CHAPTER 6
ACCOUNTING AND THE TIME VALUE OF MONEY
CHAPTER LEARNING OBJECTIVES
1.
2.
3.
4.
5.
6.
7.
8.
9.
Identify accounting topics where the time value of money is relevant.
Distinguish between simple and compound interest.
Use appropriate compound interest tables.
Identify variables fundamental to solving interest problems.
Solve future and present value of 1 problems.
Solve future value of ordinary and annuity due problems.
Solve present value of ordinary and annuity due problems.
Solve present value problems related to deferred annuities and bonds.
Apply expected cash flows to present value measurement.
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CHAPTER 7
CASH ATD RECEEVABLES
EFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
Answer
T
F
F
F
F
T
F
F
T
T
T
F
F
T
F
F
T
F
T
F
To.
Description
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Items considered cash.
Items considered cash.
Items considered cash.
Cash equivalents definition.
Bank overdrafts.
Cash equivalents.
Classification of receivables.
Items considered trade receivables.
Trade discount uses.
Sales discounts.
Valuation of receivables.
Percentage-of-receivables approach.
Percentage-of-sales method.
Reporting notes receivable.
Stated interest rate vs. effective rate.
Classification of notes receivable.
Recourse liability.
Buying receivables with recourse.
Selling receivables with recourse.
Computing receivables turnover.
MULTEPLE CHOECE—Conceptual
Answer
d
b
d
d
b
a
b
d
b
d
d
d
d
d
c
d
To.
Description
21.
22.
23.
P
24.
25.
26.
27.
28.
29.
S
30.
31.
32.
33.
34.
S
35.
S
36.
Identification of cash items.
Identification of cash items.
Classification of travel advance.
Items included as cash.
Identification of cash items.
Classification of post-dated checks.
Classification of postage stamps.
Compensating balance definition.
Classification of cash restricted for plant expansion.
Cash equivalent definition.
Classification of bank overdraft.
Classification of compensating balances.
Definition of trade receivables.
Identification of trade receivables.
Presentation of nontrade receivables.
Cash discount definition.
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Test Bank for Entermediate Accounting, Thirteenth Edition
7-2
MULTEPLE CHOECE—Conceptual (cont.)
Answer
d
a
d
c
a
c
d
a
b
c
a
d
c
d
a
b
a
d
b
c
d
a
c
c
a
a
d
c
a
d
b
c
c
b
c
To.
P
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
S
60.
S
61.
P
62.
63.
64.
65.
66.
*67.
*68.
*69.
*70.
*71.
Description
Trade discount uses.
Classification of sales discounts.
Reasons for trade discounts.
Accounting for cash discounts and trade discounts.
Theoretically correct approach for cash discounts.
Accounts receivable valuation problems.
Reason allowance method is preferable.
Allowance method concept.
Accounting for bad debts and earnings management.
Recording bad debt expense.
Journal entry for writing off an account.
Journal entry for collection of an account previously written off.
Valuation of short-term receivables.
Bad debt provision and the matching concept.
Bad debts as a percentage of sales.
Bad debts as a percentage of sales.
Bad debts as a percentage of receivables.
Financial statement effect of a note recorded incorrectly.
Imputed interest description.
Reason a company sells receivables.
Transfer of receivables as a sale.
Definition of selling receivables with recourse.
Factoring accounts receivable without recourse.
Classification of accounts and notes receivable.
Transfer of receivables with recourse.
Accounts receivable turnover ratio.
Accounts receivable turnover ratio.
Items included in accounts receivable on balance sheet.
Days to collect accounts receivable calculation.
Reason for accounts receivable turnover increase.
Balance per bank reconciling item.
Entry to replenish Petty Cash.
Purpose of Cash Over & Short account.
Classification of bank service charges.
Treatment of bank credits on bank reconciliation.
P
These questions also appear in the Problem-Solving Survival Guide.
These questions also appear in the Study Guide.
* This topic is dealt with in an Appendix to the chapter.
S
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Cash and Receivables
7-3
MULTEPLE CHOECE—Computational
Answer
b
d
b
c
b
c
c
b
c
a
c
d
c
b
b
d
c
b
a
b
b
d
b
b
d
b
a
a
b
c
c
d
a
b
d
c
a
c
c
b
b
c
c
c
c
To.
72
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
115.
116.
Description
Calculate cash balance.
Calculate effective interest on loan with required compensatory balance.
Reporting cash.
Cash and cash equivalents.
Reporting cash.
Cash and cash equivalents.
Determine effective annual interest rate of sales discount.
Calculate sales revenue using net method.
Entry for credit sale using gross method.
Entry for credit sale using net method.
Calculate ending allowance for doubtful accounts balance.
Calculate bad debt expense.
Calculate ending allowance for doubtful accounts balance.
Calculate balance of accounts receivable.
Calculate net realizable value of accounts receivable.
Calculate net realizable value of accounts receivable.
Calculate bad debt expense using aging of receivables.
Calculate bad debt expense using percent of sales.
Calculate bad debt expense using percent of receivables.
Valuation of accounts receivable.
Calculation of bad debt expense.
Calculate Allowance for Doubtful Accounts balance.
Valuation of accounts receivable.
Calculation of bad debt expense.
Calculate Allowance for Doubtful Accounts balance.
Determine appropriate interest rate for a zero-interest-bearing note.
Calculate present value of a zero-interest-bearing note.
Calculation of sales revenue.
Entry for exchange of goods for note receivable.
Calculate amount of interest.
Calculate interest revenue on a zero-interest-bearing note.
Calculate note payable amount.
Calculate gain (loss) on transfer of receivables.
Calculate gain (loss) on transfer of receivables.
Calculation of gain (loss) on transfer of receivables.
Calculate proceeds from transfer of receivables with recourse.
Record assignment of accounts receivables.
Calculate cash proceeds from transfer of receivables.
Entry to record collection of assigned receivables.
Factoring receivables without recourse.
Factoring receivables with recourse.
Calculate loss on sale of receivables.
Calculate loss on sale of receivables.
Calculate accounts receivable turnover.
Calculate accounts receivable turnover.
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Test Bank for Entermediate Accounting, Thirteenth Edition
7-4
MULTEPLE CHOECE—Computational (cont.)
Answer
d
b
b
c
b
c
To.
*117.
*118.
*119.
*120.
*121.
*122.
Description
Entry to replenish petty cash.
Calculate correct balance in bank account.
Calculate correct cash balance.
Calculate correct cash balance.
Calculate correct cash balance.
Calculate correct cash balance.
MULTEPLE CHOECE—CPA Adapted
Answer
a
d
d
b
c
d
c
c
b
a
a
To.
123.
124.
125.
126.
127.
128.
129.
130.
131.
*132.
*133.
Description
Determine current net receivables.
Calculate adjustment for bad debts.
Calculate bad debt expense.
Calculate adjustment to write off bad debts.
Effect of a write-off under the allowance method.
Determine balance in the Allowance for Doubtful Accounts.
Determine interest revenue of a zero-interest-bearing note.
Determine interest receivable at year end.
Assignment and factoring of accounts receivable.
Calculate correct cash balance.
Calculate the cash balance per books.
EXERCESES
Etem
E7-134
E7-135
E7-136
E7-137
Description
Asset classification.
Allowance for doubtful accounts.
Entries for bad debt expense.
Accounts receivable assigned.
PROBLEMS
Etem
P7-138
P7-139
P7-140
*P7-141
*P7-142
Description
Entries for bad debt expense.
Amortization of discount on note.
Accounts receivable assigned.
Factoring accounts receivable.
Bank reconciliation.
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Cash and Receivables
CHAPTER LEARTETG OBJECTEVES'
1.
2.
3.
4.
5.
6.
7.
8.
9.
*10.
Identify items considered as cash.
Indicate how to report cash and related items.
Define receivables and identify the different types of receivables.
Explain accounting issues related to recognition of accounts receivable.
Explain accounting issues related to valuation of accounts receivable.
Explain accounting issues related to recognition of notes receivable.
Explain accounting issues related to valuation of notes receivable.
Explain accounting issues related to disposition of accounts and notes receivable.
Explain how to report and analyze receivables.
Explain common techniques employed to control cash.
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7-5
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7-6
Test Bank for Entermediate Accounting, Thirteenth Edition
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Item
Type
Item
Type
Item
1.
2.
TF
TF
3.
21.
TF
MC
4.
5.
TF
TF
6.
28.
TF
MC
7.
TF
8.
TF
33.
9.
10.
TF
TF
36.
37.
MC
MC
38.
39.
11.
12.
13.
42.
43.
44.
TF
TF
TF
MC
MC
MC
45.
46.
47.
48.
49.
50.
MC
MC
MC
MC
MC
MC
51.
52.
53.
82.
83.
84.
14.
15.
16.
TF
TF
TF
54.
55.
97.
MC
MC
MC
98.
99.
100.
17.
18.
19.
56.
TF
TF
TF
MC
57.
58.
59.
S
60.
MC
MC
MC
MC
S
61.
104.
105.
106.
20.
62.
TF
MC
63.
64.
MC
MC
65.
66.
67.
68.
MC
MC
69.
70.
MC
MC
71.
117.
P
Note:
S
P
22.
23.
29.
30.
S
TF = True-False
MC = Multiple Choice
Type
Item
Type
Item
Learning Objective 1
P
MC
24. MC
26.
MC
25. MC
27.
Learning Objective 2
MC
31. MC
73.
MC
32. MC
74.
Learning Objective 3
S
MC
34. MC
35.
Learning Objective 4
MC
40. MC
78.
MC
41. MC
79.
Learning Objective 5
MC
85. MC
91.
MC
86. MC
92.
MC
87. MC
93.
MC
88. MC
94.
MC
89. MC
95.
MC
90. MC
96.
Learning Objective 6
MC
101. MC
129.
MC
102. MC
130.
MC
103. MC
139.
Learning Objective 8
MC
107. MC
111.
MC
108. MC
112.
MC
109. MC
113.
MC
110. MC
114.
Learning Objective 9
MC
115. MC
MC
116. MC
Learning Objective *10
MC
118. MC
120.
MC
119. MC
121.
Type
Item
Type
Item
Type
MC
MC
72.
MC
MC
MC
75.
76.
MC
MC
77.
134.
MC
E
MC
MC
80.
81.
MC
MC
123.
MC
MC
MC
MC
MC
MC
MC
124.
125.
126.
127.
128.
135.
MC
MC
MC
MC
MC
E
136.
138.
E
P
MC
MC
MC
MC
131.
137.
140.
141.
MC
E
P
P
MC
MC
122.
132.
MC
MC
133.
142.
MC
P
MC
MC
MC
P
E = Exercise
P = Problem
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Cash and Receivables
7-7
TRUE-FALSE—Conceptual
1. Savings accounts are usually classified as cash on the balance sheet.
2. Certificates of deposit are usually classified as cash on the balance sheet.
3. Companies include postdated checks and petty cash funds as cash.
4. Cash equivalents are investments with original maturities of six months or less.
5. Bank overdrafts are always offset against the cash account in the balance sheet.
6. Short-term, highly liquid investments may be included with cash on the balance sheet.
7. All claims held against customers and others for money, goods, or services are reported as
current assets.
8. Trade receivables include notes receivable and advances to officers and employees.
9. Trade discounts are used to avoid frequent changes in catalogs and to alter prices for
different quantities purchased.
10. In the gross method, sales discounts are reported as a deduction from sales.
11. The net amount reported for short-term receivables is not affected when a specific account
receivable is determined to be uncollectible.
12. The percentage-of-receivables approach of estimating uncollectible accounts emphasizes
matching over valuation of accounts receivable.
13. The percentage-of-sales method results in a more accurate valuation of receivables on the
balance sheet.
14. Companies record and report long-term notes receivable at the present value of the cash
they expect to collect.
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.
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Test Bank for Entermediate Accounting, Thirteenth Edition
7-8
20. The receivables turnover ratio is computed by dividing net sales by the ending net
receivables.
True False Answers—Conceptual
Etem
1.
2.
3.
4.
5.
Ans.
T
F
F
F
F
Etem
6.
7.
8.
9.
10.
Ans.
T
F
F
T
T
Etem
11.
12.
13.
14.
15.
Ans.
T
F
F
T
F
Etem
16.
17.
18.
19.
20.
Ans.
F
T
F
T
F
MULTEPLE CHOECE—Conceptual
P
21.
Which of the following is not considered cash for financial reporting purposes?
a. Petty cash funds and change funds
b. Money orders, certified checks, and personal checks
c. Coin, currency, and available funds
d. Postdated checks and I.O.U.'s
22.
Which of the following is considered cash?
a. Certificates of deposit (CDs)
b. Money market checking accounts
c. Money market savings certificates
d. Postdated checks
23.
Travel advances should be reported as
a. supplies.
b. cash because they represent the equivalent of money.
c. investments.
d. none of these.
24.
