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Chapter 6
Time Value of Money Concepts
True/False Questions
1.
Compound interest includes interest earned on interest.
Answer: True
Learning Objective: 1
Level of Learning: 1
2.
When interest is compounded, the contract rate of interest exceeds the effective rate of
interest.
Answer: False
Learning Objective: 1
Level of Learning: 2
3.
The calculation of future value requires the removal of interest.
Answer: False
Learning Objective: 2
Level of Learning: 1
4.
The calculation of present value eliminates interest from future cash flows.
Answer: True
Learning Objective: 3
Level of Learning: 1
5.
Monetary assets include only cash and cash equivalents.
Answer: False
Learning Objective: 9
Level of Learning: 1
6.
Most, but not all, liabilities are monetary liabilities.
Answer: True
Learning Objective: 9
Level of Learning: 1
7.
An annuity consists of level principal payments plus interest on the unpaid balance.
Answer: False
Learning Objective: 5
Level of Learning: 1
8.
With an annuity due, a payment is made or received on the date the agreement begins.
Answer: True
Learning Objective: 5
Level of Learning: 1
9.
Other things being equal, the present value of an annuity due will be less than the present
value of an ordinary annuity.
Answer: False
Learning Objective: 7
Level of Learning: 1
10.
Given identical current amounts owed and identical interest rates, annual payments of an
ordinary annuity will be greater than annual payments of an annuity due.
Answer: True
Learning Objective: 5
Level of Learning: 2
11.
A deferred annuity is one in which interest charges are deferred for a stated time period.
Answer: False
Learning Objective: 7
Level of Learning: 1
12.
An annuity is a series of equal periodic payments.
Answer: True
Learning Objective: 5
Level of Learning: 1
Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition
197
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View Full DocumentChapter 6
Time Value of Money Concepts
Matching Pair Questions
Use the following to answer questions 1317:
1317.
Listed below are ten terms followed by a list of phrases that describe or characterize five of
the terms. Match each phrase with the correct term placing the letter designating the best term
in the space provided by the phrase.
Terms:
A.
Annuity
B.
Future value
C.
Future value of an annuity due
D.
Future value of an ordinary annuity
E.
Monetary asset
F.
Nonmonetary asset
G.
Present value of a single amount
H.
Present value of an annuity due
I.
Simple interest
J.
Time value of money
Phrases:
13.
_____
A dollar now is worth more than a dollar later.
14.
_____
A series of equal periodic payments.
15.
_____
Accumulation of a series of equal payments with the last payment accruing interest.
16.
_____
Accumulation of a series of equal payments with the last payment accruing no
interest.
17.
_____
Accumulation of an amount with interest.
Answer: 13J; 14A; 15C; 16D; 17B
Use the following to answer questions 1822:
1822.
Listed below are ten terms followed by a list of phrases that describe or characterize five of
the terms. Match each phrase with the correct term placing the letter designating the best term
in the space provided by the phrase.
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