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Module 13 Present Value

Multiple-Choice Questions (1-25)


A. Fundamentals
1. On March 15, 2010, Ashe Corp. adopted a plan to accumulate $1,000,000 by
September 1, 2014. Ashe plans to make four equal annual deposits to a fund that will
earn interest at 10% compounded annually. Ashe made the first deposit on September 1,
2010. Future value and future amount factors are as follows:
Future value of $1 at 10% for 4 periods 1.46 Future amount of ordinary annuity of $1 at
10% for four periods 4.64 Future amount of annuity in advance of $1 at 10% for four
periods 5.11 Ashe should make four annual deposits (rounded) of
a. $250,000
b. $215,500
c. $195,700
d. $146,000
2. On July 1, 2010, James Rago signed an agreement to operate as a franchisee of Fast
Foods, Inc. for an initial franchise fee of $60,000. Of this amount, $20,000 was paid when
the agreement was signed and the balance is payable in four equal annual payments of
$10,000 beginning July 1, 2011. The agreement provides that the down payment is not
refundable and no future services are required of the franchisor. Ragos credit rating
indicates that he can borrow money at 14% for a loan of this type. Information on present
and future value factors is as follows:
Present value of $1 at 14% for four periods 0.59 Future amount of $1 at 14% for four
periods 1.69 Present value of an ordinary annuity of $1 at 14% for four periods 2.91 Rago
should record the acquisition cost of the franchise on July 1, 2010 at

a. $43,600
b. $49,100
c. $60,000
d. $67,600
3. On November 1, 2010, a company purchased a new machine that it does not have to
pay for until November 1, 2012. The total payment on November 1, 2012, will include
both principal and interest. Assuming interest at a 10% rate, the cost of the machine
would be the total payment multiplied by what time value of money concept?
a. Present value of annuity of $1.
b. Present value of $1.
c. Future amount of annuity of $1.
d. Future amount of $1.
4. For which of the following transactions would the use of the present value of an
annuity due concept be appropriate in calculating the present value of the asset obtained
or liability owed at the date of incurrence?
a. A capital lease is entered into with the initial lease payment due one month
subsequent to the signing of the lease agreement.
b. A capital lease is entered into with the initial lease payment due upon the signing of
the lease agreement.
c. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1
and January 1 yielding 7%.
d. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1
and January 1 yielding 9%.
5. Jole Co. lent $10,000 to a major supplier in exchange for a noninterest-bearing note
due in three years and a contract to purchase a fixed amount of merchandise from the
supplier at a 10% discount from prevailing market prices over the next three years. The
market rate for a note of this type is 10%. On issuing the note, Jole should record
Discount on note receivable Deferred charge a. Yes Yes b. Yes No c. No Yes d. No No A.9.
Notes Receivable and Payable
6. On December 30, 2010, Chang Co. sold a machine to Door Co. in exchange for a
noninterest-bearing note requiring ten annual payments of $10,000. Door made the first
payment on December 30, 2010. The market interest rate for similar notes at date of
issuance was 8%. Information on present value factors is as follows:
Period Present value of $1 at 8% Present value of ordinary annuity of $1 at 8% 9 0.50
6.25 10 0.46 6.71 In its December 31, 2010 balance sheet, what amount should Chang
report as note receivable?
a. $45,000
b. $46,000
c. $62,500
d. $67,100
Items 7 and 8 are based on the following:

On January 2, 2010, Emme Co. sold equipment with a carrying amount of $480,000 in
exchange for a $600,000 noninterest-bearing note due January 2, 2013. There was no
established exchange price for the equipment. The prevailing rate of interest for a note of
this type at January 2, 2010, was 10%. The present value of $1 at

10% for three periods is 0.75.