Which of the following items should not be included in the Cash caption on the balance
sheet?
a. Coins and currency in the cash register
b. Checks from other parties presently in the cash register
c. Amounts on deposit in checking account at the bank
d. Postage stamps on hand
25.
All of the following may be included under the heading of "cash" except
a. currency.
b. money market funds.
c. checking account balance.
d. savings account balance.
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Cash and Receivables
S
7-9
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.
30.
A cash equivalent is a short-term, highly liquid investment that is readily convertible into
known amounts of cash and
a. is acceptable as a means to pay current liabilities.
b. has a current market value that is greater than its original cost
c. 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 be
a. 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 balances
a. 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" includes
a. advances to officers and employees.
b. income tax refunds receivable.
c. claims against insurance companies for casualties sustained.
d. none of these.
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7 - 10
Test Bank for Entermediate Accounting, Thirteenth Edition
34.
Which of the following should be recorded in Accounts Receivable?
a. Receivables from officers
b. Receivables from subsidiaries
c. Dividends receivable
d. None of these
S
35.
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.
S
36.
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.
P
37.
Trade discounts are
a. 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 as
a. 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 are
a. the same.
b. always recorded net.
c. not the same.
d. tied to the timing of cash collections on the account.
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Cash and Receivables
7 - 11
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 for
a. 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.
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7 - 12
Test Bank for Entermediate Accounting, Thirteenth Edition
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 because
a. 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 sales
b. Percentage of ending accounts receivable
c. Percentage of average accounts receivable
d. 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 allowance
b. A percentage of sales not adjusted for the balance in the allowance
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. 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 approach
a. 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.
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Cash and Receivables
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54.
At the beginning of 2009, 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 2009 year-end statement of
financial position and $1,000 as sales revenue for 2009. What effect did this accounting
for the note have on Gannon's net earnings for 2009, 2010, 2011, and its retained
earnings at the end of 2011, respectively?
a. Overstate, overstate, understate, zero
b. Overstate, understate, understate, understate
c. Overstate, overstate, overstate, overstate
d. None of these
55.
What is imputed interest?
a. Interest based on the stated interest rate.
b. Interest based on the implicit interest rate.
c. Interest based on the average interest rate.
d. Interest based on the coupon rate.
56.
Why would a company sell receivables to another company?
a. To improve the quality of its credit granting process.
b. To limit its legal liability.
c. To accelerate access to amounts collected.
d. To comply with customer agreements.
57.
When should a transfer of receivables be recorded as a sale?
a. The transferred assets are isolated from the transferor.
b. The transferor does not maintain effective control over the transferred assets through
an agreement to repurchase or redeem them prior to their maturity.
c. The transferee has the right to pledge or exchange the transferred assets.
d. All of the above.
58.
What is "recourse" as it relates to selling receivables?
a. The obligation of the seller of the receivables to pay the purchaser in case
fails to pay.
b. The obligation of the purchaser of the receivables to pay the seller in case
fails to pay
c. The obligation of the seller of the receivables to pay the purchaser in case
returns the product related to the sale.
d. The obligation of the purchaser of the receivables to pay the seller if
receivables are collected.
59.
the debtor
the debtor
the debtor
all of the
Which of the following is true when accounts receivable are factored without recourse?
a. The transaction may be accounted for either as a secured borrowing or as a sale,
depending upon the substance of the transaction.
b. The receivables are used as collateral for a promissory note issued to the factor by the
owner of the receivables.
c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting
the receivables.
d. The financing cost (interest expense) should be recognized ratably over the collection
period of the receivables.
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Test Bank for Entermediate Accounting, Thirteenth Edition
S
60.
Which of the following statements is incorrect regarding the classification of accounts and
notes receivable?
a. Segregation of the different types of receivables is required if they are material.
b. Disclose any loss contingencies that exist on the receivables.
c. Any discount or premium resulting from the determination of present value in notes
receivable transactions is an asset or liability respectively.
d. Valuation accounts should be appropriately offset against the proper receivable
accounts.
S
61.
Of the following conditions, which is the only one that is not required if the transfer of
receivables with recourse is to be accounted for as a sale?
a. The transferor is obligated to make a genuine effort to identify those receivables that
are uncollectible.
b. The transferor surrenders control of the future economic benefits of the receivables.
c. The transferee cannot require the transferor to repurchase the receivables.
d. The transferor's obligation under the recourse provisions can be reasonably
estimated.
P
62.
The accounts receivable turnover ratio measures the
a. number of times the average balance of accounts receivable is collected during the
period.
b. percentage of accounts receivable turned over to a collection agency during the
period.
c. percentage of accounts receivable arising during certain seasons.
d. number of times the average balance of inventory is sold during the period.
63.
The accounts receivable turnover ratio is computed by dividing
a. gross sales by ending net receivables.
b. gross sales by average net receivables.
c. net sales by ending net receivables.
d. net sales by average net receivables.
64.
Which of the following items should be included in accounts receivable reported on the
balance sheet?
a. Notes receivable.
b. Interest receivable.
c. Allowance for doubtful accounts.
d. Advances to related parties and officers.
65.
How is days to collect accounts receivable determined?
a. 365 days divided by accounts receivable turnover.
b. Net sales divided by 365.
c. Net sales divided by average net trade receivables.
d. Accounts receivable turnover divided by 365 days.
66.
What is a possible reason for accounts receivable turnover to increase from one year to
the next year
a. Decreased credit sales during a recession.
b. Write-off uncollectible receivables.
c. Granting credit to customers with lower credit quality.
d. Improved collection process.
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*67.
Which of the following is an appropriate reconciling item to the balance per bank in a
bank reconciliation?
a. Bank service charge.
b. Deposit in transit.
c. Bank interest.
d. Chargeback for NSF check.
*68.
Which of the following is not true?
a. The imprest petty cash system in effect adheres to the rule of disbursement by check.
b. Entries are made to the Petty Cash account only to increase or decrease the size of
the fund or to adjust the balance if not replenished at year-end.
c. The Petty Cash account is debited when the fund is replenished.
d. All of these are not true.
*69.
A Cash Over and Short account
a. is not generally accepted.
b. is debited when the petty cash fund proves out over.
c. is debited when the petty cash fund proves out short.
d. is a contra account to Cash.
*70.
The journal entries for a bank reconciliation
a. are taken from the "balance per bank" section only.
b. may include a debit to Office Expense for bank service charges.
c. may include a credit to Accounts Receivable for an NSF check.
d. may include a debit to Accounts Payable for an NSF check.
*71.
When preparing a bank reconciliation, bank credits are
a. added to the bank statement balance.
b. deducted from the bank statement balance.
c. added to the balance per books.
d. deducted from the balance per books.
Multiple Choice Answers—Conceptual
Etem
21.
22.
23.
P
24.
25.
26.
27.
28.
Ans.
d
b
d
d
b
a
b
d
Etem
29.
30.
31.
32.
33.
34.
S
35.
S
36.
S
Ans.
b
d
d
d
d
d
c
d
Etem
P
37.
38.
39.
40.
41.
42.
43.
44.
Ans.
d
a
d
c
a
c
d
a
Etem
45.
46.
47.
48.
49.
50.
51.
52.
Ans.
b
c
a
d
c
d
a
b
Etem
53.
54.
55.
56.
57.
58.
59.
S
60.
Ans.
a
d
b
c
d
a
c
c
Etem
S
61.
62.
63.
64.
65.
66.
*67.
*68.
P
Ans.
Etem
Ans.
a
a
d
c
a
d
b
c
*69.
*70.
*71.
c
b
c
Solutions to those Multiple Choice questions for which the answer is “none of these.”
23. As receivables.
32. Many answers are possible.
33. Open accounts resulting from short-term extensions of credit to customers.
34. Open accounts resulting from short-term extensions of credit to customers.
54. Overstate, understate, understate, zero.
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7 - 16
Test Bank for Entermediate Accounting, Thirteenth Edition
MULTEPLE CHOECE—Computational
72.
Consider the following: Cash in Bank – checking account of $13,500, Cash on hand of
$500, Post-dated checks received totaling $3,500, and Certificates of deposit totaling
$124,000. How much should be reported as cash in the balance sheet?
a. $ 13,500.
b. $ 14,000.
c. $ 17,500.
d. $131,500.
73.
On January 1, 2010, Lynn Company borrows $2,000,000 from National Bank at 11%
annual interest. In addition, Lynn is required to keep a compensatory balance of $200,000
on deposit at National Bank which will earn interest at 5%. The effective interest that Lynn
pays on its $2,000,000 loan is
a. 10.0%.
b. 11.0%.
c. 11.5%.
d. 11.6%.
74.
Kennison Company has cash in bank of $10,000, restricted cash in a separate account of
$3,000, and a bank overdraft in an account at another bank of $1,000. Kennison should
report cash of
a. $9,000.
b. $10,000.
c. $12,000.
d. $13,000.
75.
Kaniper Company has the following items at year-end:
Cash in bank
Petty cash
Short-term paper with maturity of 2 months
Postdated checks
$20,000
300
5,500
1,400
Kaniper should report cash and cash equivalents of
a. $20,000.
b. $20,300.
c. $25,800.
d. $27,200.
76.
Lawrence Company has cash in bank of $15,000, restricted cash in a separate account of
$4,000, and a bank overdraft in an account at another bank of $2,000. Lawrence should
report cash of
a. $13,000.
b. $15,000.
c. $18,000.
d. $19,000.
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Cash and Receivables
77.
7 - 17
Steinert Company has the following items at year-end:
Cash in bank
Petty cash
Short-term paper with maturity of 2 months
Postdated checks
$30,000
500
8,200
2,100
Steinert should report cash and cash equivalents of
a. $30,000.
b. $30,500.
c. $38,700.
d. $40,800.
78.
If a company purchases merchandise on terms of 1/10, n/30, the cash discount available
is equivalent to what effective annual rate of interest (assuming a 360-day year)?
a. 1%
b. 12%
c. 18%
d. 30%
79.
AG Inc. made a $10,000 sale on account with the following terms: 1/15, n/30. If the
company uses the net method to record sales made on credit, how much should be
recorded as revenue?
a. $ 9,800.
b. $ 9,900.
c. $10,000.
d. $10,100.
80.
AG Inc. made a $10,000 sale on account with the following terms: 1/15, n/30. If the
company uses the gross method to record sales made on credit, what is/are the debit(s) in
the journal entry to record the sale?
a. Debit Accounts Receivable for $9,900.
b. Debit Accounts Receivable for $9,900 and Sales Discounts for $100.
c. Debit Accounts Receivable for $10,000.
d. Debit Accounts Receivable for $10,000 and Sales Discounts for $100.
81.
AG Inc. made a $10,000 sale on account with the following terms: 2/10, n/30. If the
company uses the net method to record sales made on credit, what is/are the debit(s) in
the journal entry to record the sale?
a. Debit Accounts Receivable for $9,800.
b. Debit Accounts Receivable for $9,800 and Sales Discounts for $200.
c. Debit Accounts Receivable for $10,000.
d. Debit Accounts Receivable for $10,000 and Sales Discounts for $200.
82.
Wellington Corp. has outstanding accounts receivable totaling $2.54 million as of
December 31 and sales on credit during the year of $12.8 million. There is also a debit
balance of $6,000 in the allowance for doubtful accounts. If the company estimates that
1% of its net credit sales will be uncollectible, what will be the balance in the allowance for
doubtful accounts after the year-end adjustment to record bad debt expense?
a. $ 25,400.
b. $ 31,400.
c. $122,000.
d. $134,000.
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7 - 18
Test Bank for Entermediate Accounting, Thirteenth Edition
83.
Wellington Corp. has outstanding accounts receivable totaling $6.5 million as of
December 31 and sales on credit during the year of $24 million. There is also a credit
balance of $12,000 in the allowance for doubtful accounts. If the company estimates that
8% of its outstanding receivables will be uncollectible, what will be the amount of bad debt
expense recognized for the year?
a. $ 532,000.
b. $ 520,000.
c. $1,920,000.
d. $ 508,000.
84.
Wellington Corp. has outstanding accounts receivable totaling $3 million as of
December 31 and sales on credit during the year of $15 million. There is also a debit
balance of $12,000 in the allowance for doubtful accounts. If the company estimates that
8% of its outstanding receivables will be uncollectible, what will be the balance in the
allowance for doubtful accounts after the year-end adjustment to record bad debt
expense?
a. $1,200,000.
b. $ 228,000.
c. $ 240,000.
d. $ 252,000.
85.
At the close of its first year of operations, December 31, 2010, Ming Company had
accounts receivable of $540,000, after deducting the related allowance for doubtful
accounts. During 2010, the company had charges to bad debt expense of $90,000 and
wrote off, as uncollectible, accounts receivable of $40,000. What should the company
report on its balance sheet at December 31, 2010, as accounts receivable before the
allowance for doubtful accounts?
a. $670,000
b. $590,000
c. $490,000
d. $440,000
86.
Before year-end adjusting entries, Dunn Company's account balances at December 31,
2010, for accounts receivable and the related allowance for uncollectible accounts were
$600,000 and $45,000, respectively. An aging of accounts receivable indicated that
$62,500 of the December 31 receivables are expected to be uncollectible. The net
realizable value of accounts receivable after adjustment is
a. $582,500.
b. $537,500.
c. $492,500.
d. $555,000.
87.
During the year, Kiner Company made an entry to write off a $4,000 uncollectible account.
Before this entry was made, the balance in accounts receivable was $50,000 and the
balance in the allowance account was $4,500. The net realizable value of accounts
receivable after the write-off entry was
a. $50,000.
b. $49,500.
c. $41,500.
d. $45,500.
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88.
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The following information is available for Murphy Company:
Allowance for doubtful accounts at December 31, 2009
Credit sales during 2010
Accounts receivable deemed worthless and written off during 2010
$
8,000
400,000
9,000
As a result of a review and aging of accounts receivable in early January 2011, however, it
has been determined that an allowance for doubtful accounts of $5,500 is needed at
December 31, 2010. What amount should Murphy record as "bad debt expense" for the
year ended December 31, 2010?
a. $4,500
b. $5,500
c. $6,500
d. $13,500
Use the following information for questions 89 and 90.
A trial balance before adjustments included the following:
Debit
Sales
Sales returns and allowance
Accounts receivable
Allowance for doubtful accounts
Credit
$425,000
$14,000
43,000
760
89.
If the estimate of uncollectibles is made by taking 2% of net sales, the amount of the
adjustment is
a. $6,700.
b. $8,220.
c. $8,500.
d. $9,740.
90.
If the estimate of uncollectibles is made by taking 10% of gross account receivables, the
amount of the adjustment is
a. $3,540.
b. $4,300.
c. $4,224.
d. $5,060.
91.
Lankton Company has the following account balances at year-end:
Accounts receivable
Allowance for doubtful accounts
Sales discounts
$60,000
3,600
2,400
Lankton should report accounts receivable at a net amount of
a. $54,000.
b. $56,400.
c. $57,600.
d. $60,000.
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Test Bank for Entermediate Accounting, Thirteenth Edition
92.
Smithson Corporation had a 1/1/10 balance in the Allowance for Doubtful Accounts of
$10,000. During 2010, it wrote off $7,200 of accounts and collected $2,100 on accounts
previously written off. The balance in Accounts Receivable was $200,000 at 1/1 and
$240,000 at 12/31. At 12/31/10, Smithson estimates that 5% of accounts receivable will
prove to be uncollectible. What is Bad Debt Expense for 2010?
a. $2,000.
b. $7,100.
c. $9,200.
d. $12,000.
93.
Black Corporation had a 1/1/10 balance in the Allowance for Doubtful Accounts of
$12,000. During 2010, it wrote off $8,640 of accounts and collected $2,520 on accounts
previously written off. The balance in Accounts Receivable was $240,000 at 1/1 and
$288,000 at 12/31. At 12/31/10, Black estimates that 5% of accounts receivable will prove
to be uncollectible. What should Black report as its Allowance for Doubtful Accounts at
12/31/10?
a. $5,760.
b. $5,880.
c. $8,280.
d. $14,400.
94.
Shelton Company has the following account balances at year-end:
Accounts receivable
Allowance for doubtful accounts
Sales discounts
$80,000
4,800
3,200
Shelton should report accounts receivable at a net amount of
a. $72,000.
b. $75,200.
c. $76,800.
d. $80,000.
95.
Vasguez Corporation had a 1/1/10 balance in the Allowance for Doubtful Accounts of
$20,000. During 2010, it wrote off $14,400 of accounts and collected $4,200 on accounts
previously written off. The balance in Accounts Receivable was $400,000 at 1/1 and
$480,000 at 12/31. At 12/31/10, Vasguez estimates that 5% of accounts receivable will
prove to be uncollectible. What is Bad Debt Expense for 2010?
a. $4,000.
b. $14,200.
c. $18,400.
d. $24,000.
96.
McGlone Corporation had a 1/1/10 balance in the Allowance for Doubtful Accounts of
$15,000. During 2010, it wrote off $10,800 of accounts and collected $3,150 on accounts
previously written off. The balance in Accounts Receivable was $300,000 at 1/1 and
$360,000 at 12/31. At 12/31/10, McGlone estimates that 5% of accounts receivable will
prove to be uncollectible. What should McGlone report as its Allowance for Doubtful
Accounts at 12/31/10?
a. $7,200.
b. $7,350.
c. $10,350.
d. $18,000.
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97.
Lester Company received a seven-year zero-interest-bearing note on February 22, 2010,
in exchange for property it sold to Porter Company. There was no established exchange
price for this property and the note has no ready market. The prevailing rate of interest for
a note of this type was 7% on February 22, 2010, 7.5% on December 31, 2010, 7.7% on
February 22, 2011, and 8% on December 31, 2011. What interest rate should be used to
calculate the interest revenue from this transaction for the years ended December 31,
2010 and 2011, respectively?
a. 0% and 0%
b. 7% and 7%
c. 7% and 7.7%
d. 7.5% and 8%
98.
On December 31, 2010, Flint Corporation sold for $75,000 an old machine having an
original cost of $135,000 and a book value of $60,000. The terms of the sale were as
follows:
$15,000 down payment
$30,000 payable on December 31 each of the next two years
The agreement of sale made no mention of interest; however, 9% would be a fair rate for
this type of transaction. What should be the amount of the notes receivable net of the
unamortized discount on December 31, 2010 rounded to the nearest dollar? (The present
value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.)
a. $52,773.
b. $67,773.
c. $60,000.
d. $105,546.
99.
Assume Royal Palm Corp., an equipment distributor, sells a piece of machinery with a list
price of $800,000 to Arch Inc. Arch Inc. will pay $850,000 in one year. Royal Palm Corp.
normally sells this type of equipment for 90% of list price. How much should be recorded
as revenue?
a. $720,000.
b. $765,000.
c. $800,000.
d. $850,000.
100.
Equestrain Roads sold $50,000 of goods and accepted the customer's $50,000 10%
1-year note receivable in exchange. Assuming 10% approximates the market rate of
return, what would be the debit in this journal entry to record the sale?
a. No journal entry until cash is collected.
b. Debit Notes Receivable for $50,000.
c. Debit Accounts Receivable for $50,000.
d. Debit Notes Receivable for $45,000.
101.
Equestrain Roads sold $50,000 of goods and accepted the customer's $50,000 10%
1-year note payable in exchange. Assuming 10% approximates the market rate of return,
how much interest would be recorded for the year ending December 31 if the sale was
made on June 30?
a. $0.
b. $1,250.
c. $2,500.
d. $5,000.
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Test Bank for Entermediate Accounting, Thirteenth Edition
102.
Equestrain Roads accepted a customer's $50,000 zero-interest-bearing six-month note
payable in a sales transaction. The product sold normally sells for $46,000. If the sale was
made on June 30, how much interest revenue from this transaction would be recorded for
the year ending December 31?
a. $0.
b. $2,000.
c. $4,000.
d. $5,000.
103.
Assuming the market interest rate is 10% per annum, how much would Green Co. record
as a note payable if the terms of the loan with a bank are that it would have to make one
$60,000 payment in two years?
a. $60,000.
b. $54,422.
c. $54,545.
d. $49,587.
104.
Sun Inc. factors $2,000,000 of its accounts receivables without recourse for a finance
charge of 5%. The finance company retains an amount equal to 10% of the accounts
receivable for possible adjustments. Sun estimates the fair value of the recourse liability at
$75,000. What would be recorded as a gain (loss) on the transfer of receivables?
a. Loss of $100,000.
b. Gain of $175,000.
c. Loss of $375,000.
d. Loss of $75,000.
105.
Sun Inc. factors $2,000,000 of its accounts receivables with recourse for a finance charge
of 3%. The finance company retains an amount equal to 10% of the accounts receivable
for possible adjustments. Sun estimates the fair value of the recourse liability at $100,000.
What would be recorded as a gain (loss) on the transfer of receivables?
a. Gain of $60,000.
b. Loss of 160,000.
c. Gain of $360,000.
d. Loss of $100,000.
106.
Sun Inc assigns $2,000,000 of its accounts receivables as collateral for a $1 million 8%
loan with a bank. Sun Inc. also pays a finance fee of 1% on the transaction upfront. What
would be recorded as a gain (loss) on the transfer of receivables?
a. Loss of $20,000.
b. Loss of $160,000.
c. Loss of $180,000.
d. $0.
107.
Moon Inc. factors $1,000,000 of its accounts receivables with recourse for a finance
charge of 4%. The finance company retains an amount equal to 8% of the accounts
receivable for possible adjustments. Moon estimates the fair value of the recourse liability
at $100,000. What would be the debit to Cash in the journal entry to record this
transaction?
a. $1,000,000.
b. $960,000.
c. $880,000.
d. $780,000.
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Cash and Receivables
108.
7 - 23
Moon Inc assigns $1,500,000 of its accounts receivables as collateral for a $1 million loan
with a bank. The bank assesses a 3% finance fee and charges interest on the note at 6%.
What would be the journal entry to record this transaction?
a. Debit Cash for $970,000, debit Finance Charge for $30,000, and credit Notes payable
for $1,000,000.
b. Debit Cash for $970,000, debit Finance Charge for $30,000, and credit Accounts
Receivable for $1,000,000.
c. Debit Cash for $970,000, debit Finance Charge for $30,000, debit Due from Bank for
$500,000, and credit Accounts Receivable for $1,500,000.
d. Debit Cash for $910,000, debit Finance Charge for $90,000, and credit Notes Payable
for $1,000,000.
Use the following information for questions 109 and 110.
Geary Co. assigned $400,000 of accounts receivable to Kwik Finance Co. as security for a loan
of $335,000. Kwik charged a 2% commission on the amount of the loan; the interest rate on the
note was 10%. During the first month, Geary collected $110,000 on assigned accounts after
deducting $380 of discounts. Geary accepted returns worth $1,350 and wrote off assigned
accounts totaling $2,980.
109.
The amount of cash Geary received from Kwik at the time of the transfer was
a. $301,500.
b. $327,000.
c. $328,300.
d. $335,000.
110.
Entries during the first month would include a
a. debit to Cash of $110,380.
b. debit to Bad Debt Expense of $2,980.
c. debit to Allowance for Doubtful Accounts of $2,980.
d. debit to Accounts Receivable of $114,710.
Use the following information for questions 111 and 112.
On February 1, 2010, Henson Company factored receivables with a carrying amount of $300,000
to Agee Company. Agee Company assesses a finance charge of 3% of the receivables and
retains 5% of the receivables. Relative to this transaction, you are to determine the amount of
loss on sale to be reported in the income statement of Henson Company for February.
111.
Assume that Henson factors the receivables on a without recourse basis. The loss to be
reported is
a. $0.
b. $9,000.
c. $15,000.
d. $24,000.
112.
Assume that Henson factors the receivables on a with recourse basis. The recourse
obligation has a fair value of $1,500. The loss to be reported is
a. $9,000.
b. $10,500.
c. $15,000.
d. $25,500.
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7 - 24
Test Bank for Entermediate Accounting, Thirteenth Edition
113.
Maxwell Corporation factored, with recourse, $100,000 of accounts receivable with Huskie
Financing. The finance charge is 3%, and 5% was retained to cover sales discounts, sales
returns, and sales allowances. Maxwell estimates the recourse obligation at $2,400. What
amount should Maxwell report as a loss on sale of receivables?
a. $ -0-.
b. $3,000.
c. $5,400.
d. $10,400.
114.
Wilkinson Corporation factored, with recourse, $300,000 of accounts receivable with
Huskie Financing. The finance charge is 3%, and 5% was retained to cover sales
discounts, sales returns, and sales allowances. Wilkinson estimates the recourse
obligation at $7,200. What amount should Wilkinson report as a loss on sale of
receivables?
a. $ -0-.
b. $9,000.
c. $16,200.
d. $31,200.
115.
Remington Corporation had accounts receivable of $100,000 at 1/1. The only transactions
affecting accounts receivable were sales of $600,000 and cash collections of $550,000.
The accounts receivable turnover is
a. 4.0.
b. 4.4.
c. 4.8.
d. 6.0.
116.
Laventhol Corporation had accounts receivable of $100,000 at 1/1. The only transactions
affecting accounts receivable were sales of $900,000 and cash collections of $850,000.
The accounts receivable turnover is
a. 6.0.
b. 6.6.
c. 7.2.
d. 9.0.
*117.
If a petty cash fund is established in the amount of $250, and contains $150 in cash and
$95 in receipts for disbursements when it is replenished, the journal entry to record
replenishment should include credits to the following accounts
a. Petty Cash, $75.
b. Petty Cash, $100.
c. Cash, $95; Cash Over and Short, $5.
d. Cash, $100.
*118.
If the month-end bank statement shows a balance of $36,000, outstanding checks are
$12,000, a deposit of $4,000 was in transit at month end, and a check for $500 was
erroneously charged by the bank against the account, the correct balance in the bank
account at month end is
a. $27,500.
b. $28,500.
c. $20,500.
d. $43,500.
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Cash and Receivables
*119.
7 - 25
In preparing its bank reconciliation for the month of April 2010, Henke, Inc. has available
the following information.
Balance per bank statement, 4/30/10
NSF check returned with 4/30/10 bank statement
Deposits in transit, 4/30/10
Outstanding checks, 4/30/10
Bank service charges for April
$39,140
450
5,000
5,200
20
What should be the correct balance of cash at April 30, 2010?
a. $39,370
b. $38,940
c. $38,490
d. $38,470
*120. Finley, Inc.’s checkbook balance on December 31, 2010 was $21,200. In addition, Finley
held the following items in its safe on December 31.
(1) A check for $450 from Peters, Inc. received December 30, 2010, which was not
included in the checkbook balance.
(2) An NSF check from Garner Company in the amount of $900 that had been
deposited at the bank, but was returned for lack of sufficient funds on December
29. The check was to be redeposited on January 3, 2011. The original deposit has
been included in the December 31 checkbook balance.
(3) Coin and currency on hand amounted to $1,450.
The proper amount to be reported on Finley's balance sheet for cash at December 31,
2010 is
a. $21,300.
b. $20,400.
c. $22,200.
d. $21,750.
*121. The cash account shows a balance of $45,000 before reconciliation. The bank statement
does not include a deposit of $2,300 made on the last day of the month. The bank
statement shows a collection by the bank of $940 and a customer's check for $320 was
returned because it was NSF. A customer's check for $450 was recorded on the books as
$540, and a check written for $79 was recorded as $97. The correct balance in the cash
account was
a. $45,512.
b. $45,548.
c. $45,728.
d. $47,848.
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Test Bank for Entermediate Accounting, Thirteenth Edition
*122. In preparing its May 31, 2010 bank reconciliation, Catt Co. has the following information
available:
Balance per bank statement, 5/31/10
$30,000
Deposit in transit, 5/31/10
5,400
Outstanding checks, 5/31/10
4,900
Note collected by bank in May
1,250
The correct balance of cash at May 31, 2010 is
a. $35,400.
b. $29,250.
c. $30,500.
d. $31,750.
Multiple Choice Answers—Computational
Etem
72.
73.
74.
75.
76.
77.
78.
79.
Ans.
b
d
b
c
b
c
c
b
Etem
80.
81.
82.
83.
84.
85.
86.
87.
Ans.
c
a
c
d
c
b
b
d
Etem
88.
89.
90.
91.
92.
93.
94.
95.
Ans.
Etem
Ans.
Etem
Ans.
Etem
Ans.
Etem
Ans.
c
b
a
b
b
d
b
b
96.
97.
98.
99.
100.
101.
102.
103.
d
b
a
a
b
c
c
d
104.
105.
106.
107.
108.
109.
110.
111.
a
b
d
c
a
c
c
b
112.
113.
114.
115.
116.
*117.
*118.
*119.
b
c
c
c
c
d
b
b
*120.
*121.
*122.
c
b
c
MULTEPLE CHOECE—CPA Adapted
123.
On the December 31, 2010 balance sheet of Vanoy Co., the current receivables consisted
of the following:
Trade accounts receivable
Allowance for uncollectible accounts
Claim against shipper for goods lost in transit (November 2010)
Selling price of unsold goods sent by Vanoy on consignment
at 130% of cost (not included in Vanoy 's ending inventory)
Security deposit on lease of warehouse used for storing
some inventories
Total
$ 75,000
(2,000)
3,000
26,000
30,000
$132,000
At December 31, 2010, the correct total of Vanoy's current net receivables was
a. $76,000.
b. $102,000.
c. $106,000.
d. $132,000.
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124.
7 - 27
Ace Co. prepared an aging of its accounts receivable at December 31, 2010 and
determined that the net realizable value of the receivables was $300,000. Additional
information is available as follows:
Allowance for uncollectible accounts at 1/1/10—credit balance
Accounts written off as uncollectible during 2010
Accounts receivable at 12/31/10
Uncollectible accounts recovered during 2010
$ 34,000
23,000
325,000
5,000
For the year ended December 31, 2010, Ace's uncollectible accounts expense would be
a. $25,000.
b. $23,000.
c. $16,000.
d. $9,000.
125.
For the year ended December 31, 2010, Dent Co. estimated its allowance for uncollectible
accounts using the year-end aging of accounts receivable. The following data are available:
Allowance for uncollectible accounts, 1/1/10
$56,000
Provision for uncollectible accounts during 2010
(2% on credit sales of $2,000,000)
40,000
Uncollectible accounts written off, 11/30/10
46,000
Estimated uncollectible accounts per aging, 12/31/10
69,000
After year-end adjustment, the uncollectible accounts expense for 2010 should be
a. $46,000.
b. $62,000.
c. $69,000.
d. $59,000.
126.
Nenn Co.'s allowance for uncollectible accounts was $95,000 at the end of 2010 and
$90,000 at the end of 2009. For the year ended December 31, 2010, Nenn reported bad
debt expense of $13,000 in its income statement. What amount did Nenn debit to the
appropriate account in 2010 to write off actual bad debts?
a. $5,000
b. $8,000
c. $13,000
d. $18,000
127.
Under the allowance method of recognizing uncollectible accounts, the entry to write off
an uncollectible account
a. increases the allowance for uncollectible accounts.
b. has no effect on the allowance for uncollectible accounts.
c. has no effect on net income.
d. decreases net income.
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128.
Test Bank for Entermediate Accounting, Thirteenth Edition
The following accounts were abstracted from Starr Co.'s unadjusted trial balance at
December 31, 2010:
Debit
Credit
Accounts receivable
$750,000
Allowance for uncollectible accounts
8,000
Net credit sales
$3,000,000
Starr estimates that 2% of the gross accounts receivable will become uncollectible. After
adjustment at December 31, 2010, the allowance for uncollectible accounts should have a
credit balance of
a. $60,000.
b. $52,000.
c. $23,000.
d. $15,000.
129.
On January 1, 2010, West Co. exchanged equipment for a $400,000 zero-interest-bearing
note due on January 1, 2013. The prevailing rate of interest for a note of this type at
January 1, 2010 was 10%. The present value of $1 at 10% for three periods is 0.75. What
amount of interest revenue should be included in West's 2011 income statement?
a. $0
b. $30,000
c. $33,000
d. $40,000
130.
On June 1, 2010, Yang Corp. loaned Gant $300,000 on a 12% note, payable in five
annual installments of $60,000 beginning January 2, 2011. In connection with this loan,
Gant was required to deposit $3,000 in a zero-interest-bearing escrow account. The
amount held in escrow is to be returned to Gant after all principal and interest payments
have been made. Interest on the note is payable on the first day of each month beginning
July 1, 2010. Gant made timely payments through November 1, 2010. On January 2, 2011,
Yang received payment of the first principal installment plus all interest due. At
December 31, 2010, Yang's interest receivable on the loan to Gant should be
a. $0.
b. $3,000.
c. $6,000.
d. $9,000.
131.
Which of the following is a method to generate cash from accounts receivable?
a.
b.
c.
d.
Assignment
Yes
Yes
No
No
Factoring
No
Yes
Yes
No
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*132. In preparing its August 31, 2010 bank reconciliation, Bing Corp. has available the
following information:
Balance per bank statement, 8/31/10
Deposit in transit, 8/31/10
Return of customer's check for insufficient funds, 8/30/10
Outstanding checks, 8/31/10
Bank service charges for August
$21,650
3,900
600
2,750
100
At August 31, 2010, Bing's correct cash balance is
a. $22,800.
b. $22,200.
c. $22,100.
d. $20,500.
*133. Tresh, Inc. had the following bank reconciliation at March 31, 2010:
Balance per bank statement, 3/31/10
Add: Deposit in transit
$37,200
10,300
47,500
12,600
$34,900
Less: Outstanding checks
Balance per books, 3/31/10
Data per bank for the month of April 2010 follow:
Deposits
Disbursements
$46,700
49,700
All reconciling items at March 31, 2010 cleared the bank in April. Outstanding checks at
April 30, 2010 totaled $6,000. There were no deposits in transit at April 30, 2010. What is
the cash balance per books at April 30, 2010?
a. $28,200
b. $31,900
c. $34,200
d. $38,500
Multiple Choice Answers—CPA Adapted
Etem
Ans.
Etem
Ans.
Etem
Ans.
Etem
Ans.
Etem
Ans.
Etem
Ans.
123.
124.
a
d
125.
126.
d
b
127.
128.
c
d
129.
130.
c
c
131.
*132.
b
a
*133.
a
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Test Bank for Entermediate Accounting, Thirteenth Edition
DEREVATEOTS — Computational
To.
Answer
72
b
Derivation
$13,500 + $500 = $14,000.
73.
d
$2,000,000 × .11
=
$200,000 × (.11 – .05) =
Interest
$220,000
12,000
$232,000
$232,000 ÷ $2,000,000 = .116 = 11.6%.
74.
b
75.
c
76.
b
77.
c
$30,000 + $500 + $8,200 = $38,700.
78.
c
.01 × 360 ÷ 20 = 18%.
79.
b
$10,000 × (1 – .01) = $9,900.
80.
c
$10,000 × 100% = $10,000.
81.
a
$10,000 × (1 – .02) = $9,800.
82.
c
($12,800,000 × .01) – $6,000 = $122,000.
83.
d
($6,500,000 × .08) – $12,000 = $508,000.
84.
c
$3,000,000 × .08 = $240,000.
85.
b
$540,000 + ($90,000 – $40,000) = $590,000.
86.
b
$600,000 – $62,500 = $537,500.
87.
d
($50,000 – $4,000) – ($4,500 – $4,000) = $45,500.
88.
c
$8,000 – $9,000 + X = $5,500; X = $6,500.
89.
b
($425,000 – $14,000) × .02 = $8,220.
90.
a
($43,000 × .10) – $760 = $3,540.
91.
b
$60,000 – $3,600 = $56,400.
92.
b
($240,000 × .05) – [$10,000 – ($7,200 – $2,100)] = $7,100.
93.
d
$288,000 × .05 = $14,400.
$20,000 + $300 + $5,500 = $25,800.
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Cash and Receivables
94.
b
$80,000 – $4,800 = $75,200.
DEREVATEOTS — Computational (cont.)
To.
Answer
Derivation
95.
b
$480,000 × .05 – [$20,000 – ($14,400 – $4,200)] = $14,200.
96.
d
$360,000 × .05 = $18,000.
97.
b
7% and 7%.
98.
a
$30,000 × 1.75911 = $52,773.
99.
a
($800,000 × .90) = $720,000.
100.
b
101.
c
$50,000 × .10 × 6/12 = $2,500.
102.
c
$50,000 – $46,000 = $4,000.
103.
d
$60,000 × .82645 = $49,587.
104.
a
$2,000,000 × .05 = $100,000.
105.
b
($2,000,000 × .03) + $100,000 = $160,000.
106.
d
107.
c
$1,000,000 – [$1,000,000 × (.04 + .08)] = $880,000.
108.
a
$1,000,000 × .03 = $30,000; $1,000,000 – $30,000 = $970,000.
109.
c
$335,000 – $6,700 = $328,300.
110.
c
111.
b
$300,000 × .03 = $9,000.
112.
b
($300,000 × .03) + $1,500 = $10,500.
113.
c
($100,000 × .03) + $2,400 = $5,400.
114.
c
($300,000 × .03) + $7,200 = $16,200.
115.
c
$600,000 ÷ [($100,000 + $150,000) ÷ 2] = 4.8.
116.
c
$900,000 ÷ [($100,000 + $150,000) ÷ 2] = 7.2.
*117.
d
$250 – $150 = $100.
*118.
b
$36,000 – $12,000 + $4,000 + $500 = $28,500.
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Test Bank for Entermediate Accounting, Thirteenth Edition
DEREVATEOTS — Computational (cont.)
To.
Answer
*119.
b
$39,140 + $5,000 – $5,200 = $38,940.
Derivation
*120.
c
$21,200 + $450 – $900 + $1,450 = $22,200.
*121.
b
$45,000 + $940 – $320 – $90 + $18 = $45,548.
*122.
c
$30,000 + $5,400 – $4,900 = $30,500.
DEREVATEOTS — CPA Adapted
To.
Answer
123.
a
$75,000 – $2,000 + $3,000 = $76,000.
Derivation
124.
d
Allowance for Doubtful Acct. balance $34,000 + $5,000 – $23,000 =
$16,000 (before bad debt expense)
$325,000 – $300,000 – $16,000 = $9,000 (bad debt expense).
125.
d
$69,000 – $56,000 + $46,000 = $59,000.
126.
b
$90,000 + $13,000 – $95,000 = $8,000.
127.
c
Conceptual.
128.
d
$750,000 × .02 = $15,000.
129.
c
$400,000 × .75 = $300,000 present value
$300,000 × .10 = $30,000 (2010 interest)
($300,000 + $30,000) × .10 = $33,000 (2011 interest).
130.
c
$300,000 × 12% × 2 ÷ 12 = $6,000.
131.
b
Conceptual.
*132.
a
$21,650 + $3,900 – $2,750 = $22,800.
*133.
a
$37,200 + $46,700 – $49,700 = $34,200 (4/30 balance per bank)
$34,200 – $6,000 = $28,200.
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EXERCESES
Ex. 7-134—Asset classification.
Below is a list of items. Classify each into one of the following balance sheet categories:
a. Cash
b. Receivables
c. Short-term Investments
d. Other
____
1. Compensating balances held in long-term borrowing arrangements
____
2. Savings account
____
3. Trust fund
____
4. Checking account
____
5. Postage stamps
____
6. Treasury bills maturing in six months
____
7. Post-dated checks from customers
____
8. Certificate of deposit maturing in five years
____
9. Common stock of another company (to be sold by December 31, this year)
____ 10. Change fund
Solution 7-134
1.
2.
d
a
3.
4.
d
a
5.
6.
d
c
7.
8.
b
d
9.
10.
c
a
Ex. 7-135—Allowance for doubtful accounts.
When a company has a policy of making sales for which credit is extended, it is reasonable to
expect a portion of those sales to be uncollectible. As a result of this, a company must recognize
bad debt expense. There are basically two methods of recognizing bad debt expense: (1) direct
write-off method, and (2) allowance method.
Enstructions
(a) Describe fully both the direct write-off method and the allowance method of recognizing bad
debt expense.
(b) Discuss the reasons why one of the above methods is preferable to the other and the reasons
why the other method is not usually in accordance with generally accepted accounting
principles.
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Test Bank for Entermediate Accounting, Thirteenth Edition
Solution 7-135
(a) There are basically two methods of recognizing bad debt expense: (1) direct write-off and (2)
allowance.
The direct write-off method requires the identification of specific balances that are deemed to
be uncollectible before any bad debt expense is recognized. At the time a specific account is
deemed uncollectible, the account is removed from accounts receivable and a corresponding
amount of bad debt expense is recognized.
The allowance method requires an estimate of bad debt expense for a period of time by
reference to the composition of the accounts receivable balance at a specific point in time
(aging) or to the overall experience with credit sales over a period of time. Thus, total bad
debt expense expected to arise as a result of operations for a specific period is estimated, the
valuation account (allowance for doubtful accounts) is appropriately adjusted, and a
corresponding amount of bad debt expense is recognized. As specific accounts are identified
as uncollectible, the account is written off. It is removed from accounts receivable and a
corresponding amount is removed from the valuation account (allowance for doubtful
accounts). Net accounts receivable do not change, and there is no charge to bad debt
expense when specific accounts are identified as uncollectible and written off using the
allowance method.
(b) The allowance method is preferable because it matches the cost of making a credit sale with
the revenues generated by the sale in the same period and achieves a proper carrying value
for accounts receivable at the end of a period. Since the direct write-off method does not
recognize the bad debt expense until a specific amount is deemed uncollectible, which may
be in a subsequent period, it does not comply with the matching principle and does not
achieve a proper carrying value for accounts receivable at the end of a period.
Ex. 7-136—Entries for bad debt expense.
A trial balance before adjustment included the following:
Accounts receivable
Allowance for doubtful accounts
Sales
Sales returns and allowances
Debit
$80,000
Credit
730
$340,000
8,000
Give journal entries assuming that the estimate of uncollectibles is determined by taking (1) 5% of
gross accounts receivable and (2) 1% of net sales.
Solution 7-136
(1)
Bad Debt Expense ..............................................................
Allowance for Doubtful Accounts .............................
Gross receivables
$80,000
Rate
5%
Total allowance needed
4,000
Present allowance
(730)
Adjustment needed
$ 3,270
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3,270
3,270
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7 - 35
Solution 7-136 (cont.)
(2)
Bad Debt Expense ..............................................................
Allowance for Doubtful Accounts .............................
Sales
$340,000
Sales returns and allowances
8,000
Net sales
332,000
Rate
1%
Bad debt expense
$ 3,320
3,320
3,320
Ex. 7-137—Accounts receivable assigned.
Accounts receivable in the amount of $250,000 were assigned to the Fast Finance Company by
Marsh, Inc., as security for a loan of $200,000. The finance company charged a 4% commission
on the face amount of the loan, and the note bears interest at 9% per year.
During the first month, Marsh collected $130,000 on assigned accounts. This amount was
remitted to the finance company along with one month's interest on the note.
Enstructions
Make all the entries for Marsh Inc. associated with the transfer of the accounts receivable, the
loan, and the remittance to the finance company.
Solution 7-137
Cash ...............................................................................................
Finance Charge...............................................................................
Notes Payable.....................................................................
192,000
8,000
Cash ...............................................................................................
Accounts Receivable...........................................................
130,000
Notes Payable.................................................................................
Interest Expense.............................................................................
Cash ....................................................................................
130,000
1,500
200,000
130,000
131,500
PROBLEMS
Pr. 7-138—Entries for bad debt expense.
The trial balance before adjustment of Risen Company reports the following balances:
Accounts receivable
Allowance for doubtful accounts
Sales (all on credit)
Sales returns and allowances
Dr.
$100,000
Cr.
$
40,000
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2,500
750,000
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Test Bank for Entermediate Accounting, Thirteenth Edition
Enstructions
(a) Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated
to be (1) 6% of gross accounts receivable and (2) 1% of net sales.
(b) Assume that all the information above is the same, except that the Allowance for Doubtful
Accounts has a debit balance of $2,500 instead of a credit balance. How will this difference
affect the journal entries in part (a)?
Solution 7-138
(a)
(1)
(2)
(b)
Bad Debt Expense.........................................................
Allowance for Doubtful Accounts........................
Gross receivables
$100,000
Rate
6%
Total allowance needed
6,000
Present allowance
(2,500)
Bad debt expense
$ 3,500
3,500
Bad Debt Expense.........................................................
Allowance for Doubtful Accounts........................
Sales
$750,000
Sales returns and allowances
(40,000)
Net sales
710,000
Rate
1%
Bad debt expense
$ 7,100
7,100
3,500
7,100
The percentage of receivables approach would be affected as follows:
Gross receivables
$100,000
Rate
6%
Total allowance needed
6,000
Present allowance
2,500
Additional amount required
$ 8,500
The journal entry is therefore as follows:
Bad Debt Expense.........................................................
Allowance for Doubtful Accounts........................
The entry would not change under the percentage of sales method.
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8,500
8,500
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Pr. 7-139—Amortization of discount on note.
On December 31, 2010, Green Company finished consultation services and accepted in
exchange a promissory note with a face value of $400,000, a due date of December 31, 2013,
and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the
services is not readily determinable and the note is not readily marketable. Under the
circumstances, the note is considered to have an appropriate imputed rate of interest of 10%.
The following interest factors are provided:
Interest Rate
5%
10%
1.15763
1.33100
.86384
.75132
3.15250
3.31000
2.72325
2.48685
Table Factors For Three Periods
Future Value of 1
Present Value of 1
Future Value of Ordinary Annuity of 1
Present Value of Ordinary Annuity of 1
Enstructions
(a) Determine the present value of the note.
(b) Prepare a Schedule of Note Discount Amortization for Green Company under the effective
interest method. (Round to whole dollars.)
Solution 7-139
(a) Present value of interest
Present value of maturity value
=
=
$20,000 × 2.48685
$400,000 × .75132
=
=
$ 49,737
300,528
$350,265
(b) Green Company
Schedule of Note Discount Amortization
Effective Interest Method
5% Note Discounted at 10% (Imputed)
Date
12/31/10
12/31/11
12/31/12
12/31/13
Cash
Interest
(5%)
Effective
Interest
(10%)
$20,000
20,000
20,000
$60,000
$ 35,027
36,529
38,179*
$109,735
Discount
Amortized
$15,027
16,529
18,179
$49,735
Unamortized
Discount
Balance
$49,735
34,708
18,179
0
*$3 adjustment to compensate for rounding.
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Present
Value
of Note
$350,265
365,292
381,821
400,000
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7 - 38
Test Bank for Entermediate Accounting, Thirteenth Edition
Pr. 7-140—Accounts receivable assigned.
Prepare journal entries for Mars Co. for:
(a) Accounts receivable in the amount of $500,000 were assigned to Utley Finance Co. by Mars
as security for a loan of $425,000. Utley charged a 3% commission on the accounts; the
interest rate on the note is 12%.
(b) During the first month, Mars collected $200,000 on assigned accounts after deducting $450 of
discounts. Mars wrote off a $530 assigned account.
(c) Mars paid to Utley the amount collected plus one month's interest on the note.
Solution 7-140
(a) Cash ........................................................................................
Finance Charge.........................................................................
Notes Payable................................................................
410,000
15,000
(b) Cash ........................................................................................
Sales Discounts.........................................................................
Allowance for Doubtful Accounts...............................................
Accounts Receivable.....................................................
200,000
450
530
(c) Notes Payable...........................................................................
Interest Expense........................................................................
Cash..............................................................................
200,000
4,250
425,000
200,980
204,250
Pr. 7-141—Factoring Accounts Receivable.
On May 1, Dexter, Inc. factored $800,000 of accounts receivable with Quick Finance on a without
recourse basis. Under the arrangement, Dexter was to handle disputes concerning service, and
Quick Finance was to make the collections, handle the sales discounts, and absorb the credit
losses. Quick Finance assessed a finance charge of 6% of the total accounts receivable factored
and retained an amount equal to 2% of the total receivables to cover sales discounts.
Enstructions
(a) Prepare the journal entry required on Dexter's books on May 1.
(b) Prepare the journal entry required on Quick Finance’s books on May 1.
(c) Assume Dexter factors the $800,000 of accounts receivable with Quick Finance on a with
recourse basis instead. The recourse provision has a fair value of $14,000. Prepare the
journal entry required on Dexter’s books on May 1.
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Cash and Receivables
7 - 39
Solution 7-141
(a) Cash..............................................................................................
Due from Factor (2% × $800,000)..................................................
Loss on Sale of Receivables (6% × $800,000)..............................
Accounts Receivable.....................................................
736,000
16,000
48,000
(b) Accounts Receivable.....................................................................
Due to Dexter.......................................................................
Financing Revenue..............................................................
Cash ....................................................................................
800,000
(c) Cash..............................................................................................
Due from Factor ...........................................................................
Loss on Sale of Receivables..........................................................
Accounts Receivable...........................................................
Recourse Liability................................................................
736,000
16,000
62,000
800,000
16,000
48,000
736,000
800,000
14,000
*Pr. 7-142—Bank reconciliation.
Benson Plastics Company deposits all receipts and makes all payments by check. The following
information is available from the cash records:
MARCH 31 BANK RECONCILIATION
Balance per bank
Add: Deposits in transit
Deduct: Outstanding checks
Balance per books
$26,746
2,100
(3,800)
$25,046
Month of April Results
Balance April 30
April deposits
April checks
April note collected (not included in April deposits)
April bank service charge
April NSF check of a customer returned by the bank
(recorded by bank as a charge)
Enstructions
(a) Calculate the amount of the April 30:
1. Deposits in transit
2. Outstanding checks
(b) What is the April 30 adjusted cash balance? Show all work.
*Solution 7-142
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Per Bank
$27,995
10,784
11,600
3,000
35
900
Per Books
$28,855
13,889
10,080
-0-0-0-
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7 - 40
Test Bank for Entermediate Accounting, Thirteenth Edition
(a) 1. Deposits in transit, $5,205 [$13,889 – ($10,784 – $2,100)]
2. Outstanding checks, $2,280 [$10,080 – ($11,600 – $3,800)]
(b) Adjusted cash balance at April 30, $30,920
($27,995 + $5,205 – $2,280)
OR
($28,855 + $3,000 – $35 – $900)
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Cash and Receivables
7 - 41
EFRS QUESTEOTS
True/False:
1. iGAAP and U.S. GAAP are very similar in accounting for cash and receivables.
2. iGAAP does not permit the reversal of impairment losses, as does U.S. GAAP.
3. Under iGAAP, there is a specific standard that mandates segregation of receivables with
different characteristics.
4. Under iGAAP, there is no specific standard related to pledging receivables.
5. Both the FASB and IASB have indicated that they believe all financial instruments should be
recorded and reported at fair value.
Answers to True/False:
1. True
2. False
3. False
4. True
5. True
Multiple Choice
Use the following information to answer Question 1 and 2.
Harrison Company has a loan receivable with a carrying value of $15,000 at December 31, 2010.
On January 3, 2011, the borrower, Thomas Clark Imports, declares bankruptcy, and Harrison
estimates that it will collect only 60% of the loan balance.
1. Which of the following entries would Harrison make to record the impairment under iGAAP?
a. Loan Receivable
Impairment Loss
9,000
b. Loan Recovery Expense
Loan Receivable
6,000
c. Impairment Loss
Loan Receivable
9,000
d. Impairment Loss
Loan Receivable
6,000
9,000
6,000
9,000
6,000
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7 - 42
Test Bank for Entermediate Accounting, Thirteenth Edition
2. Assume that on January 5, 2012, Harrison learns that Thomas Clark Imports has emerged
from bankruptcy. As a result, Harrison now estimates that all but $1,500 will be repaid on the
loan. Under iGAAP, which of the following entries would be made on January 5, 2012?
a. Loan Receivable
4,500
Recovery of Impairment Loss
4,500
b. Loan Receivable
1,500
Recovery of Impairment Loss
1,500
c. Bad Debt Expense
1,500
Impairment Loss
1,500
d. No journal entry is allowed under iGAAP.
3. The iGAAP approach for derecognizing a receivable focuses on which of the following?
a. Risks
b. Rewards
c. Loss of control
d. All of these
4. When comparing U.S. GAAP with iGAAP, which of the following is true regarding the reporting
of securitizations?
a. Both U.S. GAAP and iGAAP show these as off-balance-sheet treatments.
b. Only iGAAP requires full or partial balance sheet recognition of securitizations.
c. Only U.S. GAAP requires full or partial balance sheet recognition of securitizations.
d. Both U.S. GAAP and iGAAP requires full or partial balance sheet recognition of
securitizations.
5. Which of the following authoritative iGAAP guidance specifically addresses issues related to
cash?
a. AIS No.1 (Presentation of Financial Statements)
b. IRFS No. 7 (Financial Instruments: Disclosures)
c. IAS No. 39 (Financial Instruments: Recognition and Measurement)
d. None of these standards specifically addresses cash issues.
6. Key similarities between U.S. GAAP and iGAAP include all of the following except
a. the definition used for cash equivalents.
b. accounting and reporting issues related to recognition and measurement of
receivables, such as the use of allowance accounts.
c. working toward implementing fair value measurement for all financial instruments.
d. the same criteria is used to derecognize a receivable.
7. Genesis Company has seven loans receivable. The loans vary in size and have been
extended to companies with different credit ratings. Given a downturn in the economy, it is
expected that at least two of these loans will be impaired. Which of the following statements
best describes the accounting for these loans under iGAAP?
a. iGAAP implies that the loans should be reported as an aggregated portfolio.
b. iGAAP uses an incurred loss model rather than an expected loss model, so no
impairment on each of the two loans is recognized until an identifiable event occurs
and is measurable.
c. Under iGAAP, when impairment is permitted, the balance on each of the impaired
loans becomes the new basis for the loan.
d. iGAAP uses an expected loss model, so the entire diverse portfolio should be written
down based on the anticipated impairment.
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Cash and Receivables
7 - 43
8. iGAAP requires an impairment loss for a loan receivable be recognized when
a. its carrying amount is less than its recoverable amount.
b. its recoverable amount is less than its carrying amount.
c. its present value of expected future cash flows is greater than its carrying amount.
d. its principal amount is less than its interest amount.
Use the following information to answer Questions 9 and 10.
Johnstone Company has a loan receivable with a carrying value of $125,000 at December 31, 2010.
On January 1, 2011, the borrower, Ralph Young Industries, declares bankruptcy, and Johnstone
estimates that it will collect only 45% of the loan balance.
9. Which of the following entries would Johnstone make to record the impairment under iGAAP?
a. Loan Receivable
Impairment Loss
56,250
b. Loan Recovery Expense
Loan Receivable
68,750
c. Impairment Loss
Loan Receivable
56,250
d. Impairment Loss
Loan Receivable
68,750
56,250
68,750
56,250
68,750
10. Assume that on January 4, 2012, Johnstone learns that Ralph Young Industries has emerged
from bankruptcy. As a result, Johnstone now estimates that all but $11,500 will be paid on the
loan. Under iGAAP, which of the following entries would be made on January 4, 2012?
a. Loan Receivable
57,250
Recovery of impairment Loss
57,250
b. Loan Receivable
11,500
Recovery of impairment Loss
11,500
c. Bad Debt Expense
11,500
Impairment Loss
11,500
d. No journal entry is allowed under iGAAP.
11. Under iGAAP, the characteristics that would imply segregation of receivables would include
a. past-due status.
b. industry.
c. collateral type.
d. All of these could be used to determine whether segregation of receivables is implied.
Answers to Multiple Choice
1. d
2. a
3. d
4. b
5. a
6. d
7. b
8. b
9. d
10. a
11. d
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7 - 44
Test Bank for Entermediate Accounting, Thirteenth Edition
Short Answer:
1. Briefly describe some of the similarities and differences between U.S. GAAP and iGAAP with
respect to the accounting for cash and receivables.
1. Key similarities relate to (1) the definition used for cash equivalents, (2) accounting and
reporting issues related to recognition and measurement of receivables, such as the use of
allowance accounts, how to record trade and sales discounts, use of percentage of sales and
receivables methods, pledging, and factoring and (3) both Boards are working to implement
fair value measurement for all financial instruments but both Boards have faced bitter
opposition from various factions.
Key differences relate to (1) iGAAP has no guidance for segregation of receivables with
different characteristics, (2) iGAAP and U.S. GAAP standards on the fair value option are
similar but not identical. The international standard related to the fair value option is subject to
certain qualifying criteria not in the U.S. standard. In addition, there is some difference in the
financial instruments covered, (3) iGAAP and U.S. GAAP differ in the criteria used to
derecognize a receivable. iGAAP is a combination of a risks and rewards and a loss of control
approach. U.S. GAAP uses loss of control as the primary criterion. In addition, iGAAP permits
partial derecognition—U.S. GAAP does not.
2. Walton Company, which uses iGAAP, has a note receivable with a carrying value of $30,000 at
December 31, 2010. On January 2, 2011, the borrower declares bankruptcy, and Walton
estimates that only $25,000 of the note will be collected. Briefly describe the accounting for
the loan subsequent to the bankruptcy, assuming Walton estimates that more than $25,000
can be repaid.
2. Under iGAAP, Walton may record recovery of losses on prior impairments. Under U.S.
GAAP, reversal of impairment is not permitted. Rather the balance on the loan after the
impairment becomes the new basis for the loan.
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6-2
Test Bank for Intermediate Accounting, IFRS Edition
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 longterm 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. The number of compounding periods will always be one less than the number of rents when
computing the future value of an ordinary annuity.
16. 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.
Accounting and the Time Value of Money
6-3
17. 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.
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.
21. Under iGAAP, if an estimate is being developed for a large number of items with varied
outcomes, then the expected cash flow approach is used.
22. The rate used to discount the expected cash flows when using the expected cash flow
approach includes an adjustment for credit risk.
23. The risk-free rate of return is defined as the pure rate of return.
True False Answers—Conceptual
Item
1.
2.
3.
4.
5.
Ans.
F
T
F
T
T
Item
6.
7.
8.
9.
10.
Ans.
F
F
T
T
T
Item
11.
12.
13.
14.
15.
Ans.
F
F
F
T
T
Item
16.
17.
18.
19.
20.
Ans.
F
T
T
F
T
Item
21.
22.
23.
Ans.
T
F
F
MULTIPLE CHOICE—Conceptual
24.
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.
25.
Which of the following situations does not base an accounting measure on present
values?
a. Pensions.
b. Prepaid insurance.
c. Leases.
d. Sinking funds.
6-4
Test Bank for Intermediate Accounting, IFRS Edition
26.
What is interest?
a. Payment for the use of money.
b. An equity investment.
c. Return on capital.
d. Loan.
27.
What is not a variable that is considered in interest computations?
a. Principal.
b. Interest rate.
c. Assets.
d. Time.
28.
Charlie Corp. is purchasing new equipment with a cash cost of $100,000 for an assembly
line. The manufacturer has offered to accept $22,960 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. $22,960.
b. $100,000.
c. $122,960.
d. $37,760.
29.
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.
30.
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.
31.
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
32.
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
Accounting and the Time Value of Money
6-5
33.
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
34.
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
35.
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
36.
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
37.
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
S
38.
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.
S
39.
On June 1, 2010, 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, 2010. 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.
6-6
Test Bank for Intermediate Accounting, IFRS Edition
S
40.
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.
P
41.
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.
P
42.
On December 1, 2010, 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, 2010, 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.
43.
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.
44.
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.
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.
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.
Accounting and the Time Value of Money
P
6-7
47.
Assume ABC Company deposits $25,000 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. $33,598.
b. $25,000.
c. $32,500.
d. $33,456.
48.
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%.
49.
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
50.
In the time diagram below, which concept is being depicted?
0
1
$1
PV
a.
b.
c.
d.
Present value of an ordinary annuity
Present value of an annuity due
Future value of an ordinary annuity
Future value of an annuity due
2
$1
3
$1
4
$1
6-8
P
Test Bank for Intermediate Accounting, IFRS Edition
51.
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.
52.
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, 2010, the present value of that sum decreases
as the date draws closer to December 31, 2010.
53.
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
54.
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.
55.
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.
Accounting and the Time Value of Money
6-9
Items 56 through 58 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 56 to 58 is based on 8%
interest compounded annually.
Periods
1
2
3
4
5
56.
Future Value of 1 at 8%
1.080
1.166
1.260
1.360
1.469
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
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Test Bank for Intermediate Accounting, IFRS Edition
57.
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)
58.
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 59 through 61 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 59 to
61 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
59.
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
60.
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
61.
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
62.
At the end of two years, what will be the balance in a savings account paying 6% annually
if $5,000 is deposited today? The future value of one at 6% for one period is 1.06.
a. $5,000
b. $5,300
c. $5,600
d. $5,618
Accounting and the Time Value of Money
6 - 11
63.
Mordica Company will receive $100,000 in 7 years. If the appropriate interest rate is 10%,
the present value of the $100,000 receipt is
a. $51,000.
b. $51,316.
c. $151,000.
d. $194,872.
64.
Dunston Company will receive $100,000 in a future year. If the future receipt is discounted
at an interest rate of 10%, its present value is $51,316. In how many years is the
$100,000 received?
a. 5 years
b. 6 years
c. 7 years
d. 8 years
65.
Milner Company will invest $200,000 today. The investment will earn 6% for 5 years, with
no funds withdrawn. In 5 years, the amount in the investment fund is
a. $200,000.
b. $260,000.
c. $267,646.
d. $268,058.
66.
Barber Company will receive $500,000 in 7 years. If the appropriate interest rate is 10%,
the present value of the $500,000 receipt is
a. $255,000.
b. $256,580.
c. $755,000.
d. $974,360.
67.
Barkley Company will receive $100,000 in a future year. If the future receipt is discounted
at an interest rate of 8%, its present value is $63,017. In how many years is the $100,000
received?
a. 5 years
b. 6 years
c. 7 years
d. 8 years
68.
Altman Company will invest $300,000 today. The investment will earn 6% for 5 years, with
no funds withdrawn. In 5 years, the amount in the investment fund is
a. $300,000.
b. $390,000.
c. $401,469.
d. $402,087.
69.
John Jones won a lottery that will pay him $1,000,000 after twenty years. Assuming an
appropriate interest rate is 5% compounded annually, what is the present value of this
amount?
a. $1,000,000.
b. $2,653,300.
c. $12,462,210.
d. $376,890.
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Test Bank for Intermediate Accounting, IFRS Edition
70.
Angie invested $50,000 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. $77,567.
b. $80,525.
c. $81,445.
d. $88,578.
71.
Bella requires $80,000 in four years to purchase a new home. What amount must be
invested today in an investment that earns 6% interest, compounded annually?
a. $63,367.
b. $65,816.
c. $96,891.
d. $100,998.
72.
What interest rate (the nearest percent) must Charlie earn on a $75,000 investment today
so that he will have $190,000 after 12 years?
a. 6%.
b. 7%.
c. 8%.
d. 9%.
73.
Ethan has $20,000 to invest today at an annual interest rate of 4%. Approximately how
many years will it take before the investment grows to $40,500?
a. 18 years.
b. 20 years.
c. 16 years.
d. 11 years.
74.
Jane wants to set aside funds to take an around the world cruise in four years. Assuming
that Jane has $5,000 to invest today in an account expected to earn 6% per annum, how
much will she have to spend on her vacation?
a. $3,960.
b. $6,312.
c. $21,873.
d. $6,691.
Accounting and the Time Value of Money
6 - 13
75.
Jane wants to set aside funds to take an around the world cruise in four years. Jane
expects that she will need $12,000 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. $2,663.
b. $16,325.
c. $8,820.
d. $8,167.
76.
What would you pay for an investment that pays you $1,000,000 after forty years?
Assume that the relevant interest rate for this type of investment is 6%.
a. $31,180.
b. $311,800.
c. $97,220.
d. $103,670.
77.
What would you pay for an investment that pays you $10,000 at the end of each year for
the next ten years and then returns a maturity value of $150,000 after ten years? Assume
that the relevant interest rate for this type of investment is 8%.
a. $69,479.
b. $67,101.
c. $72,468.
d. $136,579.
78.
Anna has $60,000 to invest. She requires $100,000 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.
79.
On January 1, 2012, Ball Co. exchanged equipment for a $160,000 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 Ball's 2013 income statement?
a. $0
b. $12,000
c. $13,200
d. $16,000
80.
If Jethro wanted to save a set amount each month in order to buy a new pick-up truck
when the new models are next available, which time value concept would be used to
determine the monthly payment?
a. Present value of one.
b. Future value of one.
c. Present value of an annuity due.
d. Future value of an ordinary annuity.
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Test Bank for Intermediate Accounting, IFRS Edition
81.
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 annuity.
d. Future value of one.
82
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.
83.
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.
84.
What amount will be in an 8% 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
85.
Lucy and Fred want to begin saving for their baby's college education. They estimate that
they will need $250,000 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. $8,089.
b. $7,631.
c. $13,889.
d. $7,405.
86.
Lucy and Fred want to begin saving for their baby's college education. They estimate that
they will need $350,000 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. $13,554.
b. $29,941.
c. $28,960.
d. $12,441.
Accounting and the Time Value of Money
6 - 15
87.
Jane wants to set aside funds to take an around the world cruise in four years. Jane
expects that she will need $12,000 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. $2,663.
b. $16,325.
c. $8,820.
d. $2,466.
88.
Spencer Corporation will invest $10,000 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. $41,114.
b. $46,048.
c. $81,152.
d. $90,890.
89.
Tipson Corporation will invest $10,000 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. $41,114
b. $46,048.
c. $81,152.
d. $90,890.
90.
Renfro Corporation will invest $30,000 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. $123,342
b. $138,144.
c. $243,456.
d. $272,670.
91.
Vannoy Corporation will invest $25,000 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. $102,785.
b. $115,120.
c. $202,880.
d. $227,225.
92.
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 $50,000
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
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Test Bank for Intermediate Accounting, IFRS Edition
a.
b.
c.
d.
$326,166
$299,235
$272,500
$250,000
Use the following 8% interest factors for questions 93 through 96.
7 periods
8 periods
9 periods
Present Value of
Ordinary Annuity
5.2064
5.7466
6.2469
Future Value of
Ordinary Annuity
8.92280
10.63663
12.48756
93.
What will be the balance on September 1, 2018 in a fund which is accumulated by making
$8,000 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. $85,093
b. $71,383
c. $60,480
d. $45,973
94.
If $5,000 is deposited annually starting on January 1, 2012 and it earns 8%, what will the
balance be on December 31, 2019?
a. $44,614
b. $48,183
c. $53,183
d. $57,438
95.
Korman Company wishes to accumulate $300,000 by May 1, 2019 by making 8 equal
annual deposits beginning May 1, 2011 to a fund paying 8% interest compounded
annually. What is the required amount of each deposit?
a. $52,205
b. $28,204
c. $26,115
d. $30,234
96.
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.
97.
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 investment?
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.
Accounting and the Time Value of Money
6 - 17
98.
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).
99.
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.
100.
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.
101.
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.
102.
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.
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Test Bank for Intermediate Accounting, IFRS Edition
103.
What amount should an individual have in a 10% 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
104.
Pearson Corporation makes an investment today (January 1, 2012). They will receive
$10,000 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. $41,114.
b. $46,048.
c. $81,152.
d. $90,890.
105.
Garretson Corporation will receive $10,000 today (January 1, 2010), and also on each
January 1st for the next five years (2013 – 2017). What is the present value of the six
$10,000 receipts, assuming a 12% interest rate?
a. $41,114.
b. $46,048.
c. $81,152.
d. $90,890.
106.
Hiller Corporation makes an investment today (January 1, 2012). They will receive
$20,000 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. $82,228.
b. $92,096.
c. $162,304.
d. $181,780.
107.
What amount should be recorded as the cost of a machine purchased December 31,
2010, which is to be financed by making 8 annual payments of $6,000 each beginning
December 31, 2011? The applicable interest rate is 8%.
a. $42,000
b. $37,481
c. $63,820
d. $34,480
108.
How much must be deposited on January 1, 2010 in a savings account paying 6%
annually in order to make annual withdrawals of $20,000 at the end of the years 2010 and
2011? The present value of one at 6% for one period is .9434.
a. $36,668
b. $37,740
c. $40,000
d. $17,800
Accounting and the Time Value of Money
6 - 19
109.
How much must be invested now to receive $10,000 for 15 years if the first $10,000 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. $80,607
b. $87,862
c. $150,000
d. $73,125
110.
Jenks Company financed the purchase of a machine by making payments of $18,000 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. $26,448
b. $71,869
c. $90,000
d. $105,600
111.
A machine is purchased by making payments of $5,000 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. $33,578
b. $30,526
c. $20,849
d. $18,954
112.
Lane Co. has a machine that cost $200,000. 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. $21,356
b. $23,909
c. $29,728
d. $23,492
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Test Bank for Intermediate Accounting, IFRS Edition
113.
Find the present value of an investment in plant and equipment if it is expected to provide
annual earnings of $21,000 for 15 years and to have a resale value of $40,000 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. $159,728
b. $169,303
c. $185,276
d. $324,576
114.
John won a lottery that will pay him $100,000 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. $1,060,360.
b. $21,455.
c. $981,815.
d. $4,576,196.
115.
Jonas won a lottery that will pay him $100,000 at the end of each of the next twenty years.
Zebra Finance has offered to purchase the payment stream for $1,359,000. 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
$22,000 annual payments due at the beginning of each year. What is the present value of
the payments discounted at 8% per annum?
a. $94,867.
b. $87,840.
c. $83,981.
d. $79,736.
117.
Jeremy is in the process of purchasing a car. The list price of the car is $32,000. 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 $6,850 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 $10,000 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. $83,658.
b. $720,524.
c. $10,367.
d. $74,694.
Accounting and the Time Value of Money
6 - 21
119.
What would you pay for an investment that pays you $12,000 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. $73,734.
b. $81,108.
c. $77,941.
d. $85,735.
120.
Ziggy is considering purchasing a new car. The cash purchase price for the car is
$28,000. What is the annual interest rate if Ziggy is required to make annual payments of
$6,500 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 $100,000 for the assembly
line. The manufacturer has offered to accept $22,960 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
$400,000. 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. $42,713.
b. $46,984.
c. $6,984.
d. $20,209.
123.
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%.
124.
On January 15, 2012, Dolan Corp. adopted a plan to accumulate funds for environmental
improvements beginning July 1, 2016, at an estimated cost of $4,000,000. 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
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Test Bank for Intermediate Accounting, IFRS Edition
Future value of ordinary annuity of 1 at 10% for 4 periods
Future value of annuity due of 1 at 10% for 4 periods
4.64
5.11
Dolan should make four annual deposits of
a. $711,618.
b. $782,779.
c. $862,069.
d. $1,000,000.
125.
On December 30, 2012, AGH, Inc. purchased a machine from Grant Corp. in exchange
for a zero-interest-bearing note requiring eight payments of $50,000. 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. $235,600.
b. $257,300.
c. $261,775.
d. $285,600.
126.
On January 1, 2012, Ott Co. sold goods to Flynn Company. Flynn signed a zero-interestbearing note requiring payment of $80,000 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:
Period
6
7
Present Value
of 1 at 10%
.5645
.5132
Present Value of Ordinary
Annuity of 1 at 10%
4.3553
4.8684
Ott should record sales revenue in January 2012 of
a. $428,424.
b. $389,472.
c. $348,424.
d. $285,600.
127.
On July 1, 2012, Ed Wynne signed an agreement to operate as a franchisee of Kwik
Foods, Inc., for an initial franchise fee of $180,000. Of this amount, $60,000 was paid
when the agreement was signed and the balance is payable in four equal annual
payments of $30,000 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
Accounting and the Time Value of Money
Future value of 1 at 14% for 4 periods
Present value of an ordinary annuity of 1 at 14% for 4 periods
6 - 23
1.69
2.91
Wynne should record the acquisition cost of the franchise on July 1, 2012 at
a. $130,800.
b. $147,300.
c. $180,000.
d. $202,800.
128.
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.
129.
On January 2, 2010, Wine Corporation wishes to issue $2,000,000 (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
Present value of 1 at 10% for 10 periods
Present value of an ordinary annuity at 8% for 10 periods
Present value of an ordinary annuity at 10% for 10 periods
a.
b.
c.
d.
0.4632
0.3855
6.7101
6.1446
$2,000,000
$1,754,136
$2,000,012
$2,212,052
130.
The market price of a $200,000, ten-year, 12% (pays interest semiannually) bond issue
sold to yield an effective rate of 10% is
a. $224,578.
b. $224,925.
c. $226,654.
d. $374,472.
131.
Stech Co. is issuing $2.6 million 12% bonds in a private placement on July 1, 2010. 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. $3,306,705.
b. $5,426,797.
c. $3,297,839.
d. $3,324,385.
6 - 24
Test Bank for Intermediate Accounting, IFRS Edition
132.
On January 1, 2012, Haley Co. issued ten-year bonds with a face amount of $4,000,000
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. $4,000,000.
b. $3,920,000.
c. $3,680,000.
d. $3,510,400.
133.
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, 2010, due on March 1, 2025, 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.
b.
c.
d.
134.
$2,220,000
$1,269,776
$2,153,730
$1,690,970
Reegan Company owns a trade name that was purchased in an acquisition of Hamilton
Company. The trade name has a book value of $3,500,000, but according to GAAP, it is
assessed for impairment on an annual basis. To perform this impairment test, Reegan
must estimate the fair value of the trade name. It has developed the following cash flow
estimates related to the trade name based on internal information. Each cash flow
estimate reflects Reegan's estimate of annual cash flows over the next 7 years. The trade
name is assumed to have no residual value after the 7 years. (Assume the cash flows
occur at the end of each year.)
Probability Assessment
30%
50%
20%
Cash Flow Estimate
$480,000
730,000
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.
b.
c.
d.
$3,500,000
$ 679,000
$2,060,000
$3,790,436
Accounting and the Time Value of Money
135.


6 - 25
Jamison Company uses iGAAP 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.
b.
c.
d.
136.
$240,000
$132,000
$264,000
$120,000
Techtronics, a technology company that uses iGAAP for its financial reporting, has been
found to have polluted the property surrounding its plant. The property is leased 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
$120,000. There is 30% chance that the lease will be renewed and the cleanup costs will
be $250,000 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. $159,000
b. $75,042
c. $185,000
d. $151,050
Multiple Choice Answers—Computational
Item
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
Ans
d
b
a
c
d
d
b
b
a
d
c
c
b
c
Item
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
Ans
a
c
d
d
d
a
c
a
d
d
a
a
c
c
Item
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
Ans
c
b
b
c
c
d
d
b
c
c
b
b
c
d
Item
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
Ans
Item
Ans
Item
Ans
Item
Ans
Item
Ans
c
a
b
c
c
d
d
c
d
b
c
b
a
b
88.
89.
c
d
c
d
a
a
d
c
c
b
b
b
b
c
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
115.
116.
117.
a
b
a
d
a
b
b
c
d
b
c
d
a
b
120.
121.
122.
123.
124.
125.
126.
127.
128.
129.
130.
131.
132.
133.
b
c
b
a
b
a
a
b
d
b
b
a
d
c
136
b
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100
.
101
6 - 26
38.
39.
Test Bank for Intermediate Accounting, IFRS Edition
c
a
54.
55.
b
d
70.
71.
c
a
86.
87.
d
d
102
103.
.
c
a
118.
119.
d
b
134.
135.
d
b
Accounting and the Time Value of Money
6 - 27
EXERCISES
Ex. 6-133—Present and future value concepts.
On the right are six diagrams representing six different present and future value concepts stated
on the left. Identify the diagrams with the concepts by writing the identifying letter of the diagram
on the blank line at the left. Assume n = 4 and i = 8%.
Concept
_____ 1.
Future value of 1.
_____ 2.
Present value of 1.
_____ 3.
Future value of an annuity
Diagram of Concept
?
a.
due of 1.
_____ 4.
b.
Future value of an ordinary
annuity of 1.
_____ 5.
Present value of an ordinary
annuity of 1.
_____ 6.
Present value of an annuity
c.
due of 1.
d.
$1
|
|
|
|
|
$1
$1
$1
?
$1
|- - - - |
|
|
|
?
$1
$1
$1
$1
|
|
|
|- - - - |
?
$1
$1
$1
$1
|
|
|
|
|
$1
e.
f.
?
|
|
|
|
|
$1
$1
$1
$1
?
|
|
|
|
|
Solution 6-133
1. e
2. a
3. f
4. b
5. d
6. c
Ex. 6-134—Present value of an investment in equipment. (Tables needed.)
Find the present value of an investment in equipment if it is expected to provide annual savings of
$10,000 for 10 years and to have a resale value of $25,000 at the end of that period. Assume an
interest rate of 9% and that savings are realized at year end.
6 - 28
Test Bank for Intermediate Accounting, IFRS Edition
Solution 6-134
Present value of $10,000 for 10 periods at 9% (6.41766 × $10,000) =
Present value of $25,000 discounted for 10 periods at 9% (.42241 × $25,000) =
Present value of investment in equipment
$64,177
10,560
$74,737
Ex. 6-135—Future value of an annuity due. (Tables needed.)
If $4,000 is deposited annually starting on January 1, 2010 and it earns 9%, how much will
accumulate by December 31, 2019?
Solution 6-135
Future value of an annuity due of $4,000 for 10 periods at 9%
($4,000 × 15.19293 × 1.09) = $66,241.
Ex. 6-136—Compute estimated goodwill. (Tables needed.)
Compute estimated goodwill if it is found by discounting excess earnings at 12% compounded
quarterly. Excess annual earnings of $12,000 are expected for 8 years.
Solution 6-136
Present value of $3,000 for 32 periods at 3% ($3,000 × 20.38877) = $61,166.
Ex. 6-137—Present value of an annuity due.(Tables needed.)
How much must be invested now to receive $20,000 for ten years if the first $20,000 is received
today and the rate is 8%?
Solution 6-137
Present value of an annuity due of $20,000 for ten periods at 8% ($20,000 × 7.24689) =
$144,938.
Ex. 6-138—Compute the annual rent. (Tables needed.)
Crone Co. has machinery that cost $80,000. It is to be leased for 15 years with rent received at
the beginning of each year. Crone wants a return of 10%. Compute the amount of the annual
rent.
Solution 6-138
Present value factor for an annuity due for 15 periods at 10% = 8.36669;
$80,000 ÷ 8.36669 = $9,562.
Accounting and the Time Value of Money
6 - 29
Ex. 6-139—Calculate market price of a bond. (Tables needed.)
Determine the market price of a $200,000, ten-year, 10% (pays interest semiannually) bond issue
sold to yield an effective rate of 12%.
Solution 6-139
Present value of $10,000 for 20 periods at 6% ($10,000 × 11.46992) =
Present value of $200,000 discounted for 20 periods at 6% ($200,000 × .31180) =
Market price of the bond issue
$114,699
62,360
$177,059
Ex. 6-140—Calculate market price of a bond.
On January 1, 2010 Lance Co. issued five-year bonds with a face value of $400,000 and a stated
interest rate of 12% payable semiannually on July 1 and January 1. The bonds were sold to yield
10%. Present value table factors are:
Present value of 1 for 5 periods at 10%
.62092
Present value of 1 for 5 periods at 12%
.56743
Present value of 1 for 10 periods at 5%
.61391
Present value of 1 for 10 periods at 6%
.55839
Present value of an ordinary annuity of 1 for 5 periods at 10%
3.79079
Present value of an ordinary annuity of 1 for 5 periods at 12%
3.60478
Present value of an ordinary annuity of 1 for 10 periods at 5%
7.72173
Present value of an ordinary annuity of 1 for 10 periods at 6%
7.36009
Calculate the issue price of the bonds.
Solution 6-140
Present value of $400,000 discounted for 10 periods at 5% ($400,000 × .61391) =
Present value of $24,000 for 10 periods at 5% ($24,000 × 7.72173) =
Issue price of the bonds
$245,564
185,322
$430,886
PROBLEMS
Pr. 6-141—Annuity with change in interest rate.
Jan Green established a savings account for her son's college education by making annual
deposits of $6,000 at the beginning of each of six years to a savings account paying 8%. At the
end of the sixth year, the account balance was transferred to a bank paying 10%, and annual
deposits of $6,000 were made at the end of each year from the seventh through the tenth years.
What was the account balance at the end of the tenth year?
Solution 6-141
Years 1-6:
Future value of annuity due of $6,000 for 6 periods at 8%:
(7.33592 × 1.08) × $6,000 = $47,537
Years 7-10: Future value of $47,537 for 4 periods at 10%:
6 - 30
Test Bank for Intermediate Accounting, IFRS Edition
1.4641 × $47,537 = $69,599
Future value of ordinary annuity of $6,000 for 4 periods at 10%:
4.6410 × $6,000 = $27,846
Sum in bank at end of tenth year:
$27,846 + $69,599 = $97,445
Pr. 6-142—Present value and future value computations.
Part (a) Compute the amount that a $20,000 investment today would accumulate at 10%
(compound interest) by the end of 6 years.
Part (b) Tom wants to retire at the end of this year (2010). His life expectancy is 20 years from
his retirement. Tom has come to you, his CPA, to learn how much he should deposit on
December 31, 2010 to be able to withdraw $40,000 at the end of each year for the next
20 years, assuming the amount on deposit will earn 8% interest annually.
Part (c) Judy Thomas has a $1,200 overdue debt for medical books and supplies at Joe's
Bookstore. She has only $400 in her checking account and doesn't want her parents to
know about this debt. Joe's tells her that she may settle the account in one of two ways
since she can't pay it all now:
1. Pay $400 now and $1,000 when she completes her residency, two years from today.
2. Pay $1,600 one year after completion of residency, three years from today.
Assuming that the cost of money is the only factor in Judy's decision and that the cost of
money to her is 8%, which alternative should she choose? Your answer must be
supported with calculations.
Solution 6-142
Part (a) Future value of $20,000 compounded @ 10% for 6 years
($20,000 × 1.77156) = $35,431.
Part (b) Present value of a $40,000 ordinary annuity discounted @ 8% for 20 years
($40,000 × 9.81815) = $392,726.
Part (c) Alternative 1
Present value of $1,000 discounted @ 8% for 2 years
($1,000 × .85734) = Present value of $1,000 now =
Present value of $400 now =
Present value of Alternative 1
Alternative 2
Present value of $1,600 discounted @ 8% for 3 years ($1,600 × .79383)
On the present value basis, Alternative 1 is preferable.
$ 857
400
$1,257
$1,270
Accounting and the Time Value of Money
6 - 31
Pr. 6-143—Present value of an ordinary annuity due.
Jill Morris is presently leasing a small business computer from Eller Office Equipment Company.
The lease requires 10 annual payments of $4,000 at the end of each year and provides the lessor
(Eller) with an 8% return on its investment. You may use the following 8% interest factors:
Future Value of 1
Present Value of 1
Future Value of Ordinary Annuity of 1
Present Value of Ordinary Annuity of 1
Present Value of Annuity Due of 1
9 Periods
1.99900
.50025
12.48756
6.24689
6.74664
10 Periods
2.15892
.46319
14.48656
6.71008
7.24689
11 Periods
2.33164
.42888
16.64549
7.13896
7.71008
Instructions
(a) Assuming the computer has a ten-year life and will have no salvage value at the expiration of
the lease, what was the original cost of the computer to Eller?
(b) What amount would each payment be if the ten annual payments are to be made at the
beginning of each period?
Solution 6-143
(a) Present value of an ordinary annuity of $4,000 at 8% for 10 years is
6.71008 × $4,000 =
$26,840
(b) Present value factor for an annuity due of $4,000 at 8% for 10 years is
7.24689; $26,840 ÷ 7.24689 =
$3,704
Pr. 6-144—Finding the implied interest rate.
Bates Company has entered into two lease agreements. In each case the cash equivalent
purchase price of the asset acquired is known and you wish to find the interest rate which is
applicable to the lease payments.
Instructions
Calculate the implied interest rate for the lease payments.
Lease A — Lease A covers office equipment which could be purchased for $36,048. Bates
Company has, however, chosen to lease the equipment for $10,000 per year, payable at the end
of each of the next 5 years.
Lease B — Lease B applies to a machine which can be purchased for $57,489. Bates Company
has chosen to lease the machine for $12,000 per year on a 6-year lease. Payments are due at
the start of each year.
Solution 6-144
Lease A — Calculation of the Implied Interest Rate:
$10,000 × (factor for Present Value of Ordinary Annuity for 5 yrs.) = $36,048
Factor for Present Value of Ordinary Annuity for 5 yrs. = $36,048 ÷ $10,000
= 3.6048
6 - 32
Test Bank for Intermediate Accounting, IFRS Edition
The 3.6048 factor implies a 12% interest rate.
Lease B — Calculation of the Implied Interest Rate:
$12,000 × (factor for Present Value of Annuity Due for 6 yrs.) = $57,489
Factor for Present Value of Annuity Due for 6 yrs. = $57,489 ÷ $12,000
= 4.79075
The 4.79075 factor implies a 10% interest rate (present value of an annuity due table).
Pr. 6-145—Calculation of unknown rent and interest.
Pine Leasing Company purchased specialized equipment from Wayne Company on December
31, 2009 for $400,000. On the same date, it leased this equipment to Sears Company for 5 years,
the useful life of the equipment. The lease payments begin January 1, 2010 and are made every
6 months until July 1, 2014. Pine Leasing wants to earn 10% annually on its investment.
Various Factors at 10%
Periods
or Rents
9
10
11
Periods
or Rents
9
10
11
Future
Value of $1
2.35795
2.59374
2.85312
Present
Value of $1
.42410
.38554
.35049
Future Value of an
Ordinary Annuity
13.57948
15.93743
18.53117
Present Value of an
Ordinary Annuity
5.75902
6.14457
6.49506
Future
Value of $1
1.55133
1.62889
1.71034
Various Factors at 5%
Present
Future Value of an
Value of $1
Ordinary Annuity
.64461
11.02656
.61391
12.57789
.58468
14.20679
Present Value of an
Ordinary Annuity
7.10782
7.72173
8.30641
Instructions
(a) Calculate the amount of each rent.
(b) How much interest revenue will Pine earn in 2010?
Solution 6-145
(a) Calculation of rent: 7.72173  1.05 = 8.10782
(present value of a 10-rent annuity due at 5%.) $400,000  8.10782 = $49,335.
(b) Interest Revenue during 2010:
Rent No.
1
2
None
Cash
Received
$49,335
49,335
None
Date
1/1/10
7/1/10
12/31/10
Total
Interest
Revenue
$ -017,533
15,943 (Accrual)
$33,476
Lease
Receivable
$350,665
318,863
Accounting and the Time Value of Money
6 - 33
Pr. 6-146—Deferred annuity.
Carey Company owns a plot of land on which buried toxic wastes have been discovered. Since it
will require several years and a considerable sum of money before the property is fully detoxified
and capable of generating revenues, Carey wishes to sell the land now. It has located two
potential buyers: Buyer A, who is willing to pay $320,000 for the land now, and Buyer B, who is
willing to make 20 annual payments of $50,000 each, with the first payment to be made 5 years
from today. Assuming that the appropriate rate of interest is 9%, to whom should Carey sell the
land? Show calculations.
Solution 6-146
Buyer A. The present value of the purchase price is $320,000.
Buyer B. The present value of the purchase price is:
Present value of ordinary annuity of $50,000 for 24 periods at 9%
Less present value of ordinary annuity of $50,000 for 4 periods (deferred) at 9%
Difference
Multiplied by annual payments
Present value of payments
9.70661
3.23972
6.46689
× $50,000
$323,345
Conclusion: Carey should sell to Buyer B.
Pr. 6-147
Lupo's washers Dryers offers a 2-year warranty on all appliances sold. The company is trying to
estimate the warranty expense for 2011 and the related warranty liability at December 31, 2011.
Because there is no ready market for such warranty contracts, the company must estimate the
fair value of the contracts using the expected cash flow approach shown below are the estimated
cash flows and probability assessments for 2011 and 2012.
2011
2012
Cost flow
Estimate
*3,900
6,400
7,600
Probability
Assessment
30%
50%
20%
*5,500
7,400
8,000
20%
50%
30%
Instructions:
Assuming a risk-free rate of 6% and that the cash flows occurs at year-end, calculate the
warranty obligation:
6 - 34
Test Bank for Intermediate Accounting, IFRS Edition
Solution 6-147
Cost Flow
Assumption
*3,900
6,400
7,600
2011
2012
Probability
x Assessment
30%
50%
20%
*5,500
7,400
8,000
Estimated
Cash Flow
*5,890
7,200
Year
2011
2012
Total
20%
50%
30%
x
PV Factor
I = 6%
0.94340
0.89000
Expected
= Cash Flow
*1,170
3,200
1,520
*5,890
*1,100
3,700
2,400
*7,200
= Present Value
*5,557
6,408
*11,965