APPENDIX C

TIME VALUE OF MONEY

SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY

Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT
True-False Statements
1. 1 K 3. 1 K 5. 2 K 7. 4 K 9. 5 K
2. 1 K 4. 2 K 6. 3 K 8. 4 K 10. 5 K
Multiple Choice Questions
11. 2 K 19. 3 AP 27. 3 AP 35. 4 C 43. 5 C
12. 2 C 20. 3 AP 28. 3 AP 36. 4 C 44. 5 AP
13. 2 C 21. 3 AP 29. 3 AP 37. 4 AP 45. 5 AP
14. 2 AP 22. 3 C 30. 3 AP 38. 4 AP 46. 3 AP
15. 2 AP 23. 3 AP 31. 3 AP 39. 4 AP 47. 4 AP
16. 3 AP 24. 3 AP 32. 3 AP 40. 5 C
17. 3 AP 25. 3 AP 33. 4 AP 41. 5 C
18. 3 C 26. 3 C 34. 4 AP 42. 5 C
Exercises
48. 3 AP 51. 3 AP 54. 4 AP 57. 4 AP 60. 5 AP
49. 3 AP 52. 3 AP 55. 4 AP 58. 4 AP 61. 5 AP
50. 3 AP 53. 3 AP 56. 4 AP 59. 4 AP
Completion Statements
62. 1 K 63. 2 K 64. 4 K 65. 4 K 66. 5 K
C-2 Test Bank for Accounting Principles, Eighth Edition

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Study Objective 1
1. TF 2. TF 3. TF 62. C
Study Objective 2
4. TF 11. MC 13. MC 15. MC
5. TF 12. TF 14. MC 63. C
Study Objective 3
6. TF 19. MC 23. MC 27. MC 31. MC 49. Ex 53. Ex
16. MC 20. MC 24. MC 28. MC 32. MC 50. Ex
17. MC 21. MC 25. MC 29. MC 46. MC 51. Ex
18. MC 22. MC 26. MC 30. MC 48. Ex 52. Ex
Study Objective 4
7. TF 34. MC 37. MC 47. MC 56. Ex 59. Ex
8. TF 35. MC 38. MC 54. Ex 57. Ex 64. C
33. MC 36. MC 39. MC 55. Ex 58. Ex 65. C
Study Objective 5
9. TF 40. MC 42. MC 44. MC 60. Ex 66. C
10. TF 41. MC 43. MC 45. MC 61. Ex

Note: TF = True-False C = Completion

MC = Multiple Choice Ex = Exercise

Appendix C also contains one set of five Matching questions.

 Time Value of Money C-3

CHAPTER STUDY OBJECTIVES

1. Distinguish between simple and compound interest. Simple interest is computed on the
principal only, while compound interest is computed on the principal and any interest earned
that has not been withdrawn.
2. Identify the variables fundamental to solving present value problems. The following
three variables are fundamental to solving present value problems: (1) the future amount, (2)
the number of periods, and (3) the interest rate (the discount rate).
3. Solve for present value of a single amount. Prepare a time diagram of the problem.
Identify the future amount, the number of discounting periods, and the discount (interest) rate.
Using the present value of 1 table, multiply the future amount by the present value factor
specified at the intersection of the number of periods and the discount rate.
4. Solve for present value of an annuity. Prepare a time diagram of the problem. Identify the
future amounts (annuities), the number of discounting periods, and the discount (interest)
rate. Using the present value of an annuity of 1 table, multiply the amount of the annuity by
the present value factor specified at the intersection of the number of periods and the interest
rate.
5. Compute the present value of notes and bonds. To determine the present value of the
principal amount: Multiply the principal amount (a single future amount) by the present value
factor (from the present value of 1 table) intersecting at the number of periods (number of
interest payments) and the discount rate. To determine the present value of the series of
interest payments: Multiply the amount of the interest payment by the present value factor
(from the present value of an annuity of 1 table) intersecting at the number of periods (number
of interest payments) and the discount rate. Add the present value of the principal amount to
the present value of the interest payments to arrive at the present value of the note or bond.
C-4 Test Bank for Accounting Principles, Eighth Edition

TRUE-FALSE STATEMENTS
1. Interest is the difference between the amount borrowed and the principal.