7. In Emmes 2010 income statement, what amount should be reported as interest
income?
a. $ 9,000
b. $45,000
c. $50,000
d. $60,000
8. In Emmes 2010 income statement, what amount should be reported as gain (loss) on
sale of machinery?
a. $(30,000) loss.
b. $ 30,000 gain.
c. $120,000 gain.
d. $270,000 gain.
9. On December 31, 2010, Jet Co. received two $10,000 notes receivable from customers
in exchange for services rendered. On both notes, interest is calculated on the
outstanding balance at the interest rate of 3% compounded annually and payable at
maturity. The note from Hart Corp., made under customary trade terms, is due in nine
months and the note from Maxx, Inc. is due in five years. The market interest rate for
similar notes on December 31, 2010, was 8%. The compound interest factors are as
follows:
Future value of $1 due in nine months at 3% 1.0225 Future value of $1 due in five years
at 3% 1.1593 Present value of $1 due in nine months at 8% .944 Present value of $1 due
in five years at 8% .680 Jet does not elect the fair value option for reporting its financial
assets. At what amounts should these two notes receivable be reported in Jets December
31, 2010 balance sheet?
Hart Maxx a. $ 9,440 $6,800 b. $ 9,652 $7,820 c. $10,000 $6,800 d. $10,000 $7,883 10.
Leaf Co. purchased from Oak Co. a $20,000, 8%, five-year note that required five equal
annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf.
At the date of purchase, Leaf recorded the note at its present value of $19,485. Leaf does
not elect the fair value option for reporting its financial liabilities. What should be the
total interest revenue earned by Leaf over the life of this note?
a. $5,045
b. $5,560
c. $8,000
d. $9,000
Items 11 and 12 are based on the following:
House Publishers offered a contest in which the winner would receive $1,000,000,
payable over twenty years. On December 31, 2010, House announced the winner of the
contest and signed a note payable to the winner for $1,000,000, payable in $50,000
installments every January 2. Also on December 31, 2010, House purchased an annuity

for $418,250 to provide the $950,000 prize monies remaining after the first $50,000
installment, which was paid on January 2, 2011.
11. In its December 31, 2010 balance sheet, what amount should House report as note
payablecontest winner, net of current portion?
a. $368,250
b. $418,250

c. $900,000
d. $950,000
12. In its 2010 income statement, what should House report as contest prize expense?
a. $0
b. $ 418,250
c. $ 468,250
d. $1,000,000
13. On December 31, 2010, Roth Co. issued a $10,000 face value note payable to Wake
Co. in exchange for services rendered to Roth. The note, made at usual trade terms, is
due in nine months and bears interest, payable at maturity, at the annual rate of 3%. The
market interest rate is 8%. The compound interest factor of $1 due in nine months at 8%
is .944. At what amount should the note payable be reported in Roths December 31,
2010 balance sheet?
a. $10,300
b. $10,000
c. $ 9,652
d. $ 9,440
14. On January 1, 2010, Parke Company borrowed $360,000 from a major customer
evidenced by a noninterest-bearing note due in three years. Parke agreed to supply the
customers inventory needs for the loan period at lower than market price. At the 12%
imputed interest rate for this type of loan, the present value of the note is $255,000 at
January 1, 2010. What amount of interest expense should be included in Parkes 2010
income statement?
a. $43,200
b. $35,000
c. $30,600
d. $0
15. Pie Co. uses the installment sales method to recognize revenue. Customers pay the
installment notes in twenty-four equal monthly amounts, which include 12% interest.
What is an installment notes receivable balance six months after the sale?
a. 75% of the original sales price.
b. Less than 75% of the original sales price.
c. The present value of the remaining monthly payments discounted at 12%.
d. Less than the present value of the remaining monthly payments discounted at 12%.
16. On July 1, 2010, a company obtained a two-year 8% note receivable for services
rendered. At that time the market rate of interest was 10%. The face amount of the note
and the entire amount of the interest are due on June 30, 2012. Interest receivable at
December 31, 2010, was
a. 5% of the face value of the note.
b. 4% of the face value of the note.
c. 5% of the July 1, 2010, present value of the amount due June 30, 2012.

