This action might not be possible to undo. Are you sure you want to continue?

# 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.

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

Future value of an annuity due of 1 c. starting one year hence? a. 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 or present value of 1 b. Present value of 1 c. Future value of an ordinary annuity of 1 d. 40. 7. b. Which of the following tables would show the largest value for an interest rate of 5% for six periods? a. Future value of 1 b. the value now of a future amount. 36.34. d. 63. E P P P P P Note: MC = E = Exercise P = Problem MULTIPLE CHOICE—Conceptual 1. Present value of 1 c. Future value of 1 b. None of these Which table has a factor of 1. 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. Present value of an annuity due of 1 d. Future value of an ordinary annuity of 1 b. 64. 3. 59. Present value is a. Multiple Choice 35. always smaller than the future value. the amount that must be invested now to produce a known future value. Future value of an annuity due of 1 d. 4. 39. 37. Future value of an ordinary annuity of 1 b.000 today? a. 60. . Future value of an ordinary annuity of 1 b. Future value of an ordinary annuity of 1 d. Present value of an ordinary annuity of 1 c. Present value of an ordinary annuity of 1 2. 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. 5.00000 for 1 period at every interest rate? a. Future value of an annuity due of 1 c. 6. 62. 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. 38. Future value of an ordinary annuity of 1 d. MC MC MC MC MC MC MC 58. c. all of these.

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

000 accumulated. How should he compute his required initial investment at the beginning of the first year if the fund earns 10% compounded annually? a. 8% for eight periods. At the end of five years. How should she compute her required annual investment? a. c. b. If compounding occurs quarterly. 11. dividing the present value by the future value and looking for the quotient in the future value of 1 table. 12. dividing the future value by the present value and looking for the quotient in the future value of 1 table. 2% for 32 periods. 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. 10.000 (including principal) from an investment fund at the end of each year for five years. From what interest table is this figure taken? a. An amount is deposited for eight years at 8%. 14.000 divided by the present value of a 5-year.000 times the present value of a 5-year. $50. 10% ordinary annuity of 1. d. b. c.000 divided by the present value of a 5-year. 6% ordinary annuity of 1. Rents occur at the beginning of each period of an ordinary annuity. dividing the future value by the present value and looking for the quotient in the present value of 1 table. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 7%.000 divided by the future value of a 5-year. c. d. c. b. $25. 8% for 32 periods. then the table value is found at a. If the number of periods is known. Ann Ruth wants to invest a certain sum of money at the end of each year for five years. 6% ordinary annuity of 1. The figure . d. c.000 times the future value of a 5-year. multiplying the present value by the future value and looking for the product in the present value of 1 table. d. 6% ordinary annuity of 1. c.000 divided by the future value of a 5-year. $50. Present value of 1 d. 2% for eight periods. $50. she will need a total of $50. Rents occur at the end of each period of an annuity due.94232 is taken from the column marked 2% and the row marked three periods in a certain interest table. Future value of annuity of 1 c. d. None of these. the interest rate is determined by a. Which of the following is true? a.000 times the present value of a 5-year. 10% ordinary annuity of 1. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 9%.000 times the future value of a 5-year. $25. The investment will earn 6% compounded annually. $25. 10% ordinary annuity of 1. Future value of 1 b. . b. 10% ordinary annuity of 1. b. A capital lease is entered into with the initial lease payment due one month subsequent to the signing of the lease agreement. 6% ordinary annuity of 1. A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement. $50. d. Rents occur at the beginning of each period of an annuity due. b. 13. Present value of annuity of 1 Ed Sloan wants to withdraw $25.8. 9. $25.

