the original cost of the computer to Darby? (b) What amount would each payment be if the ten annual payments are to be made at the beginning of each period? Solution 6-103 (a) Present value of an ordinary annuity of \$4,000 at 8% for 10 years is 6.71008 × \$4,000 = \$26,840 (b) Present value factor for an annuity due of \$4,000 at 8% for 10 years is 7.24689; \$26,840 ÷ 7.24689 = \$3,704 Pr 6-104—Finding the implied interest rate Cline Company has entered into two lease agreements In each case the cash equivalent purchase price of the asset acquired is known and you wish to find the interest rate which is applicable to the lease payments Instructions Calculate the implied interest rate for the lease payments Lease A — Lease A covers office equipment which could be purchased for \$36,048 Cline Company has, however, chosen to lease the equipment for \$10,000 per year, payable at the end of each of the next years Lease B — Lease B applies to a machine which can be purchased for \$57,489 Cline Company has chosen to lease the machine for \$12,000 per year on a 6-year lease Payments are due at the start of each year Solution 6-104 Lease A — Calculation of the Implied Interest Rate: \$10,000 × (factor for Present Value of Ordinary Annuity for yrs.) = \$36,048 Factor for Present Value of Ordinary Annuity for yrs = \$36,048 ÷ \$10,000 = 3.6048 The 3.6048 factor implies a 12% interest rate Lease B — Calculation of the Implied Interest Rate: \$12,000 × (factor for Present Value of Annuity Due for yrs.) = \$57,489 Factor for Present Value of Annuity Due for yrs = \$57,489 ÷ \$12,000 = 4.79075 The 4.79075 factor implies a 10% interest rate (present value of an annuity due table) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com - 28 Test Bank for Intermediate Accounting, Twelfth Edition Pr 6-105—Calculation of unknown rent and interest Rice Leasing Company purchased specialized equipment from Wayne Company on December 31, 2006 for \$400,000 On the same date, it leased this equipment to Sears Company for years, the useful life of the equipment The lease payments begin January 1, 2007 and are made every months until July 1, 2011 Rice Leasing wants to earn 10% annually on its investment Various Factors at 10% Periods or Rents 10 11 Periods or Rents 10 11 Future Value of \$1 2.35795 2.59374 2.85312 Present Value of \$1 42410 38554 35049 Future Value of an Ordinary Annuity 13.57948 15.93743 18.53117 Present Value of an Ordinary Annuity 5.75902 6.14457 6.49506 Future Value of \$1 1.55133 1.62889 1.71034 Various Factors at 5% Present Future Value of an Value of \$1 Ordinary Annuity 64461 11.02656 61391 12.57789 58468 14.20679 Present Value of an Ordinary Annuity 7.10782 7.72173 8.30641 Instructions (a) Calculate the amount of each rent (b) How much interest revenue will Rice earn in 2007? Solution 6-105 (a) Calculation of rent: 7.72173 × 1.05 = 8.10782 (present value of a 10-rent annuity due at 5%.) \$400,000 ÷ 8.10782 = \$49,335 (b) Interest Revenue during 2007: Rent No None Cash Received \$49,335 49,335 None Date 1/1/07 7/1/07 12/31/07 Total Interest Revenue \$ -017,533 15,943 (Accrual) \$33,476 Lease Receivable \$350,665 318,863 Pr 6-106—Deferred annuity Baker Company owns a plot of land on which buried toxic wastes have been discovered Since it will require several years and a considerable sum of money before the property is fully detoxified and capable of generating revenues, Baker wishes to sell the land now It has located two potential buyers: Buyer A, who is willing to pay \$320,000 for the land now, and Buyer B, who is willing to make 20 annual payments of \$50,000 each, with the first payment to be made years from today Assuming that the appropriate rate of interest is 9%, to whom should Baker sell the land? Show calculations To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting and the Time Value of Money - 29 Solution 6-106 Buyer A The present value of the purchase price is \$320,000 Buyer B The present value of the purchase price is: Present value of ordinary annuity of \$50,000 for 24 periods at 9% Less present value of ordinary annuity of \$50,000 for periods (deferred) at 9% Difference Multiplied by annual payments Present value of payments Conclusion: Baker should sell to Buyer B 9.70661 3.23972 6.46689 × \$50,000 \$323,345 ... slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-4 Test Bank for Intermediate Accounting, Twelfth Edition CHAPTER LEARNING OBJECTIVES Identify accounting topics where... solutions and test bank, visit http://downloadslide.blogspot.com - 16 Test Bank for Intermediate Accounting, Twelfth Edition 74 Henson Company wishes to accumulate \$300,000 by May 1, 2015 by making... solutions and test bank, visit http://downloadslide.blogspot.com Test Bank for Intermediate Accounting, Twelfth Edition 6-6 17 The future value of an annuity due factor is found by multiplying
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