d. 4% of the July 1, 2010, present value of the amount due June 30, 2012.
17. Which of the following is reported as interest expense?
a. Pension cost interest.

b. Postretirement health-care benefits interest.


c. Imputed interest on noninterest-bearing note.
d. Interest incurred to finance construction of machinery for own use.
18. Norton Corp. does not elect the fair value option for recording its financial liabilities.
The discount resulting from the determination of a note payables present value should
be reported on its balance sheet as a(n)
a. Addition to the face amount of the note.
b. Deferred charge separate from the note.
c. Deferred credit separate from the note.
d. Direct reduction from the face amount of the note.
A.10. Loan Origination Costs and Fees
19. In calculating the carrying amount of a loan, the lender adds to the principal
Direct loan origination costs incurred by the lender Loan origination fees charged to the
borrower a. Yes Yes b. Yes No c. No Yes d. No No 20. Duff, Inc. borrowed from Martin Bank
under a ten-year loan in the amount of $150,000 with a stated interest rate of 6%.
Payments are due monthly, and are computed to be $1,665. Martin Bank incurs $4,000 of
direct loan origination costs and $2,000 of indirect loan origination costs. In addition,
Martin Bank charges Duff, Inc. a four-point nonrefundable loan origination fee.
Martin Bank, the lender, has a carrying amount of
a. $144,000
b. $148,000
c. $150,000
d. $152,000
21. Martin Bank grants a ten-year loan to Duff, Inc. in the amount of $150,000 with a
stated interest rate of 6%. Payments are due monthly, and are computed to be $1,665.
Martin Bank incurs $4,000 of direct loan origination costs and $2,000 of indirect loan
origination costs. In addition, Martin Bank charges Duff, Inc. a four-point nonrefundable
loan origination fee.
Duff, the borrower, has a carrying amount of
a. $144,000
b. $148,000
c. $150,000
d. $152,000
22. On December 1, 2010, Money Co. gave Home Co. a $200,000, 11% loan. Money paid
proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee.
Principal and interest are due in sixty monthly installments of $4,310, beginning January
1, 2011. The repayments yield an effective interest rate of 11% at a present value of
$200,000 and 12.4% at a present value of $194,000. What amount of income from this
loan should Money report in its 2010 income statement?
a. $0
b. $1,833

c. $2,005
d. $7,833
23. On July 1, 2011, Marseto Corporation borrows $100,000 on a 10%, five-year

interest-bearing note. At December 31, 2011, the fair value of the note is determined to
be $97,500. Marseto elects the fair value option for reporting its financial liabilities. On its
December 31, 2011 financial statements, what amounts should be presented for this
note?
24. On January 1, 2011, Connor Corporation signed a $100,000 noninterest-bearing note
due in three years at a discount rate of 10%. Connor elects to use the fair value option for
reporting its financial liabilities. On December 31, 2011, Connors credit rating and risk
factors indicated that the rate of interest applicable to its borrowings was 9%. The
present value factors at 10% and 9% are presented below.
PV factor 10%, 3 periods .751 PV factor 10%, 2 periods .826 PV factor 10%, 1 period .909
PV factor 9%, 3 periods .772 PV factor 9%, 2 periods .842 PV factor 9%, 1 period .917 At
what amount should Connor present the note on the December 31, 2011 balance sheet?
a. $75,100
b. $77,200
c. $82,610
d. $84,200
25. On January 1, 2011, London Corporation borrowed $500,000 on a 8%, noninterestbearing note due in four years. The present value of the note on January 1, 2011, was
$367,500. London Corporation elects the fair value method for reporting its financial
liabilities. On December 31, 2011, it is determined the fair value of the note is $408,150.
At what amount should the discount on notes payable be presented on the balance sheet
on December 31, 2011?
a. $132,500
b. $103,100
c. $ 91,850
d. $0

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