2. Compound interest is computed on the principal and any interest earned that has not
been paid or received.

3. Simple interest is generally applicable only to short-term situations of one year or less.

4. The present value is the value now of a given amount to be paid or received in the future,
assuming simple interest.

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

6. A higher discount rate produces a higher present value.

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

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

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

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

Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. F 3. T 5. T 7. F 9. F
2. T 4. F 6. F 8. T 10. T

MULTIPLE CHOICE QUESTIONS

Note: Students will need present value tables for several of these questions.

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

12. Present value is based on

a. the dollar amount to be received.
b. the length of time until the amount is received.
c. the interest rate.
d. all of these.
 Time Value of Money C-5

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

14. If you are able to earn an 8% rate of return, what amount would you need to invest to
have $10,000 one year from now?
a. $9,248.90
b. $9,259.26
c. $9,090.90
d. $9,900.00

15. If you are able to earn a 15% rate of return, what amount would you need to invest to
have $5,000 one year from now?
a. $4,950.45
b. $4,375.00
c. $4,250.00
d. $4,347.83

16. If a single future amount of $1,500 is to be received in 2 years and discounted at 11%, its
present value is
a. $1,363.65.
b. $1,217.43.
c. $1,351.35.
d. $1,239.68.

17. If a single future amount of $2,000 is to be received in 3 years and discounted at 6%, its
present value is
a. $1,679.25.
b. $1,886.80.
c. $1,733.40.
d. $1,880.00.

18. Which of the following discount rates will produce the smallest present value?
a. 9%
b. 10%
c. 12%
d. 6%

19. Suppose you have a winning sweepstakes ticket and you are given the option of
accepting $1,000,000 three years from now or taking the present value of the $1,000,000
now. The sponsor of the prize uses a 7% discount rate. If you elect to receive the present
value of the prize now, the amount you will receive is
a. $816,298.
b. $873,440.
c. $934,580.
d. $1,000,000.
C-6 Test Bank for Accounting Principles, Eighth Edition

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

21. The amount you must deposit now in your savings account, paying 5% interest, in order to
accumulate $4,000 for your first tuition payment when you start college in 3 years is
a. $3,400.00.
b. $3,132.00.
c. $3,455.35.
d. $3,543.84.

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

23. If Susy Lane invests $88,785 now and she will receive $150,000 at the end of 9 years,
what annual rate of interest will she be earning on her investment?
a. 4%
b. 4.5%
c. 5%
d. 6%

24. Carol Fordyce has been offered the opportunity of investing $84,820 now. The investment
will earn 10% per year and at the end of its life will return $200,000 to Carol. How many
years must Carol wait to receive the $200,000?
a. 8
b. 9
c. 10
d. 11

25. Dodd Company is considering purchasing equipment. The equipment will produce the
following cash flows:
Year 1 $90,000
Year 2 $150,000
Dodd requires a minimum rate of return of 10%. What is the maximum price Dodd should
pay for this equipment?
a. $205,785
b. $123,968
c. $240,000
d. $120,000

26. Which of the following discount rates will produce the largest present value?
a. 8%
b. 9%
c. 10%
d. 4%
 Time Value of Money C-7

27. Suppose you have a winning lottery ticket and you are given the option of accepting
$500,000 three years from now or taking the present value of the $500,000 now. The
sponsor of the prize uses a 6% discount rate. If you elect to receive the present value of
the prize now, the amount you will receive is
a. $500,000.
b. $445,000.
c. $431,920.
d. $419,810.

28. The amount you must deposit now in your savings account, paying 6% interest, in order to
accumulate $3,000 for a down payment 5 years from now on a new Toyota Camry is
a. $600.00.
b. $2,100.00.
c. $2,238.66.
d. $2,241.78.

29. Exeter Company is considering purchasing machinery. The machinery will produce the
following cash flows:
Year 1 $40,000
Year 2 $60,000
Exeter requires a minimum rate of return of 10%. What is the maximum price Exeter
should pay for this machinery?
a. $85,950.60
b. $42,975.30
c. $100,000
d. $50,000

30. If Sloane Joyner invests $7,009.87 now and she will receive $20,000 at the end of 11
years, what annual rate of interest will she be earning on her investment?
a. 8%
b. 8.5%
c. 9%
d. 10%

31. Suzy Douglas has been offered the opportunity of investing $36,770 now. The investment
will earn 8% per year and at the end of its life will return $100,000 to Suzy. How many
years must Suzy wait to receive the $100,000?
a. 10
b. 11
c. 12
d. 13

32. Peter Johnson invests $7,103.36 now for a series of $1,000 annual returns beginning one
year from now. Peter will earn 10% on the initial investment. How many annual payments
will Peter receive?
a. 10
b. 12
c. 13
d. 15
C-8 Test Bank for Accounting Principles, Eighth Edition

33. The Hazel Company has just purchased equipment that requires annual payments of
$10,000 to be paid at the end of each of the next 4 years. The appropriate discount rate is
15%. What is the present value of the payments?
a. $28,549.80
b. $40,000.00
c. $11,743.64
d. $37,533.56

34. The Perdue Company has purchased equipment that requires annual payments of
$10,000 to be paid at the end of each of the next 6 years. The appropriate discount rate is
12%. What amount will be used to record the equipment?
a. $60,000.00
b. $41,114.10
c. $55,257.36
d. $38,549.80

35. A $10,000, 8%, 5-year note payable that pays interest quarterly would be discounted back
to its present value by using tables that would indicate which one of the following period-
interest combinations?
a. 5 interest periods, 8% interest
b. 20 interest periods, 8% interest
c. 20 interest periods, 2.0% interest
d. 5 interest periods, 2.0% interest

36. In order to compute the present value of an annuity, it is necessary to know the
1. discount rate.
2. number of discount periods and the amount of the periodic payments or
receipts.
a. 1
b. 2
c. both 1 and 2
d. something in addition to 1 and 2

37. Norman Company has just signed a capital lease contract for equipment that requires
annual lease payments of $24,000 to be paid at the end of each of the next 4 years. The
appropriate discount rate is 15%. What is the present value of the lease payments?
a. $68,519.49
b. $96,000.00
c. $28,184.73
d. $90,080.55

38. Cline Company has signed a capital lease contract for equipment that requires annual
rental payments of $15,000 to be paid at the end of each of the next 6 years. The
appropriate discount rate is 12%. What amount will be used to capitalize the leased
equipment?
a. $90,000.00
b. $61,671.10
c. $82,886.05
d. $57,824.70
 Time Value of Money C-9

39. Kim Terrell invests $149,738 now for a series of $20,000 annual returns beginning one
year from now. Kim will earn 9% on the initial investment. How many annual payments will
Kim receive?
a. 8
b. 10
c. 12
d. 13

40. If a bond has a stated interest rate of 5%, but the market interest rate is 6%, the bond
a. will sell at a discount.
b. will sell at a premium.
c. may sell at either a premium or a discount.
d. will sell at its par value.

41. When determining the proceeds received when issuing a bond, the factor applied to the
amount of the interest payments is determined from the Table for the
1. present value of 1.
2. present value of an annuity of 1.
a. 1
b. 2
c. both 1 and 2
d. neither 1 nor 2

42. When determining the proceeds received when issuing a bond, the factor applied to the
amount of the bond principal is determined from the Table for the
a. present value of 1.
b. present value of annuity of 1.
c. future value of 1.
d. none of these.

43. If a bond has a stated rate of 8% and is discounted at 8%, then the proceeds received at
issuance will be
a. equal to the par value of the bonds.
b. greater than the par value of the bonds.
c. less than the par value of the bonds.
d. zero.

44. Elston Company is about to issue $800,000 of 5-year bonds, with a stated rate of interest
of 10%, payable semiannually. The market rate for such securities is 12%. How much can
Elston expect to receive for the sale of these bonds?
a. $741,119
b. $800,000
c. $865,888
d. None of these

45. The Melba Company issued $100,000 of 5-year bonds, with a stated rate of interest of
8%, payable semiannually. The market rate for such securities is 10%. How much did
Melba receive from the sale of these bonds?
a. $92,278
b. $100,000
c. $108,111
d. None of these
C - 10 Test Bank for Accounting Principles, Eighth Edition

Additional Multiple Choice Questions

46. A higher discount rate produces

a. a smaller present value.
b. a higher present value.
c. the same present value.
d. a greater length of time.

47. Which of the following is not necessary to know when computing the present value of an
annuity?
a. The discount rate
b. The amount of the periodic receipts or payments
c. The number of discount periods
d. The probability of receiving the amount due

Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
11. d 17. a 23. d 29. a 35. c 41. b 47. d
12. d 18. c 24. b 30. d 36. c 42. a
13. b 19. a 25. a 31. d 37. a 43. a
14. b 20. b 26. d 32. c 38. b 44. a
15. d 21. c 27. d 33. a 39. d 45. a
16. b 22. a 28. d 34. b 40. a 46. a

EXERCISES
Ex. 48
(a) What is the present value of $80,000 due 7 years from now, discounted at 9%?
(b) What is the present value of $120,000 due 5 years from now, discounted at 12%?

Solution 48 (4 min.)
Use Table 1.
(a) $80,000 × .54703 (7 periods and 9%) = $43,762.40
(b) $120,000 × .56743 (5 periods and 12%) = $68,091.60

Ex. 49
Noll Company is considering an investment which will return a lump sum of $600,000 six years
from now. What amount should Noll Company pay for this investment to earn an 8% return?
 Time Value of Money C - 11

Solution 49 (3 min.)
Use Table 1.
$600,000 × .63017 (6 periods and 8%) = $378,102

Ex. 50
Tovar Company earns 12% on an investment that will return $300,000 eleven years from now.
What is the amount that Tovar Company should invest now to earn this rate of return?

Solution 50 (3 min.)
Use Table 1.
$300,000 × .28748 (11 periods and 12%) = $86,244

Ex. 51
Snell Company sold a three-year, $150,000, zero interest-bearing note receivable to Marin
Company. Marin Company wishes to earn 10% over the remaining 2 years of the note. How
much cash will Snell Company receive upon sale of the note?

Solution 51 (3 min.)
Use Table 1.
$150,000 × .82645 (2 years and 10%) = $123,968

Ex. 52
Barkley Company issues a three-year, zero interest-bearing note of $60,000. The interest rate
used to discount the zero interest-bearing note is 5%. What are the cash proceeds that Barkley
Company should receive?

Solution 52 (3 min.)
Use Table 1.
$60,000 × .86384 (3 periods and 5%) = $51,830

Ex. 53
If Linda Cline invests $22,062 now she will receive $60,000 at the end of 13 years. What annual
rate of return will Linda earn on her investment?
C - 12 Test Bank for Accounting Principles, Eighth Edition

Solution 53 (3 min.)
Use Table 1.
8% $60,000 × .3677 (8% and 13 periods) = $22,062

Ex. 54
Luis Rodriguez wants to buy a car in three years. He will need $2,000 for a down payment. The
annual interest rate is 9%. How much money must Luis invest today for the purchase?

Solution 54 (3 min.)
Use Table 1.
$2,000 × .77218 = $1,544.36

Ex. 55
Amy Brown plans to buy a surround sound stereo for $1,600 after 3 years. If the interest rate is
6%, how much money should Amy set aside today for the purchase?

Solution 55 (3 min.)
Use Table 1.
$1,600 × .83962 = $1,343.39

Ex. 56
Lucky Lou has just won the lottery and will receive an annual payment of $50,000 every year for
the next 20 years. If the annual interest rate is 8%, what is the present value of the winnings?

Solution 56 (3 min.)
Use Table 2.
$50,000 × 9.81815 = $490,907.50

Ex. 57
CVS leases a building for 20 years. The lease requires 20 annual payments of $10,000 each,
with the first payment due immediately. The interest rate in the lease is 10%. What is the present
value of the cost of leasing the building?
 Time Value of Money C - 13

Solution 57 (3 min.)
Use Table 2.
$10,000 + ($10,000 × 8.36492) = $93,649.20

Ex. 58
Hale Company is considering investing in an annuity contract that will return $75,000 annually at
the end of each year for 20 years. What amount should Hale Company pay for this investment if it
earns an 8% return?

Solution 58 (3 min.)
Use Table 2.
$75,000 × 9.81815 (20 periods and 8%) = $736,361

Ex. 59
Betty Klein purchased an investment for $53,680.64. From this investment, she will receive
$8,000 annually for the next 10 years starting one year from now. What rate of interest will Betty
be earning on her investment?

Solution 59 (4 min.)
Use Table 2.
Answer: 8%
$53,680.64 ÷ $8,000 = 6.71008 (10 periods and 8%) = 6.71008

Ex. 60
Zuber Company issued $500,000, 10%, 2-year bonds which pay interest semiannually. Compute
the amount at which the bonds would sell if investors required a rate of return of 8%.

Solution 60 (5 min.)
Present value of principal
$500,000 × .85480 (Table 1, 4 periods – 4%)..................................... $427,400
Present value of interest payments
$500,000 × .05 = $25,000
$25,000 × 3.62990 (Table 2, 4 periods – 4%)..................................... 90,748
Proceeds from issuance of bonds ............................................................... $518,148
C - 14 Test Bank for Accounting Principles, Eighth Edition

Ex. 61
Farley Company issued 9%, 5-year, $1,000,000 par value bonds that pay interest semiannually
on October 1 and April 1. The bonds are dated April 1, 2008, and are issued on that date. The
market rate of interest for such bonds on April 1, 2008, is 8%. What cash proceeds did Farley
Company receive from issuance of the bonds?

Solution 61 (5 min.)
Present Value of the Interest Payment:
$1,000,000 × 9% × 6/12 = $45,000
$45,000 × PV of 1 due periodically for 10 periods at 4%
$45,000 × 8.11090 (Table 2) = $364,991

Present Value of the Principal:

$1,000,000 × PV of 1 due in 10 periods at 4%
$1,000,000 × .67556 (Table 1) = $675,560

Proceeds = $364,991 + $675,560 = $1,040,551

COMPLETION STATEMENTS
62. ___________ interest is computed on the principal and on any interest earned that has
not been paid or withdrawn.

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

64. A series of equal dollar amounts to be received or paid periodically are ______________.

65. The _____________________ of an annuity is the value now of a series of future receipts
or payments.

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

Answers to Completion Statements

62. Compound
63. discounting
64. annuities
65. present value
66. interest, principal
 Time Value of Money C - 15

MATCHING
67. Match the items below by entering the appropriate code letter in the space provided.

A. Annuities D. Present value of a single amount

B. Discounting E. Present value of an annuity
C. Compound interest

_____ 1. The value today of a future amount to be received or paid.

_____ 2. A series of equal dollar amounts to be received or paid periodically.

_____ 3. Return on principal plus interest for two or more periods.

_____ 4. Value today of a series of future amounts to be received or paid.

_____ 5. The process of determining the present value of a future amount.

Answers to Matching
1. D 4. E
2. A 5. B
3. C