c 3. b Solution to Multiple Choice question for which the answer is “none of 4.00000 to the ordinary annuity table value for one less period. nine periods and multiply by (1 – . 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 future value of the annuity due is less than the future value of the ordinary annuity. c 8. The future value of a deferred annuity is the same as the future value of an annuity not deferred. the accountant would use the present value factor in the 10% column for a. b 18. The factor for the present value of an annuity due is found by adding 1. c. d. eight periods. b. the present value of the annuity due is greater than the present value of the ordinary annuity. c 13. A deferred annuity is an annuity in which the rents begin after a specified number of periods. To compute the present value. a 12. b. eight periods and multiply by (1 + . d 7. 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. a 2. a 6. it means the ordinary annuity is deferred for six periods. the present value of the annuity due is less than the present value of the ordinary annuity. Which statement is false? a. 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.00000 from the ordinary annuity table value for one more period. Present value of an Ordinary Annuity of 1. MULTIPLE CHOICE—Computational Items 19 through 22 apply to the appropriate use of interest tables. c 5. Which of the following is false? a. The factor for the future value of an annuity due is found by subtracting 1. c.080 2 1. d. If the first rent is received at the end of the sixth period. d.15. c. c 9. 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. d 11. To compute the present value of a deferred annuity.” 16.10). Multiple Choice Answers—Conceptual 1. Each of the items 19 to 22 is based on 8% interest compounded annually. Periods Future Value of 1 at 8% 1 1. 17. 18. b 15. 16. d. c 14. b 10. d these. c. the future value of the annuity due is equal to the future value of the ordinary annuity. If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates. 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.10). Given below are the future value factors for 1 at 8% for one to five periods. then a. d 4. seven periods.166 . b 17. b.

260 × 3 c.080 × 4 If $6. $10. $5.000 in a savings account today.000 × 1. $10.360) d. what amount will be available three years from today? a. 21.000 × 1.621 23.3 4 5 19. $5. 25. $5.000 × 0.360 × 4 c. $5. Items 23 through 26 apply to the appropriate use of present value tables. Each of the items 23 to 26 is based on 10% interest compounded annually.000 × 1.751 4 0.000 × 1.469 What amount should be deposited in a bank account today to grow to $10.000 × 1.080) + $8.260 b. $8.260) + ($8.000 × 1.469 c.260 d.000 × 0. $10.080 × 3 If $5.000 ÷ 1. If an individual put $5.080 × 3 d.000 is invested each year for four years with the first investment to be made today? a.000 ÷ 0.826 3 0.826 b.909 2 0. what amount will be available six years from now? a. ($8. $8.000 is put in a savings account today.621 × 0.080 × 1. $10. $5.000 × 1.166) + ($8.260 b. $6.080) + ($8.260 × 2 20. $6.000 × 1.909 × 6 b.000 × 1.826 d. $8.683 5 0. what amount of cash would be available two years from today? a.909 d. $6.000 to be received six years from today? a.166 × 3 d.000 × 1.000 three years from today? a.000 × 0.260 c. ($8. $6.909 × 2 What is the present value today of $8.000 ÷ 1.000 ÷ 0.000 three years from today? 24.000 × 0.000 × 1.166) + ($5.000 × 1. Present Value of $1 Periods Discounted at 10% per Period 1 0. $5.000 × 1.080) + ($5. 1.080 × 6 b.00 discounted at 10% for one to five periods.000 × 1. $5. $8. $8.000 × 1.000 × 1.751 × 2 c.000 × 0.260) + ($8. 22. .000 × 1.000 × 1.000 is put in a savings account today. Given below are the present value factors for $1.683 × 3 What amount should be deposited in a bank today to grow to $6.000 b.166) + ($8.260 1.000 × 0.000 ÷ 1.826 × 2 c. ($5. $8.260) What amount will be in a bank account three years from now if $8.000 × 1.000 × 1.360 1.

