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... Accounting MCQs | Accounting MCQs

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 capital lease is entered into with the initial lease payment
due one month subsequent to the signing of the
lease agreement.A capital lease is entered into with the initial lease payment
due upon the signing of the lease agreement.
A ten-year 8% bond is issued on January 2 with interest
payable semiannually on July 1 and January 1 yielding
7%. A ten-year 8% bond is issued on January 2 with interest
payable semiannually on July 1 and January 1 yielding
9%.Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

(b) The requirement is the situation which illustrates an
annuity due. An annuity due (annuity in advance) is a series of
payments where the first payment is made at the beginning of the
first period, in contrast to an ordinary annuity (annuity in arrears),
in which the first payment is made at the end of the first
period. Answer (b) is correct because the initial lease payment is
due immediately (at the beginning of the first period). Answers
(a), (c), and (d) all illustrate situations in which the first
lease or interest payment occurs at the end of the first period.
Note that in answers (c) and (d), the stated rate and yield rate of
the bonds differ; while this would affect the present value of the
bonds, it has no effect on the classification as an annuity due or
an ordinary annuity.