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 FALSEConceptual

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 companys 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 AnswersConceptual

MULTIPLE CHOICEConceptual

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 returnb.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.

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.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.2c.3d.1 and 2

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

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.

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.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 companys 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.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.

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 these78.A generally accepted account title isa.Prepaid Revenue.b.Appropriation for Contingencies.cEarned Surplus.d.Reserve for Doubtful Accounts.

Multiple Choice AnswersConceptualSolutions 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 ChoiceComputational

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)94,000Fulton 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$600,000Trademarks195,000Long-term receivables225,000In Grimmetts 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.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)94,000Kohler 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$560,000Trademarks180,000Long-term receivables210,000In Randolphs 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. 20122013Assets, January 1$2,600$3,360Liabilities, January 11,680?Stockholders' Equity, Jan. 1??Dividends560420Common Stock504448Stockholders' Equity, Dec. 31??Net Income560448Stockholders' Equity at January 1, 2012 isa.$ 504.b.$ 560.c.$ 920.d.$1,424.

86.Presented below are data for Bandkok Corp. 20122013Assets, January 1$5,400$6,480Liabilities, January 13,240?Stockholders' Equity, Jan. 1??Dividends1,080810Common Stock972864Stockholders' Equity, Dec. 31??Net Income1,280864Stockholders' 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. 20132014Assets, January 1$4,560?Liabilities, January 1?$2,736Stockholders' Equity, Jan. 1?2,750Dividends570646Common Stock608650Stockholders' Equity, Dec. 31?2,166Net Income684?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 activities110,000Cash provided by financing activities140,000Beginning cash balance70,000What is Lohmeyers ending cash balance?a.$250,000.b.$320,000.c.$470,000.d.$540,000.

89.Keisler Corporation reports:Cash provided by operating activities$240,000Cash used by investing activities110,000Cash provided by financing activities140,000Beginning cash balance70,000What is Keislers 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 Payable1,000 increaseBuilding 4,000 decreaseDepreciation Expense1,500 increaseBonds Payable8,000 increaseWhat 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 receivable60,000Harding 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 expense70,000Increase in accounts receivable30,000Sauder should report cash provided by operating activities ofa.$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 liabilities150,000Average long-term liabilities100,000 Dividends declared60,000Capital expenditures110,000Payments of debt35,000Packards 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 liabilities150,000Average long-term liabilities100,000 Dividends paid60,000Capital expenditures110,000Payments of debt35,000Packards 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 liabilities150,000Average long-term liabilities100,000Dividends paid60,000Capital expenditures110,000Payments of debt35,000Pedigos cash debt coverage ratio isa.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 liabilities150,000Average long-term liabilities100,000Dividends paid60,000Capital expenditures110,000Payments of debt35,000Pedigo free cash flow isa.$50,000.b.$105,000.c.$165,000.d.$215,000.

Multiple Choice AnswersComputational

Multiple ChoiceCPA Adapted

97.Stine Corp.'s trial balance reflected the following account balances at December 31, 2012:Accounts receivable (net)$24,000Trading securities6,000Accumulated depreciation on equipment and furniture15,000Cash16,000Inventory30,000Equipment25,000Patent4,000Prepaid expenses2,000Land held for future business site18,000In Stine's December 31, 2012 balance sheet, the current assets total isa.$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 BalanceDecember 31, 2012 Dr. Cr.Cash$ 975,000Accounts receivable (net)2,695,000Inventory2,085,000Property, plant, and equipment (net)7,366,000Accounts payable and accrued liabilities$ 1,801,000Income taxes payable654,000Deferred income tax liability85,000Common stock2,350,000Additional paid-in capital3,680,000Retained earnings, 1/1/123,450,000Net sales and other revenues13,460,000Costs and expenses11,180,000Income 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.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 LiabilityLong-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 MethodCompositiona.NoYesb.YesYesc.YesNod.NoNo

Multiple Choice AnswersCPA AdaptedIFRS 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.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-FALSEConceptual

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 AnswersConceptual

MULTIPLE CHOICEConceptual

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 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 1d.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.

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?

01$12$13$14$1

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.

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.

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.

P51If 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 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.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 AnswersConceptualSolution to Multiple Choice question for which the answer is none of these.30.Present value of an Ordinary Annuity of 1.

Multiple ChoiceComputational

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.PeriodsFuture Value of 1 at 8%11.08021.16631.26041.36051.469

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 $1PeriodsDiscounted at 10% per Period10.90920.82630.75140.68350.621

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 0.826b.$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

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.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.$61,671b.$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.

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 ofFuture Value ofOrdinary AnnuityOrdinary Annuity4 periods3.23974.57315 periods3.88975.98476 periods4.48597.5233a.$260,932b.$239,388c.$218,000d.$200,000

Use the following 8% interest factors for questions 102 through 105.Present Value ofFuture Value ofOrdinary AnnuityOrdinary Annuity7 periods5.20648.922808 periods5.746610.636639 periods6.246912.48756

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

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 ofPeriodsOrdinary Annuity at 9%147.78615158.06069168.31256a.$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

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 ofPeriodOrdinary Annuity198.36492208.51356218.64869a.$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 periods0.4632Present value of 1 at 10% for 10 periods0.3855Present value of an ordinary annuity at 8% for 10 periods6.7101Present value of an ordinary annuity at 10% for 10 periods6.1446a.$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.

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 AnswersComputational

Multiple ChoiceCPA 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

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%.

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 periods1.61Future value of ordinary annuity of 1 at 10% for 4 periods4.64Future value of annuity due of 1 at 10% for 4 periods5.11Dolan 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 OrdinaryPresent Value ofPeriodAnnuity of 1 at 11%Annuity Due of 1 at 11%74.7125.23185.1465.712On 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 ValuePresent Value of OrdinaryPeriodof 1 at 10%Annuity of 1 at 10%6.56454.35537.51324.8684Ott should record sales revenue in January 2012 ofa.$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 periods0.4630.386Present value of an ordinary annuity of 1 for 10 periods6.7106.145The 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 periods0.59Future value of 1 at 14% for 4 periods1.69Present value of an ordinary annuity of 1 at 14% for 4 periods2.91Wynne 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 AnswersCPA 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:

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.

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 Receivable75,000Sales Revenue64,301Discount on Notes Receivable10,699$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.

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 AssessmentCash 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

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

10Techtronics, 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

Answers to Multiple Choice.

CHAPTER 7

CASH AND RECEIVABLES

IFRS questions are available at the end of this chapter.

TRUE-FALSEConceptual

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.

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 AnswersConceptual

MULTIPLE CHOICEConceptual

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" excepta.currency.b.money market funds.c.checking account balance.d.savings account balance.

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.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.

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 based only on an analysis of the receivables aging.d.Bad debt expense is management's determination of which accounts will be sent to the attorney for collection.

45.How can accounting for bad debts be used for earnings management?a.Determining which accounts to write-off.b.Changing the percentage of sales recorded as bad debt expense.c.Using an aging of the accounts receivable balance to determine bad debt expense.d.Reversing previous write-offs.

46.What is the normal journal entry for recording bad debt expense under the allowance method?a.Debit Allowance for Doubtful Accounts, credit Accounts Receivable.b.Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.c.Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.d.Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

47.What is the normal journal entry when writing-off an account as uncollectible under the allowance method?a.Debit Allowance for Doubtful Accounts, credit Accounts Receivable.b.Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.c.Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.d.Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

48.Which of the following is included in the normal journal entry to record the collection of accounts receivable previously written off when using the allowance method?a.Debit Allowance for Doubtful Accounts, credit Accounts Receivable.b.Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.c.Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.d.Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

49.Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does not make the balance sheet misleading becausea.most short-term receivables are not interest-bearing.b.the allowance for uncollectible accounts includes a discount element.c.the amount of the discount is not material.d.most receivables can be sold to a bank or factor.

50.Which of the following methods of determining bad debt expense does not properly match expense and revenue?a.Charging bad debts with a percentage of sales under the allowance method.b.Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method.c.Charging bad debts with an amount derived from aging accounts receivable under the allowance method.d.Charging bad debts as accounts are written off as uncollectible.

51.Which of the following methods of determining annual bad debt expense best achieves the matching concept?a.Percentage of salesb.Percentage of ending accounts receivablec.Percentage of average accounts receivabled.Direct write-off

52.Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense?a.A percentage of sales adjusted for the balance in the allowanceb.A percentage of sales not adjusted for the balance in the allowancec.A percentage of accounts receivable not adjusted for the balance in the allowanced.An amount derived from aging accounts receivable and not adjusted for the balance in the allowance

53.The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that this approacha.gives a reasonably correct statement of receivables in the balance sheet.b.best relates bad debt expense to the period of sale.c.is the only generally accepted method for valuing accounts receivable.d.makes estimates of uncollectible accounts unnecessary.

54.At the beginning of 2011, Gannon Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a $1,000 trade note receivable on its