ACC 303 Final Exam Perfect Score

ACC 303 Final Exam Perfect Score

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ACC 303 Final Exam Week 11 Chapter 5,6,7
Intermediate 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.

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 except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.

23. Balance sheet information is useful for all of the following except to
a. compute rates of return

b. analyze cash inflows and outflows for the period
c. evaluate capital structure
d. assess future cash flows

24. Balance sheet information is useful for all of the following except
a. assessing a company's risk
b. evaluating a company's liquidity
c. evaluating a company's financial flexibility
d. determining free cash flows.

25. A limitation of the balance sheet that is not also a limitation of the income
statement is
a. the use of judgments and estimates
b. omitted items
c. the numbers are affected by the accounting methods employed
d. valuation of items at historical cost

S26. The balance sheet contributes to financial reporting by providing a basis for all
of the following except
a. 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 is
a. 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 as
a. solvency.
b. financial flexibility.
c. liquidity.
d. exchangeability.

29. The net assets of a business are equal to
a. 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 is
a. 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
within
a. 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 in
a. 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.

d. inventory back into cash, or 12 months, whichever is longer.

33. The current assets section of the balance sheet should include
a. 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 as
a. 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 insurance
b. Franchise
c. Land held for speculation
d. A sinking fund

39. A generally accepted method of valuation is
1. trading securities at market value.
2. accounts receivable at net realizable value.
3. inventories at current cost.

a. 1
b. 2

c. 3
d. 1 and 2

40. Which item below is not a current liability?
a. Unearned revenue
b. Stock dividends distributable
c. The currently maturing portion of long-term debt
d. Trade accounts payable

41. Working capital is
a. 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 is
a. accrued interest on notes receivable.
b. goodwill.
c. goods in process.
d. temporary investments.

43. Long-term liabilities include
a. 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 cycle
b. Most pension obligations
c. Long-term liabilities that mature within the operating cycle and will be paid from
a sinking fund
d. 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 authorized
b. The shares issued
c. The shares outstanding
d. 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 stock
b. Common stock subscribed
c. Stock dividend distributable
d. Stock investment in affiliate

48. The stockholders' equity section is usually divided into what three parts?
a. Preferred stock, common stock, treasury stock
b. Preferred stock, common stock, retained earnings
c. Capital stock, additional paid-in capital, retained earnings
d. Capital stock, appropriated retained earnings, unappropriated retained earnings

49. Which of the following is not an acceptable major asset classification?
a. Current assets
b. Long-term investments
c. Property, plant, and equipment
d. Deferred charges

P50. Which of the following is a contra account?
a. Premium on bonds payable
b. Unearned revenue
c. Patents
d. Accumulated depreciation

51. The financial statement which summarizes operating, investing, and financing
activities of an entity for a period of time is the
a. 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
except
a. 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 except
a. 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 the
a. amount of future cash flows.
b. source of future cash flows.
c. timing of future cash flows.
d. uncertainty of future cash flows.

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
are
a. 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 activities
a. 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 value
b. Sale of merchandise on credit
c. Declaration of a cash dividend
d. Issuance of bonds payable at a discount

61. Preparing the statement of cash flows involves all of the following except
determining the
a. cash provided by operations.
b. cash provided by or used in investing and financing activities.
c. change in cash during the period.

d. cash collections from customers during the period.

62. The cash debt coverage ratio is computed by dividing net cash provided by
operating activities by
a. 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 assess
a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.

64. A measure of a company’s financial flexibility is the
a. 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 less
a. 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 the
a. 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 assets
b. Current liabilities
c. Plant assets
d. Long-term liabilities

69. The presentation of long-term liabilities in the balance sheet should disclose
a. maturity dates.

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. Contingencies
b. Financial forecasts
c. Accounting policies
d. Contractual situations

71. Typical contractual situations that are disclosed in the notes to the balance
sheet include all of the following except
a. debt covenants
b. lease obligations
c. advertising contracts
d. pension obligations

72. Accounting policies disclosed in the notes to the financial statements typically
include all of the following except
a. the cost flow assumption used
b. the depreciation methods used
c. significant estimates made
d. 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 lawsuits
b. Loss from a lawsuit settled out of court prior to the end of the fiscal year
c. Warranty claims on future sales
d. Estimated loss from an ongoing lawsuit

74. Which of the following is not a method of disclosing pertinent information?
a. Supporting schedules
b. Parenthetical explanations
c. Cross reference and contra items
d. All of these are methods of disclosing pertinent information.