000 × 0. $10.236 On January 1. $10.000 × 0. $130. 2000 in a savings account paying 6% annually in order to make annual withdrawals of $3. c.751) $6. $100.000 ÷ 0.000 × 0. within $10.000 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. d. 30. Present Value of Future Value of Ordinary Annuity Ordinary Annuity 4 periods 3.4859 7.5731 5 periods 3. What will be the balance in the fund.751) + ($10.000 is received today and the rate is 9%? Present Value of Periods Ordinary Annuity at 9% 14 7. $2. $119.909 × 4 If a savings account pays interest at 4% compounded quarterly. $10. b.909) + ($10.670 How much must be invested now to receive $20. $109. 6 periods at 4%.826) + ($6. 6 periods at 1%.751 $6.000 × 0.000 + ($10.751) b. 29.000 × 0.000 at 9% each January 1 beginning in 2001. 2006 (one year after the last deposit)? The following 9% interest factors may be used. $5. $10.500 b.000 × 0.06. $6. .909 × 3 ($6.000 ÷ 0. 2001. the Carly Company decided to begin accumulating a fund for asset replacement five years later.000 × 0. The company plans to make five annual deposits of $20. $5. $10.751 What amount should an individual have in a bank account today before withdrawal if $10.000 d. d. on January 1.000 × 0.000 × 0.000 for 15 years if the first $20.9434.200 d.000 d. 26.826) + ($10.) a.000 at the end of the years 2000 and 2001? The present value of one at 6% for one period is . $11. a. 28. ($10.000 × 0.8897 5.661 c. c.000 How much must be deposited on January 1.000 is deposited today? The future value of one at 6% for one period is 1. 24 periods at 1%. then the amount of $1 left on deposit for 6 years would be found in a table using a.909) + ($6.000 b.694 c. 31.000 × 0.466 b. 24 periods at 4%. a.826) + ($10.000 ÷ 0. $11.600 c.909) + ($10.683 × 4 c.78615 15 8.9847 6 periods 4.000 × 0. b. $6.5233 a.2397 4.683) d. what will be the balance in a savings account paying 6% annually if $10.a. At the end of two years.06069 27.

2007 in a fund which is accumulated by making $12. $71.16 a.2469 12.074 c.382 b.31256 Use the following 8% interest factors for questions 32 through 35.251 8. .901 33. what will the balance be on December 31. $90.093 d.640 b. $127. $77.63663 9 periods 6.000 is deposited annually starting on January 1. $68. Present Value of Future Value of Ordinary Annuity Ordinary Annuity 7 periods 5.2064 8. b.723 $300.720 d. $107. c.214 $175. What will be the balance on September 1. $85.48756 32. 2001 and it earns 8%.959 If $8. with the last deposit being made on September 1. $161.92280 8 periods 5. $91.7466 10.000 $146.093 c. 2008? a.000 annual deposits each September 1 beginning in 2000. 2007? The fund pays interest at 8% compounded annually. a. d.

000 at the end of that period. Henson Company wishes to accumulate $200. The appropriate rate of interest was 8%.000 at the beginning of each of the next five years. $20. What was the cost of the machine to Foxx? a.000 for 15 years and to have a resale value of $80. $30. 36. a. $30.64869 a. $8.359 d. 37. Find the present value of an investment in plant and equipment if it is expected to provide annual earnings of $42. The present value of an ordinary annuity at 10% for 15 periods is 7.238 35. $18. $63.17725.725 b. $34.326 Cline Co.000 d. The future value of 1 at 10% for 15 periods is 4. $23. .000 at the end of each of five years.410 d.36492 20 8. 39.8666.719 Foxx Company financed the purchase of a machine by making payments of $6. The present value of 1 at 10% for 15 periods is .841 c. $48. What was the cost of the machine? a.730 d. $95.34. 2001 to a fund paying 8% interest compounded annually.803 c. Assume a 10% rate and earnings at year end. 2001? The applicable interest rate is 8%. $51. has a machine that cost $300. The present value of an ordinary annuity of 1 for five periods is 3.23939.034 b. $35. 38. The interest rate was 10%. What is the required amount of each deposit? a. $35. $33. The future value of one for five periods at 8% is 1.000 each beginning December 31.99271.956 c.79079.592 d. $35. Cline wants a return of 10%.000 b. Calculate the amount of the annual rent. The future value of an ordinary annuity of 1 for five periods is 6.200 A machine is purchased by making payments of $8. It is to be leased for 20 years with rent received at the beginning of each year. which is to be financed by making 8 annual payments of $9. $32.000. $44. $17.60608.10510.46933.000 by May 1. Present Value of Period Ordinary Annuity 19 8.156 What amount should be recorded as the cost of a machine purchased December 31.51356 21 8.816 b. The present value of an ordinary annuity for five periods at 8% is 3.222 c. 2000. 2009 by making 8 equal annual deposits beginning May 1. $56. The future value of an ordinary annuity for five periods at 8% is 5. $53.803 b.864 c.

b.000 (par value) of its 8%.1446 Note: Students must be given interest tables for question 41. $449. c. b a d c 35. Assuming interest at a 10% rate. $449. 41. 43. d 31. d.456 $338. On May 1. $453. a 33. 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.120 $300. a 34.552 $649. b 40. b 24. b. c. 12% (pays interest semiannually) bond issue sold to yield an effective rate of 10% is a. b MULTIPLE CHOICE—CPA Adapted 42. c 28. c. b 26. $748.808 0. ten-year. The total payment on May 1. A capital lease is entered into with the initial lease payment due one month subsequent to the signing of the lease agreement. 20. 2001.308. d.944.7101 6. 38. . The market price of a $400. compute the amount that Vick will realize from the sale (issuance) of the bonds.606 $370. Multiple Choice Answers—Computational 19. c. 2003. b. $319.000 $263. The current yield rate on such bonds is 10%. 10-year bonds. a 30. Vick Corporation wishes to issue $300. A ten-year 8% bond is issued on January 2 with interest payable semiannually on January 2 and July 1 yielding 9%. 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 25. d 29. c 27. Using the interest factors below. 21. the cost of the machine would be the total payment multiplied by what time value of money factor? a.a. d b c a 39. 2003 will include both principal and interest.3855 6.4632 0. c 23. The bonds pay interest annually on January 1. b 41. d 32. A ten-year 8% bond is issued on January 2 with interest payable semiannually on January 2 and July 1 yielding 7%. Present value of annuity of 1 d. 22.000. $300. 36.850.002 $331. 40. 2001 a company purchased a new machine which it does not have to pay for until May 1. d. d. 37. A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement.152 On January 2. Future value of annuity of 1 b. Future value of 1 c.156.

000. c. Future value factors are as follows: Future value of 1 at 10% for 5 periods 1.500.5132 Present Value of Ordinary Annuity of 1 at 10% 4. sold goods to Cox Company. 2001 balance sheet. The prevailing rate of interest for this type of note at date of issuance was 10%. $293. The first deposit was made on July 1.5645 . At date of issuance. 2001. On January 15. On December 30. $114. 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 4.8684 . $323. b.240.146 5. c. The first payment was made on January 1. adopted a plan to accumulate funds for environmental improvements beginning July 1. b. On January 1. 2001. Inc.712 On Dye's December 31.820. $102. 46. d.000. in exchange for a noninterest-bearing note requiring eight payments of $20.520.000 annually for seven years. Elgin Corp.240. 2005.11 Elgin should make four annual deposits (rounded) of a.61 Future value of ordinary annuity of 1 at 10% for 4 periods 4.920. 2001.3553 4. $375.231 8 5. Dye.44. 2001.712 5. Elgin plans to make four equal annual deposits in a fund that will earn interest at 10% compounded annually.64 Future value of annuity due of 1 at 10% for 4 periods 5. at an estimated cost of $1. 2001. purchased a machine from Frank Corp. 2001.620. $94. d. the net note payable to Frank is a.000. $266. Marx Co. the prevailing rate of interest for this type of note was 11%. $104. 45. Information on present value factors is as follows: Period 6 7 Present Value of 1 at 10% . The first payment was made on December 30. and the others are due annually on December 30. Cox signed a noninterest-bearing note requiring payment of $30.280.

sold to Day Corp.710 6.800. 49. for an initial franchise fee of $60. Grant Co.660. c.632. Lank Co. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. What amount of interest revenue should be included in Cox's 2002 income statement? a.000.706 b.000 and a stated interest rate of 8% payable annually on January 1.75. $146. $49. b. $20. 2001.600. $0 b. $160. c.000. $24.000 beginning July 1.Marx should record sales revenue in January 2001 of (rounded) a.000 was paid when the agreement was signed and the balance is payable in four equal annual payments of $10. Ed Yates signed an agreement to operate as a franchisee of Kwik Foods. $21.463 0. $60. c. issued ten-year bonds with a face amount of $3.900 d. The prevailing rate of interest for a note of this type at January 1.100. $107.000. $2. 2001.000.145 The total issue price (rounded) of the bonds was a.000 c..940. $20. 2001.386 Present value of an ordinary annuity of 1 for 10 periods 6. The bonds were priced to yield 10%.91 Yates should record the acquisition cost of the franchise on July 1. Interest is payable semiannually on January 1 and July 1.000 noninterestbearing note due on January 1.59 Future value of 1 at 14% for 4 periods 1. d. $43. Information on present and future value factors is as follows: Present value of 1 at 14% for 4 periods 0.660. 47. $17.69 Present value of an ordinary annuity of 1 at 14% for 4 periods 2. Yates' credit rating indicates that he can borrow money at 14% for a loan of this type.050. Of this amount. b. exchanged equipment for a $120.000. 48.000 On January 1. $2. 2002. 2001 was 10%. . On January 1. $2.760. b. d.247 d. $400.000 of its 10% bonds for $354. $9. On January 1.000 c. $3. Cox Co. $12. $130.000 On July 1. What amount should Lank report as interest expense for the six months ended June 30. 2001? a. 2004.100. 50. 2001. Present value factors are as follows: At 8% At 10% Present value of 1 for 10 periods 0. Inc. 2001 at a.118 to yield 12%.000. $9.000. The present value of $1 at 10% for three periods is 0.

b DERIVATIONS — Computational No.37689) = $449.000 × 1. R = $300.826 × PV = $5. 28. c 49.06 = $24.3855) = $263.000 ÷ 9.000 × (1. 37.9847 × 1.000 × 12.46221) + ($400. $10. $58.260 × $5. PV = $10. 38.000 × (3.000 × 0. 31. 20.120. 22.000 × 5.359.10) = $8.09.000 × (1.1446) 41. 29.79079 × 1.260. 40. d 44.000 × (7.6366 = $127. a 48. 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 1.000 × 1. 23.000 × (12. 19.7466 = $51.826) + ($10.000.16987 = $33. $6.466 or $20. 6.000 × 0.000.000 × (7. 36.260 × PV = $10. d 43.826.000 × 4 × 6 = 24 periods. 26. PV = $5.034.236.09.956.08) × R = $200.000 + ($10.000.000 × + ($300.08.260) + ($8.000 × 3. $32. 35. $8. b 46.751). Multiple Choice Answers—CPA Adapted 42.909. 4% ÷ 4 = 1%. 27. $6.166) + ($8.000 ÷ 0. a 45.000 ÷ 1. (10. 25. c 50.000 × 0.000 × 1.23939) = $338. $67.000 × 1.06)2 = $11.08 = $24.410. 39. 1. 21. $20. $300. a 47.000 × .000 × 0. DERIVATIONS — CPA Adapted .640.d. R = $200.000 × 7. $6.000 × 4.000 × (0.06069 × $12. 34. $300.606.48756 = $9. 24.000 × . 33.901 or $8.5233 – 1) = $130.36492 = ($42. 1. 0.000 × 0.60608) + ($80.000 × 5.000 × 8. ($3.500.600.080)6 or $6.9434) + [$3.000 × . ($8.000 × 10.000.51356 × 1. $400.719.850.469 × 1.9434)2] = $5.621 × 0. 32.000 × 0.000 × 10. 30. $20.78615 + 1) = $175.080) + $8.6366 × 1.080.63663 × 1.000 × .99271 = $23.10).000 (semiannual interest payment) ($24.909) + ($10.000 ÷ 11. $8.723 or $20.4876 – 1) = $91. $17.000 (annual interest payment) ($24. $10. 0.000.751.000 = R × (8.

100. $3. 45. 46. Conceptual. $120. 47.000 × 0.900.000 = $49. $99. R = $1.660.000 = $30.3553) + $30.000 ($240. $20. 5.000 × .000.000 × 0. 49.10 = $9.240 or ($20.000 (present value of note) $90.386) = $2.91) + $20.11 = $293.08 = $240.000 × 1.247.145) + ($3. 50.542. .712) – $20.000.632. ($10. Answer d a b a a c d c b Derivation Conceptual. $354.000 × (4.118 × .000 × 2.11 × R = $1.240.No.000 × 5.000 × 4.8684 × 1.1) = $160.000 × .500. $94.800. 42.000 = $160. 43.660 or ($30.10 = $99. 48.500.712 = $94.000 × 4.75 = $90.000.000 × 6.06 = $21.000. 44.000 ÷ 5.

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

Ex. 6-55—Compute the annual rent. 2010? Solution 6-53 Future value of an annuity due of $6.24689) = $144.5% ($4.000 for ten years if the first $20. has machinery that cost $60.341 8. Ex. 10% (pays interest semiannually) bond issue sold to yield an effective rate of 12%.84918) = $87.000 for 10 periods at 9% (6.000 is received today and the rate is 8%? Solution 6-52 Present value of an annuity due of $20.) Find the present value of an investment in equipment if it is expected to provide annual savings of $8.362. Excess annual earnings of $16.19293 × 1.000 × 15.42241 × $20.000 are expected for 8 years. how much will accumulate by December 31.60608) = 8.09) = $99.171. (Tables needed.000 is deposited annually starting on January 1.000 × 7. Ex. (Tables needed. Solution 6-54 Present value of $4.000 ÷ 8.000) = Present value of $20.938. 6-54—Compute goodwill.36669 = $7.000 for 32 periods at 2. 2001 and it earns 9%.) If $6.How much must be invested now to receive $20. 6-57—Calculate market price of a bond. Carey wants a return of 10%.000) = Present value of investment in equipment Ex. Ex.789 Determine the market price of a $500. 6-56—Present value of an investment in equipment.000 for ten periods at 8% ($20.) Carey Co. (Tables needed.000 × 21.) Compute goodwill if it is found by discounting excess earnings at 10% compounded quarterly. Solution 6-56 Present value of $8.000 for 10 years and to have a resale value of $20.000 discounted for 10 periods at 9% (. 6-53—Future value of an annuity due. Compute the amount of the annual rent.000 for 10 periods at 9% ($6. It is to be leased for 15 years with rent received at the beginning of each year.) $51.000.41766 × $8.36669 $60.000 at the end of that period. (Tables needed. Solution 6-55 Present value factor for an annuity due for 15 periods at 10% (1. Assume an interest rate of 9% and that savings are realized at year end.448 $59.10 × 7. ten-year. .397. (Tables needed.000.

61391 Present value of 1 for 10 periods at 6% .173 Present value of $18. Part (a) Compute the amount that a $25.72173) = 138.36009 Calculate the issue price of the bonds.000 × 7. 6-58—Calculate market price of a bond. Jim's tells her that she may settle the account in one of two ways since she can't pay it all now: 1. Steve has come to you. She has only $300 in her checking account and doesn't want her parents to know about this debt.900 Market price of the bond issue $442.72173 Present value of an ordinary annuity of 1 for 10 periods at 6% 7.000 × . Part (b) Steve wants to retire at the end of this year (2001). to learn how much he should deposit on December 31. which alternative should she choose? Your answer must be supported with calculations. his CPA. Assuming that the cost of money is the only factor in Mary's decision and that the cost of money to her is 8%. Pay $1.000 × 11. issued five-year bonds with a face value of $300. On January 1.Solution 6-57 Present value of $25.000 for 10 periods at 5% ($18.164 PROBLEMS Pr.60478 Present value of an ordinary annuity of 1 for 10 periods at 5% 7. The bonds were sold to yield 10%.61391) = $184. two years from today.62092 Present value of 1 for 5 periods at 12% .46992) = $286. 2001 to be able to withdraw $30.000 for 20 periods at 6% ($25.648 Ex.000 discounted for 10 periods at 5% ($300. three years from today.991 Issue price of the bonds $323. .000 at the end of each year for the next 20 years. 6-59—Present value and future value computations. Pay $300 now and $700 when she completes her residency.79079 Present value of an ordinary annuity of 1 for 5 periods at 12% 3.31180) = 155.000 investment today would accumulate at 10% (compound interest) by the end of 6 years. 2.55839 Present value of an ordinary annuity of 1 for 5 periods at 10% 3. Solution 6-58 Present value of $300. assuming the amount on deposit will earn 8% interest annually.748 Present value of $500.200 one year after completion of residency.000 and a stated interest rate of 12% payable semiannually on July 1 and January 1.000 × . His life expectancy is 20 years from his retirement.000 discounted for 20 periods at 6% ($500. 2001 Kiner Co. Present value table factors are: Present value of 1 for 5 periods at 10% . Part (c) Mary Houser has a $900 overdue debt for medical books and supplies at Jim's Bookstore.56743 Present value of 1 for 10 periods at 5% .

79383) On the present value basis.77156) = $44.71008 10 Periods 2.33164 .000 ordinary annuity discounted @ 8% for 20 years ($30.Solution 6-59 Part (a) Future value of $25.13896 6.24689. 6-60—Present value of an ordinary annuity due.42888 14. Alternative 1 is preferable. 6-61—Annuity with change in interest rate.200 discounted @ 8% for 3 years ($1.000 compounded @ 10% for 6 years ($25.420 ÷ 7.85734) = Present value of $700 now = Present value of $300 now = Present value of Alternative 1 Alternative 2 Present value of $1.420 $1.24689 = $13.74664 7. (a) Assuming the computer has a ten-year life and will have no salvage value at the expiration of the lease.15892 .99900 2.000 = Present value factor for an annuity due of $2.000 × 9.000 at 8% for 10 years is 7.48656 6.71008 × $2.50025 12. Pr.81815) = $294. The lease requires 10 annual payments of $2. .000 × 1.48756 16. 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 1.64549 6.46319 .000 at 8% for 10 years is 6. Jill Norris is presently leasing a small business computer from Rice Office Equipment Company. $13. Part (b) Present value of a $30.24689 7.24689 11 $600 300 $900 $953 Solution 6-60 Present value of an ordinary annuity of $2.71008 7.289. Part (c) Alternative 1 Present value of $700 discounted @ 8% for 2 years ($700 × .000 at the end of each year and provides the lessor (Rice) with an 8% return on its investment.200 × .852 Pr.545.

Doane Company has chosen to lease the machine for $12.907.000 × (factor for Present Value of Annuity Due for 5 yrs.614 = $57.907.204 Pr. 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. Lease B — Lease B applies to a machine which can be purchased for $48.999 Future value of ordinary annuity of $5.614 Years 7-10: Future value of $39. however.4641 × $39. = $37.000 × (factor for Present Value of Ordinary Annuity for 5 yrs.999 = $81.907.) The 4. Doane Company has.614 for 4 periods at 10%: 1.79079 The 3.79079 factor implies a 10% interest rate.90. and annual deposits of $5.90 Factor for Present Value of Ordinary Annuity for 5 yrs.448.205 + $57.) = $37.6410 × $5.000 = 4.Meg Sloan established a savings account for her son's college education by making annual deposits of $5.448. Instructions Calculate the implied interest rate for the lease payments.000 = 3.000 per year. Doane Company has entered into two lease agreements.000 = $39.33592 × 1.20 ÷ $12. 6-62—Finding the implied interest rate.000 were made at the end of each year from the seventh through the tenth years. .000 per year on a 5-year lease. Lease A — Lease A covers office equipment which could be purchased for $37. Solution 6-62 Lease A — Calculation of the Implied Interest Rate: $10. the account balance was transferred to a bank paying 10%.= $48.20 Factor for Present Value of Annuity Due for 5 yrs. Lease B — Calculation of the Implied Interest Rate: $12.20.03735 factor implies a 12% interest rate (present value of an annuity due table).90 ÷ $10.000 for 4 periods at 10%: 4.205 Sum in bank at end of tenth year: $23.000 at the beginning of each of six years to a savings account paying 8%. chosen to lease the equipment for $10.08) × $5.000 = $23. payable at the end of each of the next 5 years.448. Payments are due at the start of each year.000 for 6 periods at 8%: (7. At the end of the sixth year. 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.) = $48.03735 Solution 6-62 (cont.

10782 1.997 478.72173 1.05 = 8.02656 7.93743 6.003 None Interest Revenue $ -026. it leased this equipment to Sears Company for 5 years.10782 (present value of a 10-rent annuity due at 5%.Pr. 2001 for $600.57789 7.85312 .38554 15.14457 11 2. Stiner Leasing Company purchased specialized equipment from Wayne Company on December 31. The lease payments begin January 1.35049 18. the useful life of the equipment. 6-63—Calculation of unknown rent and interest. 2002 and are made every 6 months until July 1.20679 8.294 .64461 11.000 ÷ 8.215 Lease Receivable $525.003 74.72173 × 1.55133 .10782 = $74.35795 .59374 .71034 . Stiner Leasing wants to earn 10% annually on its investment. (b) How much interest revenue will Stiner earn in 2002? Solution 6-63 (a) Calculation of rent: 7.915 (Accrual) $50.62889 .42410 13.) $600.000.003.30641 Instructions (a) Calculate the amount of each rent. (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 1.58468 14.61391 12.300 23.57948 5. 2006.75902 10 2. On the same date. 1 2 None Date 1/1/02 7/1/02 12/31/02 Total Cash Received $74.53117 6. 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.

Since it will require several years and a considerable sum of money before the property is fully detoxified and capable of generating revenues. .46689 Multiplied by annual payments × $40.000. to whom should Carley sell the land? Show calculations. The present value of the purchase price is: Present value of ordinary annuity of $40.000 Present value of payments $258.23972 Difference 6. Assuming that the appropriate rate of interest is 9%. The present value of the purchase price is $255. who is willing to make 20 annual payments of $40. 6-64—Deferred annuity.70661 Less present value of ordinary annuity of $40.000 for the land now.000 each. Buyer B. Carley Company owns a plot of land on which buried toxic wastes have been discovered. Carley wishes to sell the land now. Solution 6-64 Buyer A. and Buyer B. It has located two potential buyers: Buyer A. with the first payment to be made 5 years from today.000 for 4 periods (deferred) at 9% 3. who is willing to pay $255.676 Conclusion: Carley should sell to Buyer B.Pr.000 for 24 periods at 9% 9.