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ACC 303 Final Exam Perfect Score
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ACC 303 Final Exam Week 11 Chapter 5,6,7Intermediate Accounting
I (Strayer)
CHAPTER 5
BALANCE SHEET AND STATEMENT OF CASH FLOWS
TRUE FALSE—Conceptual
1. Liquidity refers to the ability of an enterprise to pay its
debts as they mature.
2. The balance sheet omits many items that are of financial
value to the business but cannot be recorded objectively.
3. Financial flexibility measures the ability of an enterprise
to take effective actions to alter the amounts and timing of cash
flows.
4. Companies frequently describe the terms of all long-term
liability agreements in notes to the financial statements.
5. An asset which is expected to be converted into cash, sold,
or consumed within one year of the balance sheet date is always
reported as a current asset.
6. Land held for speculation is reported in the property, plant,
and equipment section of the balance sheet.
7. The account form and the report form of the balance sheet are
both acceptable under GAAP.
8. The primary purpose of a statement of cash flows is to report
the cash effects of operations during a period.
9. The statement of cash flows reports only the cash effects of
operations during a period and financing transactions.
10. Financial flexibility is a company’s ability to respond and
adapt to financial adversity and unexpected needs and
opportunities.
11. Collection of a loan is reported as an investing activity in
the statement of cash flows.
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12. Companies determine cash provided by operating activities by
converting net income on an accrual basis to a cash basis.
13. Significant financing and investing activities that do not
affect cash are not reported in the statement of cash flows or any
other place.
14. Financial statement readers often assess liquidity by using
the current cash debt coverage ratio.
15. Free cash flow is net income less capital expenditures and
dividends.
16. Because of the historical cost principle, fair values may
not be disclosed in the balance sheet.
17. Companies have the option of disclosing information about
the nature of their operations and the use of estimates in
preparing financial statements.
18. Companies may use parenthetical explanations, notes, cross
references, and supporting schedules to disclose pertinent
information.
19. The accounting profession has recommended that companies use
the word reserve only to describe amounts deducted from assets.
20. On the balance sheet, an adjunct account reduces either an
asset, a liability, or an owners’ equity account.
True False Answers—Conceptual
MULTIPLE CHOICE—Conceptual
21. Which of the following is a limitation of the balance
sheet?a. Many items that are of financial value are omitted.b.
Judgments and estimates are used.c. Current fair value is not
reported.d. All of these
22. The balance sheet is useful for analyzing all of the
following excepta. liquidity.b. solvency.c. profitability.d.
financial flexibility.
23. Balance sheet information is useful for all of the following
except toa. compute rates of return
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b. analyze cash inflows and outflows for the periodc. evaluate
capital structured. assess future cash flows
24. Balance sheet information is useful for all of the following
excepta. assessing a company's riskb. evaluating a company's
liquidityc. evaluating a company's financial flexibilityd.
determining free cash flows.
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25. A limitation of the balance sheet that is not also a
limitation of the income statement isa. the use of judgments and
estimatesb. omitted itemsc. the numbers are affected by the
accounting methods employedd. valuation of items at historical
cost
S26. The balance sheet contributes to financial reporting by
providing a basis for all of the following excepta. computing rates
of return.b. evaluating the capital structure of the enterprise.c.
determining the increase in cash due to operations.d. assessing the
liquidity and financial flexibility of the enterprise.
S27. One criticism not normally aimed at a balance sheet
prepared using current accounting and reporting standards isa.
failure to reflect current value information.b. the extensive use
of separate classifications.c. an extensive use of estimates.d.
failure to include items of financial value that cannot be recorded
objectively.
P28. The amount of time that is expected to elapse until an
asset is realized or otherwise converted into cash is referred to
asa. solvency.b. financial flexibility.c. liquidity.d.
exchangeability.
29. The net assets of a business are equal toa. current assets
minus current liabilities.b. total assets plus total liabilities.c.
total assets minus total stockholders' equity.d. none of these.
30. The correct order to present current assets isa. cash,
accounts receivable, prepaid items, inventories.b. cash, accounts
receivable, inventories, prepaid items.c. cash, inventories,
accounts receivable, prepaid items.d. cash, inventories, prepaid
items, accounts receivable.
31. The basis for classifying assets as current or noncurrent is
conversion to cash withina. the accounting cycle or one year,
whichever is shorter.b. the operating cycle or one year, whichever
is longer.c. the accounting cycle or one year, whichever is
longer.d. the operating cycle or one year, whichever is
shorter.
32. The basis for classifying assets as current or noncurrent is
the period of time normally required by the accounting entity to
convert cash invested ina. inventory back into cash, or 12 months,
whichever is shorter.b. receivables back into cash, or 12 months,
whichever is longer.c. tangible fixed assets back into cash, or 12
months, whichever is longer.
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d. inventory back into cash, or 12 months, whichever is
longer.
33. The current assets section of the balance sheet should
includea. machinery.b. patents.c. goodwill.d. inventory.
34. Which of the following is a current asset?a. Cash surrender
value of a life insurance policy of which the company is the
bene-
ficiary.b. Investment in equity securities for the purpose of
controlling the issuing
company.c. Cash designated for the purchase of tangible fixed
assets.d. Trade installment receivables normally collectible in 18
months.
35. Which of the following should not be considered as a current
asset in the balance sheet?a. Installment notes receivable due over
18 months in accordance with normal trade
practice.b. Prepaid taxes which cover assessments of the
following operating cycle of the
business.c. Equity or debt securities purchased with cash
available for current operations.d. The cash surrender value of a
life insurance policy carried by a corporation, the
beneficiary, on its president.
36. Equity or debt securities held to finance future
construction of additional plants should be classified on a balance
sheet asa. current assets.b. property, plant, and equipment.c.
intangible assets.d. long-term investments.
37. When a portion of inventories has been pledged as security
on a loan,a. the value of the portion pledged should be subtracted
from the debt.b. an equal amount of retained earnings should be
appropriated.c. the fact should be disclosed but the amount of
current assets should not be
affected.d. the cost of the pledged inventories should be
transferred from current assets to
noncurrent assets.
38. Which of the following is not a long-term investment?a. Cash
surrender value of life insuranceb. Franchisec. Land held for
speculationd. A sinking fund
39. A generally accepted method of valuation is1. trading
securities at market value.2. accounts receivable at net realizable
value.3. inventories at current cost.
a. 1b. 2
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c. 3d. 1 and 2
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40. Which item below is not a current liability?a. Unearned
revenueb. Stock dividends distributablec. The currently maturing
portion of long-term debtd. Trade accounts payable
41. Working capital isa. capital which has been reinvested in
the business.b. unappropriated retained earnings.c. cash and
receivables less current liabilities.d. none of these.
42. An example of an item which is not an element of working
capital isa. accrued interest on notes receivable.b. goodwill.c.
goods in process.d. temporary investments.
43. Long-term liabilities includea. obligations not expected to
be liquidated within the operating cycle.b. obligations payable at
some date beyond the operating cycle.c. deferred income taxes and
most lease obligations.d. all of these.
44. Which of the following should be excluded from long-term
liabilities?a. Obligations payable at some date beyond the
operating cycleb. Most pension obligationsc. Long-term liabilities
that mature within the operating cycle and will be paid from
a sinking fundd. None of these
45. Treasury stock should be reported as a(n)a. current asset.b.
investment.c. other asset.d. reduction of stockholders' equity.
46. Which of the following should be reported for capital
stock?a. The shares authorizedb. The shares issuedc. The shares
outstandingd. All of these
47. Which of the following would be classified in a different
major section of a balance sheet from the others?a. Capital stockb.
Common stock subscribedc. Stock dividend distributabled. Stock
investment in affiliate
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48. The stockholders' equity section is usually divided into
what three parts?a. Preferred stock, common stock, treasury stockb.
Preferred stock, common stock, retained earningsc. Capital stock,
additional paid-in capital, retained earningsd. Capital stock,
appropriated retained earnings, unappropriated retained
earnings
49. Which of the following is not an acceptable major asset
classification?a. Current assetsb. Long-term investmentsc.
Property, plant, and equipmentd. Deferred charges
P50. Which of the following is a contra account?a. Premium on
bonds payableb. Unearned revenuec. Patentsd. Accumulated
depreciation
51. The financial statement which summarizes operating,
investing, and financing activities of an entity for a period of
time is thea. retained earnings statement.b. income statement.c.
statement of cash flows.d. statement of financial position.
S52. The statement of cash flows provides answers to all of the
following questions excepta. where did the cash come from during
the period?b. what was the cash used for during the period?c. what
is the impact of inflation on the cash balance at the end of the
year?d. what was the change in the cash balance during the
period?
53. The statement of cash flows reports all of the following
excepta. the net change in cash for the period.b. the cash effects
of operations during the period.c. the free cash flows generated
during the period.d. investing transactions.
54. The statement of cash flows helps meet the objective of
financial reporting, which is to assess all of the following except
thea. amount of future cash flows.b. source of future cash flows.c.
timing of future cash flows.d. uncertainty of future cash
flows.
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55. If common stock was issued to acquire an $8,000 machine, how
would the transaction appear on the statement of cash flows?a. It
would depend on whether you are using the direct or the
indirect
method.b. It would be a positive $8,000 in the financing section
and a negative
$8,000 in the investing section.c. It would be a negative $8,000
in the financing section and a positive
$8,000 in the investing section.d. It would not appear on the
statement of cash flows but rather on a schedule
of noncash investing and financing activities.
56. Which of the following events will appear in the cash flows
from financing activities section of the statement of cash flows?a.
Cash purchases of equipment.b. Cash purchases of bonds issued by
another company.c. Cash received as repayment for funds loaned.d.
Cash purchase of treasury stock.
57. Making and collecting loans and disposing of property,
plant, and equipment area. operating activities.b. investing
activities.c. financing activities.d. liquidity activities.
58. In preparing a statement of cash flows, sale of treasury
stock at an amount greater than cost would be classified as a(n)a.
operating activity.b. financing activity.c. extraordinary
activity.d. investing activity.
59. In preparing a statement of cash flows, cash flows from
operating activitiesa. are always equal to accrual accounting
income.b. are calculated as the difference between revenues and
expenses.c. can be calculated by appropriately adding to or
deducting from net income those
items in the income statement that do not affect cash.d. can be
calculated by appropriately adding to or deducting from net income
those
items in the income statement that do affect cash.
60. In preparing a statement of cash flows, which of the
following transactions would be considered an investing activity?a.
Sale of equipment at book valueb. Sale of merchandise on creditc.
Declaration of a cash dividendd. Issuance of bonds payable at a
discount
61. Preparing the statement of cash flows involves all of the
following except determining thea. cash provided by operations.b.
cash provided by or used in investing and financing activities.c.
change in cash during the period.
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d. cash collections from customers during the period.
62. The cash debt coverage ratio is computed by dividing net
cash provided by operating activities bya. average long-term
liabilities.b. average total liabilities.c. ending long-term
liabilities.d. ending total liabilities.
63. The current cash debt coverage ratio is often used to
assessa. financial flexibility.b. liquidity.c. profitability.d.
solvency.
64. A measure of a company’s financial flexibility is thea. cash
debt coverage ratio.b. current cash debt coverage ratio.c. free
cash flow.d. cash debt coverage ratio and free cash flow.
65. Free cash flow is calculated as net cash provided by
operating activities lessa. capital expenditures.b. dividends.c.
capital expenditures and dividends.d. capital expenditures and
depreciation.
S66. One of the benefits of the statement of cash flows is that
it helps users evaluate financial flexibility. Which of the
following explanations is a description of financial flexibility?a.
The nearness to cash of assets and liabilities.b. The firm's
ability to respond and adapt to financial adversity and
unexpected
needs and opportunities.c. The firm's ability to pay its debts
as they mature.d. The firm's ability to invest in a number of
projects with different objectives and
costs.
P67. Net cash provided by operating activities divided by
average total liabilities equals thea. current cash debt coverage
ratio.b. cash debt coverage ratio.c. free cash flow.d. current
ratio.
S68. Which of the following balance sheet classifications would
normally require the greatest amount of supplementary disclosure?a.
Current assetsb. Current liabilitiesc. Plant assetsd. Long-term
liabilities
69. The presentation of long-term liabilities in the balance
sheet should disclosea. maturity dates.
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b. interest rates.c. conversion rights.d. All of the above.
70. Which of the following is not a required supplemental
disclosure for the balance sheet?
a. Contingenciesb. Financial forecastsc. Accounting policiesd.
Contractual situations
71. Typical contractual situations that are disclosed in the
notes to the balance sheet include all of the following excepta.
debt covenantsb. lease obligationsc. advertising contractsd.
pension obligations
72. Accounting policies disclosed in the notes to the financial
statements typically include all of the following excepta. the cost
flow assumption usedb. the depreciation methods usedc. significant
estimates maded. significant inventory purchasing policies
73. Which of the following best exemplifies a contingency that
is reported in the notes to the financial statements?a. Losses from
potential future lawsuitsb. Loss from a lawsuit settled out of
court prior to the end of the fiscal yearc. Warranty claims on
future salesd. Estimated loss from an ongoing lawsuit
74. Which of the following is not a method of disclosing
pertinent information?a. Supporting schedulesb. Parenthetical
explanationsc. Cross reference and contra itemsd. All of these are
methods of disclosing pertinent information.
75. Significant accounting policies may not bea. selected on the
basis of judgment.b. selected from existing acceptable
alternatives.c. unusual or innovative in application.d. omitted
from financial-statement disclosure.
76. A general description of the depreciation methods applicable
to major classes of depreci-able assetsa. is not a current practice
in financial reporting.b. is not essential to a fair presentation
of financial position.c. is needed in financial reporting when
company policy differs from income tax
policy.d. should be included in corporate financial statements
or notes thereto.
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77. It is mandatory that the essential provisions of which of
the following be clearly stated in the notes to the financial
statements?a. Stock option plansb. Pension obligationsc. Lease
contractsd. All of these
78. A generally accepted account title isa. Prepaid Revenue.b.
Appropriation for Contingencies.c Earned Surplus.d. Reserve for
Doubtful Accounts.
Multiple Choice Answers—ConceptualSolutions to those Multiple
Choice questions for which the answer is “none of these.”29. Total
assets minus total liabilities.41. Current assets less current
liabilities.44. Many answers are possible.
MULTIPLE CHOICE—Computational
79. Fulton Company owns the following investments:Trading
securities (fair value) $120,000Available-for-sale securities (fair
value) 70,000Held-to-maturity securities (amortized cost)
94,000
Fulton will report investments in its current assets section
ofa. $0. b. exactly $120,000.c. $120,000 or an amount greater than
$120,000, depending on the circumstances.d. exactly $190,000.
80. For Grimmett Company, the following information is
available:Capitalized leases $600,000Trademarks 195,000Long-term
receivables 225,000
In Grimmett’s balance sheet, intangible assets should be
reported ata. $195,000.b. $225,000.c. $795,000.d. $825,000.
81. Houghton Company has the following items: common stock,
$900,000; treasury stock, $105,000; deferred taxes, $125,000 and
retained earnings, $390,000. What total amount should Houghton
Company report as stockholders’ equity?a. $1,060,000.b.
$1,185,000.
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c. $1,310,000.d. $1,395,000.
82. Kohler Company owns the following investments:Trading
securities (fair value) $120,000Available-for-sale securities (fair
value) 70,000Held-to-maturity securities (amortized cost)
94,000
Kohler will report securities in its long-term investments
section ofa. exactly $190,000.b. exactly $214,000.c. exactly
$284,000.d. $164,000 or an amount less than $164,000, depending on
the circumstances.
83. For Randolph Company, the following information is
available:Capitalized leases $560,000Trademarks 180,000Long-term
receivables 210,000
In Randolph’s balance sheet, intangible assets should be
reported ata. $180,000.b. $210,000.c. $740,000.d. $770,000.
84. Olmsted Company has the following items: common stock,
$900,000; treasury stock, $105,000; deferred taxes, $125,000 and
retained earnings, $454,000. What total amount should Olmsted
Company report as stockholders’ equity?a. $1,124,000.b.
$1,249,000.c. $1,374,000.d. $1,499,000.
85. Presented below are data for Antwerp Corp. 2012 2013
Assets, January 1 $2,600 $3,360Liabilities, January 1 1,680
?Stockholders' Equity, Jan. 1 ? ?Dividends 560 420Common Stock 504
448Stockholders' Equity, Dec. 31 ? ?Net Income 560 448
Stockholders' Equity at January 1, 2012 isa. $ 504.b. $ 560.c. $
920.d. $1,424.
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86. Presented below are data for Bandkok Corp. 2012 2013
Assets, January 1 $5,400 $6,480Liabilities, January 1 3,240
?Stockholders' Equity, Jan. 1 ? ?Dividends 1,080 810Common Stock
972 864Stockholders' Equity, Dec. 31 ? ?Net Income 1,280 864
Stockholders' Equity at January 1, 2013 isa. $3,332.b. $2,160.c.
$2,360.d. $3,440.
87. Presented below are data for Caracas Corp. 2013 2014
Assets, January 1 $4,560 ?Liabilities, January 1 ?
$2,736Stockholders' Equity, Jan. 1 ? 2,750Dividends 570 646Common
Stock 608 650Stockholders' Equity, Dec. 31 ? 2,166Net Income 684
?
Net income for 2014 isa. $584 income.b. $584 loss.c. $62 loss.d.
$62 income.
88. Lohmeyer Corporation reports:Cash provided by operating
activities $220,000Cash used by investing activities 110,000Cash
provided by financing activities 140,000Beginning cash balance
70,000
What is Lohmeyer’s ending cash balance?a. $250,000.b.
$320,000.c. $470,000.d. $540,000.
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89. Keisler Corporation reports:Cash provided by operating
activities $240,000Cash used by investing activities 110,000Cash
provided by financing activities 140,000Beginning cash balance
70,000
What is Keisler’s ending cash balance?a. $270,000.b. $340,000.c.
$490,000.d. $560,000.
90. During 2012 the DLD Company had a net income of $55,000. In
addition, selected accounts showed the following changes:
Accounts Receivable $3,000 increaseAccounts Payable 1,000
increaseBuilding 4,000 decreaseDepreciation Expense 1,500
increaseBonds Payable 8,000 increase
What was the amount of cash provided by operating activities?a.
$54,500b. $55,000c. $56,500d. $64,500
91. Harding Corporation reports the following information:
Net income $450,000Depreciation expense 140,000Increase in
accounts receivable 60,000
Harding should report cash provided by operating activities ofa.
$250,000.b. $370,000.c. $530,000.d. $650,000.
92. Sauder Corporation reports the following information:Net
income $300,000Depreciation expense 70,000Increase in accounts
receivable 30,000
Sauder should report cash provided by operating activities ofa.
$200,000.b. $260,000.c. $340,000.d. $400,000.
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93. Packard Corporation reports the following information:
Net cash provided by operating activities $235,000 Average
current liabilities 150,000Average long-term liabilities 100,000
Dividends declared 60,000Capital expenditures 110,000Payments of
debt 35,000
Packard’s cash debt coverage ratio isa. 0.94.b. 1.59.c. 2.35.d.