75. Significant accounting policies may not be
a. 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 assets
a. 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.

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 plans
b. Pension obligations
c. Lease contracts
d. All of these

78. A generally accepted account title is
a. Prepaid Revenue.
b. Appropriation for Contingencies.
c Earned Surplus.
d. Reserve for Doubtful Accounts.

Multiple Choice Answers—Conceptual

Solutions 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) $120,000
Available-for-sale securities (fair value) 70,000
Held-to-maturity securities (amortized cost) 94,000

Fulton will report investments in its current assets section of
a. $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 $600,000
Trademarks 195,000
Long-term receivables 225,000

In Grimmett’s balance sheet, intangible assets should be reported at
a. $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.

c. $1,310,000.
d. $1,395,000.

82. Kohler Company owns the following investments:

Trading securities (fair value) $120,000
Available-for-sale securities (fair value) 70,000
Held-to-maturity securities (amortized cost) 94,000

Kohler will report securities in its long-term investments section of
a. 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 $560,000
Trademarks 180,000
Long-term receivables 210,000

In Randolph’s balance sheet, intangible assets should be reported at
a. $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. 2013
2012
$3,360
Assets, January 1 $2,600 ?
Liabilities, January 1 1,680 ?
Stockholders' Equity, Jan. 1
Dividends ? 420
Common Stock 560 448
Stockholders' Equity, Dec. 31 504
Net Income ?
? 448
560

Stockholders' Equity at January 1, 2012 is
a. $ 504.
b. $ 560.
c. $ 920.
d. $1,424.

86. Presented below are data for Bandkok Corp. 2013
2012
$6,480
Assets, January 1 $5,400 ?
Liabilities, January 1 3,240 ?
Stockholders' Equity, Jan. 1
Dividends ? 810
Common Stock 1,080 864
Stockholders' Equity, Dec. 31
Net Income 972 ?
? 864

1,280

Stockholders' Equity at January 1, 2013 is
a. $3,332.
b. $2,160.
c. $2,360.
d. $3,440.

87. Presented below are data for Caracas Corp. 2014
2013
?
Assets, January 1 $4,560 $2,736
Liabilities, January 1 ? 2,750
Stockholders' Equity, Jan. 1 ?
Dividends 646
Common Stock 570 650
Stockholders' Equity, Dec. 31 608 2,166
Net Income
? ?
684

Net income for 2014 is
a. $584 income.
b. $584 loss.
c. $62 loss.
d. $62 income.

88. Lohmeyer Corporation reports: $220,000
110,000
Cash provided by operating activities 140,000
Cash used by investing activities 70,000
Cash provided by financing activities
Beginning cash balance

What is Lohmeyer’s ending cash balance?
a. $250,000.
b. $320,000.
c. $470,000.
d. $540,000.

89. Keisler Corporation reports: $240,000
110,000
Cash provided by operating activities 140,000
Cash used by investing activities 70,000
Cash provided by financing activities
Beginning cash balance

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 increase

Accounts Payable 1,000 increase

Building 4,000 decrease

Depreciation Expense 1,500 increase

Bonds Payable 8,000 increase

What was the amount of cash provided by operating activities?

a. $54,500

b. $55,000

c. $56,500

d. $64,500

91. Harding Corporation reports the following information:

Net income $450,000
Depreciation expense 140,000
Increase in accounts receivable 60,000

Harding should report cash provided by operating activities of
a. $250,000.
b. $370,000.
c. $530,000.
d. $650,000.

92. Sauder Corporation reports the following information:

Net income $300,000
Depreciation expense 70,000
Increase in accounts receivable 30,000

Sauder should report cash provided by operating activities of
a. $200,000.
b. $260,000.
c. $340,000.
d. $400,000.

93. Packard Corporation reports the following information:

Net cash provided by operating activities $235,000
Average current liabilities 150,000
Average long-term liabilities 100,000
Dividends declared 60,000
Capital expenditures 110,000
Payments of debt 35,000

Packard’s cash debt coverage ratio is
a. 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 150,000
Average long-term liabilities 100,000
Dividends paid 60,000
Capital expenditures 110,000
Payments of debt 35,000

Packard’s free cash flow is
a. $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 150,000
Average long-term liabilities 100,000
Dividends paid 60,000
Capital expenditures 110,000
Payments of debt 35,000

Pedigo’s cash debt coverage ratio is
a. 1.10.
b. 1.83.
c. 2.75.
d. 2.50.

96. Pedigo Corporation reports the following information:

Net cash provided by operating activities $275,000
Average current liabilities 150,000
Average long-term liabilities 100,000
Dividends paid 60,000
Capital expenditures 110,000
Payments of debt 35,000
Pedigo free cash flow is
a. $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) $24,000

Trading securities 6,000

Accumulated depreciation on equipment and furniture 15,000

Cash 16,000

Inventory 30,000

Equipment 25,000

Patent 4,000

Prepaid expenses 2,000

Land held for future business site 18,000

In Stine's December 31, 2012 balance sheet, the current assets total is
a. $95,000.
b. $87,000.
c. $82,000.
d. $78,000.

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 $ 975,000

Accounts receivable (net) 2,695,000

Inventory 2,085,000

Property, plant, and equipment (net) 7,366,000

Accounts payable and accrued liabilities $ 1,801,000

Income taxes payable 654,000

Deferred income tax liability 85,000

Common stock 2,350,000

Additional paid-in capital 3,680,000

Retained earnings, 1/1/12 3,450,000

Net sales and other revenues 13,460,000

Costs and expenses 11,180,000

Income 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 is
a. $6,280,000.
b. $5,755,000.
c. $5,605,000.
d. $5,155,000.

99. The current liabilities total is
a. $1,950,000.
b. $2,015,000.
c. $2,475,000.
d. $2,540,000.

100. The final retained earnings balance is
a. $4,551,000.
b. $4,636,000.

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 Liability

a. $0 $400,000

b. $100,000 $200,000

c. $200,000 $200,000

d. $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 from
a. 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 for
a. 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 from
a. 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 for
a. 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 Composition
a. No Yes
b. Yes Yes
c. Yes No
d. No No



Multiple Choice Answers—CPA Adapted

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 at
a. 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 at
a. 8,040,000 euros on the Statement of Stockholders' Equity.
b. 8,365,000 euros in the Assets section of the Balance Sheet
c. 8,690,000 euros in the stockholders' equity section of the Balance Sheet.

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.

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

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.

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 1
b. Present value of 1
c. Future value of an ordinary annuity of 1
d. 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 1
b. Future value of an annuity due of 1
c. Future value of an ordinary annuity of 1
d. 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 1
b. Future value of an annuity due of 1
c. Present value of an annuity due of 1
d. None of these

31. Which table has a factor of 1.00000 for 1 period at every interest rate?
a. Future value of 1
b. Present value of 1
c. Future value of an ordinary annuity of 1

d. Present value of an ordinary annuity of 1
32. Which table would show the largest factor for an interest rate of 8% for five

periods?
a. Future value of an ordinary annuity of 1
b. Present value of an ordinary annuity of 1
c. Future value of an annuity due of 1
d. 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 1
b. Present value of an ordinary annuity of 1
c. Future value of an annuity due of 1
d. 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 1
b. Future value of annuity of 1
c. Present value of 1
d. 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.

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 an
a. ordinary annuity.
b. annuity in arrears.
c. annuity due.
d. unearned receipt.

P39. In the time diagram below, which concept is being depicted?

0 1234
PV $1 $1 $1 $1

a. Present value of an ordinary annuity
b. Present value of an annuity due
c. Future value of an ordinary annuity
d. 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 periods
b. Future amount of 1 for four periods
c. Present value of an ordinary annuity of 1 for four periods
d. 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 at
a. 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 by
a. 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.

43. Present value is
a. 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.



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.

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 for
a. 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, then
a. 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 n1
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.

d. Location A and Location B.

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—Conceptual
Solution 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 using
a. 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 1.080
2 1.166
3 1.260

4 1.360
5 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 × 1.260
b. $10,000 × 1.260 × 3
c. $10,000 ÷ 1.260
d. $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 ÷ 1.260
b. $3,000 × 1.260
c. $3,000 × 1.080 × 3
d. ($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) + $6,000
b. $6,000 × 1.360 × 4
c. ($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 × 6
b. $4,000 × 1.080 × 1.469
c. $4,000 × 1.166 × 3
d. $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 $1

Periods Discounted at 10% per Period

1 0.909

2 0.826

3 0.751

4 0.683

5 0.621

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 × 0.826
b. $4,000 × 0.826 × 2
c. $4,000 ÷ 0.826
d. $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 × 6
b. $6,000 × 0.751 × 2
c. $6,000 × 0.621 × 0.909
d. $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 ÷ 0.751
b. $3,000 × 0.909 × 3
c. ($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 × 4
c. ($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. $10,000
b. $10,600
c. $11,200
d. $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 is
a. $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 years
b. 6 years
c. 7 years
d. 8 years

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 is
a. $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 is
a. $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 years
b. 6 years
c. 7 years
d. 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 is
a. $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.

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.

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.

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. $61,671
b. $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. $205,570
b. $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.

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 of

Ordinary Annuity Ordinary Annuity

4 periods 3.2397 4.5731

5 periods 3.8897 5.9847

6 periods 4.4859 7.5233

a. $260,932
b. $239,388
c. $218,000
d. $200,000

Use the following 8% interest factors for questions 102 through 105.

7 periods Present Value of Future Value of
8 periods Ordinary Annuity Ordinary Annuity
9 periods
5.2064 8.92280
5.7466 10.63663
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. $106,366
b. $89,229
c. $75,600
d. $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. $53,537
b. $57,820
c. $63,820
d. $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. $69,606
b. $37,606
c. $34,820
d. $40,312

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. $56,000
b. $49,975
c. $85,093
d. $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. $45,835
b. $47,175
c. $50,000
d. $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 of

Periods Ordinary Annuity at 9%

14 7.78615

15 8.06069

16 8.31256

a. $161,214

b. $175,723

c. $300,000

d. $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. $14,794
b. $39,927
c. $50,000
d. $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. $40,294
b. $36,631
c. $25,019
d. $22,745

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 of

Period Ordinary Annuity

19 8.36492

20 8.51356

21 8.64869

a. $32,034

b. $35,864

c. $44,592

d. $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. $197,758
b. $209,728
c. $247,758
d. $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 0.4632
Present value of 1 at 10% for 10 periods 0.3855
Present value of an ordinary annuity at 8% for 10 periods 6.7101
Present value of an ordinary annuity at 10% for 10 periods 6.1446

a. $3,000,000
b. $2,631,204
c. $3,000,018
d. $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% is
a. $561,445.
b. $562,311.
c. $566,635.
d. $936,180.

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.

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. $26,559
b. $30,000
c. $31,871
d. $36,000

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 1
b. Future value of 1
c. Present value of annuity of 1
d. 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. $0
b. $15,000
c. $16,500
d. $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%.

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

1.61
Future value of ordinary annuity of 1 at 10% for 4 periods

4.64
Future value of annuity due of 1 at 10% for 4 periods

5.11

Dolan should make four annual deposits of
a. $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 of

Period Annuity of 1 at 11% Annuity Due of 1 at

11%

7 4.712 5.231

8 5.146 5.712

On AGH's December 31, 2012 balance sheet, the net note payable to Grant is

a. $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:

Ordinary Period Present Value Present Value of
10%
6 of 1 at 10% Annuity of 1 at
7
.5645 4.3553
.5132 4.8684

Ott should record sales revenue in January 2012 of
a. $481,972.

b. $438,156.
c. $391,977.
d. $321,300.

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 0.386

Present value of an ordinary annuity of 1 for 10 periods 6.710 6.145

The total issue price of the bonds was

a. $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

0.59
Future value of 1 at 14% for 4 periods

1.69
Present 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 at
a. $174,400.
b. $196,400.
c. $240,000.
d. $270,400.

Multiple Choice Answers—CPA Adapted

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: