CHAPTER 6

ACCOUNTING AND THE TIME VALUE OF MONEY
MULTIPLE CHOICE—Conceptual
Answer d c a d c c b d a c c b a c b b b d No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Description Definition of present value. 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 number of compounding periods. Adjust the interest rate for time periods. Identification of present value of 1 table. Determine present value of an ordinary annuity. Identification of a future value of an ordinary annuity of 1. Appropriate use of an annuity due table. Determine the timing of rents of an annuity due. Present value of an ordinary annuity and an annuity due. Factors of an ordinary annuity and an annuity due. Difference between an ordinary annuity and an annuity due. Definition of deferred annuities.

MULTIPLE CHOICE—Computational
Answer c b a b c c d a d d a a b a d c Description 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. Interest compounded quarterly. Calculate the future value of 1. Calculate future value of an annuity due. Calculate present value of an ordinary annuity. Calculate present 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. MULTIPLE CHOICE—Computational (cont.) Answer d b No. 35. 36. Description Calculate cost of machine purchased on installment. Calculate cost of machine purchased on installment. No. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34.

c a b b b

37. 38. 39. 40. 41.

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 d a b a a c d c b No. 42. 43. 44. 45. 46. 47. 48. 49. 50. Description Identification of correct compound interest table. 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. Calculate interest revenue of a noninterest-bearing note. Determine the issue price of a bond. Calculate interest expense of bonds. Determine the acquisition cost of a franchise.

EXERCISES
Item E6-51 E6-52 E6-53 E6-54 E6-55 E6-56 E6-57 E6-58 Description Present and future value concepts. Present value of an annuity due. Future value of an annuity due. Compute goodwill. Compute the annual rent. Present value of an investment in equipment. Calculate the market price of a bond. Calculate the market price of a bond.

PROBLEMS
Item P6-59 P6-60 P6-61 P6-62 P6-63 P6-64 Description Present value and future value computations. Present value of ordinary annuity and annuity due. Annuity with change in interest rate. Finding the implied interest rate. Calculation of unknown rent and interest. Deferred annuity.

Type 2. E 59. 3. 7 (cont. MC 25. SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS L.O. E 57. MC MC No. Solve present value of ordinary and annuity due problems. Type 14. Learn how to use appropriate compound interest tables. MC L. E 61. MC 45. MC 21. 6. MC MC L.O. 2. MC 44. P L. MC 42. L. E 54. 5 Type 13. MC 46. 6 No. MC 32. Type 11. Distinguish between simple and compound interest. E 55. 4.O. Identify variables fundamental to solving interest problems. 3. MC 5. MC 29. 1. MC 26. MC 50. 1 L. MC 23.O. 19. MC 43. MC 27. MC 16. MC 6. Type 41. MC MC MC 4. MC 20.O.) No.CHAPTER LEARNING OBJECTIVES 1. E 56.O. MC 12. MC 48. MC 28. Identify accounting topics where time value of money is relevant. Solve future and present value of 1 problems. MC 22. 9. MC 33. P L. MC 15. Type 49. 2 No. MC 53. MC 18. E MC 47. Solve future value of ordinary and annuity due problems. MC 16. 5. Type No. . MC 17.O. MC 10. 4 No. MC 52. Type 8. MC 7. MC 31. MC 30. 3 No. MC L.O. 7. 7 No. MC 24. MC 51.

38. Present value of 1 c. 62. 4.00000 for 1 period at every interest rate? a. 36. starting one year hence? a. c. the amount that must be invested now to produce a known future value. Future value of 1 or present value of 1 b. 6. Present value of an ordinary annuity of 1 c. Future value of an ordinary annuity of 1 b.34. Present value is a. Present value of 1 c. Future value of an ordinary annuity of 1 b. Present value of an ordinary annuity of 1 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. 39. 59. b. Multiple Choice 35. Future value of an ordinary annuity of 1 d. . None of these Which table has a factor of 1. 64. Future value of an ordinary annuity of 1 d. Future value of an annuity due of 1 c. Future value of an annuity due of 1 d. d.000 today? a. 40. Present value of an ordinary annuity of 1 Which table would you use to determine how much must be deposited now in order to provide for 5 annual withdrawals at the beginning of each year. the value now of a future amount. Future value of an ordinary annuity of 1 b. Which of the following tables would show the largest value for an interest rate of 5% for six periods? a. 60. MC MC MC MC MC MC MC 58. E P P P P P Note: MC = E = Exercise P = Problem MULTIPLE CHOICE—Conceptual 1. all of these. Future value of an ordinary annuity of 1 d. 7. Present value of an annuity due of 1 Which of the following tables would show the smallest factor for an interest rate of 10% for six periods? a. Future value of 1 b. Future value of an annuity due of 1 c. 5. Present value of an ordinary annuity of 1 Which table would show the largest factor for an interest rate of 8% for five periods? a. Future value of 1 b. 37. 3. always smaller than the future value. Present value of an annuity due of 1 d. 63. Present value of an ordinary annuity of 1 2.

c. Future value of an annuity due of 1 d. Present value of an annuity due of 1 .

d. b. c. b. How should she compute her required annual investment? a. 2% for 32 periods. The investment will earn 6% compounded annually.000 times the present value of a 5-year. $25. d.000 divided by the future value of a 5-year.000 times the future value of a 5-year. b. dividing the future value by the present value and looking for the quotient in the future value of 1 table. 11. c. 10.000 (including principal) from an investment fund at the end of each year for five years.000 divided by the present value of a 5-year. 6% ordinary annuity of 1. The figure . 10% ordinary annuity of 1. d. 10% ordinary annuity of 1. Present value of annuity of 1 Ed Sloan wants to withdraw $25. 12. Rents occur at the end of each period of an annuity due. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 9%. c. Future value of 1 b. b. From what interest table is this figure taken? a.000 divided by the present value of a 5-year. 6% ordinary annuity of 1. . None of these. 6% ordinary annuity of 1. A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement. dividing the present value by the future value and looking for the quotient in the future value of 1 table. $25. If the number of periods is known. 2% for eight periods. 8% for 32 periods. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 7%. multiplying the present value by the future value and looking for the product in the present value of 1 table. Future value of annuity of 1 c.000 divided by the future value of a 5-year. If compounding occurs quarterly. How should he compute his required initial investment at the beginning of the first year if the fund earns 10% compounded annually? a.8. dividing the future value by the present value and looking for the quotient in the present value of 1 table. At the end of five years. 10% ordinary annuity of 1. Ann Ruth wants to invest a certain sum of money at the end of each year for five years. b. Present value of 1 d. 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. 6% ordinary annuity of 1. 10% ordinary annuity of 1. Rents occur at the beginning of each period of an annuity due. $25. 9. $25. $50. A capital lease is entered into with the initial lease payment due one month subsequent to the signing of the lease agreement. d. 14.94232 is taken from the column marked 2% and the row marked three periods in a certain interest table. 13. Which of the following is true? a. $50. she will need a total of $50. Rents occur at the beginning of each period of an ordinary annuity. c. An amount is deposited for eight years at 8%. d. $50. c. $50. d.000 accumulated. c.000 times the future value of a 5-year.000 times the present value of a 5-year. 8% for eight periods. b. then the table value is found at a. the interest rate is determined by a.

the accountant would use the present value factor in the 10% column for a. a 2.” 16. seven periods. a 6. 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. eight periods and multiply by (1 + . d. eight periods. the future value of the annuity due is less than the future value of the ordinary annuity. To compute the present value of a deferred annuity. the present value of the annuity due is greater than the present value of the ordinary annuity. c 9. c 8. b Solution to Multiple Choice question for which the answer is “none of 4.10). Multiple Choice Answers—Conceptual 1. MULTIPLE CHOICE—Computational Items 19 through 22 apply to the appropriate use of interest tables. To compute the present value. Given below are the future value factors for 1 at 8% for one to five periods. we compute the present value of an ordinary annuity of 1 for the entire period and subtract the present value of the rents which were not received during the deferral period. d. the future value of the annuity due is equal to the future value of the ordinary annuity. 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. it means the ordinary annuity is deferred for six periods. c 14. 16. The factor for the future value of an annuity due is found by subtracting 1. b 17. b. b. Which statement is false? a. c. nine periods and multiply by (1 – . If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates. Which of the following is false? a. the present value of the annuity due is less than the present value of the ordinary annuity. d 7. The future value of a deferred annuity is the same as the future value of an annuity not deferred.166 . c. The factor for the present value of an annuity due is found by adding 1. b. Present value of an Ordinary Annuity of 1. Periods Future Value of 1 at 8% 1 1. c. 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. d these.080 2 1. d 11. Each of the items 19 to 22 is based on 8% interest compounded annually. A deferred annuity is an annuity in which the rents begin after a specified number of periods.10). If the first rent is received at the end of the sixth period. b 10. 17. b 15. c 3.15.00000 to the ordinary annuity table value for one less period. a 12.00000 from the ordinary annuity table value for one more period. c 13. 18. d. b 18. then a. d 4. c 5. d. b. 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. c.

