# Present Value of an Ordinary Annuity

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 1 After the payments in an ordinary annuity have been discounted to time period 0, you will have the ____________ value of the ordinary annuity.

 2 ______________ interest is referred to as interest on interest.

 3 The interest removed from the payments in an ordinary annuity when calculating the present value is also referred to as ______________.

 4 In the calculation of present values, the payment amounts that are discounted are not accrual accounting amounts; rather they are __________ amounts.

 5 If the cash amount of a transaction is not known, accountants will record the transaction at the fair __________ value of the property or services exchanged. If neither amount is available, the accountant will record the transaction at the ___________ value of the future cash amounts.

 6. Under the accrual basis of accounting, the discount on notes receivable should be reported as interest revenue when the note is received          over the life of the note          when the note matures

 7 Under the accrual basis of accounting, the discount on notes payable should be reported as interest _____________ over the life of the note.

 8 If you know the present value, the recurring payment amount, and length of the annuity, you can calculate the __________  ________ by using a present value of an ordinary annuity factor.

 9. Which of the following present value of an ordinary annuity (PVOA) factors are larger? PVOA factors for 10%            PVOA factors for 12%

 10 You can determine the number of payments (n) in an ordinary annuity, if you know the amount of each payment, the present value of the annuity, and the ___________  _________.

 11. Company X received a promissory note from Corp Y. The note does not specify any interest and it requires \$3,000 to be paid at the end of each year for four years. Which interest rate should Company X use to discount this note receivable to its present value? Borrowing rate of Company X            Borrowing rate of Corp Y

 12 A present value of an ordinary annuity table is used to compute the present value of a five-year ordinary annuity with a payment occurring every three months. If the company has a time value of money of 12% per year, compounded quarterly, the number of periods (n) to be used in the calculation is _________ and the interest rate is _________.

 13 A present value of an ordinary annuity (PVOA) table is used to compute the amount of a single deposit to be made today into an account earning interest of 6% per year compounded monthly. The deposit must be sufficient to cover a withdrawal of an identical amount each month for 10 years. At the end of the 10 years, the balance in the account should be \$0. When using the PVOA Table to solve for the amount needed (the present value), the number of periods (n) is _________ and the interest rate per period is __________.

Use the following information for answering Questions 14 - 18.
Company X's accounting year ends on December 31 of each year. On December 31, 2011 Company X received a promissory note from Corp Y in exchange for services provided by Company X. The fair market value of the services is not known and the fair market value of the note is not known. The note calls for two payments of \$10,000 each: one on December 31, 2012 and one on December 31, 2013. No interest is specified in the note. Company X computed the present value of the note to be \$17,000 as of December 31, 2011.

 14 The amount of service revenue that Company X should report in 2011 is \$_____________.

 15 The amount of interest revenue that Company X should report in 2011 is \$_____________.

 16 The carrying value of the note at December 31, 2011 is \$_____________.

 17 The amount of interest revenue that Company X should report in 2012, if it amortizes the discount on notes receivable by using the straight-line method is \$_____________.

 18 If the \$3,000 of discount is a significant amount in light of Company X's net income and other financial information, the ______________  _____________  _________ method of amortization should be used.

Use the following present value of an ordinary annuity factors for solving the remaining questions:

 n 1% 2% 4% 8% 12% 2 1.970 1.942 1.886 1.783 1.690 5 4.853 4.713 4.452 3.993 3.605 10 9.471 8.983 8.111 6.710 5.650 12 11.255 10.575 9.385 7.536 6.194 15 13.865 12.849 11.118 8.559 6.811 16 14.718 13.578 11.652 8.851 6.974 24 21.243 18.914 15.247 10.529 7.784

 19 Assuming the time value of money is 8% compounded annually, the present value on January 1, 2012 of a \$1,000 cash amount occurring on January 1 of each of the years 2013, 2014, 2015, 2016, and 2017 is \$_____________.

 20 Assuming the time value of money is 8% per year compounded quarterly, the present value on December 31, 2011 of a \$1,000 cash amount occurring on March 31, June 30, September 30, and December 31 of each of the years 2012, 2013, 2014, and 2015 is \$_____________.

 21 Assuming the time value of money is 12% per year compounded monthly, the present value on January 1, 2012 of a \$1,000 cash amount occurring on the last day of each month of 2012 is \$_____________.

 22 As of January 1, 2012, a non-interest bearing note has a present value of \$5,650. The note requires ten payments of \$1,000 each to be made on December 31 of each year beginning on December 31, 2012. The interest rate used to calculate the present value was _______% compounded _______________.

 23 A fund earning 8% per year compounded annually has a balance of \$8,559 as of January 1, 2012. The owner of the fund wishes to withdraw \$1,000 on December 31 of each year starting on December 31, 2012. The number of withdrawals that can be made before the fund reaches a \$0 balance is ___________. The last withdrawal will occur on December 31, ______.

 24 The answers to PVOA calculations can often be verified by preparing an ___________ schedule, which shows the amount of interest and principal contained in each payment.

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