3.92.
94. Packard Corporation reports the following information:
Net cash provided by operating activities $235,000 Average
current liabilities 150,000Average long-term liabilities 100,000
Dividends paid 60,000Capital expenditures 110,000Payments of debt
35,000
Packard’s free cash flow isa. $50,000.b. $65,000.c. $125,000.d.
$175,000.
95. Pedigo Corporation reports the following information:
Net cash provided by operating activities $275,000 Average
current liabilities 150,000Average long-term liabilities
100,000Dividends paid 60,000Capital expenditures 110,000Payments of
debt 35,000
Pedigo’s cash debt coverage ratio isa. 1.10.b. 1.83.c. 2.75.d.
2.50.
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96. Pedigo Corporation reports the following information:
Net cash provided by operating activities $275,000 Average
current liabilities 150,000Average long-term liabilities
100,000Dividends paid 60,000Capital expenditures 110,000Payments of
debt 35,000
Pedigo free cash flow isa. $50,000.b. $105,000.c. $165,000.d.
$215,000.
Multiple Choice Answers—Computational
MULTIPLE CHOICE—CPA Adapted
97. Stine Corp.'s trial balance reflected the following account
balances at December 31, 2012:
Accounts receivable (net) $24,000Trading securities
6,000Accumulated depreciation on equipment and furniture 15,000Cash
16,000Inventory 30,000Equipment 25,000Patent 4,000Prepaid expenses
2,000Land held for future business site 18,000
In Stine's December 31, 2012 balance sheet, the current assets
total isa. $95,000.b. $87,000.c. $82,000.d. $78,000.
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Use the following information for questions 98 through 100.
The following trial balance of Reese Corp. at December 31, 2012
has been properly adjusted except for the income tax expense
adjustment.
Reese Corp.Trial Balance
December 31, 2012 Dr.
Cr.Cash $ 975,000Accounts receivable (net) 2,695,000Inventory
2,085,000Property, plant, and equipment (net) 7,366,000Accounts
payable and accrued liabilities $ 1,801,000Income taxes payable
654,000Deferred income tax liability 85,000Common stock
2,350,000Additional paid-in capital 3,680,000Retained earnings,
1/1/12 3,450,000Net sales and other revenues 13,460,000Costs and
expenses 11,180,000Income tax expenses 1,179,000
$25,480,000 $25,480,000
Other financial data for the year ended December 31, 2012:*
Included in accounts receivable is $1,200,000 due from a customer
and payable in quarterly installments of $150,000. The last payment
is due December 29, 2014.* The balance in the Deferred Income Tax
Liability account pertains to a temporary difference that arose in
a prior year, of which $20,000 is classified as a current
liability.* During the year, estimated tax payments of $525,000
were charged to income tax expense. The current and future tax rate
on all types of income is 30%.
In Reese's December 31, 2012 balance sheet,
98. The current assets total isa. $6,280,000.b. $5,755,000.c.
$5,605,000.d. $5,155,000.
99. The current liabilities total isa. $1,950,000.b.
$2,015,000.c. $2,475,000.d. $2,540,000.
100. The final retained earnings balance isa. $4,551,000.b.
$4,636,000.
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c. $5,076,000.d. $5,005,000.
101. On January 4, 2012, Kiley Co. leased a building to Dodd
Corp. for a ten-year term at an annual rental of $100,000. At
inception of the lease, Dodd received $400,000 covering the first
two years' rent of $200,000 and a security deposit of $200,000.
This deposit will not be returned to Dodd upon expiration of the
lease but will be applied to payment of rent for the last two years
of the lease. What portion of the $400,000 should be shown as a
current and long-term liability in Kiley's December 31, 2012
balance sheet?
Current Liability Long-term Liabilitya. $0 $400,000b. $100,000
$200,000c. $200,000 $200,000d. $200,000 $100,000
102. In a statement of cash flows, receipts from sales of
property, plant, and equipment and other productive assets should
generally be classified as cash inflows froma. operating
activities.b. financing activities.c. investing activities.d.
selling activities.
103. In a statement of cash flows, interest payments to lenders
and other creditors should be classified as cash outflows fora.
operating activities.b. borrowing activities.c. lending
activities.d. financing activities.
104. In a statement of cash flows, proceeds from issuing equity
instruments should be classified as cash inflows froma. lending
activities.b. operating activities.c. investing activities.d.
financing activities.
105. In a statement of cash flows, payments to acquire debt
instruments of other entities (other than cash equivalents) should
be classified as cash outflows fora. operating activities.b.
investing activities.c. financing activities.d. lending
activities.
106. Which of the following facts concerning fixed assets should
be included in the summary of significant accounting policies?
Depreciation Method Compositiona. No Yesb. Yes Yesc. Yes Nod. No
No
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Multiple Choice Answers—CPA Adapted
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IFRS QUESTIONS
True/False:1. Although the presentation formats for the balance
sheet and statement of cash
flows are similar under IFRS and U.S. GAAP, IFRS requires far
more extensive disclosure.
2. One significant difference between a balance sheet prepared
using IFRS rather than U.S. GAAP is that long-term tangible assets
will be reported at fair value rather than historical cost.
3. Both IFRS and U.S. GAAP require that specific items be
reported on the balance sheet.
4. Both IFRS and U.S. GAAP require current assets to be listed
first on the balance sheet.
Answers to True/False:
Multiple Choice Questions:
1. Which of the following statements about IFRS and U.S. GAAP
accounting and reporting requirements for the balance sheet is not
correct?a. The presentation formats required by IFRS and U.S. GAAP
for the balance
sheet are similar.b. One difference between the reporting
requirements under IFRS and those of
U.S. GAAP balance sheet is that an IFRS balance sheet may list
long-term assets first.
c. Both IFRS and U.S. GAAP require that property, plant and
equipment be reported at historical cost on the balance sheet.
d. Both IFRS and U.S. GAAP require that comparative information
be reported.
Use the following information to answer the next two
questions.
Franco Company uses IFRS and owns property, plant and equipment
with a historical cost of 5,000,000 euros. At December 31, 2011,
the company reported a valuation reserve of 8,365,000 euros. At
December 31, 2012, the property, plant and equipment was appraised
at 5,325,000 euros.
2. The property, plant and equipment will be reported on the
December 31, 2012 balance sheet ata. 5,000,000 euros.b. 5,325,000
euros.c. 8,365,000 euros.d. 8,690,000 euros.
3. The valuation reserve at December 31, 2012 will be reported
ata. 8,040,000 euros on the Statement of Stockholders' Equity.b.
8,365,000 euros in the Assets section of the Balance Sheetc.
8,690,000 euros in the stockholders' equity section of the Balance
Sheet.
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d. 325,000 euros on the Income Statement.
4. Similarities between IFRS and U.S. GAAP requirements for
balance sheet presentation include all of the following except:a.
Both require that changes to the valuation reserve be disclosed in
the notes to
the financial statements.b. Both require disclosure of
significant accounting policies.c. Both require the preparation of
financial statements annually.d. Both generally require the use of
the current/ non-current classification for
both assets and liabilities.
Answers to Multiple Choice:IFRS Short Answer:
1. Briefly describe some of the similarities and differences
between U.S. GAAP and IFRS with respect to balance sheet
reporting.
2. Briefly describe the convergence efforts related to financial
statement presentation.
CHAPTER 6
ACCOUNTING AND THE TIME VALUE OF MONEY
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
1. The time value of money refers to the fact that a dollar
received today is worth less than a dollar promised at some time in
the future.
2. Interest is the excess cash received or repaid over and above
the amount lent or borrowed.
3. Simple interest is computed on principal and on any interest
earned that has not been withdrawn.
4. Compound interest, rather than simple interest, must be used
to properly evaluate long- term investment proposals.
5. Compound interest uses the accumulated balance at each year
end to compute interest in the succeeding year.
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6. The future value of an ordinary annuity table is used when
payments are invested at the beginning of each period.
7. The present value of an annuity due table is used when
payments are made at the end of each period.
8. If the compounding period is less than one year, the annual
interest rate must be converted to the compounding period interest
rate by dividing the annual rate by the number of compounding
periods per year.
9. Present value is the value now of a future sum or sums
discounted assuming compound interest.
10. The future value of a single sum is determined by
multiplying the future value factor by its present value.
11. In determining present value, a company moves backward in
time using a process of accumulation.
12. The unknown present value is always a larger amount than the
known future value because dollars received currently are worth
more than dollars to be received in the future.
13. The rents that comprise an annuity due earn no interest
during the period in which they are originally deposited.
14. If two annuities have the same number of rents with the same
dollar amount, but one is an annuity due and one is an ordinary
annuity, the future value of the annuity due will be greater than
the future value of the ordinary annuity.
15. If two annuities have the same number of rents with the same
dollar amount, but one is an annuity due and one is an ordinary
annuity, the present value of the annuity due will be greater than
the present value of the ordinary annuity.
16. The number of compounding periods will always be one less
than the number of rents when computing the future value of an
ordinary annuity.
17. The future value of an annuity due factor is found by
multiplying the future value of an ordinary annuity factor by 1
minus the interest rate.
18. The present value of an ordinary annuity is the present
value of a series of equal rents withdrawn at equal intervals.
19. The future value of a deferred annuity is less than the
future value of an annuity not deferred.
20. At the date of issue, bond buyers determine the present
value of the bonds’ cash flows using the market interest rate.
True False Answers—Conceptual
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MULTIPLE CHOICE—Conceptual
21. Which of the following transactions would require the use of
the present value of an annuity due concept in order to calculate
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 upon the
signing of the lease agreement.b. A capital lease is entered
into with the initial lease payment due one month
subse-quent to 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%.