$6.909 d. Present Value of $1 Periods Discounted at 10% per Period 1 0.000 × 1.000 ÷ 1. $8.360 × 4 c. $10.621 23.260 × 3 c. $8.260 d.080) + ($5. ($8.000 × 1. ($5.000 b.000 ÷ 0.080 × 4 If $6.000 × 1.260) + ($8.621 × 0. $6.3 4 5 19.000 × 1. what amount of cash would be available two years from today? a.000 × 0.909 2 0.683 × 3 What amount should be deposited in a bank today to grow to $6. $10.000 × 1.260 c.260 × 2 20. $10.166) + ($8.080 × 1.000 × 0.000 × 1.00 discounted at 10% for one to five periods.826 d.000 × 1. $5.826 × 2 c. Given below are the present value factors for $1. $10.166) + ($5. $5. 25.469 What amount should be deposited in a bank account today to grow to $10.000 × 1.683 5 0.260 1.000 × 1. what amount will be available six years from now? a. $8.751 4 0.000 is put in a savings account today.000 × 1. $5.469 c. If an individual put $5.000 is put in a savings account today.260) What amount will be in a bank account three years from now if $8.826 b.000 × 0.000 × 1.000 × 1.080 × 3 If $5.000 three years from today? 24.000 × 0.000 three years from today? a.360 1.000 in a savings account today.000 × 1.080 × 6 b. $5.000 ÷ 0.000 × 0. ($8.000 × 1. Items 23 through 26 apply to the appropriate use of present value tables. 21.000 × 0. what amount will be available three years from today? a.000 × 1.000 to be received six years from today? a.080 × 3 d. 22.000 ÷ 1. $6.260) + ($8.000 is invested each year for four years with the first investment to be made today? a.080) + $8. $8.000 × 1.826 3 0.000 × 1.080) + ($8.166) + ($8. $5. Each of the items 23 to 26 is based on 10% interest compounded annually.000 × 1. $8.000 × 1. $5.000 × 1. .909 × 6 b.751 × 2 c.909 × 2 What is the present value today of $8.360) d. $8. $6. $5. 1.000 ÷ 1.166 × 3 d.260 b.260 b.

000 How much must be deposited on January 1. .5731 5 periods 3. $130. c.06.236 On January 1.000 × 0. ($10.000 d.000 + ($10. b. What will be the balance in the fund.4859 7.000 × 0. on January 1.683 × 4 c. a.9434. d.000 ÷ 0.466 b.8897 5.200 d. 24 periods at 1%. c.751) b. 26. $10.06069 27. 31.2397 4. $5.000 × 0. 30. At the end of two years. then the amount of $1 left on deposit for 6 years would be found in a table using a.000 × 0.909) + ($10.661 c.000 at the end of the years 2000 and 2001? The present value of one at 6% for one period is .826) + ($10. $10. 28.000 at 9% each January 1 beginning in 2001.000 × 0.683) d. 29.751) + ($10. 24 periods at 4%. $119.5233 a.000 b. $11.000 ÷ 0.000 for 15 years if the first $20. b.000 d. $6.000 × 0.000 × 0.000 is received today and the rate is 9%? Present Value of Periods Ordinary Annuity at 9% 14 7.000 × 0. The company plans to make five annual deposits of $20.751) $6.000 × 0.9847 6 periods 4. 2001.) a.826) + ($6.000 × 0.909) + ($6.000 × 0.909 × 3 ($6.751 What amount should an individual have in a bank account today before withdrawal if $10.826) + ($10.000 is deposited today? The future value of one at 6% for one period is 1. within $10.78615 15 8.909 × 4 If a savings account pays interest at 4% compounded quarterly. $6.000 is needed each year for four years with the first withdrawal to be made today and each subsequent withdrawal at one-year intervals? (The balance in the bank account should be zero after the fourth withdrawal. $10. what will be the balance in a savings account paying 6% annually if $10.909) + ($10. $10.000 ÷ 0. $11.a. $100. $2.000 × 0. $10.694 c. Present Value of Future Value of Ordinary Annuity Ordinary Annuity 4 periods 3. $5. 6 periods at 4%.751 $6. $109. the Carly Company decided to begin accumulating a fund for asset replacement five years later. a.600 c.500 b. 6 periods at 1%.670 How much must be invested now to receive $20. 2000 in a savings account paying 6% annually in order to make annual withdrawals of $3. 2006 (one year after the last deposit)? The following 9% interest factors may be used. d.

$107. b. $71. 2008? a.382 b.48756 32.2064 8. Present Value of Future Value of Ordinary Annuity Ordinary Annuity 7 periods 5. $161. $85. c.093 d. $91. What will be the balance on September 1.92280 8 periods 5.074 c. with the last deposit being made on September 1.000 annual deposits each September 1 beginning in 2000. a. $77.7466 10.959 If $8. what will the balance be on December 31. 2001 and it earns 8%.214 $175.2469 12. 2007? The fund pays interest at 8% compounded annually. .000 $146. d. $127. $90.63663 9 periods 6.720 d.723 $300. 2007 in a fund which is accumulated by making $12.640 b.16 a.901 33.093 c.31256 Use the following 8% interest factors for questions 32 through 35. $68.251 8.000 is deposited annually starting on January 1.

000. 37.200 A machine is purchased by making payments of $8. 2001 to a fund paying 8% interest compounded annually.725 b. $63. 39.99271. It is to be leased for 20 years with rent received at the beginning of each year.956 c.000 d.64869 a. The future value of an ordinary annuity for five periods at 8% is 5. The future value of an ordinary annuity of 1 for five periods is 6.000 at the beginning of each of the next five years. $35. $18.000 b.864 c.803 c.730 d. 36.46933. 2009 by making 8 equal annual deposits beginning May 1. $32.23939. The interest rate was 10%. Present Value of Period Ordinary Annuity 19 8. $30. $8.000 at the end of each of five years.34. Cline wants a return of 10%. The present value of 1 at 10% for 15 periods is . The appropriate rate of interest was 8%. The future value of one for five periods at 8% is 1. $35. $34. Find the present value of an investment in plant and equipment if it is expected to provide annual earnings of $42. 2001? The applicable interest rate is 8%.10510.000 each beginning December 31.79079. .60608.17725. Assume a 10% rate and earnings at year end. $48.222 c.000 for 15 years and to have a resale value of $80. $17. What is the required amount of each deposit? a.000 at the end of that period. $30. which is to be financed by making 8 annual payments of $9. $56. The present value of an ordinary annuity for five periods at 8% is 3. The present value of an ordinary annuity of 1 for five periods is 3. $20. Calculate the amount of the annual rent. The future value of 1 at 10% for 15 periods is 4. $23. What was the cost of the machine to Foxx? a. $44. 38. $53.238 35.841 c.51356 21 8.359 d. The present value of an ordinary annuity at 10% for 15 periods is 7. a.719 Foxx Company financed the purchase of a machine by making payments of $6.156 What amount should be recorded as the cost of a machine purchased December 31.36492 20 8. $35. has a machine that cost $300. $51.592 d. $95.803 b. Henson Company wishes to accumulate $200. 2000. What was the cost of the machine? a. $33.034 b.000 by May 1.816 b.8666.326 Cline Co.410 d.

000 $263. 10-year bonds. 40. Present value of annuity of 1 d. 2003. A ten-year 8% bond is issued on January 2 with interest payable semiannually on January 2 and July 1 yielding 9%.606 $370.456 $338. compute the amount that Vick will realize from the sale (issuance) of the bonds. 20.152 On January 2. Using the interest factors below.552 $649. $748. Future value of annuity of 1 b. Present value of 1 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 ten-year 8% bond is issued on January 2 with interest payable semiannually on January 2 and July 1 yielding 7%.4632 0. b 41.a. d. d. $319. a 30. The total payment on May 1. a 33.000. $449. Present value of 1 at 8% for 10 periods Present value of 1 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. $453. b a d c 35. b. ten-year. 38. the cost of the machine would be the total payment multiplied by what time value of money factor? a. 21. d b c a 39. 2003 will include both principal and interest.120 $300. Assuming interest at a 10% rate. d 32. $449. 22.3855 6.7101 6.002 $331. b.156.1446 Note: Students must be given interest tables for question 41. b. The market price of a $400. A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement.808 0. 2001 a company purchased a new machine which it does not have to pay for until May 1. A capital lease is entered into with the initial lease payment due one month subsequent to the signing of the lease agreement. d 31. b 40. On May 1. c. c 28. c 23. . c. 43. Future value of 1 c. d. d 29. a 34. Vick Corporation wishes to issue $300. a 25.944.850. c. c 27. 37. Multiple Choice Answers—Computational 19. b. 12% (pays interest semiannually) bond issue sold to yield an effective rate of 10% is a. The bonds pay interest annually on January 1. $300. 36. c. The current yield rate on such bonds is 10%. b 24. b MULTIPLE CHOICE—CPA Adapted 42.308. 2001. 41.000 (par value) of its 8%. d. b 26.

3553 4. The first deposit was made on July 1. in exchange for a noninterest-bearing note requiring eight payments of $20.11 Elgin should make four annual deposits (rounded) of a. Elgin Corp. $293.146 5. and the others are due annually on December 30. sold goods to Cox Company. d. c.500. Cox signed a noninterest-bearing note requiring payment of $30.000.000.5645 . the net note payable to Frank is a. $375. at an estimated cost of $1. Elgin plans to make four equal annual deposits in a fund that will earn interest at 10% compounded annually. 2001. 2001. $102. 2001. 2001.820. Present value factors are as follows: Present Value of Ordinary Present Value of Period Annuity of 1 at 11% Annuity Due of 1 at 11% 7 4. $323. b. At date of issuance. Future value factors are as follows: Future value of 1 at 10% for 5 periods 1. 2005. On January 15.5132 Present Value of Ordinary Annuity of 1 at 10% 4. Information on present value factors is as follows: Period 6 7 Present Value of 1 at 10% .240. 2001. $94. Marx Co.000 annually for seven years. 2001.520.64 Future value of annuity due of 1 at 10% for 4 periods 5. The prevailing rate of interest for this type of note at date of issuance was 10%. adopted a plan to accumulate funds for environmental improvements beginning July 1. 2001 balance sheet. On January 1. 46.231 8 5.712 5. Inc.61 Future value of ordinary annuity of 1 at 10% for 4 periods 4. b. the prevailing rate of interest for this type of note was 11%. purchased a machine from Frank Corp.920.000.44.620. $104. $114.280.240.8684 . d. c. The first payment was made on December 30. On December 30. $266. Dye. The first payment was made on January 1.712 On Dye's December 31. 45.

The present value of $1 at 10% for three periods is 0. $9. $20. 50.100.118 to yield 12%. $43. On January 1. 2004. What amount of interest revenue should be included in Cox's 2002 income statement? a. 2002.91 Yates should record the acquisition cost of the franchise on July 1. c. $107.000 of its 10% bonds for $354.706 b. for an initial franchise fee of $60. Lank Co.000 was paid when the agreement was signed and the balance is payable in four equal annual payments of $10. b. $49.632. d. $146. c. 2001.940.900 d. 2001. $0 b.000. 2001.59 Future value of 1 at 14% for 4 periods 1.800. $2. 49. sold to Day Corp.000. 47. $400. On January 1.000 c. $9. $60.600. $24. Interest is payable semiannually on January 1 and July 1.000 and a stated interest rate of 8% payable annually on January 1. The bonds were priced to yield 10%. What amount should Lank report as interest expense for the six months ended June 30. 2001? a. The prevailing rate of interest for a note of this type at January 1. . Information on present and future value factors is as follows: Present value of 1 at 14% for 4 periods 0.000 beginning July 1. c.000 On January 1. Yates' credit rating indicates that he can borrow money at 14% for a loan of this type. d. $3.69 Present value of an ordinary annuity of 1 at 14% for 4 periods 2. 2001 was 10%. $12.000 noninterestbearing note due on January 1.660. $130. Grant Co. $17. b. $20. $2.660.000.247 d. 2001.000.145 The total issue price (rounded) of the bonds was a.000. Present value factors are as follows: At 8% At 10% Present value of 1 for 10 periods 0. 48. Inc.000 c.75.463 0.760. $160.050. $2.710 6. $21.000 On July 1.000. Of this amount.. exchanged equipment for a $120.386 Present value of an ordinary annuity of 1 for 10 periods 6. 2001 at a. Ed Yates signed an agreement to operate as a franchisee of Kwik Foods.100.Marx should record sales revenue in January 2001 of (rounded) a. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. b. issued ten-year bonds with a face amount of $3. Cox Co.000.

22. $67.956.09.1446) 41.359.606.79079 × 1.37689) = $449. $20.10). ($3.3855) = $263. 34.080.000 ÷ 11.469 × 1. d 44.d. 26.640.000.466 or $20.5233 – 1) = $130.99271 = $23.000 × 0.06069 × $12. $300.751.120.06 = $24.000 × 5.000 ÷ 0.000 × + ($300.621 × 0. 19.000 × 1.000 × 4 × 6 = 24 periods.260.000 ÷ 9. R = $200. 24.000.000 × 4. $400.000 × .000 + ($10.000 (annual interest payment) ($24.826 × PV = $5.000 × 0.751). 30.080)6 or $6. (10. $6.410. Answer c b a b c c d a d d a a b a d c d b c a b b b Derivation 1.9847 × 1. 1.16987 = $33.9434)2] = $5.850.719. 23. 28. 38. c 50.000 × 5.000.06)2 = $11. $6.4876 – 1) = $91. 36. PV = $5.000 × (1.826.000 × 10.60608) + ($80.63663 × 1.909. 33.000 × .6366 = $127.236.000 × (1. $8. $17. b DERIVATIONS — Computational No. 21.080) + $8. a 48.723 or $20.260 × PV = $10.7466 = $51. $10.36492 = ($42.000 × 12.000 × (7.260) + ($8.09.909) + ($10. DERIVATIONS — CPA Adapted .9434) + [$3. $300.000 × .000 × 0. $8. $6. ($8.000 × 0. 4% ÷ 4 = 1%.08.600.000 × 1.000 × 3.000 × 1.000 × 0. 37.000 ÷ 1.500. a 45. 39. 27.000 = R × (8. 31. $10.000.10) = $8.08 = $24.000 × 10. R = $300.000 × (0. 32.000 × (7.08) × R = $200.000 × 7.78615 + 1) = $175.48756 = $9.46221) + ($400.000 (semiannual interest payment) ($24.23939) = $338. d 43. 20. $20.826) + ($10. PV = $10.000. $32.901 or $8.260 × $5. b 46. 0.000 × 1. a 47. 29. 25.034. 6.000 × (3. 35.000 × (12.6366 × 1. Multiple Choice Answers—CPA Adapted 42. 0. 40. c 49.000 × 0.000 × 8. $58.166) + ($8.51356 × 1. 1.000 × .

000 × 6. 45.500.10 = $9.712 = $94.000 × .000 × 0. .900.240.000 × 4.240 or ($20. 5. 42.542.000 = $30.660 or ($30.000 × 5.800.11 = $293.386) = $2. 47.000 × 2.75 = $90.118 × .000 × (4. 49.91) + $20.247.000 (present value of note) $90. 48. 44.11 × R = $1. 46.000.660.000 × . $354. ($10. 43. 50.000 = $160.632.000 ÷ 5. $99.000. Answer d a b a a c d c b Derivation Conceptual.712) – $20.000 × 0.06 = $21. $20.10 = $99.8684 × 1. $94.No.3553) + $30. $3. $120.100.000.000.08 = $240.000 = $49.145) + ($3. R = $1.000 × 4.1) = $160.000 × 1. Conceptual.000 ($240.500.

? Future value of an annuity $1 due of 1. Future value of 1. ? Diagram of Concept | | | | | _____ 2. Future value of an ordinary annuity of 1. Identify the diagrams with the concepts by writing the identifying letter of the diagram on the blank line at the left. On the right are six diagrams representing six different present and future value concepts stated on the left. d 6. _____ 3. | annuity of 1.- | | | _____ 4. | | | |. Present value of an ordinary | ? $1 c. $1 b. $1 $1 $1 | | | | | Solution 6-51 1.) .. a 3. Present value of an annuity $1 due of 1. | | | | | $1 ? f. Present value of 1. $1 $1 $1 _____ 5. c Ex.EXERCISES Ex. ? d.- -_____ 6. f 4. 6-52—Present value of an annuity due. e 2. $1 $1 $1 | | | | | $1 ? e. $1 a. (Tables needed. $1 $1 |.. 6-51—Present and future value concepts.. Concept _____ 1. Assume n = 4 and i = 8%. b 5.

000 for 10 years and to have a resale value of $20. Ex. (Tables needed. (Tables needed.000 × 21.341 8.5% ($4. Carey wants a return of 10%.How much must be invested now to receive $20.) If $6. It is to be leased for 15 years with rent received at the beginning of each year.000 for ten years if the first $20.24689) = $144.) Carey Co.000 is received today and the rate is 8%? Solution 6-52 Present value of an annuity due of $20.000 for 10 periods at 9% (6. (Tables needed. how much will accumulate by December 31.) Find the present value of an investment in equipment if it is expected to provide annual savings of $8. Solution 6-55 Present value factor for an annuity due for 15 periods at 10% (1. Compute the amount of the annual rent. .397. Ex.84918) = $87.19293 × 1.000.789 Determine the market price of a $500.000 ÷ 8. 2001 and it earns 9%.000) = Present value of investment in equipment Ex. Solution 6-54 Present value of $4.36669 $60. has machinery that cost $60. Excess annual earnings of $16.41766 × $8. (Tables needed.000 for 10 periods at 9% ($6. 6-55—Compute the annual rent.000 for ten periods at 8% ($20.362. Ex.09) = $99.) $51. 6-57—Calculate market price of a bond.000 discounted for 10 periods at 9% (.000 are expected for 8 years.60608) = 8. Ex.448 $59.000 × 15. 2010? Solution 6-53 Future value of an annuity due of $6. 10% (pays interest semiannually) bond issue sold to yield an effective rate of 12%. 6-53—Future value of an annuity due.000.171. Assume an interest rate of 9% and that savings are realized at year end.42241 × $20.) Compute goodwill if it is found by discounting excess earnings at 10% compounded quarterly.000 is deposited annually starting on January 1. Solution 6-56 Present value of $8. 6-56—Present value of an investment in equipment. ten-year. 6-54—Compute goodwill.938.000 × 7. (Tables needed.36669 = $7.000 at the end of that period.000 for 32 periods at 2.10 × 7.000) = Present value of $20.

000 and a stated interest rate of 12% payable semiannually on July 1 and January 1. Assuming that the cost of money is the only factor in Mary's decision and that the cost of money to her is 8%.Solution 6-57 Present value of $25. to learn how much he should deposit on December 31.36009 Calculate the issue price of the bonds. Pay $300 now and $700 when she completes her residency.31180) = 155.79079 Present value of an ordinary annuity of 1 for 5 periods at 12% 3.60478 Present value of an ordinary annuity of 1 for 10 periods at 5% 7.173 Present value of $18.55839 Present value of an ordinary annuity of 1 for 5 periods at 10% 3. Solution 6-58 Present value of $300. 6-59—Present value and future value computations. .000 discounted for 10 periods at 5% ($300.000 for 10 periods at 5% ($18.900 Market price of the bond issue $442. his CPA.000 investment today would accumulate at 10% (compound interest) by the end of 6 years.56743 Present value of 1 for 10 periods at 5% .000 discounted for 20 periods at 6% ($500.61391 Present value of 1 for 10 periods at 6% .991 Issue price of the bonds $323. issued five-year bonds with a face value of $300. She has only $300 in her checking account and doesn't want her parents to know about this debt.648 Ex.000 × 11.62092 Present value of 1 for 5 periods at 12% . His life expectancy is 20 years from his retirement. assuming the amount on deposit will earn 8% interest annually. three years from today.164 PROBLEMS Pr. Jim's tells her that she may settle the account in one of two ways since she can't pay it all now: 1. Part (a) Compute the amount that a $25. Steve has come to you. 2001 to be able to withdraw $30.000 × .748 Present value of $500. The bonds were sold to yield 10%. On January 1.000 for 20 periods at 6% ($25. Part (b) Steve wants to retire at the end of this year (2001). 2. Part (c) Mary Houser has a $900 overdue debt for medical books and supplies at Jim's Bookstore.72173) = 138. 2001 Kiner Co.200 one year after completion of residency.000 at the end of each year for the next 20 years.000 × 7. two years from today. Present value table factors are: Present value of 1 for 5 periods at 10% .72173 Present value of an ordinary annuity of 1 for 10 periods at 6% 7. Pay $1. which alternative should she choose? Your answer must be supported with calculations. 6-58—Calculate market price of a bond.46992) = $286.61391) = $184.000 × .

74664 7.71008 7.99900 2.000 at the end of each year and provides the lessor (Rice) with an 8% return on its investment.85734) = Present value of $700 now = Present value of $300 now = Present value of Alternative 1 Alternative 2 Present value of $1. (a) Assuming the computer has a ten-year life and will have no salvage value at the expiration of the lease.79383) On the present value basis.000 × 9.000 at 8% for 10 years is 6.852 Pr.000 × 1.64549 6.200 × .48656 6. .Solution 6-59 Part (a) Future value of $25.71008 × $2.24689 7. Part (c) Alternative 1 Present value of $700 discounted @ 8% for 2 years ($700 × . The lease requires 10 annual payments of $2.000 ordinary annuity discounted @ 8% for 20 years ($30.000 compounded @ 10% for 6 years ($25.81815) = $294. Part (b) Present value of a $30. Alternative 1 is preferable.289.420 ÷ 7. Jill Norris is presently leasing a small business computer from Rice Office Equipment Company. 6-61—Annuity with change in interest rate.33164 .000 at 8% for 10 years is 7. 6-60—Present value of an ordinary annuity due.48756 16.200 discounted @ 8% for 3 years ($1.42888 14.46319 .77156) = $44.24689 = $13.24689.000 = Present value factor for an annuity due of $2.545.50025 12.15892 . what was the original cost of the computer to Rice? (b) What amount would each payment be if the ten annual payments are to be made at the beginning of each period? You may use the following 8% interest factors: 9 Periods Periods Future Value of 1 Present Value of 1 Future Value of Ordinary Annuity of 1 Present Value of Ordinary Annuity of 1 Present Value of Annuity Due of 1 1.24689 11 $600 300 $900 $953 Solution 6-60 Present value of an ordinary annuity of $2.420 $1.71008 10 Periods 2. Pr. $13.13896 6.

000 for 6 periods at 8%: (7.03735 factor implies a 12% interest rate (present value of an annuity due table).000 for 4 periods at 10%: 4.79079 The 3.90 ÷ $10.90 Factor for Present Value of Ordinary Annuity for 5 yrs.205 Sum in bank at end of tenth year: $23. Instructions Calculate the implied interest rate for the lease payments.204 Pr.08) × $5.614 Years 7-10: Future value of $39.000 = $39.000 per year.4641 × $39. chosen to lease the equipment for $10. however.999 Future value of ordinary annuity of $5.000 at the beginning of each of six years to a savings account paying 8%. Lease B — Calculation of the Implied Interest Rate: $12.907. Payments are due at the start of each year. Solution 6-62 Lease A — Calculation of the Implied Interest Rate: $10. payable at the end of each of the next 5 years. .03735 Solution 6-62 (cont.000 = 3.20 ÷ $12. Lease A — Lease A covers office equipment which could be purchased for $37.907. Lease B — Lease B applies to a machine which can be purchased for $48.000 = 4.614 = $57.000 = $23. Doane Company has.000 × (factor for Present Value of Ordinary Annuity for 5 yrs. and annual deposits of $5. What was the account balance at the end of the tenth year? Solution 6-61 Years 1-6: Future value of annuity due of $5.90.000 per year on a 5-year lease.448. 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.907.20.614 for 4 periods at 10%: 1. = $37.) = $48.999 = $81. the account balance was transferred to a bank paying 10%. Doane Company has entered into two lease agreements.20 Factor for Present Value of Annuity Due for 5 yrs.Meg Sloan established a savings account for her son's college education by making annual deposits of $5.448. Doane Company has chosen to lease the machine for $12.205 + $57.000 × (factor for Present Value of Annuity Due for 5 yrs.6410 × $5.) = $37.448.000 were made at the end of each year from the seventh through the tenth years.79079 factor implies a 10% interest rate.33592 × 1.= $48.) The 4. At the end of the sixth year. 6-62—Finding the implied interest rate.

72173 1.003 None Interest Revenue $ -026.000. Stiner Leasing Company purchased specialized equipment from Wayne Company on December 31.Pr.71034 .14457 11 2.62889 .57948 5.20679 8.75902 10 2. the useful life of the equipment. 2006.997 478. (b) How much interest revenue will Stiner earn in 2002? Solution 6-63 (a) Calculation of rent: 7.93743 6.294 .) $600.215 Lease Receivable $525.64461 11.55133 .61391 12.72173 × 1.10782 (present value of a 10-rent annuity due at 5%.05 = 8.53117 6.003 74.85312 . 6-63—Calculation of unknown rent and interest. 2002 and are made every 6 months until July 1.30641 Instructions (a) Calculate the amount of each rent.35795 .59374 .42410 13. On the same date. it leased this equipment to Sears Company for 5 years.003. The lease payments begin January 1. Stiner Leasing wants to earn 10% annually on its investment.35049 18.300 23.10782 1.58468 14.915 (Accrual) $50.57789 7.02656 7.38554 15. (b) Interest Revenue during 2002: Rent No.49506 Periods or Rents 9 10 11 Various Factors at 5% Future Present Future Value of an Present Value of an Value of $1 Value of $1 Ordinary Annuity Ordinary Annuity 1. 2001 for $600.10782 = $74. Various Factors at 10% Periods Future Present Future Value of an Present Value of an or Rents Value of $1 Value of $1 Ordinary Annuity Ordinary Annuity 9 2. 1 2 None Date 1/1/02 7/1/02 12/31/02 Total Cash Received $74.000 ÷ 8.

Carley wishes to sell the land now. It has located two potential buyers: Buyer A. with the first payment to be made 5 years from today. to whom should Carley sell the land? Show calculations. .000 for 4 periods (deferred) at 9% 3. The present value of the purchase price is: Present value of ordinary annuity of $40.000 each.000. 6-64—Deferred annuity. and Buyer B. who is willing to make 20 annual payments of $40. Since it will require several years and a considerable sum of money before the property is fully detoxified and capable of generating revenues.000 Present value of payments $258.70661 Less present value of ordinary annuity of $40. Buyer B. Assuming that the appropriate rate of interest is 9%.000 for the land now. Solution 6-64 Buyer A. who is willing to pay $255.46689 Multiplied by annual payments × $40.000 for 24 periods at 9% 9. The present value of the purchase price is $255.Pr.23972 Difference 6. Carley Company owns a plot of land on which buried toxic wastes have been discovered.676 Conclusion: Carley should sell to Buyer B.

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