Connect

Close
Skip to eBook contentSkip to Chapter linksSkip to Content links for this ChapterSkip to eBook links

Chapter6: Time Value of Money Concepts

Exercises

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/820130/Connect_Accounting_CMYK.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (38.0K)</a>

An alternate exercise and problem set is available on the text website: www.mhhe.com/spiceland6e

E 6-1
 
Future value; single amount
 
 LO2

Determine the future value of the following single amounts:

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/326_1.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

E 6-2
 
Future value; single amounts
 
 LO2

Determine the future value of $10,000 under each of the following sets of assumptions:

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/326_2.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

E 6-3
 
Present value; single amount
 
 LO3

Determine the present value of the following single amounts:

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/326_3.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

E 6-4
 
Present value; multiple, unequal amounts
 
 LO3

Determine the combined present value as of December 31, 2011, of the following four payments to be received at the end of each of the designated years, assuming an annual interest rate of 8%.

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/326_4.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

E 6-5
 
Noninterest-bearing note; single payment
 
 LO3

The Field Detergent Company sold merchandise to the Abel Company on June 30, 2011. Payment was made in the form of a noninterest-bearing note requiring Abel to pay $85,000 on June 30, 2013. Assume that a 10% interest rate properly reflects the time value of money in this situation.

Required:

Calculate the amount at which Field should record the note receivable and corresponding sales revenue on June 30, 2011.

p. 327

E 6-6
 
Solving for unknowns; single amounts
 
 LO4

For each of the following situations involving single amounts, solve for the unknown (?). Assume that interest is compounded annually. (i = interest rate, and n = number of years)

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/327_1.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

E 6-7
 
Future value; annuities
 
 LO6

Wiseman Video plans to make four annual deposits of $2,000 each to a special building fund. The fund's assets will be invested in mortgage instruments expected to pay interest at 12% on the fund's balance. Using the appropriate annuity table, determine how much will be accumulated in the fund on December 31, 2014, under each of the following situations:

1.

 

The first deposit is made on December 31, 2011, and interest is compounded annually.

2.

 

The first deposit is made on December 31, 2010, and interest is compounded annually.

3.

 

The first deposit is made on December 31, 2010, and interest is compounded quarterly.

4.

 

The first deposit is made on December 31, 2010, interest is compounded annually, and interest earned is withdrawn at the end of each year.

E 6-8
 
Present value; annuities
 
 LO7

Using the appropriate present value table and assuming a 12% annual interest rate, determine the present value on December 31, 2011, of a five-period annual annuity of $5,000 under each of the following situations:

1.

 

The first payment is received on December 31, 2012, and interest is compounded annually.

2.

 

The first payment is received on December 31, 2011, and interest is compounded annually.

3.

 

The first payment is received on December 31, 2012, and interest is compounded quarterly.

E 6-9
 
Solving for unknowns; annuities
 
 LO8

For each of the following situations involving annuities, solve for the unknown (?). Assume that interest is compounded annually and that all annuity amounts are received at the end of each period. (i = interest rate, and n = number of years)

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/327_2.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

E 6-10
 
Future value; solving for annuities and single amount
 
 LO4 LO8

John Rider wants to accumulate $100,000 to be used for his daughter's college education. He would like to have the amount available on December 31, 2016. Assume that the funds will accumulate in a certificate of deposit paying 8% interest compounded annually.

Required:

Answer each of the following independent questions.

1.

 

If John were to deposit a single amount, how much would he have to invest on December 31, 2011?

2.

 

If John were to make five equal deposits on each December 31, beginning on December 31, 2012, what is the required deposit?

3.

 

If John were to make five equal deposits on each December 31, beginning on December 31, 2011, what is the required deposit?

E 6-11
 
Future and present value
 
 LO3 LO6 LO7

Answer each of the following independent questions.

1.

 

Alex Meir recently won a lottery and has the option of receiving one of the following three prizes: (1) $64,000 cash immediately, (2) $20,000 cash immediately and a six-period annuity of $8,000 beginning one year from today, or (3) a six-period annuity of $13,000 beginning one year from today. Assuming an interest rate of 6%, which option should Alex choose?

2.

 

The Weimer Corporation wants to accumulate a sum of money to repay certain debts due on December 31, 2020. Weimer will make annual deposits of $100,000 into a special bank account at the end of each of 10 years beginning December 31, 2011. Assuming that the bank account pays 7% interest compounded annually, what will be the fund balance after the last payment is made on December 31, 2020?

E 6-12
 
Deferred annuities
 
 LO7

Lincoln Company purchased merchandise from Grandville Corp. on September 30, 2011. Payment was made in the form of a noninterest-bearing note requiring Lincoln to make six annual payments of $5,000 on each September 30, beginning on September 30, 2014.

Required:

Calculate the amount at which Lincoln should record the note payable and corresponding purchases on September 30, 2011, assuming that an interest rate of 10% properly reflects the time value of money in this situation.

p. 328

E 6-13
 
Solving for unknown annuity payment
 
 LO8

Don James purchased a new automobile for $20,000. Don made a cash down payment of $5,000 and agreed to pay the remaining balance in 30 monthly installments, beginning one month from the date of purchase. Financing is available at a 24% annual interest rate.

Required:

Calculate the amount of the required monthly payment.

E 6-14
 
Solving for unknown interest rate
 
 LO8

Lang Warehouses borrowed $100,000 from a bank and signed a note requiring 20 annual payments of $13,388 beginning one year from the date of the agreement.

Required:

Determine the interest rate implicit in this agreement.

E 6-15
 
Solving for unknown annuity amount
 
 LO8

Sandy Kupchack just graduated from State University with a bachelors degree in history. During her four years at the U, Sandy accumulated $12,000 in student loans. She asks for your help in determining the amount of the quarterly loan payment. She tells you that the loan must be paid back in five years and that the annual interest rate is 8%. Payments begin in three months.

Required:

Determine Sandy's quarterly loan payment.

E 6-16
 
Deferred annuities; solving for annuity amount
 
 LO7 LO8

On April 1, 2011, John Vaughn purchased appliances from the Acme Appliance Company for $1,200. In order to increase sales, Acme allows customers to pay in installments and will defer any payments for six months. John will make 18 equal monthly payments, beginning October 1, 2011. The annual interest rate implicit in this agreement is 24%.

Required:

Calculate the monthly payment necessary for John to pay for his purchases.

E 6-17
 
Price of a bond
 
 LO9

On September 30, 2011, the San Fillipo Corporation issued 8% stated rate bonds with a face amount of $300 million. The bonds mature on September 30, 2031 (20 years). The market rate of interest for similar bonds was 10%. Interest is paid semiannually on March 31 and September 30.

Required:

Determine the price of the bonds on September 30, 2011.

E 6-18
 
Price of a bond; interest expense
 
 LO9

On June 30, 2011, Singleton Computers issued 6% stated rate bonds with a face amount of $200 million. The bonds mature on June 30, 2026 (15 years). The market rate of interest for similar bond issues was 5% (2.5% semiannual rate). Interest is paid semiannually (3%) on June 30 and December 31, beginning on December 31, 2011.

Required:

1.

 

Determine the price of the bonds on June 30, 2011.

2.

 

Calculate the interest expense Singleton reports in 2011 for these bonds.

E 6-19
 
Lease payments
 
 LO9

On June 30, 2011, Fly-By-Night Airlines leased a jumbo jet from Boeing Corporation. The terms of the lease require Fly-By-Night to make 20 annual payments of $400,000 on each June 30. Generally accepted accounting principles require this lease to be recorded as a liability for the present value of scheduled payments. Assume that a 7% interest rate properly reflects the time value of money in this situation.

Required:

1.

 

At what amount should Fly-By-Night record the lease liability on June 30, 2011, assuming that the first payment will be made on June 30, 2012?

2.

 

At what amount should Fly-By-Night record the lease liability on June 30, 2011, before any payments are made, assuming that the first payment will be made on June 30, 2011?

E 6-20
 
Lease payments; solve for unknown interest rate
 
 LO8 LO9

On March 31, 2011, Southwest Gas leased equipment from a supplier and agreed to pay $200,000 annually for 20 years beginning March 31, 2012. Generally accepted accounting principles require that a liability be recorded for this lease agreement for the present value of scheduled payments. Accordingly, at inception of the lease, Southwest recorded a $2,293,984 lease liability.

Required:

Determine the interest rate implicit in the lease agreement.

p. 329

E 6-21
 
Concepts; terminology
 
 LO1 through LO3 LO5

Listed below are several terms and phrases associated with concepts discussed in the chapter. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it.

List A

List B


_____1.Interest

a.First cash flow occurs one period after agreement begins.

_____2.Monetary asset

b.The rate at which money will actually grow during a year.

_____3.Compound interest

c.First cash flow occurs on the first day of the agreement.

_____4.Simple interest

d.The amount of money that a dollar will grow to.

_____5.Annuity

e.Amount of money paid/received in excess of amount borrowed/lent.

_____6.Present value of a single amount

f.Obligation to pay a sum of cash, the amount of which is fixed.

_____7.Annuity due

g.Money can be invested today and grow to a larger amount.

_____8.Future value of a single amount

h.No fixed dollar amount attached.

_____9.Ordinary annuity

i.Computed by multiplying an invested amount by the interest rate.

_____10.Effective rate or yield

j.Interest calculated on invested amount plus accumulated interest.

_____11.Nonmonetary asset

k.A series of equal-sized cash flows.

_____12.Time value of money

l.Amount of money required today that is equivalent to a given future amount.

_____13.Monetary liability

m.Claim to receive a fixed amount of money.

2011 McGraw-Hill Higher Education
Any use is subject to the Terms of Use and Privacy Notice.
McGraw-Hill Higher Education is one of the many fine businesses of The McGraw-Hill Companies.