22. What best describes the time value of money?a. The interest
rate charged on a loan.b. Accounts receivable that are determined
uncollectible.c. An investment in a checking account.d. The
relationship between time and money.
23. Which of the following situations does not base an
accounting measure on present values?a. Pensions.b. Prepaid
insurance.c. Leases.d. Sinking funds.
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24. What is interest?a. Payment for the use of money.b. An
equity investment.c. Return on capital.d. Loan.
25. What is NOT a variable that is considered in interest
computations?a. Principal.b. Interest rate.c. Assets.d. Time.
26. If you invest $50,000 to earn 8% interest, which of the
following compounding approaches would return the lowest amount
after one year?a. Daily.b. Monthly.c. Quarterly.d. Annually.
27. Which factor would be greater — the present value of $1 for
10 periods at 8% per period or the future value of $1 for 10
periods at 8% per period?a. Present value of $1 for 10 periods at
8% per period.b. Future value of $1 for 10 periods at 8% per
period.c. The factors are the same.d. Need more information.
28. Which of the following tables would show the smallest value
for an interest rate of 5% for six periods?a. Future value of 1b.
Present value of 1c. Future value of an ordinary annuity of 1d.
Present value of an ordinary annuity of 1
29. Which table would you use to determine how much you would
need to have deposited three years ago at 10% compounded annually
in order to have $1,000 today?a. Future value of 1 or present value
of 1b. Future value of an annuity due of 1c. Future value of an
ordinary annuity of 1d. Present value of an ordinary annuity of
1
30. Which table would you use to determine how much must be
deposited now in order to provide for 5 annual withdrawals at the
beginning of each year, starting one year hence?a. Future value of
an ordinary annuity of 1b. Future value of an annuity due of 1c.
Present value of an annuity due of 1d. None of these
31. Which table has a factor of 1.00000 for 1 period at every
interest rate?a. Future value of 1b. Present value of 1c. Future
value of an ordinary annuity of 1
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d. Present value of an ordinary annuity of 132. Which table
would show the largest factor for an interest rate of 8% for
five
periods?a. Future value of an ordinary annuity of 1b. Present
value of an ordinary annuity of 1c. Future value of an annuity due
of 1d. Present value of an annuity due of 1
33. Which of the following tables would show the smallest factor
for an interest rate of 10% for six periods?a. Future value of an
ordinary annuity of 1b. Present value of an ordinary annuity of 1c.
Future value of an annuity due of 1d. Present value of an annuity
due of 1
34. The figure .94232 is taken from the column marked 2% and the
row marked three periods in a certain interest table. From what
interest table is this figure taken?a. Future value of 1b. Future
value of annuity of 1c. Present value of 1d. Present value of
annuity of 1
S35. Which of the following tables would show the largest value
for an interest rate of 10% for 8 periods?a. Future amount of 1
table.b. Present value of 1 table.c. Future amount of an ordinary
annuity of 1 table.d. Present value of an ordinary annuity of 1
table.
S36. On June 1, 2012, Pitts Company sold some equipment to
Gannon Company. The two companies entered into an installment sales
contract at a rate of 8%. The contract required 8 equal annual
payments with the first payment due on June 1, 2012. What type of
compound interest table is appropriate for this situation?a.
Present value of an annuity due of 1 table.b. Present value of an
ordinary annuity of 1 table.c. Future amount of an ordinary annuity
of 1 table.d. Future amount of 1 table.
S37. Which of the following transactions would best use the
present value of an annuity due of 1 table?a. Fernetti, Inc. rents
a truck for 5 years with annual rental payments of $20,000 to
be made at the beginning of each year.b. Edmiston Co. rents a
warehouse for 7 years with annual rental payments of
$120,000 to be made at the end of each year.c. Durant, Inc.
borrows $20,000 and has agreed to pay back the principal plus
interest in three years.d. Babbitt, Inc. wants to deposit a lump
sum to accumulate $50,000 for the
construction of a new parking lot in 4 years.
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P38. A series of equal receipts at equal intervals of time when
each receipt is received at the beginning of each time period is
called ana. ordinary annuity.b. annuity in arrears.c. annuity
due.d. unearned receipt.
P39. In the time diagram below, which concept is being
depicted?
0 1$1
2$1
3$1
4$1
PV
a. Present value of an ordinary annuityb. Present value of an
annuity duec. Future value of an ordinary annuityd. Future value of
an annuity due
P40. On December 1, 2012, Richards Company sold some machinery
to Fleming Company. The two companies entered into an installment
sales contract at a predetermined interest rate. The contract
required four equal annual payments with the first payment due on
December 1, 2012, the date of the sale. What present value concept
is appropriate for this situation?a. Future amount of an annuity of
1 for four periodsb. Future amount of 1 for four periodsc. Present
value of an ordinary annuity of 1 for four periodsd. Present value
of an annuity due of 1 for four periods.
41. An amount is deposited for eight years at 8%. If compounding
occurs quarterly, then the table value is found ata. 8% for eight
periods.b. 2% for eight periods.c. 8% for 32 periods.d. 2% for 32
periods.
42. If the number of periods is known, the interest rate is
determined bya. dividing the future value by the present value and
looking for the quotient in the
future value of 1 table.b. dividing the future value by the
present value and looking for the quotient in the
present value of 1 table.c. dividing the present value by the
future value and looking for the quotient in the
future value of 1 table.d. multiplying the present value by the
future value and looking for the product in
the present value of 1 table.
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43. Present value isa. the value now of a future amount.b. the
amount that must be invested now to produce a known future value.c.
always smaller than the future value.d. all of these.
P44. Which of the following statements is true?a. The higher the
discount rate, the higher the present value.b. The process of
accumulating interest on interest is referred to as discounting.c.
If money is worth 10% compounded annually, $1,100 due one year from
today is
equivalent to $1,000 today.d. If a single sum is due on December
31, 2012, the present value of that sum
decreases as the date draws closer to December 31, 2012.
45. What is the primary difference between an ordinary annuity
and an annuity due?a. The timing of the periodic payment.b. The
interest rate.c. Annuity due only relates to present values.d.
Ordinary annuity only relates to present values.
46. What is the relationship between the future value of one and
the present value of one?a. The present value of one equals the
future value of one plus one.b. The present value of one equals one
plus future value factor for n-1 periods.c. The present value of
one equals one divided by the future value of one.d. The present
value of one equals one plus the future value factor for n+1
value
47. Peter invests $100,000 in a 3-year certificate of deposit
earning 3.5% at his local bank. Which time value concept would be
used to determine the maturity value of the certificate?a. Present
value of one.b. Future value of one.c. Present value of an annuity
due.d. Future value of an ordinary annuity.
48. Jerry recently was offered a position with a major
accounting firm. The firm offered Jerry either a signing bonus of
$23,000 payable on the first day of work or a signing bonus of
$26,000 payable after one year of employment. Assuming that the
relevant interest rate is 10%, which option should Jerry choose?a.
The options are equivalent.b. Insufficient information to
determine.c. The signing bonus of $23,000 payable on the first day
of work.d. The signing bonus of $26,000 payable after one year of
employment.
49. If Jethro wanted to save a set amount each month in order to
buy a new pick-up truck when the new models are next available,
which time value concept would be used to determine the monthly
payment?a. Present value of one.b. Future value of one.c. Present
value of an annuity due.d. Future value of an ordinary annuity.
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50. Betty wants to know how much she should begin saving each
month to fund her retirement. What kind of problem is this?a.
Present value of one.b. Future value of an ordinary annuity.c.
Present value of an ordinary.d. Future value of one.
P51 If the interest rate is 10%, the factor for the future value
of annuity due of 1 for n = 5, i = 10% is equal to the factor for
the future value of an ordinary annuity of 1 for n = 5, i = 10%a.
plus 1.10.b. minus 1.10.c. multiplied by 1.10.d. divided by
1.10.
52. Which of the following is true?a. Rents occur at the
beginning of each period of an ordinary annuity.b. Rents occur at
the end of each period of an annuity due.c. Rents occur at the
beginning of each period of an annuity due.d. None of these.
53. Which statement is false?a. The factor for the future value
of an annuity due is found by multiplying the
ordinary annuity table value by one plus the interest rate.b.
The factor for the present value of an annuity due is found by
multiplying the
ordinary annuity table value by one minus the interest rate.c.
The factor for the future value of an annuity due is found by
subtracting 1.00000
from the ordinary annuity table value for one more period.d. The
factor for the present value of an annuity due is found by adding
1.00000 to
the ordinary annuity table value for one less period.
54. Al Darby wants to withdraw $20,000 (including principal)
from an investment fund at the end of each year for five years. How
should he compute his required initial investment at the beginning
of the first year if the fund earns 10% compounded annually?a.
$20,000 times the future value of a 5-year, 10% ordinary annuity of
1.b. $20,000 divided by the future value of a 5-year, 10% ordinary
annuity of 1.c. $20,000 times the present value of a 5-year, 10%
ordinary annuity of 1.d. $20,000 divided by the present value of a
5-year, 10% ordinary annuity of 1.
55. Sue Gray wants to invest a certain sum of money at the end
of each year for five years. The investment will earn 6% compounded
annually. At the end of five years, she will need a total of
$40,000 accumulated. How should she compute her required annual
invest-ment?a. $40,000 times the future value of a 5-year, 6%
ordinary annuity of 1.b. $40,000 divided by the future value of a
5-year, 6% ordinary annuity of 1.c. $40,000 times the present value
of a 5-year, 6% ordinary annuity of 1.d. $40,000 divided by the
present value of a 5-year, 6% ordinary annuity of 1.
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56. An accountant wishes to find the present value of an annuity
of $1 payable at the beginning of each period at 10% for eight
periods. The accountant has only one present value table which
shows the present value of an annuity of $1 payable at the end of
each period. To compute the present value, the accountant would use
the present value factor in the 10% column fora. seven periods.b.
eight periods and multiply by (1 + .10).c. eight periods.d. nine
periods and multiply by (1 – .10).
57. If an annuity due and an ordinary annuity have the same
number of equal payments and the same interest rates, thena. the
present value of the annuity due is less than the present value of
the ordinary
annuity.b. the present value of the annuity due is greater than
the present value of the
ordinary annuity.c. the future value of the annuity due is equal
to the future value of the ordinary
annuity.d. the future value of the annuity due is less than the
future value of the ordinary
annuity.
58. What is the relationship between the present value factor of
an ordinary annuity and the present value factor of an annuity due
for the same interest rate?a. The ordinary annuity factor is not
related to the annuity due factor.b. The annuity due factor equals
one plus the ordinary annuity factor for n1
periods.c. The ordinary annuity factor equals one plus the
annuity due factor for n+1
periods.d. The annuity due factor equals the ordinary annuity
factor for n+1 periods minus
one.
59. Paula purchased a house for $300,000. After providing a 20%
down payment, she borrowed the balance from the local savings and
loan under a 30-year 6% mortgage loan requiring equal monthly
installments at the end of each month. Which time value concept
would be used to determine the monthly payment?a. Present value of
one.b. Future value of one.c. Present value of an ordinary
annuity.d. Future value of an ordinary annuity.
60. Stemway requires a new manufacturing facility. Management
found three locations; all of which would provide needed capacity,
the only difference is the price. Location A may be purchased for
$500,000. Location B may be acquired with a down payment of
$100,000 and annual payments at the end of each of the next twenty
years of $50,000. Location C requires $40,000 payments at the
beginning of each of the next twenty-five years. Assuming Stemway's
borrowing costs are 8% per annum, which option is the least costly
to the company?a. Location A.b. Location B.c. Location C.
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d. Location A and Location B.
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61. Which of the following is false?a. The future value of a
deferred annuity is the same as the future value of an
annuity not deferred.b. A deferred annuity is an annuity in
which the rents begin after a specified number
of periods.c. To compute the present value of a deferred
annuity, we compute the present
value of an ordinary annuity of 1 for the entire period and
subtract the present value of the rents which were not received
during the deferral period.
d. If the first rent is received at the end of the sixth period,
it means the ordinary annuity is deferred for six periods.
Multiple Choice Answers—ConceptualSolution to Multiple Choice
question for which the answer is “none of these.”30. Present value
of an Ordinary Annuity of 1.
MULTIPLE CHOICE—Computational
62. Assume ABC Company deposits $50,000 with First National Bank
in an account earning interest at 6% per annum, compounded
semi-annually. How much will ABC have in the account after five
years if interest is reinvested?a. $67,196.b. $50,000.c. $65,000.d.
$66,912.
63. Charlie Corp. is purchasing new equipment with a cash cost
of $150,000 for an assembly line. The manufacturer has offered to
accept $34,440 payment at the end of each of the next six years.
How much interest will Charlie Corp. pay over the term of the
loan?a. $34,440.b. $150,000.c. $184,440.d. $56,640.
64. If a savings account pays interest at 4% compounded
quarterly, then the amount of $1 left on deposit for 8 years would
be found in a table usinga. 8 periods at 4%.b. 8 periods at 1%.c.
32 periods at 4%.d. 32 periods at 1%.
Items 65 through 68 apply to the appropriate use of interest
tables. Given below are the future value factors for 1 at 8% for
one to five periods. Each of the items 65 to 68 is based on 8%
interest compounded annually.
Periods Future Value of 1 at 8%1 1.0802 1.1663 1.260
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4 1.3605 1.469
65. What amount should be deposited in a bank account today to
grow to $10,000 three years from today?a. $10,000 × 1.260b. $10,000
× 1.260 × 3c. $10,000 ÷ 1.260d. $10,000 ÷ 1.080 × 3
66. If $3,000 is put in a savings account today, what amount
will be available three years from today?a. $3,000 ÷ 1.260b. $3,000
× 1.260c. $3,000 × 1.080 × 3d. ($3,000 × 1.080) + ($3,000 × 1.166)
+ ($3,000 × 1.260)
67. What amount will be in a bank account three years from now
if $6,000 is invested each year for four years with the first
investment to be made today?a. ($6,000 × 1.260) + ($6,000 × 1.166)
+ ($6,000 × 1.080) + $6,000b. $6,000 × 1.360 × 4c. ($6,000 × 1.080)
+ ($6,000 × 1.166) + ($6,000 × 1.260) + ($6,000 × 1.360)d. $6,000 ×
1.080 × 4
68. If $4,000 is put in a savings account today, what amount
will be available six years from now?a. $4,000 × 1.080 × 6b. $4,000
× 1.080 × 1.469c. $4,000 × 1.166 × 3d. $4,000 × 1.260 × 2
Items 69 through 72 apply to the appropriate use of present
value tables. Given below are the present value factors for $1.00
discounted at 10% for one to five periods. Each of the items 69 to
72 is based on 10% interest compounded annually.
Present Value of $1Periods Discounted at 10% per Period
1 0.9092 0.8263 0.7514 0.6835 0.621
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69. If an individual put $4,000 in a savings account today, what
amount of cash would be available two years from today?a. $4,000 ×
0.826b. $4,000 × 0.826 × 2c. $4,000 ÷ 0.826d. $4,000 ÷ 0.909 ×
2
70. What is the present value today of $6,000 to be received six
years from today?a. $6,000 × 0.909 × 6b. $6,000 × 0.751 × 2c.
$6,000 × 0.621 × 0.909d. $6,000 × 0.683 × 3
71. What amount should be deposited in a bank today to grow to
$3,000 three years from today?a. $3,000 ÷ 0.751b. $3,000 × 0.909 ×
3c. ($3,000 × 0.909) + ($3,000 × 0.826) + ($3,000 × 0.751)d. $3,000
× 0.751
72. What amount should an individual have in a bank account
today before withdrawal if $5,000 is needed each year for four
years with the first withdrawal to be made today and each
subsequent withdrawal at one-year intervals? (The balance in the
bank account should be zero after the fourth withdrawal.)a. $5,000
+ ($5,000 × 0.909) + ($5,000 × 0.826) + ($5,000 × 0.751)b. $5,000 ÷
0.683 × 4c. ($5,000 × 0.909) + ($5,000 × 0.826) + ($5,000 × 0.751)
+ ($5,000 × 0.683)d. $5,000 ÷ 0.909 × 4
73. At the end of two years, what will be the balance in a
savings account paying 6% annually if $10,000 is deposited today?
The future value of one at 6% for one period is 1.06.a. $10,000b.
$10,600c. $11,200d. $11,236
74. Mordica Company will receive $250,000 in 7 years. If the
appropriate interest rate is 10%, the present value of the $250,000
receipt isa. $127,500.b. $128,290.c. $377,500.d. $487,180.
75. Dunston Company will receive $200,000 in a future year. If
the future receipt is discounted at an interest rate of 10%, its
present value is $102,632. In how many years is the $200,000
received?a. 5 yearsb. 6 yearsc. 7 yearsd. 8 years
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76. Milner Company will invest $400,000 today. The investment
will earn 6% for 5 years, with no funds withdrawn. In 5 years, the
amount in the investment fund isa. $400,000.b. $520,000.c.
$535,292.d. $536,116.
77. Barber Company will receive $800,000 in 7 years. If the
appropriate interest rate is 10%, the present value of the $800,000
receipt isa. $408,000.b. $410,528.c. $1,208,000.d. $1,558,976.
78. Barkley Company will receive $300,000 in a future year. If
the future receipt is discounted at an interest rate of 8%, its
present value is $189,051. In how many years is the $300,000
received?a. 5 yearsb. 6 yearsc. 7 yearsd. 8 years
79. Altman Company will invest $500,000 today. The investment
will earn 6% for 5 years, with no funds withdrawn. In 5 years, the
amount in the investment fund isa. $500,000.b. $650,000.c.
$669,115.d. $670,145.
80. John Jones won a lottery that will pay him $2,000,000 after
twenty years. Assuming an appropriate interest rate is 5%
compounded annually, what is the present value of this amount?a.
$2,000,000.b. $5,306,600.c. $24,924,420.d. $753,780.
81. Angie invested $100,000 she received from her grandmother
today in a fund that is expected to earn 10% per annum. To what
amount should the investment grow in five years if interest is
compounded semi-annually?a. $155,134.b. $161,050.c. $162,890.d.
$177,156.
82. Bella requires $120,000 in four years to purchase a new
home. What amount must be invested today in an investment that
earns 6% interest, compounded annually?a. $95,051.
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b. $98,724.c. $145,337.d. $151,497.
83. What interest rate (the nearest percent) must Charlie earn
on a $150,000 investment today so that he will have $380,000 after
12 years?a. 6%.b. 7%.c. 8%.d. 9%.
84. Ethan has $80,000 to invest today at an annual interest rate
of 4%. Approximately how many years will it take before the
investment grows to $162,000?a. 18 years.b. 20 years.c. 16 years.d.
11 years.
85. Jane wants to set aside funds to take an around the world
cruise in four years. Assuming that Jane has $8,000 to invest today
in an account expected to earn 6% per annum, how much will she have
to spend on her vacation?a. $6,336.b. $10,100.c. $34,997.d.
$10,706.
86. Jane wants to set aside funds to take an around the world
cruise in four years. Jane expects that she will need $10,000 for
her dream vacation. If she is able to earn 8% per annum on an
investment, how much will she have to set aside today so that she
will have sufficient funds available?a. $2,219.b. $13,604.c.
$7,350.d. $6,806.
87. What would you pay for an investment that pays you
$3,000,000 after forty years? Assume that the relevant interest
rate for this type of investment is 6%.a. $93,540.b. $935,400.c.
$291,660.d. $311,010.
88. What would you pay for an investment that pays you $20,000
at the end of each year for the next ten years and then returns a
maturity value of $300,000 after ten years? Assume that the
relevant interest rate for this type of investment is 8%.a.
$138,958.b. $134,202.c. $144,936.d. $273,158.
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89. Anna has $30,000 to invest. She requires $50,000 for a down
payment for a house. If she is able to invest at 6%, how many years
will it be before she will accumulate the desired balance?a. 6
years.b. 7 years.c. 8 years.d. 9 years.
90. Lucy and Fred want to begin saving for their baby's college
education. They estimate that they will need $200,000 in eighteen
years. If they are able to earn 6% per annum, how much must be
deposited at the beginning of each of the next eighteen years to
fund the education?a. $6,471.b. $6,105.c. $11,111.d. $5,924.
91. Lucy and Fred want to begin saving for their baby's college
education. They estimate that they will need $300,000 in eighteen
years. If they are able to earn 5% per annum, how much must be
deposited at the end of each of the next eighteen years to fund the
education?a. $11,618.b. $25,664.c. $24,823.d. $10,664.
92. Jane wants to set aside funds to take an around the world
cruise in four years. Jane expects that she will need $10,000 for
her dream vacation. If she is able to earn 8% per annum on an
investment, how much will she need to set aside at the beginning of
each year to accumulate sufficient funds?a. $2,219.b. $13,604.c.
$7,350.d. $2,055.
93. Pearson Corporation makes an investment today (January 1,
2012). They will receive $6,000 every December 31st for the next
six years (2012 – 2017). If Pearson wants to earn 12% on the
investment, what is the most they should invest on January 1,
2012?a. $24,668.b. $27,629.c. $48,691.d. $54,534.
94. Garretson Corporation will receive $8,000 today (January 1,
2012), and also on each January 1st for the next five years (2013 –
2017). What is the present value of the six $8,000 receipts,
assuming a 12% interest rate?a. $32,891.b. $36,838.c. $64,922.d.
$72,712.
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95. Spencer Corporation will invest $15,000 every December 31st
for the next six years (2012 – 2017). If Spencer will earn 12% on
the investment, what amount will be in the investment fund on
December 31, 2017?a. $61,671.b. $69,072.c. $121,728.d.
$136,335.
96. Tipson Corporation will invest $15,000 every January 1st for
the next six years (2012 – 2017). If Linton will earn 12% on the
investment, what amount will be in the investment fund on December
31, 2017?a. $61,671b. $69,072.c. $121,728.d. $136,335.
97. Hiller Corporation makes an investment today (January 1,
2012). They will receive $40,000 every December 31st for the next
six years (2012 – 2017). If Hiller wants to earn 12% on the
investment, what is the most they should invest on January 1,
2012?a. $164,456.b. $184,191.c. $324,608.d. $363,560.
98. Sonata Corporation will receive $20,000 today (January 1,
2012), and also on each January 1st for the next five years (2013 –
2017). What is the present value of the six $40,000 receipts,
assuming a 12% interest rate?a. $164,456.b. $184,191.c. $324,608.d.
$363,560.
99. Renfro Corporation will invest $50,000 every December 31st
for the next six years (2012 – 2017). If Renfro will earn 12% on
the investment, what amount will be in the investment fund on
December 31, 2017?a. $205,570b. $230,240.c. $405,760.d.
$454,450.
100. Vannoy Corporation will invest $30,000 every January 1st
for the next six years (2012 – 2017). If Wagner will earn 12% on
the investment, what amount will be in the investment fund on
December 31, 2017?a. $123,342.b. $138,144.c. $243,456.d.
$272,670.
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101. On January 1, 2012, Kline Company decided to begin
accumulating a fund for asset replacement five years later. The
company plans to make five annual deposits of $40,000 at 9% each
January 1 beginning in 2012. What will be the balance in the fund,
within $10, on January 1, 2017 (one year after the last deposit)?
The following 9% interest factors may be used.
Present Value of Future Value ofOrdinary Annuity Ordinary
Annuity
4 periods 3.2397 4.57315 periods 3.8897 5.98476 periods 4.4859
7.5233
a. $260,932b. $239,388c. $218,000d. $200,000
Use the following 8% interest factors for questions 102 through
105.Present Value of Future Value ofOrdinary Annuity Ordinary
Annuity
7 periods 5.2064 8.922808 periods 5.7466 10.636639 periods
6.2469 12.48756
102. What will be the balance on September 1, 2018 in a fund
which is accumulated by making $10,000 annual deposits each
September 1 beginning in 2011, with the last deposit being made on
September 1, 2018? The fund pays interest at 8% compounded
annually.a. $106,366b. $89,229c. $75,600d. $57,466
103. If $6,000 is deposited annually starting on January 1, 2012
and it earns 8%, what will the balance be on December 31, 2019?a.
$53,537b. $57,820c. $63,820d. $68,925
104. Korman Company wishes to accumulate $400,000 by May 1, 2020
by making 8 equal annual deposits beginning May 1, 2012 to a fund
paying 8% interest compounded annually. What is the required amount
of each deposit?a. $69,606b. $37,606c. $34,820d. $40,312
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105. What amount should be recorded as the cost of a machine
purchased December 31, 2012, which is to be financed by making 8
annual payments of $8,000 each beginning December 31, 2013? The
applicable interest rate is 8%.a. $56,000b. $49,975c. $85,093d.
$45,973
106. How much must be deposited on January 1, 2012 in a savings
account paying 6% annually in order to make annual withdrawals of
$25,000 at the end of the years 2012 and 2013? The present value of
one at 6% for one period is .9434.a. $45,835b. $47,175c. $50,000d.
$22,250
107. How much must be invested now to receive $20,000 for 15
years if the first $20,000 is received today and the rate is
9%?
Present Value ofPeriods Ordinary Annuity at 9%
14 7.7861515 8.0606916 8.31256
a. $161,214b. $175,723c. $300,000d. $146,250
108. Jenks Company financed the purchase of a machine by making
payments of $10,000 at the end of each of five years. The
appropriate rate of interest was 8%. The future value of one for
five periods at 8% is 1.46933. The future value of an ordinary
annuity for five periods at 8% is 5.8666. The present value of an
ordinary annuity for five periods at 8% is 3.99271. What was the
cost of the machine to Jenks?a. $14,794b. $39,927c. $50,000d.
$58,667
109. A machine is purchased by making payments of $6,000 at the
beginning of each of the next five years. The interest rate was
10%. The future value of an ordinary annuity of 1 for five periods
is 6.10510. The present value of an ordinary annuity of 1 for five
periods is 3.79079. What was the cost of the machine?a. $40,294b.
$36,631c. $25,019d. $22,745
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110. Lane Co. has a machine that cost $300,000. It is to be
leased for 20 years with rent received at the beginning of each
year. Lane wants a return of 10%. Calculate the amount of the
annual rent.
Present Value ofPeriod Ordinary Annuity
19 8.3649220 8.5135621 8.64869
a. $32,034b. $35,864c. $44,592d. $35,238
111. Find the present value of an investment in plant and
equipment if it is expected to provide annual earnings of $26,000
for 15 years and to have a resale value of $50,000 at the end of
that period. Assume a 10% rate and earnings at year end. The
present value of 1 at 10% for 15 periods is .23939. The present
value of an ordinary annuity at 10% for 15 periods is 7.60608. The
future value of 1 at 10% for 15 periods is 4.17725.a. $197,758b.
$209,728c. $247,758d. $401,970
112. On January 2, 2012, Wine Corporation wishes to issue
$3,000,000 (par value) of its 8%, 10-year bonds. The bonds pay
interest annually on January 1. The current yield rate on such
bonds is 10%. Using the interest factors below, compute the amount
that Wine will realize from the sale (issuance) of the bonds.
Present value of 1 at 8% for 10 periods 0.4632Present value of 1
at 10% for 10 periods 0.3855Present value of an ordinary annuity at
8% for 10 periods 6.7101Present value of an ordinary annuity at 10%
for 10 periods 6.1446
a. $3,000,000b. $2,631,204c. $3,000,018d. $3,318,078
113. The market price of a $500,000, ten-year, 12% (pays
interest semiannually) bond issue sold to yield an effective rate
of 10% isa. $561,445.b. $562,311.c. $566,635.d. $936,180.
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114. John won a lottery that will pay him $150,000 at the end of
each of the next twenty years. Assuming an appropriate interest
rate is 8% compounded annually, what is the present value of this
amount?a. $1,590,540.b. $32,183.c. $1,472,723.d. $6,864,294.
115. Jonas won a lottery that will pay him $200,000 at the end
of each of the next twenty years. Zebra Finance has offered to
purchase the payment stream for $2,718,000. What interest rate (to
the nearest percent) was used to determine the amount of the
payment?a. 7%.b. 6%.c. 5%.d. 4%.
116. James leases a ski chalet to his best friend, Janet. The
lease term is five years with $16,000 annual payments due at the
beginning of each year. What is the present value of the payments
discounted at 8% per annum?a. $68,994.b. $63,884.c. $61,077.d.
$57,990.
117. Jeremy is in the process of purchasing a car. The list
price of the car is $36,000. If Jeremy pays cash for the car, the
dealer will reduce the price by 10%. Otherwise, the dealer will
provide financing where Jeremy must pay $7,706 at the end of each
of the next five years. Compute the effective interest rate to the
nearest percent that Jeremy would pay if he chooses to make the
five annual payments?a. 5%.b. 6%.c. 7%.d. 8%.
118. What would you pay for an investment that pays you $15,000
at the end of each year for the next twenty years? Assume that the
relevant interest rate for this type of investment is 12%.a.
$125,487.b. $1,080,786.c. $15,550.d. $112,042.
119. What would you pay for an investment that pays you $20,000
at the beginning of each year for the next ten years? Assume that
the relevant interest rate for this type of investment is 10%.a.
$122,890.b. $135,180.c. $129,902.d. $142,892.
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120. Ziggy is considering purchasing a new car. The cash
purchase price for the car is $33,600. What is the annual interest
rate if Ziggy is required to make annual payments of $7,800 at the
end of the next five years?a. 4%.b. 5%.c. 6%.d. 7%.
121. Charlie Corp. is purchasing new equipment with a cash cost
of $200,000 for the assembly line. The manufacturer has offered to
accept $45,920 payments at the end of each of the next six years.
What is the interest rate that Charlie Corp. will be paying?a.
8%.b. 9%.c. 10%.d. 11%.
122. Jeremy Leasing purchases and then leases small aircraft to
interested parties. The company is currently determining the
required rental for a small aircraft that cost them $600,000. If
the lease is for twenty years and annual lease payments are
required to be made at the end of each year, what will be the
annual rental if Jeremy wants to earn a return of 10%?a. $64,070.b.
$70,476.c. $10,476.d. $30,314.
123. Stech Co. is issuing $6.5 million 12% bonds in a private
placement on July 1, 2012. Each $1,000 bond pays interest
semi-annually on December 31 and June 30 of each year. The bonds
mature in ten years. At the time of issuance, the market interest
rate for similar types of bonds was 8%. What is the expected
selling price of the bonds?a. $8,266,764.b. $13,566,992.c.
$8,244,598.d. $8,310,962.
Multiple Choice Answers—Computational
MULTIPLE CHOICE—CPA Adapted
124. On January 1, 2012, Gore Co. sold to Cey Corp. $600,000 of
its 10% bonds for $531,177 to yield 12%. Interest is payable
semiannually on January 1 and July 1. What amount should Gore
report as interest expense for the six months ended June 30,
2012?a. $26,559b. $30,000c. $31,871d. $36,000
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125. On May 1, 2012, a company purchased a new machine which it
does not have to pay for until May 1, 2014. The total payment on
May 1, 2014 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 factor?a. Future
value of annuity of 1b. Future value of 1c. Present value of
annuity of 1d. Present value of 1
126. On January 1, 2012, Ball Co. exchanged equipment for a
$200,000 zero-interest-bearing note due on January 1, 2015. The
prevailing rate of interest for a note of this type at January 1,
2012 was 10%. The present value of $1 at 10% for three periods is
0.75. What amount of interest revenue should be included in Abel's
2013 income statement?a. $0b. $15,000c. $16,500d. $20,000
127. For which of the following transactions would the use of
the present value of an ordinary annuity concept be appropriate in
calculating the present value of the asset obtained or the
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
January 2 and July 1 yielding 7%.d. A ten-year 8% bond is issued
on January 2 with interest payable semiannually on
January 2 and July 1 yielding 9%.
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128. On January 15, 2012, Dolan Corp. adopted a plan to
accumulate funds for environmental improvements beginning July 1,
2016, at an estimated cost of $5,000,000. Dolan plans to make four
equal annual deposits in a fund that will earn interest at 10%
compounded annually. The first deposit was made on July 1, 2012.
Future value factors are as follows:
Future value of 1 at 10% for 5 periods
1.61Future value of ordinary annuity of 1 at 10% for 4
periods
4.64Future value of annuity due of 1 at 10% for 4 periods
5.11
Dolan should make four annual deposits ofa. $889,522.b.
$978,474.c. $1,077,586.d. $1,250,000.
129. On December 30, 2012, AGH, Inc. purchased a machine from
Grant Corp. in exchange for a zero-interest-bearing note requiring
eight payments of $70,000. The first payment was made on December
30, 2012, and the others are due annually on December 30. At date
of issuance, the prevailing rate of interest for this type of note
was 11%. Present value factors are as follows:
Present Value of Ordinary Present Value ofPeriod Annuity of 1 at
11% Annuity Due of 1 at
11%7 4.712 5.2318 5.146 5.712
On AGH's December 31, 2012 balance sheet, the net note payable
to Grant isa. $329,840.b. $360,220.c. $366,485.d. $399,840.
130. On January 1, 2012, Ott Co. sold goods to Flynn Company.
Flynn signed a zero-interest-bearing note requiring payment of
$90,000 annually for seven years. The first payment was made on
January 1, 2012. The prevailing rate of interest for this type of
note at date of issuance was 10%. Information on present value
factors is as follows:
Present Value Present Value of Ordinary
Period of 1 at 10% Annuity of 1 at 10%
6 .5645 4.35537 .5132 4.8684
Ott should record sales revenue in January 2012 ofa.
$481,972.
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b. $438,156.c. $391,977.d. $321,300.
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131. On January 1, 2012, Haley Co. issued ten-year bonds with a
face amount of $3,000,000 and a stated interest rate of 8% payable
annually on January 1. The bonds were priced to yield 10%. Present
value factors are as follows:
At 8% At 10%Present value of 1 for 10 periods 0.463 0.386Present
value of an ordinary annuity of 1 for 10 periods 6.710 6.145
The total issue price of the bonds wasa. $3,000,000.b.
$2,940,000.c. $2,760,000.d. $2,632,800.
132. On July 1, 2012, Ed Wynne signed an agreement to operate as
a franchisee of Kwik Foods, Inc., for an initial franchise fee of
$240,000. Of this amount, $80,000 was paid when the agreement was
signed and the balance is payable in four equal annual payments of
$40,000 beginning July 1, 2013. The agreement provides that the
down payment is not refundable and no future services are required
of the franchisor. Wynne's 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 4 periods
0.59Future value of 1 at 14% for 4 periods
1.69Present value of an ordinary annuity of 1 at 14% for 4
periods
2.91
Wynne should record the acquisition cost of the franchise on
July 1, 2012 ata. $174,400.b. $196,400.c. $240,000.d. $270,400.
Multiple Choice Answers—CPA Adapted
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IFRS QUESTIONS
True / False
1. IFRS does not intend to issue detailed guidance on the
selection of a discount rate when the time value of money is
required to determine cash flows.
2. Under IAS 37 and the establishment of estimate provisions,
discounting is required where the time value of money is
material.
3. Under IFRS, the rate implicit in the lease is generally used
to discount minimum lease payments.
4. Under IFRS, the discount rate should reflect risks for which
future cash flow estimates have been adjusted.
5. Under IFRS, if an estimate is being developed for a large
number of items with varied outcomes, then the expected value
method is used.
Answers to True / False questions:
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Multiple Choice Questions:
1. Underwood Company maintains its accounting records using
IFRS. The company recently signed a lease for a new office
building, for a lease period of 10 years. Under the lease
agreement, a security deposit of $20,000 is made, with the deposit
to be returned at the expiration of the lease, with interest
compounded at 10% per year. What amount will the company receive at
the time the lease expires?a. $51,875.b. $40,000.c. $122,892.d.
$27,711.
Use the following information to answer questions 2 & 3.
Martin Industries maintains its accounting records using IFRS.
The company purchases equipment with a price of $300,000. The
manufacturer has offered a payment plan that would allow Martin to
make 10 equal annual payments of $36,987, with the first payment
due one year after the purchase.
2. How much total interest will Martin pay on this payment
plan?a. $69,870b. $36,987c. $120,000d. $30,000
3. Martin could borrow $300,000 from its bank to finance the
purchase at an annual rate of 6%. Should Martin borrow from the
bank or use the manufacturer's payment plan to pay for the
equipment?a. Borrow from the bank.b. Use the manufacturer's payment
plan.c. The rates for both the bank and manufacturer are the same,
so Martin would be
indifferent.d. There is not enough information to answer this
question.
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4. Barton Company, a company who maintains its accounting
records using IFRS, manufactures furniture. Barton sells a $75,000
order to Save-A Lot Furniture in exchange for a
zero-interest-bearing note due from the customer in two years.
Since there is no stated interest rate on the note, the controller
uses the current market rate of 8% to derive the present value
factor. Based on this information and the incorporation of the time
value of money, which of the following would be recorded by Barton
to recognize this sale?a. A credit to Discount on Notes Receivable
for $10,699.b. A credit to Sales Revenue for $75,000.c. A debit to
Notes Receivable for $64,301.d. A debit to Discount on Notes
Receivable for $6,000.
Rationale:Notes Receivable 75,000
Sales Revenue 64,301Discount on Notes Receivable 10,699
$75,000 PV (8%, 2) = $75,000 .85734 = $64,301
5. Moore Industries manufactures exercise equipment. Recently
the vice president of operations of the company has requested
construction of a new plant to meet the increasing demand for the
company's exercise equipment. After a careful evaluation of the
request, the board of directors has decided to raise funds for the
new plant by issuing $2,000,000 of 11% bonds on March 1, 2012, due
on March 1, 2027, with interest payable each March 1 and September
1. At the time of issuance, the market interest rate for similar
financial instruments is 10%. What is the selling price of the
bonds?a. $2,220,000b. $1,269,776c. $2,153,730d. $1,690,970
The selling price of the bonds = $1,690,970 + $462,760 =
$2,153,730.
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6. Reegan Company owns a trade name that was purchased in an
acquisition of Hamilton Company. The trade name has a book value of
$3,500,000, but according to GAAP, it is assessed for impairment on
an annual basis. To perform this impairment test, Reegan must
estimate the fair value of the trade name. It has developed the
following cash flow estimates related to the trade name based on
internal information. Each cash flow estimate reflects Reegan's
estimate of annual cash flows over the next 7 years. The trade name
is assumed to have no residual value after the 7 years. (Assume the
cash flows occur at the end of each year.)
Probability Assessment Cash Flow Estimate30% $480,00050%
730,00020% 850,000
Reegan determines that the appropriate discount rate for this
estimation is 6%. To the nearest dollar, what is the estimated fair
value of the trade name?
a. $3,500,000b. $ 679,000c. $2,060,000d. $3,790,436
7. Jamison Company uses IFRS for its financial reporting. It
produces machines that sell globally. All sales are accompanied by
a one-year warranty. At the end of the year, the company has the
following data:
2,000 units were sold during the year. The trend over the past
five years has been that 4% of the machines were defective in
some way and had to be repaired. Of this 4%, half required a
full replacement at a cost of $3,000 per unit and half were able to
be repaired at an average cost of $300.
What is the expected value of the warranty cost provision?a.
$240,000b. $132,000c. $264,000d. $120,000
8. Maxim Company leased an office under a five-year contract,
which has been accounted for as an operating lease. Faced with the
downturn in the economy, the viable company decided to sub-lease
the office. However, they have had no luck with this effort and the
landlord will not allow the lease to be cancelled. The payments are
$6,000 per year and there are four years left on the lease. The
company's most recent interest rate for financing from a bank is
6%. The risk-free rate on government bonds is 4%. What is the
provision for the lease under IFRS?a. $21,780b. $22,572c. $24,000d.
$20,791
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9. Dolphin Company leased an office under a six-year contract,
which has been accounted for as an operating lease. Faced with the
downturn in the economy, the viable company decided to sub-lease
the office. However, they have had no luck with this effort and the
landlord will not allow the lease to be cancelled. The payments are
$10,000 per year and there are five years left on the lease. The
company's most recent interest rate for financing from a bank is
9%. The risk-free rate on government bonds is 5%. What is the
provision for the lease under IFRS?a. $50,000b. $44,519c. $38,897d.
$43,295
10 Techtronics, a technology company that uses IFRS for its
financial reporting, has been found to have polluted the property
surrounding its plant. The property is leaded for 12 years and
Techtronics has agreed that when the lease expires, the pollution
will be remediated before transfer back to its owner. The lease has
a renewal option for another 8 years. If this option is exercised,
the cleanup will be done at the end of the renewal period. There is
a 70% chance that the lease will not be renewed and the cleanup
will cost $180,000. There is 30% chance that the lease will be
renewed and the cleanup costs will be $375,000 at the end of the 20
years. If you assume that these estimates are derived from best
estimates of likely outcomes and the risk-free rate is 5%, the
expected present value of the cleanup provision is:a. $238,500b.
$112,562c. $277,500d. $226,575
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Answers to Multiple Choice.
CHAPTER 7
CASH AND RECEIVABLESIFRS questions are available at the end of
this chapter.
TRUE-FALSE—Conceptual
1. Savings accounts are usually classified as cash on the
balance sheet.
2. Certificates of deposit are usually classified as cash on the
balance sheet.
3. Companies include postdated checks and petty cash funds as
cash.
4. Cash equivalents are investments with original maturities of
six months or less.
5. Bank overdrafts are always offset against the cash account in
the balance sheet.
6. Short-term, highly liquid investments may be included with
cash on the balance sheet.
7. All claims held against customers and others for money,
goods, or services are reported as current assets.
8. Trade receivables include notes receivable and advances to
officers and employees.
9. Trade discounts are used to avoid frequent changes in
catalogs and to alter prices for different quantities
purchased.
10. In the gross method, sales discounts are reported as a
deduction from sales.
11. The net amount reported for short-term receivables is not
affected when a specific account receivable is determined to be
uncollectible.
12. The percentage-of-receivables approach of estimating
uncollectible accounts emphasizes matching over valuation of
accounts receivable.
13. The percentage-of-sales method results in a more accurate
valuation of receivables on the balance sheet.
14. Companies record and report long-term notes receivable at
the present value of the cash they expect to collect.
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15. When the stated rate of interest exceeds the effective rate,
the present value of the note receivable will be less than its face
value.
16. Notes receivable are generally reported as noncurrent
assets.
17. Recognition of a recourse liability will make a loss on sale
of receivables larger than it would otherwise have been.
18. When buying receivables with recourse, the purchaser assumes
the risk of collectibility and absorbs any credit loss.
19. For receivables sold with recourse, the seller guarantees
payment to the purchaser if the debtor fails to pay.
20. The receivables turnover ratio is computed by dividing net
sales by the ending net receivables.
True False Answers—Conceptual
MULTIPLE CHOICE—Conceptual
21. Which of the following is not considered cash for financial
reporting purposes?a. Petty cash funds and change fundsb. Money
orders, certified checks, and personal checksc. Coin, currency, and
available fundsd. Postdated checks and I.O.U.'s
22. Which of the following is considered cash?a. Certificates of
deposit (CDs)b. Money market checking accountsc. Money market
savings certificatesd. Postdated checks
23. Travel advances should be reported asa. supplies.b. cash
because they represent the equivalent of money.c. investments.d.
none of these.
P24. Which of the following items should not be included in the
Cash caption on the balance sheet?a. Coins and currency in the cash
registerb. Checks from other parties presently in the cash
registerc. Amounts on deposit in checking account at the bankd.
Postage stamps on hand
25. All of the following may be included under the heading of
"cash" except
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a. currency.b. money market funds.c. checking account balance.d.
savings account balance.
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26. In which account are post-dated checks received
classified?a. Receivables.b. Prepaid expenses.c. Cash.d.
Payables.
27. In which account are postage stamps classified?a. Cash.b.
Office supplies.c. Receivables.d. Inventory.
28. What is a compensating balance?a. Savings account
balances.b. Margin accounts held with brokers.c. Temporary
investments serving as collateral for outstanding loans.d. Minimum
deposits required to be maintained in connection with a
borrowing arrangement.
29. Under which section of the balance sheet is "cash restricted
for plant expansion" reported?a. Current assets.b. Non-current
assets.c. Current liabilities.d. Stockholders' equity.
S30. A cash equivalent is a short-term, highly liquid investment
that is readily convertible into known amounts of cash anda. is
acceptable as a means to pay current liabilities.b. has a current
market value that is greater than its original costc. bears an
interest rate that is at least equal to the prime rate of interest
at the date
of liquidation.d. is so near its maturity that it presents
insignificant risk of changes in interest
rates.
31. Bank overdrafts, if material, should bea. reported as a
deduction from the current asset section.b. reported as a deduction
from cash.c. netted against cash and a net cash amount reported.d.
reported as a current liability.
32. Deposits held as compensating balancesa. usually do not earn
interest.b. if legally restricted and held against short-term
credit may be included as cash.c. if legally restricted and held
against long-term credit may be included among
current assets.d. none of these.
33. The category "trade receivables" includesa. advances to
officers and employees.b. income tax refunds receivable.c. claims
against insurance companies for casualties sustained.
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d. none of these.34. Which of the following should be recorded
in Accounts Receivable?
a. Receivables from officersb. Receivables from subsidiariesc.
Dividends receivabled. None of these
S35. What is the preferable presentation of accounts receivable
from officers, employees, or affiliated companies on a balance
sheet?a. As offsets to capital.b. By means of footnotes only.c. As
assets but separately from other receivables.d. As trade notes and
accounts receivable if they otherwise qualify as current
assets.
S36. When a customer purchases merchandise inventory from a
business organization, she may be given a discount which is
designed to induce prompt payment. Such a discount is called a(n)a.
trade discount.b. nominal discount.c. enhancement discount.d. cash
discount.
P37. Trade discounts area. not recorded in the accounts; rather
they are a means of computing a price.b. used to avoid frequent
changes in catalogues.c. used to quote different prices for
different quantities purchased.d. all of the above.
38. If a company employs the gross method of recording accounts
receivable from customers, then sales discounts taken should be
reported asa. a deduction from sales in the income statement.b. an
item of "other expense" in the income statement.c. a deduction from
accounts receivable in determining the net realizable value of
accounts receivable.d. sales discounts forfeited in the cost of
goods sold section of the income
statement.
39. Why do companies provide trade discounts?a. To avoid
frequent changes in catalogs.b. To induce prompt payment.c. To
easily alter prices for different customers.d. Both a. and c.
40. The accounting for cash discounts and trade discounts area.
the same.b. always recorded net.c. not the same.d. tied to the
timing of cash collections on the account.
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41. Of the approaches to record cash discounts related to
accounts receivable, which is more theoretically correct?a. Net
approach.b. Gross approach.c. Allowance approach.d. All three
approaches are theoretically correct.
42. All of the following are problems associated with the
valuation of accounts receivable except fora. uncollectible
accounts.b. returns.c. cash discounts under the net method.d.
allowances granted.
43. Why is the allowance method preferred over the direct
write-off method of accounting for bad debts?a. Allowance method is
used for tax purposes.b. Estimates are used.c. Determining
worthless accounts under direct write-off method is difficult
to do.d. Improved matching of bad debt expense with revenue.
44. Which of the following concepts relates to using the
allowance method in accounting for accounts receivable?a. Bad debt
expense is an estimate that is based on historical and
prospective
information.b. Bad debt expense is based on the actual amounts
determined to be
uncollectible.c. Bad debt expense is an estimate that is ba