Q: Which formula is used to calculate the future value of an ordinary annuity?

$$FV = PMT \times \frac{(1 + i)^N - 1}{i}$$

Q: Which formula is used to calculate the present value of an ordinary annuity?

$$PV = PMT \times \frac{1 - (1 + i$$)^{-N}$$}{i}$$

Question 1

Which of the following best explains the time value of money concept?

Accepted Answer

A dollar received today is worth more than a dollar received in the future because it can be invested to earn a return.

Question 2

Solitude Company borrows $60,000 for 3 years at a 5% annual rate. If interest is compounded annually, what is the total interest paid at the end of 3 years?

Accepted Answer

$9,458

Question 3

Which formula correctly calculates the future value (FV) of a single sum with compound interest?

Accepted Answer

$$FV = PV 	imes (1 + i)^N$$

Question 4

Crowded Company invests $1,000 for 1 year at a stated rate of 10%, compounded semiannually. What is the effective interest rate?

Accepted Answer

10.25%

Question 5

Which of the following is true about an ordinary annuity?

Accepted Answer

Payments are made at the end of each period.

Question 6

Purple and Orange Fashion Designs, Inc. expects to receive $175,000 in 5 years. If the relevant interest rate is 12% compounded monthly, what is the present value of this investment? (Use the formula approach.)

Accepted Answer

$96,328.75

Question 7

Which equation is used to solve for the present value (PV) of a single sum?

Accepted Answer

$$PV = FV \div (1 + i)^N$$

Question 8

A company issues a non-interest-bearing note with a face value of $2,000,000 due in 10 years. If the market rate is 10% compounded annually, what is the present value of the note?

Accepted Answer

$771,087

Question 9

Which formula is used to calculate the future value of an ordinary annuity?

Accepted Answer

$$FV = PMT 	imes \frac{(1 + i)^N - 1}{i}$$

Question 10

Magoli Company deposits $100,000 at the beginning of every quarter for 4 years at 12% interest compounded quarterly. What is the future value of this annuity due?

Accepted Answer

$$2,076,159$$

Question 11

Which formula is used to calculate the present value of an ordinary annuity?

Accepted Answer

$$PV = PMT 	imes \frac{1 - (1 + i$$)^{-N}$$}{i}$$

Question 12

S A O, Inc. will receive $10,000 semiannually for 10 years, with the first payment at the end of the first period. The interest rate is 10%. What is the present value of this ordinary annuity?

Accepted Answer

$$124,622$$

Question 13

Which of the following best describes a deferred annuity?

Accepted Answer

An annuity where payments or receipts are delayed until a future period.

Question 14

Barone Contracting Corporation must pay an employee $25,000 at the end of each of 4 years, starting 5 years from now. If the interest rate is 3%, what is the present value of this deferred annuity?

Accepted Answer

$$80,160.19$$

Question 15

Auto-Stop Corporation issues a $$10,000 bond, payable in 3 years, with 400 $$interest paid semiannually. If the market rate is 10%, what is the bond issue proceeds (cash received)?

Accepted Answer

$$9,492.48$$

Question 16

Which of the following is NOT a method used to measure assets and liabilities according to the FASB?

Accepted Answer

Future value of cash flows

Question 17

If you know the present value, interest rate per compounding period, and number of compounding periods, which variable can you solve for in a single-sum problem?

Accepted Answer

Future value

Question 18

Which of the following statements about the effective interest rate is correct?

Accepted Answer

It is higher than the stated rate if interest is compounded more than once per year.

Question 19

Which process describes moving from a present value to a future value?

Accepted Answer

Compounding

Question 20

A lottery winner can choose $$12,500,000 per year for 20 years or a lump sum of 155$$,777,629. What interest rate is being used if the present value factor for 20 periods is 12.46221?

Accepted Answer

5%

Chapter 7: Accounting and the Time Value of Money – Principles of Accounting Study Notes

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