Present Value of an Ordinary Annuity (Quiz)

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  1. 1. After the payments in an ordinary annuity have been discounted to time period 0, you will have the
    __________
    present
    value of the ordinary annuity.
  2. 2.
    __________
    Compound
    interest is referred to as interest on interest.
  3. 3. The interest removed from the payments in an ordinary annuity when calculating the present value is also referred to as
    __________
    discount
    .
  4. 4. In the calculation of present values, the payment amounts that are discounted are not accrual accounting amounts; rather they are
    __________
    cash
    amounts.
  5. 5. If the cash amount of a transaction is not known, accountants will record the transaction at the fair
    __________
    market
    value of the property or services exchanged. If neither amount is available, the accountant will record the transaction at the
    __________
    present
    value of the future cash amounts.
  6. 6.

    Under the accrual basis of accounting, the discount on notes receivable should be reported as interest revenue

    When The Note Is Received
    Wrong.
    This would violate the revenue recognition principle.
    Over The Life Of The Note
    Right!
    When The Note Matures
    Wrong.
    This would violate accrual accounting and the revenue recognition principle.
  7. 7. Under the accrual basis of accounting, the discount on notes payable should be reported as interest
    __________
    expense
    over the life of the note.
  8. 8. If you know the present value, the recurring payment amount, and length of the annuity, you can calculate the
    __________
    interest rate
    by using a present value of an ordinary annuity factor.
  9. 9.

    Which of the following present value of an ordinary annuity (PVOA) factors are larger?

    PVOA Factors For 10%
    Right!
    PVOA Factors For 12%
    Wrong.
  10. 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
    __________
    interest rate
    .
  11. 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
    Wrong.
    Interest rates are a function of time and risk. The risk is whether Corp. Y will be able to pay when the note comes due.
    Borrowing Rate Of Corp Y
    Right!
  12. 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
    __________
    20.
    5 years times 4 quarters per year
    and the interest rate is
    __________
    3%.
    12% divided by 4 quarters per year
    .
  13. 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
    __________
    120.
    10 years times 12 months per year
    and the interest rate per period is
    __________
    0.5%.
    6% divided by 12 months per year
    .
  14. 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.

  15. 14. The amount of service revenue that Company X should report in 2011 is $
    __________
    $17,000
    .
  16. 15. The amount of interest revenue that Company X should report in 2011 is $
    __________
    None
    .
  17. 16. The carrying value of the note at December 31, 2011 is $
    __________
    $17,000.
    Face amount of $20,000 minus the discount of $3,000.
    .
  18. 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 $
    __________
    $1,500.
    $3,000 of discount divided by 2 years.
    .
  19. 18. If the $3,000 of discount is a significant amount in light of Company X's net income and other financial information, the
    __________
    effective interest rate
    method of amortization should be used.
  20. Use the following present value of an ordinary annuity factors for solving the remaining questions:

  21. 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 $
    __________
    $3,993.
    (PVOA factor for n=5; i=8%) times $1,000
    .
  22. 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 $
    __________
    $13,578.
    (PVOA factor for n = 16; i = 2%) times $1,000
    .
  23. 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 $
    __________
    $11,255.
    (PVOA factor for n = 12; i = 1%) times $1,000
    .
  24. 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
    __________
    12%.
    Go to the row, n = 10, and search that row until you find a factor close to 5.650 ($5,650 divided by $1,000). The factor 5.650 appears in the 12% column.
    % compounded
    __________
    annually
    .
  25. 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
    __________
    15.
    Go to the 8% column and search for the factor 8.559 ($8,559 divided by $1,000). The factor appears in the row where n = 15.
    . The last withdrawal will occur on December 31,
    __________
    2026
    .
  26. 24. The answers to PVOA calculations can often be verified by preparing an
    __________
    amortization
    schedule, which shows the amount of interest and principal contained in each payment.

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