Accounting Homework

Practice with Present and Future Values of Lump Sums and Annuities

(The answers to these problems are in the Homework solutions for Unit 1.) Set your calculators on 4 decimal places and choose the response numerically closest to your calculation. Exhibit 7-1 refers to the Interest Tables 1-4 in the back of the text.

1 Refer to Exhibit 7-1. If interest is compounded annually, the total amount of interest on an $18,000 note payable for 4 years at 10% is

a. | $5,706. |

b. | $7,200. |

c. | $8,352. |

d. | $8,500. |

1. C. Table 3 Future value factor (r = 10%, n = 4) 1.46410 x $18,000 = $26,353.8000, future value of note and interest. $26,353.8000 minus $18,000 original amount = $8353.8000 accumulated interest.

2. Refer to Exhibit 7-1. The total amount of interest compounded quarterly on a $1,500 note payable for 1 year at 12% is

a. | $180.00. |

b. | $187.50. |

c. | $189.00. |

d. | $45.00. |

C. Table 3 Future value factor (r = 12%/4 = 3% periodic interest; n = 1 x 4 periodic payments) 1.12551. $1,500 x 1.12551 = $1,688.2650. $1,688.2650 minus $1,500 = $188.2650 accumulated interest. Difference to answer B = $188.2650 - $187.50 = $0.7650. Difference to answer C = $188.2650 - $189.00 = $0.7350. Answer C is the closest.

3. Refer to Exhibit 7-1. If you must calculate the present value of an amount at 8% compounded quarterly for 2 years, then the interest factor used in the calculation is

a. | 8% for 2 periods. |

b. | 2% for 8 periods. |

c. | the interest factor for 8% for 2 years divided by 4. |

d. | twice that for 1 period at 8% multiplied by 2. |

B. 8% / 4 periods = 2% quarterly interest and n = 2 years x 4 quarters = 8 periods.

4. Refer to Exhibit 7-1. If a company wishes to accumulate $500,000 in 20 years at 5% by making equal yearly deposits into an account, calculation of the deposits is an application of the

a. | future value of a single amount. |

b. | present value of a single amount. |

c. | future value of an...