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Intermediate Accounting

Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield

Chapter 6

Accounting and the Time Value of Money - all with Video Answers

Educators

Chapter Questions

05:14

Problem 1

What is the time value of money? Why should accountants have an understanding of compound interest, annuities, and present value concepts?

Anas Venkitta
Anas Venkitta
Numerade Educator
05:14

Problem 2

Identify three situations in which accounting measures are based on present values. Do these present value applications involve single sums or annuities, or both single sums and annuities? Explain.

Anas Venkitta
Anas Venkitta
Numerade Educator
01:45

Problem 3

What is the nature of interest? Distinguish between 'simple interest" and "compound interest."

Maurizia De Palma
Maurizia De Palma
Numerade Educator
01:31

Problem 4

What are the components of an interest rate? Why is it important for accountants to understand these components?

Jingchi Yan
Jingchi Yan
Numerade Educator
03:31

Problem 5

Presented below are a number of values taken from compound interest tables involving the same number of periods and the same rate of interest. Indicate what each of these four values represents.
(a) 6.71008
(b) 2.15892
(c) .46319
(d) 14.48656

Nick Johnson
Nick Johnson
Numerade Educator
02:22

Problem 6

Jose Oliva is considering two investment options for a $\$ 1,500$ gift he received for graduation. Both investments have $8 \%$ annual interest rates. One offers quarterly compounding; the other compounds on a semiannual basis. Which investment should he choose? Why?

Amy Jiang
Amy Jiang
Numerade Educator
00:44

Problem 7

Regina Henry deposited $\$ 20,000$ in a money market certificate that provides interest of $10 \%$ compounded quarterly if the amount is maintained for 3 years. How much will Regina Henry have at the end of 3 years?

Victor Salazar
Victor Salazar
Numerade Educator
02:17

Problem 8

Will Smith will receive $\$ 80,000$ on December 31,2015 (5 years from now) from a trust fund established by his father. Assuming the appropriate interest rate for discounting is $12 \%$ (compounded semiannually), what is the present value of this amount today?

Nick Johnson
Nick Johnson
Numerade Educator
01:08

Problem 9

What are the primary characteristics of an annuity? Differentiate between an "ordinary annuity" and an "annuity due."

Charles Carter
Charles Carter
Numerade Educator
01:24

Problem 10

Kehoe, Inc. owes $\$ 40,000$ to Ritter Company. How much would Kehoe have to pay each year if the debt is retired through four equal payments (made at the end of the year), given an interest rate on the debt of $12 \% ?$ (Round to two decimal places.)

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
01:24

Problem 11

The Kellys are planning for a retirement home. They estimate they will need $\$ 200,0004$ years from now to purchase this home. Assuming an interest rate of $10 \%,$ what amount must be deposited at the end of each of the 4 years to fund the home price? (Round to two decimal places.)

Zach Steedman
Zach Steedman
Numerade Educator
01:19

Problem 12

Assume the same situation as in Question 11 , except that the four equal amounts are deposited at the beginning of the period rather than at the end. In this case, what amount must be deposited at the beginning of each period? (Round to two decimals.)

Allison Knapp
Allison Knapp
Numerade Educator
01:16

Problem 13

Explain how the future value of an ordinary annuity interest table is converted to the future value of an annuity due interest table.

Charles Carter
Charles Carter
Numerade Educator
01:16

Problem 14

Explain how the present value of an ordinary annuity interest table is converted to the present value of an annuity due interest table.

Charles Carter
Charles Carter
Numerade Educator
01:28

Problem 15

In a book named Treasure, the reader has to figure out where a 2.2 pound, 24 kt gold horse has been buried. If the horse is found, a prize of $\$ 25,000$ a year for 20 years is provided. The actual cost to the publisher to purchase an annuity to pay for the prize is $\$ 245,000 .$ What interest rate (to the nearest percent) was used to determine the amount of the annuity? (Assume end-of-year payments.)

Ian Shi
Ian Shi
Numerade Educator
00:57

Problem 16

Alexander Enterprises leases property to Hamilton, Inc. Because Hamilton, Inc. is experiencing financial difficulty, Alexander agrees to receive five rents of $\$ 20,000$ at the end of each year, with the rents deferred 3 years. What is the present value of the five rents discounted at $12 \% ?$

Joshua Eastwood
Joshua Eastwood
Numerade Educator
04:14

Problem 17

Answer the following questions.
(a) On May $1,2010,$ Goldberg Company sold some machinery to Newlin Company on an installment contract basis. The contract required five equal annual payments, with the first payment due on May 1,2010 . What present value concept is appropriate for this situation?
(b) On June $1,2010,$ Seymour Inc. purchased a new machine that it does not have to pay for until May 1
2012. The total payment on May $1,2012,$ will include both principal and interest. Assuming interest at a $12 \%$ rate, the cost of the machine would be the total payment multiplied by what time value of money concept?
(c) Costner Inc. wishes to know how much money it will have available in 5 years if five equal amounts of $\$ 35,000$ are invested, with the first amount invested immediately. What interest table is appropriate for this situation?
(d) Jane Hoffman invests in a "jumbo" $\$ 200,000,$ 3-year certificate of deposit at First Wisconsin Bank. What table would be used to determine the amount accumulated at the end of 3 years?

Abby Kennedy
Abby Kennedy
Numerade Educator
02:23

Problem 18

Recently Glenda Estes was interested in purchasing a Honda Acura. The salesperson indicated that the price of the car was either $\$ 27,600$ cash or $\$ 6,900$ at the end of each of 5 years. Compute the effective interest rate to the nearest percent that Glenda would pay if she chooses to make the five annual payments.

Mukesh Devi
Mukesh Devi
Numerade Educator
01:57

Problem 19

Recently, property/casualty insurance companies have been criticized because they reserve for the total loss as much as 5 years before it may happen. The IRS has joined the debate because they say the full reserve is unfair from a taxation viewpoint. What do you believe is the IRS position?

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator