$35.00

**ACCOUNTING AND THE TIME VALUE OF MONEY**

**IFRS questions are available at the end of this chapter.**

**TRUE-FALSe****—Conceptual**

F 1. Time value of money.

T 2. Definition of interest expense.

F 3. Simple interest.

T 4. Compound interest.

T 5. Compound interest.

F 6. Future value of an ordinary annuity.

F 7. Present value of an annuity due.

T 8. Compounding period interest rate.

T 9. Definition of present value.

T 10. Future value of a single sum.

F 11. Determining present value.

F 12. Present value of a single sum.

F 13. Annuity due and interest.

T 14. Annuity due and ordinary annuity.

T 15. Annuity due and ordinary annuity.

T 16. Number of compounding periods.

F 17. Future value of an annuity due factor.

T 18. Present value of an ordinary annuity.

F 19. Future value of a deferred annuity.

T 20. Expected cash flow approach.

**Multiple Choice****—Conceptual**

a 21. Appropriate use of an annuity due table.

d 22. Time value of money.

b 23. Present value situations.

a 24. Definition of interest.

c 25. Interest variables.

d 26. Identification of compounding approach.

b 27. Future value factor.

b 28. Understanding compound interest tables.

a 29. Identification of correct compound interest table.

d 30. Identification of correct compound interest table.

c 31. Identification of correct compound interest table.

c 32. Identification of correct compound interest table.

b 33. Identification of correct compound interest table.

c 34. Identification of present value of 1 table.

c ^{S}35. Identification of correct compound interest table.

a ^{S}36. Identification of correct compound interest table.

**Multiple Choice****—Conceptual** (cont.)

a ^{S}37. Present value of an annuity due table.

c ^{P}38. Definition of an annuity due.

a ^{P}39. Identification of compound interest concept.

d ^{P}40. Identification of compound interest concept.

d 41. Identification of number of compounding periods.

a 42. Adjust the interest rate for time periods.

d 43. Definition of present value.

c ^{P}44. Compound interest concepts.

a 45. Difference between ordinary annuity and annuity due.

c 46. Future value of 1 and present value of 1 relationship.

b 47. Identify future value of 1 concept.

d 48. Determine best bonus option

d 49. Identify future value of an ordinary annuity

b 50. Identify future value of an ordinary annuity

c ^{P}51. Future value of an annuity due factor.

c 52. Determine the timing of rents of an annuity due.

b 53. Factors of an ordinary annuity and an annuity due.

c 54. Determine present value of an ordinary annuity.

b 55. Identification of a future value of an ordinary annuity of 1.

b 56. Present value of an ordinary annuity and an annuity due.

b 57. Difference between an ordinary annuity and an annuity due.

b 58. Present value of ordinary annuity and present value of annuity due

relationship

c 59. Identify present value of ordinary annuity concept.

c 60. Determine least costly option.

d 61. Definition of deferred annuities.

^{P} These questions also appear in the Problem-Solving Survival Guide.

^{S} These questions also appear in the Study Guide.

**Multiple Choice****—Computational**

a 62. Calculate the future value of 1.

d 63. Calculate amount of interest paid.

d 64. Interest compounded quarterly.

c 65. Calculate present value of a future amount.

b 66. Calculate a future value.

a 67. Calculate a future value of an annuity due.

b 68. Calculate a future value.

c 69. Calculate a future value.

c 70. Calculate present value of a future amount.

d 71. Calculate present value of a future amount.

a 72. Calculate present value of an annuity due.

d 73. Calculate the future value of 1.

b 74. Present value of a single sum.

c 75. Present value of a single sum, unknown number of periods.

c 76. Future value of a single sum.

**Multiple Choice****—Computational (cont.)**

b 77. Present value of a single sum.

b 78. Present value of a single sum, unknown number of periods.

c 79. Future value of a single sum.

d 80. Calculate the present value of 1.

c 81. Calculate the future value of 1.

a 82. Calculate the present value of 1.

c 83. Calculate interest rate.

a 84. Calculate number of years.

b 85. Calculate the future value of 1.

c 86. Calculate the present value of 1.

c 87. Calculate the present value of 1.

d 88. Calculate the present value of 1 and present value of an ordinary annuity.

d 89. Calculate number of years.

b 90. Calculate the amount of annual deposit.

d 91. Calculate the amount of annual deposit.

d 92. Calculate the amount of annual deposit.

a 93. Present value of an ordinary annuity.

b 94. Present value of an annuity due.

c 95. Future value of an ordinary annuity.

d 96. Future value of an annuity due.

a 97. Present value of an ordinary annuity.

b 98. Present value of an annuity due.

c 99. Future value of an ordinary annuity.

d 100. Future value of an annuity due.

a 101. Calculate future value of an annuity due.

a 102. Calculate future value of an ordinary annuity.

d 103. Calculate future value of an annuity due.

c 104. Calculate annual deposit for annuity due.

d 105. Calculate cost of machine purchased on installment.

a 106. Calculate present value of an ordinary annuity.

b 107. Calculate present value of an annuity due.

b 108. Calculate cost of machine purchased on installment.

c 109. Calculate cost of machine purchased on installment.

a 110. Calculate the annual rents of leased equipment.

b 111. Calculate present value of an investment in equipment.

b 112. Calculate proceeds from issuance of bonds.

b 113. Calculate proceeds from issuance of bonds.

c 114. Calculate present value of an ordinary annuity.

d 115. Calculate interest rate.

a 116. Calculate present value of an annuity due.

b 117. Calculate effective interest rate.

d 118. Calculate present value of an ordinary annuity.

b 119. Calculate present value of an annuity due.

b 120. Calculate annual interest rate.

c 121. Calculate interest rate.

b 122. Calculate annual lease payment.

a 123. Calculate selling price of bonds.

**Multiple Choice****—CPA Adapted**

c 124. Calculate interest expense of bonds.

d 125. Identification of correct compound interest table.

c 126. Calculate interest revenue of a zero-interest-bearing note.

a 127. Appropriate use of an ordinary annuity table.

b 128. Calculate annual deposit of annuity due.

a 129. Calculate the present value of a note.

a 130. Calculate the present value of a note.

d 131. Determine the issue price of a bond.

b 132. Determine the acquisition cost of a franchise.

**BRIEF Exercises**

B E6-133 Present and future value concepts.

B E6-134 Compute loan payments.

BE6-135 Present value of an investment in equipment.

**EXERCISES**

**Item Description**

E6-136 Future value of an annuity due.

E6-137 Present value of an annuity due.

E6-138 Compute the annual rent.

E6-139 Calculate the market price of a bond.

E6-140 Calculate the market price of a bond.

**PROBLEMS**

P6-141 Present value and future value computations.

P6-142 Annuity with change in interest rate.

P6-143 Present value of ordinary annuity and annuity due.

P6-144 Finding the implied interest rate.

P6-145 Calculation of unknown rent and interest.

P6-146 Deferred annuity.

**CHAPTER LEARNING OBJECTIVES**

- 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.

**SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS**

Item | Type | Item | Type | Item | Type | Item | Type | Item | Type | Item | Type | Item | Type |

Learning Objective 1 | |||||||||||||

1. | TF | 2. | TF | 22. | MC | 23. | MC | 24. | MC | 25. | MC | ||

Learning Objective 2 | |||||||||||||

3. | TF | 4. | TF | 5. | TF | 26. | MC | 124. | MC | ||||

Learning Objective 3 | |||||||||||||

6. | TF | 21. | MC | 29. | MC | 32. | MC | ^{S}35. | MC | ^{P}38. | MC | 63. | MC |

7. | TF | 27. | MC | 30. | MC | 33. | MC | ^{S}36. | MC | 41. | MC | 64. | MC |

8. | TF | 28. | MC | 31. | MC | 34. | MC | ^{S}37. | MC | 62. | MC | 125. | MC |

Learning Objective 4 | |||||||||||||

9. | TF | ^{P}39. | MC | ^{P}40. | MC | ||||||||

Learning Objective 5 | |||||||||||||

10. | TF | 45. | MC | 68. | MC | 75. | MC | 81. | MC | 87. | MC | 141. | P |

11. | TF | 46. | MC | 69. | MC | 76. | MC | 82. | MC | 89. | MC | ||

12. | TF | 47. | MC | 70. | MC | 77. | MC | 83. | MC | 124. | MC | ||

42. | MC | 48. | MC | 71. | MC | 78. | MC | 84. | MC | 126. | MC | ||

43. | MC | 65. | MC | 73. | MC | 79. | MC | 85. | MC | 133. | BE | ||

^{P}44. | MC | 66. | MC | 74. | MC | 80. | MC | 86. | MC | 135. | BE | ||

Learning Objective 6 | |||||||||||||

13. | TF | 49. | MC | 53. | MC | 92. | MC | 96. | MC | 100. | MC | 104. | MC |

14. | TF | 50. | MC | 67. | MC | 93. | MC | 97. | MC | 101. | MC | 136. | E |

16. | TF | ^{P}51. | MC | 90. | MC | 94. | MC | 98. | MC | 102. | MC | 142. | P |

17. | TF | 52. | NC | 91. | MC | 95. | MC | 99. | MC | 103. | MC | ||

Learning Objective 7 | |||||||||||||

15. | TF | 58. | MC | 106. | MC | 112. | MC | 118. | MC | 128. | MC | 143. | P |

18. | TF | 59. | MC | 107. | MC | 113. | MC | 119. | MC | 132. | MC | 144. | P |

54. | MC | 60. | MC | 108. | MC | 114. | MC | 120. | MC | 134. | BE | 145. | P |

55. | MC | 72. | MC | 109. | MC | 115. | MC | 121. | MC | 137. | E | ||

56. | MC | 88. | MC | 110. | MC | 116. | MC | 122. | MC | 138. | E | ||

57. | MC | 105. | MC | 111. | MC | 117. | MC | 127. | MC | 141. | P | ||

Learning Objective 8 | |||||||||||||

19. | TF | 61. | MC | 123. | MC | 146. | P | 139. | E | 140. | E | ||

129. | MC | 130. | MC | 131. | MC | ||||||||

Learning Objective 9 | |||||||||||||

20. | TF | ||||||||||||

Learning Objective 10 –IFRS Questions | |||||||||||||

1. | TF | 2. | TF | 3. | TF | 4. | TF | 5. | TF | 6. | MC | 7. | MC |

8. | MC | 9. | MC | 10. | MC | 11. | MC | 12. | MC | 13. | MC | 14. | MC |

15. | MC |

Note: TF = True-False E = Exercise BE = Brief Exercise

MC = Multiple Choice P = Problem

**TRUE-FALSE****—Conceptual**

- 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.

- Interest is the excess cash received or repaid over and above the amount lent or borrowed.

- Simple interest is computed on principal and on any interest earned that has not been withdrawn.

- Compound interest, rather than simple interest, must be used to properly evaluate long- term investment proposals.

- Compound interest uses the accumulated balance at each year end to compute interest in the succeeding year.

- The future value of an ordinary annuity table is used when payments are invested at the beginning of each period.

- The present value of an annuity due table is used when payments are made at the end of each period.

- 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.

- Present value is the value now of a future sum or sums discounted assuming compound interest.

- The future value of a single sum is determined by multiplying the future value factor by its present value.

- In determining present value, a company moves backward in time using a process of accumulation.

- 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.

- The rents that comprise an annuity due earn no interest during the period in which they are originally deposited.

- 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.

- 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.

- The number of compounding periods will always be one less than the number of rents when computing the future value of an ordinary annuity.
- 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.

- The present value of an ordinary annuity is the present value of a series of equal rents withdrawn at equal intervals.

- The future value of a deferred annuity is less than the future value of an annuity not deferred.

- The expected cash flow approach uses a range of cash flows and incorporates the probabilities of those cash flows to provide a more relevant present value measurement.

**True False Answers—Conceptual**

Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. |

1. | F | 6. | F | 11. | F | 16. | T |

2. | T | 7. | F | 12. | F | 17. | F |

3. | F | 8. | T | 13. | F | 18. | T |

4. | T | 9. | T | 14. | T | 19. | F |

5. | T | 10. | T | 15. | T | 20. | T |

**MULTIPLE CHOICE****—Conceptual**

- Which of the following transactions would require the use of the present value of an
**annuity due**concept in order to calculate the present value of the asset obtained or liability owed at the date of incurrence? - A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement.
- A capital lease is entered into with the initial lease payment due one month subse-quent to the signing of the lease agreement.
- A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 7%.
- A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 9%.

- What best describes the time value of money?
- The interest rate charged on a loan.
- Accounts receivable that are determined uncollectible.
- An investment in a checking account.
- The relationship between time and money.

- Which of the following situations does not base an accounting measure on present values?
- Pensions.
- Prepaid insurance.
- Leases.
- Sinking funds.

- What is interest?
- Payment for the use of money.
- An equity investment.
- Return on capital.
- Loan.

- What is
**not**a variable that is considered in interest computations? - Principal.
- Interest rate.
- Assets.
- Time.

- If you invest $50,000 to earn 8% interest, which of the following compounding approaches would return the lowest amount after one year?
- Daily.
- Monthly.
- Quarterly.
- Annually.

- 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?
- Present value of $1 for 10 periods at 8% per period.
- Future value of $1 for 10 periods at 8% per period.
- The factors are the same.
- Need more information.

- Which of the following tables would show the smallest value for an interest rate of 5% for six periods?
- Future value of 1
- Present value of 1
- Future value of an ordinary annuity of 1
- Present value of an ordinary annuity of 1

- 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?
- Future value of 1 or present value of 1
- Future value of an annuity due of 1
- Future value of an ordinary annuity of 1
- Present value of an ordinary annuity of 1

- 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?
- Future value of an ordinary annuity of 1
- Future value of an annuity due of 1
- Present value of an annuity due of 1
- None of these answer choices are correct.

- Which table has a factor of 1.00000 for 1 period at every interest rate?
- Future value of 1
- Present value of 1
- Future value of an ordinary annuity of 1
- Present value of an ordinary annuity of 1
- Which table would show the largest factor for an interest rate of 8% for five periods?
- Future value of an ordinary annuity of 1
- Present value of an ordinary annuity of 1
- Future value of an annuity due of 1
- Present value of an annuity due of 1

- Which of the following tables would show the smallest factor for an interest rate of 10% for six periods?
- Future value of an ordinary annuity of 1
- Present value of an ordinary annuity of 1
- Future value of an annuity due of 1
- Present value of an annuity due of 1

- 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?
- Future value of 1
- Future value of annuity of 1
- Present value of 1
- Present value of annuity of 1

^{S}35. Which of the following tables would show the largest value for an interest rate of 10% for 8 periods?

- Future amount of 1 table.
- Present value of 1 table.
- Future amount of an ordinary annuity of 1 table.
- Present value of an ordinary annuity of 1 table.

^{S}36. On June 1, 2014, 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, 2014. What type of compound interest table is appropriate for this situation?

- Present value of an annuity due of 1 table.
- Present value of an ordinary annuity of 1 table.
- Future amount of an ordinary annuity of 1 table.
- Future amount of 1 table.

^{S}37. Which of the following transactions would best use the present value of an annuity due of 1 table?

- Fernetti, Inc. rents a truck for 5 years with annual rental payments of $20,000 to be made at the beginning of each year.
- Edmiston Co. rents a warehouse for 7 years with annual rental payments of $120,000 to be made at the end of each year.
- Durant, Inc. borrows $20,000 and has agreed to pay back the principal plus interest in three years.
- Babbitt, Inc. wants to deposit a lump sum to accumulate $50,000 for the construction of a new parking lot in 4 years.

^{P}38. 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

- ordinary annuity.
- annuity in arrears.
- annuity due.
- unearned receipt.

^{P}39. In the time diagram below, which concept is being depicted?

0 | 1
$1 | 2
$1 | 3
$1 | 4
$1 | |||||

- Present value of an ordinary annuity
- Present value of an annuity due
- Future value of an ordinary annuity
- Future value of an annuity due

^{P}40. On December 1, 2014, 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, 2014, the date of the sale. What present value concept is appropriate for this situation?

- Future amount of an annuity of 1 for four periods
- Future amount of 1 for four periods
- Present value of an ordinary annuity of 1 for four periods
- Present value of an annuity due of 1 for four periods.

- An amount is deposited for eight years at 8%. If compounding occurs quarterly, then the table value is found at
- 8% for eight periods.
- 2% for eight periods.
- 8% for 32 periods.
- 2% for 32 periods.

- If the number of periods is known, the interest rate is determined by
- dividing the future value by the present value and looking for the quotient in the future value of 1 table.
- dividing the future value by the present value and looking for the quotient in the present value of 1 table.
- dividing the present value by the future value and looking for the quotient in the future value of 1 table.
- multiplying the present value by the future value and looking for the product in the present value of 1 table.

- Present value is
- The value now of a future amount.
- The amount that must be invested now to produce a known future value.
- Always smaller than the future value.
- All of these answer choices are correct.

^{P}44. Which of the following statements is true?

- The higher the discount rate, the higher the present value.
- The process of accumulating interest on interest is referred to as discounting.
- If money is worth 10% compounded annually, $1,100 due one year from today is equivalent to $1,000 today.
- If a single sum is due on December 31, 2014, the present value of that sum decreases as the date draws closer to December 31, 2014.

- What is the primary difference between an ordinary annuity and an annuity due?
- The timing of the periodic payment.
- The interest rate.
- Annuity due only relates to present values.
- Ordinary annuity only relates to present values.

- What is the relationship between the future value of one and the present value of one?
- The present value of one equals the future value of one plus one.
- The present value of one equals one plus future value factor for n-1 periods.
- The present value of one equals one divided by the future value of one.
- The present value of one equals one plus the future value factor for n+1 value

- 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?
- Present value of one.
- Future value of one.
- Present value of an annuity due.
- Future value of an ordinary annuity.

- 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?
- The options are equivalent.
- Insufficient information to determine.
- The signing bonus of $23,000 payable on the first day of work.
- The signing bonus of $26,000 payable after one year of employment.

- 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?
- Present value of one.
- Future value of one.
- Present value of an annuity due.
- Future value of an ordinary annuity.

- Betty wants to know how much she should begin saving each month to fund her retirement. What kind of problem is this?
- Present value of one.
- Future value of an ordinary annuity.
- Present value of an ordinary.
- Future value of one.

^{P}51 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%

- plus 1.10.
- minus 1.10.
- multiplied by 1.10.
- divided by 1.10.

- Which of the following is true?
- Rents occur at the beginning of each period of an ordinary annuity.
- Rents occur at the end of each period of an annuity due.
- Rents occur at the beginning of each period of an annuity due.
- None of these answer choices are correct.

- Which of the following statements is
**false***?* - 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.
- 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.
- The factor for the future value of an annuity due is found by subtracting from the ordinary annuity table value for one more period.
- The factor for the present value of an annuity due is found by adding to the ordinary annuity table value for one less period.

- 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?
- $20,000 times the future value of a 5-year, 10% ordinary annuity of 1.
- $20,000 divided by the future value of a 5-year, 10% ordinary annuity of 1.
- $20,000 times the present value of a 5-year, 10% ordinary annuity of 1.
- $20,000 divided by the present value of a 5-year, 10% ordinary annuity of 1.

- Sue Gray wants to invest a certain sum of money at the end of each year for five years. The investment will earn 6% compounded annually. At the end of five years, she will need a total of $40,000 accumulated. How should she compute her required annual invest-ment?
- $40,000 times the future value of a 5-year, 6% ordinary annuity of 1.
- $40,000 divided by the future value of a 5-year, 6% ordinary annuity of 1.
- $40,000 times the present value of a 5-year, 6% ordinary annuity of 1.
- $40,000 divided by the present value of a 5-year, 6% ordinary annuity of 1.

- 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
- seven periods.
- eight periods and multiply by (1 + .10).
- eight periods.
- nine periods and multiply by (1 – .10).

- If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates, then
- the present value of the annuity due is less than the present value of the ordinary annuity.
- the present value of the annuity due is greater than the present value of the ordinary annuity.
- the future value of the annuity due is equal to the future value of the ordinary annuity.
- the future value of the annuity due is less than the future value of the ordinary annuity.

- 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?
- The ordinary annuity factor is not related to the annuity due factor.
- The annuity due factor equals one plus the ordinary annuity factor for n-1 periods.
- The ordinary annuity factor equals one plus the annuity due factor for n+1 periods.
- The annuity due factor equals the ordinary annuity factor for n+1 periods minus one.

- 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?
- Present value of one.
- Future value of one.
- Present value of an ordinary annuity.
- Future value of an ordinary annuity.

- Stemway Company requires a new manufacturing facility. It found three locations; all of which would provide the 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?
- Location A.
- Location B.
- Location C.
- Location A and Location B.

- Which of the following is
**false***?* - The future value of a deferred annuity is the same as the future value of an annuity not deferred.
- A deferred annuity is an annuity in which the rents begin after a specified number of periods.
- 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.
- If the first rent is received at the end of the sixth period, it means the ordinary annuity is deferred for six periods.

**Multiple Choice Answers—Conceptual**

Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. |

21. | a | 27. | b | 33. | b | 39. | a | 45. | a | 51. | c | 57. | b |

22. | d | 28. | b | 34. | c | 40. | d | 46. | c | 52. | c | 58. | b |

23. | b | 29. | a | 35. | c | 41. | d | 47. | b | 53. | b | 59. | c |

24. | a | 30. | d | 36. | a | 42. | a | 48. | d | 54. | c | 60. | c |

25. | c | 31. | c | 37. | a | 43. | d | 49. | d | 55. | b | 61. | d |

26. | d | 32. | c | 38. | c | 44. | c | 50. | b | 56. | b |

Solution to Multiple Choice question for which the answer is “none of these.”

- Present value of an Ordinary Annuity of 1.

**Multiple Choice****—Computational**

- Assume ABC Company deposits $70,000 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?
- $94,074.
- $70,000.
- $91,000.
- $93,677.

- Charlie Corp. is purchasing new equipment with a cash cost of $250,000 for an assembly line. The manufacturer has offered to accept $57,400 payment at the end of each of the next six years. How much interest will Charlie Corp. pay over the term of the loan?
- $57,400.
- $250,000.
- $307,400.
- $94,400.

- If a savings account pays interest at 4% compounded quarterly, then the amount of $1 left on deposit for 5 years would be found in a table using
- 5 periods at 4%.
- 5 periods at 1%.
- 20 periods at 4%.
- 20 periods at 1%.

Items 65 through 68 apply to the appropriate use of interest tables. Given below are the future value factors for 1 at 8% for one to five periods. Each of the items 65 to 68 is based on 8% interest compounded annually.

__Periods__ __Future Value of 1 at 8%__

1 1.080

2 1.166

3 1.260

4 1.360

5 1.469

- What amount should be deposited in a bank account today to grow to $15,000 three years from today?
- $15,000 × 1.260
- $15,000 × 1.260 × 3
- $15,000 ÷ 1.260
- $15,000 ÷ 1.080 × 3

- If $5,000 is deposited in a savings account today, what amount will be available three years from today?
- $5,000 ÷ 1.260
- $5,000 × 1.260
- $5,000 × 1.080 × 3
- ($5,000 × 1.080) + ($5,000 × 1.166) + ($5,000 × 1.260)

- What amount will be in a bank account three years from now if $8,000 is invested each year for four years with the first investment to be made today?
- ($8,000 × 1.260) + ($8,000 × 1.166) + ($8,000 × 1.080) + $8,000
- $8,000 × 1.360 × 4
- ($8,000 × 1.080) + ($8,000 × 1.166) + ($8,000 × 1.260) + ($8,000 × 1.360)
- $8,000 × 1.080 × 4

- If $6,000 is deposited in a savings account today, what amount will be available six years from now?
- $6,000 × 1.080 × 6
- $6,000 × 1.080 × 1.469
- $6,000 × 1.166 × 3
- $6,000 × 1.260 × 2

Items 69 through 72 apply to the appropriate use of present value tables. Given below are the present value factors for $1.00 discounted at 10% for one to five periods. Each of the items 69 to 72 is based on 10% interest compounded annually.

Present Value of $1

__Periods__ __Discounted at 10% per Period__

1 0.909

2 0.826

3 0.751

4 0.683

5 0.621

- If an individual deposits $8,000 in a savings account today, what amount of cash would be available two years from today?
- $8,000 × 0.826
- $8,000 × 0.826 × 2
- $8,000 ÷ 0.826
- $8,000 ÷ 0.909 × 2

- What is the present value today of $9,000 to be received six years from today?
- $9,000 × 0.909 × 6
- $9,000 × 0.751 × 2
- $9,000 × 0.621 × 0.909
- $9,000 × 0.683 × 3

- What amount should be deposited in a bank today to grow to $6,000 three years from today?
- $6,000 ÷ 0.751
- $6,000 × 0.909 × 3
- ($6,000 × 0.909) + ($6,000 × 0.826) + ($6,000 × 0.751)
- $6,000 × 0.751

- What amount should an individual have in a bank account today before withdrawal if $7,000 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.)
- $7,000 + ($7,000 × 0.909) + ($7,000 × 0.826) + ($7,000 × 0.751)
- $7,000 ÷ 0.683 × 4
- ($7,000 × 0.909) + ($7,000 × 0.826) + ($7,000 × 0.751) + ($7,000 × 0.683)
- $7,000 ÷ 0.909 × 4

- At the end of two years, what will be the balance in a savings account paying 6% annually if $15,000 is deposited today? The future value of one at 6% for one period is 1.06.
- $15,000
- $15,900
- $16,800
- $16,854

- Mordica Company will receive $300,000 in 7 years. If the appropriate interest rate is 10%, the present value of the $300,000 receipt is
- $153,000.
- $153,948.
- $453,000.
- $584,616.

- Dunston Company will receive $300,000 in a future year. If the future receipt is discounted at an interest rate of 10%, its present value is $153,948. In how many years is the $300,000 received?
- 5 years
- 6 years
- 7 years
- 8 years

- Milner Company will invest $500,000 today. The investment will earn 6% for 5 years, with no funds withdrawn. In 5 years, the amount in the investment fund is
- $500,000.
- $650,000.
- $669,115.
- $670,145.

- Barber Company will receive $900,000 in 7 years. If the appropriate interest rate is 10%, the present value of the $900,000 receipt is
- $459,000.
- $461,844.
- $1,359,000.
- $1,753,848.

- Barkley Company will receive $400,000 in a future year. If the future receipt is discounted at an interest rate of 8%, its present value is $252,068. In how many years is the $400,000 received?
- 5 years
- 6 years
- 7 years
- 8 years

- Altman Company will invest $700,000 today. The investment will earn 6% for 5 years, with no funds withdrawn. In 5 years, the amount in the investment fund is
- $700,000.
- $910,000.
- $936,761.
- $938,203.

- John Jones won a lottery that will pay him $3,000,000 after twenty years. Assuming an appropriate interest rate is 5% compounded annually, what is the present value of this amount?
- $3,000,000.
- $7,959,900.
- $37,386,630.
- $1,130,670.

- Angie invested $150,000 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?
- $232,701.
- $241,575.
- $244,335.
- $265,734.

- Bella requires $160,000 in four years to purchase a new home. What amount must be invested today in an investment that earns 6% interest, compounded annually?
- $126,734.
- $131,632.
- $193,783.
- $201,996.

- What interest rate (the nearest percent) must Charlie earn on a $226,000 investment today so that he will have $570,000 after 12 years?
- 6%.
- 7%.
- 8%.
- 9%.

- Ethan has $160,000 to invest today at an annual interest rate of 4%. Approximately how many years will it take before the investment grows to $324,000?
- 18 years.
- 20 years.
- 16 years.
- 11 years.

- Jane wants to set aside funds to take an around the world cruise in four years. Assuming that Jane has $12,000 to invest today in an account expected to earn 6% per annum, how much will she have to spend on her vacation?
- $9,504.
- $15,150.
- $52,495.
- $16,059.

- 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?
- $2,663.
- $16,325.
- $8,820.
- $8,167.

- What would you pay for an investment that pays you $2,500,000 after forty years? Assume that the relevant interest rate for this type of investment is 6%.
- $77,950.
- $779,500.
- $243,050.
- $259,175.

- What would you pay for an investment that pays you $30,000 at the end of each year for the next ten years and then returns a maturity value of $450,000 after ten years? Assume that the relevant interest rate for this type of investment is 8%.
- $208,437.
- $201,303.
- $217,404.
- $409,737.

- Anna has $15,000 to invest. She requires $25,000 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?
- 6 years.
- 7 years.
- 8 years.
- 9 years.

- Lucy and Fred want to begin saving for their baby’s college education. They estimate that they will need $150,000 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?
- $4,853.
- $4,579.
- $8,333.
- $4,443.

- Lucy and Fred want to begin saving for their baby’s college education. They estimate that they will need $100,000 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?
- $3,873.
- $8,555.
- $8,274.
- $3,555.

- 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?
- $2,663.
- $16,325.
- $8,820.
- $2,466.

- Pearson Corporation makes an investment today (January 1, 2014). They will receive $9,000 every December 31st for the next six years (2014 – 2019). If Pearson wants to earn 12% on the investment, what is the most they should invest on January 1, 2014?
- $37,003.
- $41,443.
- $73,036.
- $81,801.

- Garretson Corporation will receive $10,000 today (January 1, 2014), and also on each January 1st for the next five years (2015 – 2019). What is the present value of the six $10,000 receipts, assuming a 12% interest rate?
- $41,114.
- $46,048.
- $81,152.
- $90,890.

- Spencer Corporation will invest $20,000 every December 31st for the next six years (2014 – 2019). If Spencer will earn 12% on the investment, what amount will be in the investment fund on December 31, 2019?
- $82,228.
- $92,096.
- $162,304.
- $181,780.

- Tipson Corporation will invest $20,000 every January 1st for the next six years (2014 – 2019). If Tipson will earn 12% on the investment, what amount will be in the investment fund on December 31, 2019?
- $82,228
- $92,096.
- $162,304.
- $181,780.

- Hiller Corporation makes an investment today (January 1, 2014). They will receive $50,000 every December 31st for the next six years (2014 – 2019). If Hiller wants to earn 12% on the investment, what is the most they should invest on January 1, 2014?
- $205,571.
- $230,239.
- $465,760.
- $454,450.

- Sonata Corporation will receive $30,000 today (January 1, 2014), and also on each January 1st for the next five years (2015 – 2019). What is the present value of the six $30,000 receipts, assuming a 12% interest rate?
- $123,342.
- $138,143.
- $243,456.
- $272,670.

- Renfro Corporation will invest $70,000 every December 31st for the next six years (2014 – 2019). If Renfro will earn 12% on the investment, what amount will be in the investment fund on December 31, 2019?
- $287,798
- $322,336.
- $568,063.
- $636,230.

- Vannoy Corporation will invest $60,000 every January 1st for the next six years (2014 – 2019). If Vannoy will earn 12% on the investment, what amount will be in the investment fund on December 31, 2019?
- $246,684.
- $276,288.
- $486,912.
- $545,341.

- On January 1, 2014, 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 2014. What will be the balance in the fund, on January 1, 2019 (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

- $326,165
- $299,235
- $272,500
- $250,000

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

Present Value of Future Value of

__Ordinary Annuity__ __Ordinary Annuity__

7 periods 5.2064 8.92280

8 periods 5.7466 10.63663

9 periods 6.2469 12.48756

- What will be the balance on September 1, 2020 in a fund which is accumulated by making $20,000 annual deposits each September 1 beginning in 2013, with the last deposit being made on September 1, 2020? The fund pays interest at 8% compounded annually.
- $212,733
- $178,458
- $151,200
- $114,932

- If $9,000 is deposited annually starting on January 1, 2014 and it earns 8%, what will the balance be on December 31, 2021?
- $80,306
- $86,730
- $95,730
- $103,388

- Korman Company wishes to accumulate $500,000 by May 1, 2022 by making 8 equal annual deposits beginning May 1, 2014 to a fund paying 8% interest compounded annually. What is the required amount of each deposit?
- $87,008
- $47,008
- $43,525
- $50,390

- What amount should be recorded as the cost of a machine purchased December 31, 2014, which is to be financed by making 8 annual payments of $9,000 each beginning December 31, 2015? The applicable interest rate is 8%.
- $63,000
- $56,222
- $95,730
- $51,719

- How much must be deposited on January 1, 2014 in a savings account paying 6% annually in order to make annual withdrawals of $30,000 at the end of the years 2014 and 2015? The present value of one at 6% for one period is .9434.
- $55,002
- $56,610
- $60,000
- $26,700

- How much must be invested now to receive $30,000 for 15 years if the first $30,000 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

- $241,821
- $263,585
- $450,000
- $219,375

- Jenks Company financed the purchase of a machine by making payments of $20,000 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?
- $29,588
- $79,854
- $100,000
- $117,334

- A machine is purchased by making payments of $8,000 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?
- $53,725
- $48,841
- $33,359
- $30,327

- Lane Co. has a machine that cost $500,000. 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

- $53,391
- $59,773
- $74,320
- $58,730

- Find the present value of an investment in plant and equipment if it is expected to provide annual earnings of $39,000 for 15 years and to have a resale value of $75,000 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.
- $296,637
- $314,592
- $371,637
- $602,955

- On January 2, 2014, Wine Corporation wishes to issue $4,000,000 (par value) of its 8%, 10-year bonds. The bonds pay interest annually on January 1. The current yield rate on such bonds is 10%. Using the interest factors below, compute the amount that Wine will realize from the sale (issuance) of the bonds.

Present value of 1 at 8% for 10 periods 0.4632

Present value of 1 at 10% for 10 periods 0.3855

Present value of an ordinary annuity at 8% for 10 periods 6.7101

Present value of an ordinary annuity at 10% for 10 periods 6.1446

- $4,000,000
- $3,508,272
- $4,000,024
- $4,424,104

- The market price of an $800,000, ten-year, 12% (pays interest semiannually) bond issue sold to yield an effective rate of 10% is
- $898,312.
- $899,698.
- $906,616.
- $1,497,888.

- John won a lottery that will pay him $250,000 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?
- $2,650,900.
- $53,638.
- $2,454,538.
- $11,440,490.

- John won a lottery that will pay him $250,000 at the end of each of the next twenty years. Zebra Finance has offered to purchase the payment stream for $3,397,500. What interest rate (to the nearest percent) was used to determine the amount of the payment?
- 7%.
- 6%.
- 5%.
- 4%.

- James leases a ski chalet to his best friend, Janet. The lease term is five years with $20,000 annual payments due at the beginning of each year. What is the present value of the payments discounted at 8% per annum?
- $86,243.
- $79,855.
- $76,346.
- $72,488.

- Jeremy is in the process of purchasing a car. The list price of the car is $42,000. 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 $8,990 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?
- 5%.
- 6%.
- 7%.
- 8%.

- What would you pay for an investment that pays you $20,000 at the end of each year for the next twenty years? Assume that the relevant interest rate for this type of investment is 12%.
- $167,316.
- $1,441,048.
- $20,733.
- $149,389.

- What would you pay for an investment that pays you $30,000 at the beginning of each year for the next ten years? Assume that the relevant interest rate for this type of investment is 10%.
- $184,335.
- $202,771.
- $194,853.
- $214,338.

- Ziggy is considering purchasing a new car. The cash purchase price for the car is $39,200. What is the annual interest rate if Ziggy is required to make annual payments of $9,100 at the end of the next five years?
- 4%.
- 5%.
- 6%.
- 7%.

- Charlie Corp. is purchasing new equipment with a cash cost of $250,000 for the assembly line. The manufacturer has offered to accept $57,400 payments at the end of each of the next six years. What is the interest rate that Charlie Corp. will be paying?
- 8%.
- 9%.
- 10%.
- 11%.

- 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 $800,000. 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%?
- $85,427.
- $93,968.
- $13,968.
- $40,419.

- Stech Co. is issuing $7.5 million 12% bonds in a private placement on July 1, 2014. 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?
- $9,538,574.
- $11,250,000.
- $9,512,998.
- $9,589,572.

**Multiple Choice Answers—Computational**

Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. |

62. | a | 71. | d | 80. | d | 89. | d | 98. | b | 107. | b | 116. | a |

63. | d | 72. | a | 81. | c | 90. | b | 99. | c | 108. | b | 117. | b |

64. | d | 73. | d | 82. | a | 91. | d | 100. | d | 109. | c | 118. | d |

65. | c | 74. | b | 83. | c | 92. | d | 101. | a | 110. | a | 119. | b |

66. | b | 75. | c | 84. | a | 93. | a | 102. | a | 111. | b | 120. | b |

67. | a | 76. | c | 85. | b | 94. | b | 103. | d | 112. | b | 121. | c |

68. | b | 77. | b | 86. | c | 95. | c | 104. | c | 113. | b | 122. | b |

69. | c | 78. | b | 87. | c | 96. | d | 105. | d | 114. | c | 123. | a |

70. | c | 79. | c | 88. | d | 97. | a | 106. | a | 115. | d |

**Multiple Choice****—CPA Adapted**

- On January 1, 2014, Gore Co. sold to Cey Corp. $800,000 of its 10% bonds for $708,236 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Gore report as interest expense for the six months ended June 30, 2014?
- $35,412
- $40,000
- $42,494
- $48,000

- On May 1, 2014, a company purchased a new machine which it does not have to pay for until May 1, 2016. The total payment on May 1, 2016 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?
- Future value of annuity of 1
- Future value of 1
- Present value of annuity of 1
- Present value of 1

- On January 1, 2014, Ball Co. exchanged equipment for a $500,000 zero-interest-bearing note due on January 1, 2017. The prevailing rate of interest for a note of this type at January 1, 2014 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 2015 income statement?
- $0
- $37,500
- $41,250
- $50,000

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

- On January 15, 2014, Dolan Corp. adopted a plan to accumulate funds for environmental improvements beginning July 1, 2018, at an estimated cost of $6,000,000. 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, 2014. Future value factors are as follows:

Future value of 1 at 10% for 5 periods 1.61

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

Future value of annuity due of 1 at 10% for 4 periods 5.11

Dolan should make four annual deposits of

- $1,067,426.
- $1,174,168.
- $1,293,103.
- $1,500,000.

- On December 30, 2014, AGH, Inc. purchased a machine from Grant Corp. in exchange for a zero-interest-bearing note requiring eight payments of $90,000. The first payment was made on December 30, 2014, 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, 2014 balance sheet, the net note payable to Grant is

- $424,080.
- $463,140.
- $471,195.
- $514,080.

- On January 1, 2014, Ott Co. sold goods to Flynn Company. Flynn signed a zero-interest-bearing note requiring payment of $150,000 annually for seven years. The first payment was made on January 1, 2014. The prevailing rate of interest for this type of note at date of issuance was 10%. Information on present value factors is as follows:

Present Value Present Value of Ordinary

__Period__ __of 1 at 10%__ __Annuity of 1 at 10%__

6 .5645 4.3553

7 .5132 4.8684

Ott should record sales revenue in January 2014 of

- $803,286.
- $730,260.
- $653,295.
- $535,500.

- On January 1, 2014, 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

- $4,000,000.
- $3,920,000.
- $3,680,000.
- $3,510,400.

- On July 1, 2014, Ed Wynne signed an agreement to operate as a franchisee of Kwik Foods, Inc., for an initial franchise fee of $600,000. Of this amount, $200,000 was paid when the agreement was signed and the balance is payable in four equal annual payments of $100,000 beginning July 1, 2015. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. Wynne’s credit rating indicates that he can borrow money at 14% for a loan of this type. Information on present and future value factors is as follows:

Present value of 1 at 14% for 4 periods 0.59

Future value of 1 at 14% for 4 periods 1.69

Present value of an ordinary annuity of 1 at 14% for 4 periods 2.91

Wynne should record the acquisition cost of the franchise on July 1, 2014 at

- $436,000.
- $491,000.
- $600,000.
- $676,000.

**Multiple Choice Answers—CPA Adapted**

Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. |

124. | c | 126. | c | 128. | b | 130. | a | 132. | b |

125. | d | 127. | a | 129. | a | 131. | d |

**DERIVATIONS** **— Computational**

**No. Answer Derivation**

- a $70,000 × 1.34392 = $94,074.

- d ($57,400 × 6) – $250,000 = $94,400.

- d 4 × 5 = 20 periods; 4% ÷ 4 = 1%.

- c 1.260 × PV = $15,000; PV = $15,000 ÷ 1.260.

- b 1.260 × $5,000.

**No. Answer Derivation**

- a ($8,000 × 1.260) + ($8,000 × 1.166) + ($8,000 × 1.080) + $8,000.

- b $6,000 × (1.080)
^{6}or $6,000 × 1.469 × 1.080.

- c 0.826 × FV = $8,000; FV = $8,000 ÷ 0.826.

- c $9,000 × 0.621 × 0.909.

- d $6,000 × 0.751.

- a $7,000 + ($7,000 × 0.909) + ($7,000 × 0.826) + ($7,000 × 0.751).

- d $15,000 × (1.06)
^{2}= $16,854.

- b $300,000 × 0.51316 = $153,948.

- c $153,948 ÷ $300,000 = 0.51316; 0.51316 is PV factor for 7 years.

- c $500,000 × 1.33823 = $669,115.

- b $900,000 × 0.51316 = $461,844.

- b $252,068 ÷ $400,000 = 0.63017; 0.63017 is PV factor for 6 years.

- c $700,000 × 1.33823 = $936,761.

- d $3,000,000 × .37689 = $1,130,670.

- c $150,000 × 1.62890 = $244,335.

- a $160,000 × .79209 = $126,734.

- c $226,000 ÷ $570,000 = .39649; .39649 is PV factor for 8%.

- a $324,000 ÷ $160,000 = 2.025; 2.025 is FV factor for 18 years.

- b $12,000 × 1.26248 = $15,150.

- c $12,000 × .73503 = $8,820.

- c $2,500,000 × .09722 = $243,050.

- d ($30,000 × 6.71008) + ($450,000 × .46319) = $409,737.

- d $25,000 ÷ $15,000 = 1.66667; 1.66667 is FV factor for 9 years.

- b $150,000 ÷ (30.90565 × 1.06) = $4,579.

- d $100,000 ÷ 28.13238 = $3,555.

**No. Answer Derivation**

- d $12,000 ÷ (4.50611 × 1.08) = $2,466.

- a $9,000 × 4.11141 = $37,003.

- b $10,000 × 4.60478 = $46,048.

- c $20,000 × 8.11519 = $162,304.

- d $20,000 × 8.11519 × 1.12 = $181,780.

- a $50,000 × 4.11141 = $205,571.

- b $30,000 × 4.60478 = $138,143.

- c $70,000 × 8.11519 = $568,063.

- d $60,000 × 8.11519 × 1.12 = $545,341.

- a $50,000 × (7.5233 – 1) = $326,165 or $50,000 × 5.9847 × 1.09.

- a $20,000 × 10.63663 = $212,733.

- d $9,000 × (12.48756 – 1) = $103,388 or $9,000 × 10.63663 × 1.08.

- c (10.63663 × 1.08) × R = $500,000; R = $500,000 ÷ 11.48756 = $43,525.

- d $9,000 × 5.7466 = $51,719.

- a ($30,000 × 0.9434) + [$30,000 × (0.9434)
^{2}] = $55,002.

- b $30,000 × (7.78615 + 1) = $263,585 or $30,000 × 8.06069 × 1.09.

- b $20,000 × 3.99271 = $79,854.

- c $8,000 × (3.79079 × 1.10) = $8,000 × 4.16987 = $33,359.

- a $500,000 = R × (8.51356 × 1.10); R = $500,000 ÷ 9.36492 = $53,391.

- b ($39,000 × 7.60608) + ($75,000 × .23939) = $314,592.

- b $4,000,000 × .08 = $320,000 (annual interest payment)

($320,000 × 6.1446) + ($4,000,000 × 0.3855) = $3,508,272.

- b $800,000 × .06 = $48,000 (semiannual interest payment)

($48,000 × 12.46221) + ($800,000 × .37689) = $899,698.

- c $250,000 × 9.81815 = $2,454,538.

- d $3,397,500 ÷ $250,000 = 13.59; 13.59 is PV factor for 4%.

**No. Answer Derivation**

- a $20,000 × 4.31214 = $86,243.

- b ($42,000 × .90) ÷ $8,990 = 4.20467, 4.20438 is PV factor for 6%.

- d $20,000 × 7.46944 = $149,389.

- b $30,000 × 6.75902 = $202,771.

- b $39,200 ÷ $9,100 = 4.30769; 4.30769 is PV factor for 5%.

- c $250,000 ÷ $57,400 = 4.35540; 4.35540 is PV factor for 10%.

- b $800,000 ÷ 8.51356 = $93,968.

- a ($7,500,000 × .45639) + ($450,000 × 13.59033) = $9,538,574.

**DERIVATIONS** **— CPA Adapted**

**No. Answer Derivation**

- c $708,236 × .06 = $42,494.

- d Conceptual.

- c $500,000 × .75 = $375,000 (present value of note)

$375,000 × 1.10 = $412,500; $412,500 × 0.10 = $41,250.

- a Conceptual.

- b 5.11 × R = $6,000,000; R = $6,000,000 ÷ 5.11 = $1,174,168.

- a $90,000 × 4.712 = $424,080 or ($90,000 × 5.712) – $90,000 = $424,080.

- a $150,000 × (4.8684 × 1.1) = $803,286.

- d $4,000,000 × .08 = $320,000

($320,000 × 6.145) + ($4,000,000 × 0.386) = $3,510,400.

- b ($100,000 × 2.91) + $200,000 = $491,000.

**BRIEF Exercises**

**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__ __Diagram of Concept__

_____ 1. Future value of 1. **? $1**

**| | | | |**

_____ 2. Present value of 1.

**?**

_____ 3. Future value of an annuity ** $1 $1 $1 $1**

due of 1. **b. ****|- – – – | | | |**

_____ 4. Future value of an ordinary

annuity of 1. **?**

**$1 $1 $1 $1**

_____ 5. Present value of an ordinary **c. ****| | | |- – – – |**

annuity of 1.

_____ 6. Present value of an annuity **? $1 $1 $1 $1**

due of 1. **d. ****| | | | |**

**$1 ?**

**| | | | |**

**$1 $1 $1 $1 ?**

**| | | | |**

- e 2. a 3. f 4. b 5. d 6. c

**6-134**—Compute loan payments. (Tables needed.)

On January 2, 2014, Jensen Company borrowed $120,000 from Lyon Country Bank. The terms of the loan agreement specified 4 equal annual payments at 6% annual interest. Computer the amount of each of these payments, assuming, they begin on December 31, 2014.

Periodic payments = $120,000 ÷ 3.46511 (Tab. 4, 6%, per.) = __$34,631__.

**6-135**—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 $30,000 for 10 years and to have a resale value of $75,000 at the end of that period. Assume an interest rate of 9% and that savings are realized at year end.

Present value of $30,000 for 10 periods at 9% (6.41766 × $30,000) = $192,530

Present value of $75,000 discounted for 10 periods at 9% (.42241 × $75,000) = __ 31,681__

Present value of investment in equipment __$224,211__

**EXERCISES**

**Ex. 6-136**—Future value of an annuity due. (Tables needed.)

If $9,000 is deposited annually starting on January 1, 2014 and it earns 9%, how much will accumulate by December 31, 2023?

Future value of an annuity due of $9,000 for 10 periods at 9%

($9,000 × 15.19293 × 1.09) = __$149,043__.

**Ex. 6-137**—Present value of an annuity due.(Tables needed.)

How much must be invested now to receive $30,000 for ten years if the first $30,000 is received today and the rate is 8%?

Present value of an annuity due of $30,000 for ten periods at 8% ($30,000 × 7.24689) = __$217,407__.

**Ex. 6-138**—Compute the annual rent. (Tables needed.)

Crone Co. has machinery that cost $120,000. 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.

Present value factor for an annuity due for 15 periods at 10% (1.10 ´ 7.60608) = 8.36669

$120,000 ÷ 8.36669 = __$14,343__.

**Ex. 6-139**—Calculate market price of a bond. (Tables needed.)

Determine the market price of a $500,000, ten-year, 10% (pays interest semiannually) bond issue sold to yield an effective rate of 12%.

Present value of $25,000 for 20 periods at 6% ($25,000 × 11.46992) = $286,748

Present value of $500,000 discounted for 20 periods at 6% ($500,000 × .31180) = __ 155,900__

Market price of the bond issue __$442,648__

**Ex. 6-140**—Calculate market price of a bond.

On January 1, 2014 Lance Co. issued five-year bonds with a face value of $700,000 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.

Present value of $700,000 discounted for 10 periods at 5% ($700,000 × .61391) = $429,737

Present value of $42,000 for 10 periods at 5% ($42,000 × 7.72173) = __ 324,313__

Issue price of the bonds __$754,050__

**PROBLEMS**

**Pr. 6-141**—Present value and future value computations.

Part (a) Compute the amount that a $40,000 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 (2014). 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, 2014 to be able to withdraw $60,000 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 $2,100 overdue debt for medical books and supplies at Joe’s Bookstore. She has only $700 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:

- Pay $700 now and $1,750 when she completes her residency, two years from today.
- Pay $2,800 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.

Part (a) Future value of $40,000 compounded @ 10% for 6 years

($40,000 × 1.77156) = __$70,862__.

Part (b) Present value of a $60,000 ordinary annuity discounted @ 8% for 20 years

($60,000 × 9.81815) = __$589,089__.

Part (c) __Alternative 1__

Present value of $1,750 discounted @ 8% for 2 years

($1,750 × .85734) = Present value of $1,750 now = $1,500

Present value of $700 now = __ 700__

Present value of Alternative 1 __$2,200__

__Alternative 2__

Present value of $2,800 discounted @ 8% for 3 years ($2,800 × .79383) __$2,223__

On the present value basis, Alternative 1 is preferable.

**Pr. 6-142**—Annuity with change in interest rate.

Jan Green established a savings account for her son’s college education by making annual deposits of $9,000 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 $9,000 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?

Years 1-6: Future value of annuity due of $9,000 for 6 periods at 8%:

(7.33592 × 1.08) × $9,000 = __$71,305__

Years 7-10: Future value of $71,305 for 4 periods at 10%:

1.4641 × $71,305 = $104,398

Future value of ordinary annuity of $9,000 for 4 periods at 10%:

4.6410 × $9,000 = $41,769

Sum in bank at end of tenth year:

$41,769 + $104,398 = __$146,167__

**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 $5,000 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:

__9 Periods__ __10 Periods__ __11 Periods__

Future Value of 1 1.99900 2.15892 2.33164

Present Value of 1 .50025 .46319 .42888

Future Value of Ordinary Annuity of 1 12.48756 14.48656 16.64549

Present Value of Ordinary Annuity of 1 6.24689 6.71008 7.13896

Present Value of an Annuity Due of 1 6.74664 7.24689 7.71008

**Pr. 6-143** (cont.)

**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?

(a) Present value of an ordinary annuity of $5,000 at 8% for 10 years is

6.71008 × $5,000 = __$33,550__

(b) Present value factor for an annuity due of $5,000 at 8% for 10 years is

7.24689; $33,550 ÷ 7.24689 = __$4,630__

**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 $126,168. Bates Company has, however, chosen to lease the equipment for $35,000 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 $134,141. Bates Company has chosen to lease the machine for $28,000 per year on a 6-year lease. Payments are due at the start of each year.

__Lease A__ — Calculation of the Implied Interest Rate:

$35,000 × (factor for Present Value of Ordinary Annuity for 5 yrs.) = $126,168

Factor for Present Value of Ordinary Annuity for 5 yrs. = $126,168 ÷ $35,000

= __3.6048__

The 3.6048 factor implies a 12% interest rate.

__Lease B__ — Calculation of the Implied Interest Rate:

$28,000 × (factor for Present Value of Annuity Due for 6 yrs.) = $134,141

Factor for Present Value of Annuity Due for 6 yrs. = $134,141 ÷ $28,000

= __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, 2013 for $800,000. 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, 2014 and are made every 6 months until July 1, 2018. Pine Leasing wants to earn 10% annually on its investment.

Various Factors at 10%

Periods Future Present Future Value of an Present Value of an

__or Rents__ __Value of $1__ __Value of $1__ __Ordinary Annuity__ __Ordinary Annuity__

9 2.35795 .42410 13.57948 5.75902

10 2.59374 .38554 15.93742 6.14457

11 2.85312 .35049 18.53117 6.49506

Various Factors at 5%

Periods Future Present Future Value of an Present Value of an

__or Rents__ __Value of $1__ __Value of $1__ __Ordinary Annuity__ __Ordinary Annuity__

9 1.55133 .64461 11.02656 7.10782

10 1.62889 .61391 12.57789 7.72173

11 1.71034 .58468 14.20679 8.30641

**Instructions**

(a) Calculate the amount of each rent.

(b) How much interest revenue will Pine earn in 2014?

(a) Calculation of rent: 7.72173 ´ 1.05 = 8.10782

(present value of a 10-rent annuity due at 5%.) $800,000 ¸ 8.10782 = $98,670.

(b) Interest Revenue during 2014:

Cash Interest Lease

__Rent No__. __ Date __ __Received__ __Revenue__ __Receivable__

1 1/1/14 $98,670 $ -0- $701,330

2 7/1/14 98,670 35,066 637,726

None 12/31/14 None __ 31,886__ (Accrual)

Total __$66,952__

**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 $575,000 for the land now, and Buyer B, who is willing to make 20 annual payments of $90,000 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.

Buyer A. The present value of the purchase price is __$575,000.__

Buyer B. The present value of the purchase price is:

Present value of ordinary annuity of $90,000 for 24 periods at 9% 9.70661

Less present value of ordinary annuity of $90,000 for 4 periods (deferred) at 9% __ 3.23972__

Difference 6.46689

Multiplied by annual payments __× $90,000__

Present value of payments __$582,020__

Conclusion: Carey should sell to Buyer B.

**IFRS QUESTIONS**

**True / False**

- IFRS does not intend to issue detailed guidance on the selection of a discount rate when the time value of money is required to determine cash flows.

- Under IAS 37 and the establishment of estimate provisions, discounting is required where the time value of money is material.

- Under IFRS, the rate implicit in the lease is generally used to discount minimum lease payments.

- Under IFRS, the discount rate should reflect risks for which future cash flow estimates have been adjusted.

- Under IFRS, if an estimate is being developed for a large number of items with varied outcomes, then the expected value method is used.

**Answers to True / False questions:**

- True
- True
- True
- False
- True

**Multiple Choice Questions:**

- Underwood Company maintains its accounting records using IFRS. The company recently signed a lease for a new office building, for a lease period of 10 years. Under the lease agreement, a security deposit of $25,000 is made, with the deposit to be returned at the expiration of the lease, with interest compounded at 10% per year. What amount will the company receive at the time the lease expires?
- $64,844.
- $50,000.
- $153,615.
- $34,639.

Calculation:

Future value of $25,000 @ 10% for 10 years

($25,000 × 2.59374) = $64,844

Use the following information to answer questions 2 & 3.

Martin Industries maintains its accounting records using IFRS. The company purchases equipment with a price of $400,000. The manufacturer has offered a payment plan that would allow Martin to make 10 equal annual payments of $49,316, with the first payment due one year after the purchase.

- How much total interest will Martin pay on this payment plan?
- $93,160
- $49,316
- $160,000
- $40,000

Calculation: Total interest = Total payments—amount owed today

$493,160 (10 × $49,316) – $400,000 = $93,160.

- Martin could borrow $400,000 from its bank to finance the purchase at an annual rate of 6%. Should Martin borrow from the bank or use the manufacturer’s payment plan to pay for the equipment?
- Borrow from the bank.
- Use the manufacturer’s payment plan.
- The rates for both the bank and manufacturer are the same, so Martin would be indifferent.
- There is not enough information to answer this question.

Calculation: Martin should use the manufacturer’s payment plan, since it is about a 4% rate as compared to the bank’s 6% rate.

PV – OA_{10, i%} = $400,000 ¸ $49,316

= 8.11096; Inspection of the10 period row reveals a rate of about 4%.

- Barton Company, a company who maintains its accounting records using IFRS, manufactures furniture. Barton sells a $90,000 order to Save-A Lot Furniture in exchange for a zero-interest-bearing note due from the customer in two years. Since there is no stated interest rate on the note, the controller uses the current market rate of 8% to derive the present value factor. Based on this information and the incorporation of the time value of money, which of the following would be recorded by Barton to recognize this sale?
- A credit to Discount on Notes Receivable for $12,839.
- A credit to Sales Revenue for $90,000.
- A debit to Notes Receivable for $77,161.
- A debit to Discount on Notes Receivable for $7,200.

Rationale:

Notes Receivable 90,000

Sales Revenue 77,161

Discount on Notes Receivable 12,839

$75,000 ´ PV (8%, 2) = $90,000 ´ .85734 = $77,161

- 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 $3,000,000 of 11% bonds on March 1, 2014, due on March 1, 2029, 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?
- $3,330,000
- $1,904,664
- $3,230,594
- $2,536,454

Calculations:

Formula for the interest payments:

PV – OA = R (PVF – OA_{n, i})

PV – OA = $165,000 (PVF – OA_{30, 5%})

PV – OA = $165,000 (15.37245)

PV – OA = __$2,536,454__

Formula for the principal:

PV = FV (PVF_{n, i})

PV = $3,000,000 (PVF_{30, 5%})

PV = $3,000,000 (0.23138)

PV = __$694,140__

The selling price of the bonds = $2,536,454 + $694,140 = $3,230,594.

- Reegan Company owns a trade name that was purchased in an acquisition of Hamilton Company. The trade name has a book value of $1,800,000, but according to IFRS, it is assessed for impairment on an annual basis. To perform this impairment test, Reegan must estimate the fair value of the trade name. It has developed the following cash flow estimates related to the trade name based on internal information. Each cash flow estimate reflects Reegan’s estimate of annual cash flows over the next 7 years. The trade name is assumed to have no residual value after the 7 years. (Assume the cash flows occur at the end of each year.)

__Probability Assessment__ __Cash Flow Estimate__

30% $240,000

50% 365,000

20% 425,000

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?

- $1,800,000
- $ 339,500
- $1,030,000
- $1,895,218

Calculations: This exercise determines the present value of an ordinary annuity of expected cash flows as a fair value estimate.

Cash Flow Probability Expected

__Estimate ____´ Assessment = Cash Flow__

$240,000 30% $ 72,000

365,000 50% 182,500

425,000 20% __ 85,000__

$339,500 ´ PV Factor,

(n = 7, l = 6%) Present Value

$339,500 ´ 5.58238 = __$1,895,218__

- Jamison Company uses IFRS for its financial reporting. It produces machines that sell globally. All sales are accompanied by a one-year warranty. At the end of the year, the company has the following data:

- 3,000 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?

- $360,000
- $198,000
- $396,000
- $180,000

Calculation:

(3,000 ´ 4% ´ 50% ´ $3,000) + (3,000 ´ 4% ´ 50% ´ $300) = $180,000 + $18,000 = $198,000

- Maxim Company leased an office under a five-year contract, which has been accounted for as an operating lease. Faced with the downturn in the economy, the viable company decided to sub-lease the office. However, they have had no luck with this effort and the landlord will not allow the lease to be cancelled. The payments are $8,000 per year and there are four years left on the lease. The company’s most recent interest rate for financing from a bank is 6%. The risk-free rate on government bonds is 4%. What is the provision for the lease under IFRS?
- $29,040
- $30,096
- $32,000
- $27,721

Calculation: PV $8,000 (4 years, 6%) = $8,000 ´ 3.46511 = $27,721

- Dolphin Company leased an office under a six-year contract, which has been accounted for as an operating lease. Faced with the downturn in the economy, the viable company decided to sub-lease the office. However, they have had no luck with this effort and the landlord will not allow the lease to be cancelled. The payments are $15,000 per year and there are five years left on the lease. The company’s most recent interest rate for financing from a bank is 9%. The risk-free rate on government bonds is 5%. What is the provision for the lease under IFRS?
- $75,000
- $66,778
- $58,345
- $64,942

Calculation: PV $15,000 (5 years, 9%) = $15,000 ´ 3.88965 = $58,345

10 Techtronics, a technology company that uses IFRS for its financial reporting, has been found to have polluted the property surrounding its plant. The property is 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 $240,000. There is 30% chance that the lease will be renewed and the cleanup costs will be $500,000 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:

- $318,000
- $150,083
- $370,000
- $302,100

Calculation:

($240,000 ´ 70% ´ 0.55684) + ($500,000 ´ 30% ´ 0.37689) = $93,549 + $56,534 = $150,083

**Answers to Multiple Choice.**

- a
- a
- b
- a
- c
- d
- b
- d
- c
- b

**CHAPTER 7**

**CASH AND RECEIVABLES**

**IFRS questions are available at the end of this chapter.**

**TRUE-FALSe****—Conceptual**

T 1. Items considered cash.

F 2. Items considered cash.

F 3. Items considered cash.

F 4. Cash equivalents definition.

F 5. Bank overdrafts.

T 6. Cash equivalents.

F 7. Classification of receivables.

F 8. Items considered trade receivables.

T 9. Trade discount uses.

T 10. Sales discounts.

T 11. Valuation of receivables.

F 12. Percentage-of-receivables approach.

F 13. Percentage-of-sales method.

T 14. Reporting short-term receivables.

F 15. Valuation of accounts receivables.

T 16. Reporting notes receivable.

F 17. Stated interest rate vs. effective rate.

F 18. Financial instruments valuation.

T 19. Recourse liability.

F 20. Buying receivables with recourse.

T 21. Selling receivables with recourse.

F 22. Computing receivables turnover.

F 23. Impairment of receivables.

T 24. Impairment loss calculation.

F 25. Impairment measurement.

**Multiple Choice****—Conceptual**

d 26. Identification of cash items.

b 27. Identification of cash items.

d 28. Classification of travel advance.

d ^{P}29. Items included as cash.

b 30. Identification of cash items.

a 31. Classification of post-dated checks.

b 32. Classification of postage stamps.

d 33. Compensating balance definition.

b 34 Classification of cash restricted for plant expansion.

d ^{S}35. Cash equivalent definition.

d 36. Classification of bank overdraft.

d 37. Classification of compensating balances.

**Multiple Choice****—Conceptual (cont.)**

a 38 Classification of bank overdraft.

b 39 Characteristics of receivable.

d 40. Definition of trade receivables.

d 41. Identification of trade receivables.

c ^{S}42. Presentation of nontrade receivables.

d ^{S}43 Cash discount definition.

d ^{P}44. Trade discount uses.

a 45. Classification of sales discounts.

d 46. Reasons for trade discounts.

c 47. Accounting for cash discounts and trade discounts.

a 48. Theoretically correct approach for cash discounts.

c 49. Accounts receivable valuation problems.

d 50. Reason allowance method is preferable.

a 51. Allowance method concept.

b 52. Accounting for bad debts and earnings management.

c 53. Recording bad debt expense.

a 54. Journal entry for writing off an account.

d 55. Journal entry for collection of an account previously written off.

c 56. Valuation of short-term receivables.

d 57. Bad debt provision and the matching concept.

a 58. Bad debts as a percentage of sales.

b 59. Bad debts as a percentage of sales.

a 60. Bad debts as a percentage of receivables.

d 61. Financial statement effect of a note recorded incorrectly.

b 62. Imputed interest description.

c 63. Recording fair value option.

b 64. Fair value option.

c 65. Reason a company sells receivables.

d 66. Record transfer of receivables as a sale.

a 67. Definition of selling receivables with recourse.

c 68. Factoring accounts receivable without recourse.

c ^{S}69. Classification of accounts and notes receivable.

a ^{S}70. Transfer of receivables with recourse.

a ^{P}71. Accounts receivable turnover ratio.

d 72. Accounts receivable turnover ratio.

c 73. Items included in accounts receivable on balance sheet.

a 74. Days to collect accounts receivable calculation.

d 75. Reason for accounts receivable turnover increase.

d 76. Classification of receivables.

b *77. Balance per bank reconciling item.

c *78. Entry to replenish Petty Cash.

c *79. Purpose of Cash Over & Short account.

b *80. Classification of bank service charges.

c *81 Treatment of bank credits on bank reconciliation.

^{P} These questions also appear in the Problem-Solving Survival Guide.

^{S} These questions also appear in the Study Guide.

* This topic is dealt with in an Appendix to the chapter.

**Multiple Choice****—Computational**

b 82 Calculate cash balance.

d 83. Calculate effective interest on loan with required compensatory balance.

b 84. Reporting cash.

c 85. Cash and cash equivalents.

b 86. Reporting cash.

c 87. Cash and cash equivalents.

c 88. Determine effective annual interest rate of sales discount.

b 89. Calculate sales revenue using net method.

c 90. Entry for credit sale using gross method.

a 91. Entry for credit sale using net method.

a 92. Gross method entry.

c 93. Net method entry.

b 94. Gross method entry.

c 95. Trade discount.

d 96. Calculate net realizable value.

c 97. Calculate ending allowance for doubtful accounts balance.

d 98. Calculate bad debt expense.

c 99. Calculate ending allowance for doubtful accounts balance.

b 100 Calculate balance of accounts receivable.

b 101. Calculate net realizable value of accounts receivable.

d 102. Calculate net realizable value of accounts receivable.

c 103. Calculate bad debt expense using aging of receivables.

b 104. Calculate bad debt expense using percent of sales.

a 105. Calculate bad debt expense using percent of receivables.

b 106. Valuation of accounts receivable.

b 107. Calculation of bad debt expense.

d 108. Calculate Allowance for Doubtful Accounts balance.

b 109. Valuation of accounts receivable.

b 110. Calculation of bad debt expense.

d 111. Calculate Allowance for Doubtful Accounts balance.

b 112. Determine appropriate interest rate for a zero-interest-bearing note.

a 113. Calculate present value of a zero-interest-bearing note.

a 114. Calculation of sales revenue.

b 115. Entry for exchange of goods for note receivable.

c 116. Calculate amount of interest.

c 117. Calculate interest revenue on a zero-interest-bearing note.

d 118. Calculate note payable amount.

b 119. Recording fair value option.

a 120. Calculate gain (loss) on transfer of receivables.

b 121. Calculate gain (loss) on transfer of receivables.

d 122. Calculation of gain (loss) on transfer of receivables.

c 123. Calculate proceeds from transfer of receivables with recourse.

a 124. Record assignment of accounts receivables.

c 125. Calculate cash proceeds from transfer of receivables.

c 126. Entry to record collection of assigned receivables.

b 127. Factoring receivables without recourse.

b 128. Factoring receivables with recourse.

c 129. Calculate loss on sale of receivables.

c 130. Calculate loss on sale of receivables.

c 131. Calculate accounts receivable turnover.

c 132. Calculate accounts receivable turnover.

a 133. Compute accounts receivable turnover.

b 134. Compute average collection period.

**Multiple Choice****—Computational (cont.)**

d *135. Entry to replenish petty cash.

b *136. Calculate correct balance in bank account.

b *137. Calculate correct cash balance.

c *138. Calculate correct cash balance.

b *139. Calculate correct cash balance.

c *140. Calculate correct cash balance.

**Multiple Choice****—CPA Adapted**

a 141. Determine current net receivables.

d 142. Calculate adjustment for bad debts.

d 143. Calculate bad debt expense.

b 144. Calculate adjustment to write off bad debts.

c 145. Effect of a write-off under the allowance method.

d 146. Determine balance in the Allowance for Doubtful Accounts.

c 147. Determine interest revenue of a zero-interest-bearing note.

c 148. Determine interest receivable at year end.

b 149. Assignment and factoring of accounts receivable.

a *150. Calculate correct cash balance.

a *151. Calculate the cash balance per books.

**BRIEF EXERCISES**

BE7-153 Accounting for notes receivable.

BE7-154 Zero-interest-bearing note.

BE7-155 Accounts receivable assigned.

BE7-156 Factoring accounts receivable.

**Exercises**

E7-157 Asset classification.

E7-158 Allowance for doubtful accounts.

E7-159 Entries for bad debt expense.

E7-160 Fair value option.

E7-161 Accounts receivable assigned.

**PROBLEMS**

P7-162 Entries for bad debt expense.

P7-163 Amortization of discount on note.

P7-164 Accounts receivable assigned.

*P7-165 Factoring accounts receivable.

*P7-166 Bank reconciliation.

**CHAPTER LEARNING OBJECTIVES**

- Identify items considered 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 and valuation of notes receivable.
- Explain the fair value option.
- Explain accounting issues related to disposition of accounts and notes receivable.
- Describe how to report and analyze receivables.

*10. Explain common techniques employed to control cash.

*11. Describe the accounting for a loan impairment.

- Compa re the accounting procedures for cash and receivables under GAAP and IFRS.

**SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS**

Item | Type | Item | Type | Item | Type | Item | Type | Item | Type | Item | Type | Item | Type |

Learning Objective 1 | |||||||||||||

1. | TF | 3. | TF | 27. | MC | ^{P}29. | MC | 31. | MC | 82. | MC | ||

2. | TF | 26. | MC | 28. | MC | 30. | MC | 32. | MC | ||||

Learning Objective 2 | |||||||||||||

4. | TF | 33. | MC | 36. | MC | 83. | MC | 86. | MC | ||||

5. | TF | 34. | MC | 37. | MC | 84. | MC | 87. | MC | ||||

6. | TF | ^{S}35. | MC | 38. | MC | 85. | MC | 157. | E | ||||

Learning Objective 3 | |||||||||||||

7. | TF | 8. | TF | 39. | MC | 40. | MC | 41. | MC | ^{S}42 | MC | ||

Learning Objective 4 | |||||||||||||

9. | TF | ^{P}44. | MC | 47. | MC | 89. | MC | 92. | MC | 95. | MC | ||

10. | TF | 45. | MC | 48. | MC | 90. | MC | 93. | MC | 141. | MC | ||

^{S}43. | MC | 46. | MC | 88. | MC | 91. | MC | 94. | MC | 152. | BE | ||

Learning Objective 5 | |||||||||||||

11. | TF | 50. | MC | 56. | MC | 97. | MC | 103. | MC | 109. | MC | 145. | MC |

12. | TF | 51. | MC | 57. | MC | 98. | MC | 104. | MC | 110. | MC | 146. | MC |

13. | TF | 52. | MC | 58. | MC | 99. | MC | 105. | MC | 111. | MC | 158. | E |

14. | TF | 53. | MC | 59. | MC | 100. | MC | 106. | MC | 142. | MC | 159. | E |

15. | TF | 54. | MC | 60. | MC | 101. | MC | 107. | MC | 143. | MC | 162. | P – CT |

49. | MC | 55. | MC | 96. | MC | 102. | MC | 108. | MC | 144. | MC | ||

Learning Objective 6 | |||||||||||||

16. | TF | 62. | MC | 114. | MC | 117. | MC | 148. | MC | 163. | P- CT | ||

17. | TF | 112. | MC | 115. | MC | 118. | MC | 153. | BE | ||||

61. | MC | 113. | MC | 116. | MC | 147. | MC | 154. | BE | ||||

Learning Objective 7 | |||||||||||||

18. | TF | 63. | MC | 64. | MC | 119. | MC | 137. | E | 160. | E | ||

Learning Objective 8 | |||||||||||||

19. | TF | 66. | MC | ^{S}70. | MC | 123. | MC | 127. | MC | 149. | MC | 164. | P- CT |

20. | TF | 67. | MC | 120. | MC | 124. | MC | 128. | MC | 155. | BE | 165. | P- CT |

21. | TF | 68. | MC | 121. | MC | 125. | MC | 129. | MC | 156. | BE | ||

65. | MC | ^{S}69. | MC | 122. | MC | 126. | MC | 130. | MC | 161. | E | ||

Learning Objective 9 | |||||||||||||

22. | TF | 72. | MC | 74. | MC | 76. | MC | 132. | MC | 134. | MC | ||

^{P}71. | MC | 73. | MC | 75. | MC | 131. | MC | 133. | MC | ||||

Learning Objective *10 | |||||||||||||

77. | MC | 80. | MC | 136. | MC | 139. | MC | 151. | MC | ||||

78. | MC | 81. | MC | 137. | MC | 140. | MC | 166. | P | . | |||

79. | MC | 135. | MC | 138. | MC | 150. | MC | ||||||

Learning Objective 11 | |||||||||||||

23. | TF | 24. | TF | 25. | TF | ||||||||

Learning Objective 12- IFRS Questions | |||||||||||||

Note: TF = True-False E = Exercise CT= Critical Thinking

MC = Multiple Choice P = Problem

**TRUE-FALSE****—Conceptual**

- Savings accounts are usually classified as cash on the balance sheet.

- Certificates of deposit are usually classified as cash on the balance sheet.

- Companies include postdated checks and petty cash funds as cash.

- Cash equivalents are investments with original maturities of six months or less.

- Bank overdrafts are always offset against the cash account in the balance sheet.

- Short-term, highly liquid investments may be included with cash on the balance sheet.

- All claims held against customers and others for money, goods, or services are reported as current assets.

- Trade receivables include notes receivable and advances to officers and employees.

- Trade discounts are used to avoid frequent changes in catalogs and to alter prices for different quantities purchased.

- In the gross method, sales discounts are reported as a deduction from sales.

- The net amount reported for short-term receivables is not affected when a specific account receivable is determined to be uncollectible.

- The percentage-of-receivables approach of estimating uncollectible accounts emphasizes matching over valuation of accounts receivable.

- The percentage-of-sales method results in a more accurate valuation of receivables on the balance sheet.

- Companies value and report short-term receivables at net realizable value¾the net amount they expect to receive in cash.

- The percentage-of-sales and percentage-of-receivables approaches are used for impairment measurement and reporting.

- Companies record and report long-term notes receivable at the present value of the cash they expect to collect.

- When the stated rate of interest exceeds the effective rate, the present value of the note receivable will be less than its face value.

- The FASB believes that historical cost for financial instruments provides more relevant and understandable information than fair value.

- Recognition of a recourse liability will make a loss on sale of receivables larger than it would otherwise have been.

- When buying receivables with recourse, the purchaser assumes the risk of collectibility and absorbs any credit loss.

- For receivables sold with recourse, the seller guarantees payment to the purchaser if the debtor fails to pay.

- The accounts receivable turnover ratio is computed by dividing net sales by the ending net receivables.

- U.S.GAAP permits the reversal of impairment losses recorded on receivables.

- For a loan receivable, impairment loss is calculated as the difference between the investment in the loan and the expected future cash flows discounted at the loan’s historical effective interest rate.

- Companies must measure the loss on impairment at an undiscounted amount, not at a present-value amount, when it records the loss.

**True False Answers—Conceptual**

Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. |

1. | T | 6. | T | 11. | T | 16. | T | 21. | T |

2. | F | 7. | F | 12. | F | 17. | F | 22. | F |

3. | F | 8. | F | 13. | F | 18. | F | 23. | F |

4. | F | 9. | T | 14. | T | 19. | T | 24. | T |

5. | F | 10. | T | 15. | F | 20. | F | 25. | F |

**MULTIPLE CHOICE****—Conceptual**

- Which of the following is
**not**considered cash for financial reporting purposes? - Petty cash funds and change funds
- Money orders, certified checks, and personal checks
- Coin, currency, and available funds
- Postdated checks and I. O. U.’s

- Which of the following is considered cash?
- Certificates of deposit (CDs)
- Money market checking accounts
- Money market savings certificates
- Postdated checks

- Travel advances should be reported as
- supplies.
- cash because they represent the equivalent of money.
- investments.
- none of these answers are correct.

^{P}29. Which of the following items should **not** be included in the Cash caption on the balance sheet?

- Coins and currency in the cash register
- Checks from other parties presently in the cash register
- Amounts on deposit in checking account at the bank
- Postage stamps on hand
- All of the following may be included under the heading of “cash”
**except** - currency.
- money market funds.
- checking account balance.
- savings account balance.

- In which account are post-dated checks received classified?
- Receivables.
- Prepaid expenses.
- Cash.
- Payables.

- In which account are postage stamps classified?
- Cash.
- Office supplies.
- Receivables.
- Inventory.

- What is a compensating balance?
- Savings account balances.
- Margin accounts held with brokers.
- Temporary investments serving as collateral for outstanding loans.
- Minimum deposits required to be maintained in connection with a borrowing arrangement.

- Under which section of the balance sheet is “cash restricted for plant expansion” reported?
- Current assets.
- Non-current assets.
- Current liabilities.
- Stockholders’ equity.

^{S}35. A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and

- is acceptable as a means to pay current liabilities.
- has a current market value that is greater than its original cost
- bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation.
- is so near its maturity that it presents insignificant risk of changes in interest rates.

- Bank overdrafts, if material, should be
- reported as a deduction from the current asset section.
- reported as a deduction from cash.
- netted against cash and a net cash amount reported.
- reported as a current liability.

- Deposits held as compensating balances
- usually do not earn interest.
- if legally restricted and held against short-term credit may be included as cash.
- if legally restricted and held against long-term credit may be included among current assets.
- none of these answers are correct.

- When a company has cash available in another account in the same bank at which an overdraft has occurred, the company will:
- offset the overdraft against cash account.
- report the same in the notes to financial statement.
- report the bank overdraft amount as account payable.
- classify the bank overdraft as compensating balance.

- Which of the following statements is correct regarding receivables?
- Receivables are written promises of the purchaser to pay for goods or services.
- Receivables are claims held against customers and others for money, goods, or services.
- Receivables are non-financial assets.
- Receivables that are expected to be collected within a year are classified as noncurrent.

- The category “trade receivables” includes
- advances to officers and employees.
- income tax refunds receivable.
- claims against insurance companies for casualties sustained.
- none of these answer choices are correct.

- Which of the following should be recorded in Accounts Receivable?
- Receivables from officers
- Receivables from subsidiaries
- Dividends receivable
- None of these answer choices are correct.

^{S}42. What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a balance sheet?

- As offsets to capital.
- By means of footnotes only.
- As assets but separately from other receivables.
- As trade notes and accounts receivable if they otherwise qualify as current assets.

^{S}43. 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)

- trade discount.
- nominal discount.
- enhancement discount.
- cash discount.

^{P}44. Trade discounts are

- not recorded in the accounts; rather they are a means of computing a price.
- used to avoid frequent changes in catalogues.
- used to quote different prices for different quantities purchased.
- all of the above.

- If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as
- a deduction from sales in the income statement.
- an item of “other expense” in the income statement.
- a deduction from accounts receivable in determining the net realizable value of accounts receivable.
- sales discounts forfeited in the cost of goods sold section of the income statement.

- Why do companies provide trade discounts?
- To avoid frequent changes in catalogs.
- To induce prompt payment.
- To easily alter prices for different customers.
- To avoid frequent changes in catalogs and to easily alter prices for different customers.

- The accounting for cash discounts and trade discounts are
- the same.
- always recorded net.
- not the same.
- tied to the timing of cash collections on the account.

- Of the approaches to record cash discounts related to accounts receivable, which is more theoretically correct?
- Net approach.
- Gross approach.
- Allowance approach.
- All three approaches are theoretically correct.

- All of the following are problems associated with the valuation of accounts receivable except
- uncollectible accounts.
- returns.
- cash discounts under the net method.
- allowances granted.

- Why is the allowance method preferred over the direct write-off method of accounting for bad debts?
- Allowance method is used for tax purposes.
- Estimates are used.
- Determining worthless accounts under direct write-off method is difficult to do.
- Improved matching of bad debt expense with revenue.

- Which of the following concepts relates to using the allowance method in accounting for accounts receivable?
- Bad debt expense is an estimate that is based on historical and prospective information.
- Bad debt expense is based on the actual amounts determined to be uncollectible.
- Bad debt expense is an estimate that is based only on an analysis of the receivables aging.
- Bad debt expense is management’s determination of which accounts will be sent to the attorney for collection.

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

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

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

- 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?
- Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
- Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
- Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
- Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

- 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
- most short-term receivables are not interest-bearing.
- the allowance for uncollectible accounts includes a discount element.
- the amount of the discount is not material.
- most receivables can be sold to a bank or factor.

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

- Which of the following methods of determining annual bad debt expense best achieves the matching concept?
- Percentage of sales
- Percentage of ending accounts receivable
- Percentage of average accounts receivable
- Direct write-off

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

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

- At the beginning of 2013, 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 2013 year-end statement of financial position and $1,000 as sales revenue for 2013. What effect did this accounting for the note have on Gannon’s net earnings for 2013, 2014, 2015, and its retained earnings at the end of 2015, respectively?
- Overstate, overstate, understate, zero
- Overstate, understate, understate, understate
- Overstate, overstate, overstate, overstate
- None of these answer choices are correct.

- What is imputed interest?
- Interest based on the stated interest rate.
- Interest based on the implicit interest rate.
- Interest based on the average interest rate.
- Interest based on the coupon rate.

- Antique Company has notes receivable that have a fair value of $920,000 and a carrying amount of $710,000. Antique decides on December 31, 2014, to use the fair value option for these recently-acquired receivables. The adjusting entry to record this change will include a:
- debit to Unrealized Holding Gain or Loss¾Income for $210,000.
- credit to Notes Receivable for $210,000.
- credit to Unrealized Holding Gain or Loss¾Income for $210,000.
- debit to Notes Receivable for $920,000.

- Which of the following statements is
**not**true of fair value option? - Receivables are recorded at fair value in the financial statements.
- Unrealized holding gains and losses from fair value adjustments are reported as a component of comprehensive income.
- The International Accounting Standards Board believes that fair value measurement for financial instruments provides more relevant and understandable information than historical cost.
- An unrealized holding gain or loss is the net change in the fair value of the receivable from one period to another, exclusive of interest revenue.

- Why would a company sell receivables to another company?
- To improve the quality of its credit granting process.
- To limit its legal liability.
- To accelerate access to amounts collected.
- To comply with customer agreements.

- When should a transfer of receivables be recorded as a sale?
- The transferred assets are isolated from the transferor.
- The transferor does not maintain effective control over the transferred assets through an agreement to repurchase or redeem them prior to their maturity.
- The transferee has the right to pledge or exchange the transferred assets.
- All of these answers are correct.

- What is “recourse” as it relates to selling receivables?
- The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay.
- The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to pay
- The obligation of the seller of the receivables to pay the purchaser in case the debtor returns the product related to the sale.
- The obligation of the purchaser of the receivables to pay the seller if all of the receivables are collected.

- Which of the following is true when accounts receivable are factored without recourse?
- The transaction may be accounted for either as a secured borrowing or as a sale, depending upon the substance of the transaction.
- The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables.
- The factor assumes the risk of collectibility and absorbs any credit losses in collecting the receivables.
- The financing cost (interest expense) should be recognized ratably over the collection period of the receivables.

^{S}69. Which of the following statements is incorrect regarding the classification of accounts and notes receivable?

- Segregation of the different types of receivables is required if they are material.
- Disclose any loss contingencies that exist on the receivables.
- Any discount or premium resulting from the determination of present value in notes receivable transactions is an asset or liability respectively.
- Valuation accounts should be appropriately offset against the proper receivable accounts.

^{S}70. 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?

- The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible.
- The transferor surrenders control of the future economic benefits of the receivables.
- The transferee cannot require the transferor to repurchase the receivables.
- The transferor’s obligation under the recourse provisions can be reasonably estimated.

^{P}71. The accounts receivable turnover ratio measures the

- number of times the average balance of accounts receivable is collected during the period.
- percentage of accounts receivable turned over to a collection agency during the period.
- percentage of accounts receivable arising during certain seasons.
- number of times the average balance of inventory is sold during the period.

- The accounts receivable turnover ratio is computed by dividing
- gross sales by ending net receivables.
- gross sales by average net receivables.
- net sales by ending net receivables.
- net sales by average net receivables.

- Which of the following items should be included in accounts receivable reported on the balance sheet?
- Notes receivable.
- Interest receivable.
- Allowance for doubtful accounts.
- Advances to related parties and officers.

- How is days to collect accounts receivable determined?
- 365 days divided by accounts receivable turnover.
- Net sales divided by 365.
- Net sales divided by average net trade receivables.
- Accounts receivable turnover divided by 365 days.

- What is a possible reason for accounts receivable turnover to increase from one year to the next year
- Decreased credit sales during a recession.
- Write-off uncollectible receivables.
- Granting credit to customers with lower credit quality.
- Improved collection process.

- Which of the following is a general rule of classifying receivables?
- Disclose any loss contingencies that exists on the receivables.
- Indicate the receivables classified as current and noncurrent.
- Disclose any receivables designated or pledged as collateral.
- All of these answers are correct.

*77. Which of the following is an appropriate reconciling item to the balance per bank in a

bank reconciliation?

- Bank service charge.
- Deposit in transit.
- Bank interest.
- Chargeback for NSF check.

*78. Which of the following statements is false?

- The imprest petty cash system in effect adheres to the rule of disbursement by check.
- 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.
- The Petty Cash account is debited when the fund is replenished.
- All of these answers are false.

*79. A Cash Over and Short account

- is not generally accepted.
- is debited when the petty cash fund proves out over.
- is debited when the petty cash fund proves out short.
- is a contra account to Cash.

*80. The journal entries for a bank reconciliation

- are taken from the “balance per bank” section only.
- may include a debit to Office Expense for bank service charges.
- may include a credit to Accounts Receivable for an NSF check.
- may include a debit to Accounts Payable for an NSF check.

*81. When preparing a bank reconciliation, bank credits are

- added to the bank statement balance.
- deducted from the bank statement balance.
- added to the balance per books.
- deducted from the balance per books.

**Multiple Choice Answers—Conceptual**

Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. |

26. | d | 34. | b | ^{S}42. | c | 50. | d | 58. | a | 66. | d | 74. | a |

27. | b | ^{S}35. | d | ^{S}43. | d | 51. | a | 59. | b | 67. | a | 75. | d |

28. | d | 36. | d | ^{P}44. | d | 52. | b | 60. | a | 68. | c | 76. | d |

^{P}29. | d | 37. | d | 45. | a | 53. | c | 61. | d | ^{S}69. | c | *77 | b |

30. | b | 38. | a | 46. | d | 54. | a | 62. | b | ^{S}70. | a | *78 | c |

31. | a | 39. | b | 47. | c | 55. | d | 63. | c | ^{P}71. | a | *79 | c |

32. | b | 40. | d | 48. | a | 56. | c | 64. | b | 72. | d | *80 | b |

33. | d | 41. | d | 49. | c | 57. | d | 65. | c | 73. | c | *81 | c |

Solutions to those Multiple Choice questions for which the answer is “none of these.”

- As receivables.
- Many answers are possible.
- Open accounts resulting from short-term extensions of credit to customers.
- Open accounts resulting from short-term extensions of credit to customers.
- Overstate, understate, understate, zero.

**Multiple Choice****—Computational**

- Consider the following: Cash in Bank – checking account of $18,500, 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?
- $ 18,500.
- $ 19,000.
- $ 22,500.
- $136,500.

- On January 1, 2014, 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
- 10.0%.
- 11.0%.
- 11.5%.
- 11.6%.

- Kennison Company has cash in bank of $15,000, 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
- $14,000.
- $15,000.
- $17,000.
- $18,000.

- Kaniper Company has the following items at year-end:

Cash in bank $30,000

Petty cash 300

Short-term paper with maturity of 2 months 5,500

Postdated checks 1,400

Kaniper should report cash and cash equivalents of

- $30,000.
- $30,300.
- $35,800.
- $37,200.

- Lawrence Company has cash in bank of $22,000, 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
- $20,000.
- $22,000.
- $25,000.
- $26,000.

- Steinert Company has the following items at year-end:

Cash in bank $35,000

Petty cash 500

Short-term paper with maturity of 2 months 8,200

Postdated checks 2,100

Steinert should report cash and cash equivalents of

- $35,000.
- $35,500.
- $43,700.
- $45,800.

- If a company purchases merchandise on terms of 1/10, n/30, the cash discount available (assuming a 360-day year) is equivalent to an effective annual interest rate of
- 1%
- 12%
- 18%
- 30%

- AG Inc. made a $15,000 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?
- $14,700.
- $14,850.
- $15,000.
- $15,150.

- AG Inc. made a $15,000 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?
- Debit Accounts Receivable for $14,850.
- Debit Accounts Receivable for $14,850 and Sales Discounts for $150.
- Debit Accounts Receivable for $15,000.
- Debit Accounts Receivable for $15,000 and Sales Discounts for $150.

- AG Inc. made a $15,000 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?
- Debit Accounts Receivable for $14,700.
- Debit Accounts Receivable for $14,700 and Sales Discounts for $300.
- Debit Accounts Receivable for $15,000.
- Debit Accounts Receivable for $15,000 and Sales Discounts for $300.

- On July 22, Peter sold $15,500 of inventory items on credit with the terms 2/15, net 30. Payment on $10,000 sales was received on August 1 and the remaining payment was received on August 12. Assuming Peter uses the gross method of accounting for sales discounts, which one of the following entries was made on August 1 to record the cash received?
- Cash…………………………………………………………. 9,800

Sales Discount…………………………………………… 200

Accounts Receivable…………………………… 10,000

- Cash…………………………………………………………. 10,000

Accounts Receivable…………………………… 10,000

- Cash…………………………………………………………. 9,800

Accounts Receivable…………………………… 9,800

- Accounts Receivable………………………………….. 200

Sales Discount Forfeited………………………. 200

- On April 2, Kelvin sold $30,000 of inventory items on credit with the terms 1/10, net 30. Payment on $18,000 sales was received on April 8 and the remaining payment on $12,000 sales was received on April 27. Assuming Kelvin uses the net method of accounting for sales discounts, the entry recorded on April 27 would include a:
- debit to Cash and credit to Accounts Receivable for $11,880.
- debit to Accounts Receivable and credit to Sales Revenue for $30,000.
- debit to Accounts Receivable and credit to Sales Discount Forfeited for $120.
- debit to Cash and credit to Sales Discount Forfeited for $300.

- David Company uses the gross method to record sales made on credit. On June 10, 2014, it sold goods worth $200,000 with terms 2/10, n/30 to Charles Inc. On June 19, 2014, David received payment for 1/2 of the amount due from Charles Inc. David’s fiscal year end is on June 30, 2014. What amount will be reported in the financial statements for the accounts receivable due from Charles Inc.?
- $98,000.
- $100,000.
- $200,000.
- $196,000.

- Jenny Manufactures sold toys listed at $240 per unit to Jack Inc. for $204, a trade discount of 15 percent. Jack Inc. in turn sells the toys in the market at $225. Jenny should record the receivable and related sales revenue (per unit) at:
- $240.
- $225.
- $204.
- $191.

- Becky had net sales (all on account) in 2014 of $600,000. At December 31, 2013, before adjusting entries, the balances in selected accounts were: accounts receivable $750,000 debit, and allowance for doubtful accounts $1,500 debit. Becky estimates that 3% of its net sales will prove to be uncollectible. What is the net realizable value of the receivables reported on the financial statements at December 31, 2014?
- $133,500
- $730,500
- $732,000
- $733,500

- Wellington Corp. has outstanding accounts receivable totaling $1.27 million as of December 31 and sales on credit during the year of $6.4 million. There is also a debit balance of $3,000 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?
- $12,700.
- $15,700.
- $61,000.
- $67,000.

- 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?
- $ 532,000.
- $ 520,000.
- $1,920,000.
- $ 508,000.

- Wellington Corp. has outstanding accounts receivable totaling $5 million as of December 31 and sales on credit during the year of $25 million. There is also a debit balance of $20,000 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?
- $2,000,000.
- $ 380,000.
- $ 400,000.
- $ 420,000.

- At the close of its first year of operations, December 31, 2014, Ming Company had accounts receivable of $1,080,000, after deducting the related allowance for doubtful accounts. During 2014, the company had charges to bad debt expense of $180,000 and wrote off, as uncollectible, accounts receivable of $80,000. What should the company report on its balance sheet at December 31, 2014, as accounts receivable before the allowance for doubtful accounts?
- $1,340,000
- $1,180,000
- $980,000
- $880,000

- Before year-end adjusting entries, Dunn Company’s account balances at December 31, 2014, for accounts receivable and the related allowance for uncollectible accounts were $1,200,000 and $90,000, respectively. An aging of accounts receivable indicated that $125,000 of the December 31 receivables are expected to be uncollectible. The net realizable value of accounts receivable after adjustment is
- $1,165,000.
- $1,075,000.
- $985,000.
- $1,110,000.

- During the year, Kiner Company made an entry to write off a $16,000 uncollectible account. Before this entry was made, the balance in accounts receivable was $200,000 and the balance in the allowance account was $18,000. The net realizable value of accounts receivable after the write-off entry was
- $200,000.
- $198,000.
- $166,000.
- $182,000.

- The following information is available for Murphy Company:

Allowance for doubtful accounts at December 31, 2013 $ 16,000

Credit sales during 2014 800,000

Accounts receivable deemed worthless and written off during 2014 18,000

As a result of a review and aging of accounts receivable in early January 2015, it has been determined that an allowance for doubtful accounts of $11,000 is needed at December 31, 2014. What amount should Murphy record as “bad debt expense” for the year ended December 31, 2014?

- $9,000
- $11,000
- $13,000
- $27,000

**Use the following information for questions 104 and 105.**

A trial balance before adjustments included the following:

__ Debit __ __ Credit __

Sales $850,000

Sales returns and allowance $28,000

Accounts receivable 86,000

Allowance for doubtful accounts 1,520

- If the estimate of uncollectibles is made by taking 2% of net sales, the amount of the adjustment is
- $13,400.
- $16,440.
- $17,000.
- $19,480.

- If the estimate of uncollectibles is made by taking 10% of gross account receivables, the amount of the adjustment is
- $7,080.
- $8,600.
- $8,448.
- $10,120.

- Lankton Company has the following account balances at year-end:

Accounts receivable $80,000

Allowance for doubtful accounts 4,800

Sales discounts 3,200

Lankton should report accounts receivable at a net amount of

- $72,000.
- $75,200.
- $76,800.
- $80,000.

- Smithson Corporation had a 1/1/14 balance in the Allowance for Doubtful Accounts of $20,000. During 2014, 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 12/31/14, Smithson estimates that 5% of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for 2014?
- $4,000.
- $14,200.
- $18,400.
- $24,000.

- Black Corporation had a 1/1/14 balance in the Allowance for Doubtful Accounts of $18,000. During 2014, it wrote off $12,960 of accounts and collected $3,780 on accounts previously written off. The balance in Accounts Receivable was $360,000 at 1/1 and $432,000 at 12/31. At 12/31/14, Black estimates that 5% of accounts receivable will prove to be uncollectible. What should Black report as its Allowance for Doubtful Accounts at 12/31/14?
- $8,640.
- $8,820.
- $12,420.
- $21,600.

- Shelton Company has the following account balances at year-end:

Accounts receivable $120,000

Allowance for doubtful accounts 7,200

Sales discounts 4,800

Shelton should report accounts receivable at a net amount of

- $108,000.
- $112,800.
- $115,200.
- $120,000.

- Vasguez Corporation had a 1/1/14 balance in the Allowance for Doubtful Accounts of $30,000. During 2014, it wrote off $21,600 of accounts and collected $6,300 on accounts previously written off. The balance in Accounts Receivable was $600,000 at 1/1 and $720,000 at 12/31. At 12/31/14, Vasguez estimates that 5% of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for 2014?
- $6,000.
- $21,300.
- $27,600.
- $36,000.

- McGlone Corporation had a 1/1/14 balance in the Allowance for Doubtful Accounts of $25,000. During 2014, it wrote off $18,000 of accounts and collected $5,250 on accounts previously written off. The balance in Accounts Receivable was $500,000 at 1/1 and $600,000 at 12/31. At 12/31/14, McGlone estimates that 5% of accounts receivable will prove to be uncollectible. What should McGlone report as its Allowance for Doubtful Accounts at 12/31/14?
- $12,000.
- $12,250.
- $17,250.
- $30,000.
- Lester Company received a seven-year zero-interest-bearing note on February 22, 2014, 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, 2014, 7.5% on December 31, 2014, 7.7% on February 22, 2015, and 8% on December 31, 2015. What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2014 and 2015, respectively?
- 0% and 0%
- 7% and 7%
- 7% and 7.7%
- 7.5% and 8%

- On December 31, 2014, Flint Corporation sold for $100,000 an old machine having an original cost of $180,000 and a book value of $80,000. The terms of the sale were as follows:

$20,000 down payment

$40,000 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, 2014 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.)

- $70,364
- $90,364.
- $80,000.
- $140,728.

- Assume Royal Palm Corp., an equipment distributor, sells a piece of machinery with a list price of $600,000 to Arch Inc. Arch Inc. will pay $650,000 in one year. Royal Palm Corp. normally sells this type of equipment for 90% of list price. How much should be recorded as revenue?
- $540,000.
- $585,000.
- $600,000.
- $650,000.

- Equestrain Roads sold $80,000, of goods and accepted the customer’s $80,000 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? - No journal entry until cash is collected.
- Debit Notes Receivable for $80,000.
- Debit Accounts Receivable for $80,000.
- Debit Notes Receivable for $72,000.

- Equestrain Roads sold $80,000, of goods and accepted the customer’s $80,000 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? - $0.
- $2,000.
- $4,000.
- $8,000.
- 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?
- $0.
- $2,000.
- $4,000.
- $5,000.

- 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 $80,000 payment in two years? (The present value of $1 for two periods at 10% is 0.82645).
- $80,000.
- $72,563.
- $72,727.
- $66,116.

- Jones Company has notes receivable that have a fair value of $570,000 and a carrying amount of $750,000. Jones decides on December 31, 2014, to use the fair value option for these recently-acquired receivables. Which of the following entries will be made on December 31, 2014 to record the unrealized holding gain/loss?
- Unrealized Holding Gain or Loss¾Income…….. 180,000

Notes Receivable…………………………………. 180,000

- Unrealized Holding Gain or Loss¾Equity………. 180,000

Notes Receivable…………………………………. 180,000

- Notes Receivable……………………………………….. 180,000

Unrealized Holding Gain or Loss¾Income. 180,000

- Notes Receivable……………………………………….. 180,000

Unrealized Holding Gain or Loss¾Equity.. 180,000

- Sun Inc. factors $3,000,000 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 $115,000. What would be recorded as a gain (loss) on the transfer of receivables?
- Loss of $150,000.
- Gain of $265,000.
- Loss of $565,000.
- Loss of $115,000.

- Sun Inc. factors $3,000,000 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 $150,000. What would be recorded as a gain (loss) on the transfer of receivables?
- Gain of $90,000.
- Loss of 240,000.
- Gain of $540,000.
- Loss of $150,000.

- Sun Inc assigns $3,000,000 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?
- Loss of $30,000.
- Loss of $240,000.
- Loss of $270,000.
- $0.

- Moon Inc. factors $2,000,000 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 $200,000. What would be the debit to Cash in the journal entry to record this transaction?
- $2,000,000.
- $1,920,000.
- $1,760,000.
- $1,560,000.

- Moon Inc assigns $3,000,000 of its accounts receivables as collateral for a $2 million loan with a bank. The bank assesses a 3% finance charge on the loan amount and charges interest on the note at 6%. What would be the journal entry to record this transaction?
- Debit Cash for $1,940,000, debit Interest Expense for $60,000, and credit Notes payable for $2,000,000.
- Debit Cash for $1,940,000, debit Interest Expense for $60,000, and credit Accounts Receivable for $2,000,000.
- Debit Cash for $1,940,000, debit Interest Expense for $60,000, debit Due from Bank for $1,000,000, and credit Accounts Receivable for $3,000,000.
- Debit Cash for $1,820,000, debit Interest Expense for $180,000, and credit Notes Payable for $2,000,000.

- Geary Co. assigned $800,000 of accounts receivable to Kwik Finance Co. as security for a loan of $670,000. 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 $220,000 on assigned accounts after deducting $760 of discounts. Geary accepted returns worth $2,700 and wrote off assigned accounts totaling $5,960.

The amount of cash Geary received from Kwik at the time of the assignment was

- $603,000.
- $654,000.
- $656,600.
- $670,000.

- Geary Co. assigned $800,000 of accounts receivable to Kwik Finance Co. as security for a loan of $670,000. 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 $220,000 on assigned accounts after deducting $760 of discounts. Geary accepted returns worth $2,700 and wrote off assigned accounts totaling $5,960.

Entries during the first month would include a

- debit to Cash of $220,760.
- debit to Bad Debt Expense of $5,960.
- debit to Allowance for Doubtful Accounts of $5,960.
- debit to Accounts Receivable of $229,420.
- On February 1, 2014, Henson Company factored receivables with a carrying amount of $500,000 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.

Assume that Henson factors the receivables on a without recourse basis. The loss to be reported is

- $0.
- $15,000.
- $25,000.
- $40,000.

- On February 1, 2014, Henson Company factored receivables with a carrying amount of $500,000 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.

Assume that Henson factors the receivables on a with recourse basis. The recourse obligation has a fair value of $2,500. The loss to be reported is

- $15,000.
- $17,500.
- $25,000.
- $42,500.

- 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?
- $ -0-.
- $3,000.
- $5,400.
- $10,400.

- Wilkinson Corporation factored, with recourse, $400,000 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 $9,600. What amount should Wilkinson report as a loss on sale of receivables?
- $ -0-.
- $12,000.
- $21,600.
- $41,600.

- Remington Corporation had accounts receivable of $100,000 at 1/1. The only transactions affecting accounts receivable were sales of $750,000 and cash collections of $700,000. The accounts receivable turnover is
- 5.0.
- 5.5.
- 6.0.
- 7.5.
- Laventhol Corporation had accounts receivable of $100,000 at 1/1. The only transactions affecting accounts receivable were sales of $1,200,000 and cash collections of $1,150,000. The accounts receivable turnover is
- 8.0.
- 8.8.
- 9.6.
- 12.0.

- The opening balance of Accounts Receivable for George Company was $25,000. Net sales (all on account) for the year amounted to $150,000. The Company doesn’t offer any cash discount. During the year $130,000 was collected on accounts receivable. Compute accounts receivable turnover ratio for the year.
- 4.29 times
- 3.71 times
- 2.89 times
- 7.50 times

- During the year Tulip reported net sales of $800,000. The company had accounts receivable of $75,000 at the beginning of the year and $120,000 at the end of the year Compute Tulip’s average collection period (assume 365 days a year.)
- 34.2 days
- 44.5 days.
- 54.8 days.
- 89.0 days.

*135. 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

- Petty Cash, $75.
- Petty Cash, $100.
- Cash, $95; Cash Over and Short, $5.
- Cash, $100.

*136. If the month-end bank statement shows a balance of $72,000, outstanding checks are $24,000, a deposit of $8,000 was in transit at month end, and a check for $1,000 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is

- $55,000.
- $57,000.
- $41,000.
- $87,000.

*137. In preparing its bank reconciliation for the month of April 2014, Henke, Inc. has the following information available.

Balance per bank statement, 4/30/14 $34,140

NSF check returned with 4/30/14 bank statement 450

Deposits in transit, 4/30/14 5,000

Outstanding checks, 4/30/14 5,200

Bank service charges for April 20

What should be the correct balance of cash at April 30, 2014?

- $34,370
- $33,940
- $33,490
- $33,470

*138. Finley, Inc.’s checkbook balance on December 31, 2014 was $42,400. In addition, Finley held the following items in its safe on December 31.

(1) A check for $900 from Peters, Inc. received December 30, 2014, which was not included in the checkbook balance.

(2) An NSF check from Garner Company in the amount of $1,800 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, 2015. The original deposit has been included in the December 31 checkbook balance.

(3) Coin and currency on hand amounted to $2,900.

The proper amount to be reported on Finley’s balance sheet for cash at December 31, 2014 is

- $42,600.
- $40,800.
- $44,400.
- $43,550.

*139. The cash account shows a balance of $90,000 before reconciliation. The bank statement does not include a deposit of $4,600 made on the last day of the month. The bank statement shows a collection by the bank of $1,880 and a customer’s check for $640 was returned because it was NSF. A customer’s check for $900 was recorded on the books as $1,080, and a check written for $158 was recorded as $194. The correct balance in the cash account was

- $91,024.
- $91,096.
- $91,456.
- $95,696.

*140. In preparing its May 31, 2014 bank reconciliation, Catt Co. has the following information available:

Balance per bank statement, 5/31/14 $35,000

Deposit in transit, 5/31/14 5,400

Outstanding checks, 5/31/14 4,900

Note collected by bank in May 1,250

The correct balance of cash at May 31, 2014 is

- $40,400.
- $34,250.
- $35,500.
- $36,750.

**Multiple Choice Answers—Computational**

Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. |

82. | b | 91. | a | 100. | b | 109. | b | 118. | d | 127. | b | *136. | b |

83. | d | 92. | a | 101. | b | 110. | b | 119. | b | 128. | b | *137. | b |

84. | b | 93. | c | 102. | d | 111. | d | 120. | a | 129. | c | *138. | c |

85. | c | 94. | b | 103. | c | 112. | b | 121. | b | 130. | c | *139. | b |

86. | b | 95. | c | 104. | b | 113. | a | 122. | d | 131. | c | 140. | c |

87. | c | 96. | d | 105. | a | 114. | a | 123. | c | 132. | c | ||

88. | c | 97. | c | 106. | b | 115. | b | 124. | a | 133. | a | ||

89. | b | 98. | d | 107. | b | 116. | c | 125. | c | 134. | b | ||

90. | c | 99. | c | 108. | d | 117. | c | 126. | c | *135. | d |

**Multiple Choice****—CPA Adapted**

- On the December 31, 2014 balance sheet of Vanoy Co., the current receivables consisted of the following:

Trade accounts receivable $ 60,000

Allowance for uncollectible accounts (2,000)

Claim against shipper for goods lost in transit (November 2014) 3,000

Selling price of unsold goods sent by Vanoy on consignment

at 130% of cost (not included in Vanoy ‘s ending inventory) 26,000

Security deposit on lease of warehouse used for storing

some inventories __ 30,000__

Total __$117,000__

At December 31, 2014, the correct total of Vanoy’s current net receivables was

- $61,000.
- $87,000.
- $91,000.
- $117,000.

- Ace Co. prepared an aging of its accounts receivable at December 31, 2014 and determined that the net realizable value of the receivables was $600,000. Additional information is available as follows:

Allowance for uncollectible accounts at 1/1/14—credit balance $ 68,000

Accounts written off as uncollectible during 2014 46,000

Accounts receivable at 12/31/14 650,000

Uncollectible accounts recovered during 2014 10,000

For the year ended December 31, 2014, Ace’s uncollectible accounts expense would be

- $50,000.
- $46,000.
- $32,000.
- $18,000.

- For the year ended December 31, 2014, 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, 1/1/14 $84,000

Provision for uncollectible accounts during 2014

(2% on credit sales of $3,000,000) 60,000

Uncollectible accounts written off, 11/30/14 69,000

Estimated uncollectible accounts per aging, 12/31/14 104,000

After year-end adjustment, the uncollectible accounts expense for 2014 should be

- $69,000.
- $60,000.
- $104,000.
- $89,000.

- Nenn Co.’s allowance for uncollectible accounts was $190,000 at the end of 2014 and $180,000 at the end of 2013. For the year ended December 31, 2014, Nenn reported bad debt expense of $26,000 in its income statement. What amount did Nenn debit to the appropriate account in 2014 to write off actual bad debts?
- $10,000
- $16,000
- $26,000
- $36,000

- Under the allowance method of recognizing uncollectible accounts, the entry to write off an uncollectible account
- increases the allowance for uncollectible accounts.
- has no effect on the allowance for uncollectible accounts.
- has no effect on net income.
- decreases net income.

- The following accounts were abstracted from Starr Co.’s unadjusted trial balance at December 31, 2014:

__ Debit __ __ Credit __

Accounts receivable $750,000

Allowance for uncollectible accounts 8,000

Net credit sales $3,000,000

Starr estimates that 4% of the gross accounts receivable will become uncollectible. After adjustment at December 31, 2014, the allowance for uncollectible accounts should have a credit balance of

- $120,000.
- $112,000.
- $38,000.
- $30,000.

- On January 1, 2014, West Co. exchanged equipment for a $600,000 zero-interest-bearing note due on January 1, 2017. The prevailing rate of interest for a note of this type at January 1, 2014 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 2015 income statement?
- $0
- $45,000
- $49,500
- $60,000
- On June 1, 2014, Yang Corp. loaned Gant $400,000 on a 12% note, payable in five annual installments of $80,000 beginning January 2, 2015. In connection with this loan, Gant was required to deposit $4,000 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, 2014. Gant made timely payments through November 1, 2014. On January 2, 2015, Yang received payment of the first principal installment plus all interest due. At

December 31, 2014, Yang’s interest receivable on the loan to Gant should be - $0.
- $4,000.
- $8,000.
- $12,000.

- Which of the following is a method to generate cash from accounts receivable?

__Assignment__ __Factoring__

- Yes No
- Yes Yes
- No Yes
- No No

*150. In preparing its August 31, 2014 bank reconciliation, Bing Corp. has available the

following information:

Balance per bank statement, 8/31/14 $18,650

Deposit in transit, 8/31/14 3,900

Return of customer’s check for insufficient funds, 8/30/14 600

Outstanding checks, 8/31/14 2,750

Bank service charges for August 100

At August 31, 2014, Bing’s correct cash balance is

- $19,800.
- $19,200.
- $19,100.
- $17,500.

*151. Tresh, Inc. had the following bank reconciliation at March 31, 2014:

Balance per bank statement, 3/31/14 $37,200

Add: Deposit in transit __ 10,300__

47,500

Less: Outstanding checks __ 12,600__

Balance per books, 3/31/14 __$34,900__

Data per bank for the month of April 2014 follow:

Deposits $43,700

Disbursements 49,700

All reconciling items at March 31, 2014 cleared the bank in April. Outstanding checks at April 30, 2014 totaled $6,000. There were no deposits in transit at April 30, 2014. What is the cash balance per books at April 30, 2014?

- $25,200
- $28,900
- $31,200
- $35,500

**Multiple Choice Answers—CPA Adapted**

Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. |

141. | a | 143. | d | 145. | c | 147. | c | 149. | b | *151. | a |

142. | d | 144. | b | 146. | d | 148. | c | *150. | a |

**DERIVATIONS** **— Computational**

**No. Answer Derivation**

82 b $18,500 + $500 = $19,000.

- d $2,000,000 × .11 = $220,000

$200,000 × (.11 – .05) = __ 12,000__

Interest __$232,000__

$232,000 ÷ $2,000,000 = .116 = 11.6%.

- b

- c $30,000 + $300 + $5,500 = $35,800.

- b

- c $35,000 + $500 + $8,200 = $43,700.

- c .01 × 360 ÷ 20 = 18%.

- b $15,000 × (1 – .01) = $14,850.

- c $15,000 × 100% = $15,000.

- a $15,000 × (1 – .02) = $14,700.

- a $10,000 ×.02 = $200.

- c $12,000 ×.01 = $120.

- b $200,000 – $100,000 = $100,000

- c

- d $750,000 – [($600,000 × .03) – $1,500] = $733,500.

- c ($6,400,000 × .01) – $3,000 = $61,000.

- d ($6,500,000 × .08) – $12,000 = $508,000.

- c $5,000,000 × .08 = $400,000.

- b $1,080,000 + ($180,000 – $80,000) = $1,180,000.

- b $1,200,000 – $125,000 = $1,075,000.

- d ($200,000 – $16,000) – ($18,000 – $16,000) = $182,000.

- c $16,000 – $18,000 + X = $11,000; X = $13,000.

- b ($850,000 – $28,000) × .02 = $16,440.

- a ($86,000 × .10) – $1,520 = $7,080.

- b $80,000 – $4,800 = $75,200.

- b ($480,000 × .05) – [$20,000 – ($14,400 – $4,200)] = $14,200.

- d $432,000 × .05 = $21,600.

- b $120,000 – $7,200 = $112,800.

**DERIVATIONS** **— Computational (cont.)**

**No. Answer Derivation**

- b $720,000 × .05 – [$30,000 – ($21,600 – $6,300)] = $21,300.

- d $600,000 × .05 = $30,000.

- b 7% and 7%.

- a $40,000 × 1.75911 = $70,364.

- a ($600,000 × .90) = $540,000.

- b

- c $80,000 × .10 × 6/12 = $4,000.

- c $50,000 – $46,000 = $4,000.

- d $80,000 × .82645 = $66,116.

- b $750,000 – $570,000 = $180,000.

- a $3,000,000 × .05 = $150,000.

- b ($3,000,000 × .03) + $150,000 = $240,000.

- d

- c $2,000,000 – [$2,000,000 × (.04 + .08)] = $1,760,000.

- a $2,000,000 × .03 = $60,000; $2,000,000 – $60,000 = $1,940,000.

- c $670,000 – $13,400 = $656,600.

- c

- b $500,000 × .03 = $15,000.

- b ($500,000 × .03) + $2,500 = $17,500.

- c ($100,000 × .03) + $2,400 = $5,400.

- c ($400,000 × .03) + $9,600 = $21,600.

- c $750,000 ÷ [($100,000 + $150,000) ÷ 2] = 6.0.

- c $1,200,000 ÷ [($100,000 + $150,000) ÷ 2] = 9.6.

- a $150,000 ÷ [($25,000 + $45,000) ÷ 2] = 4.29.

- b $800,000 ÷ [($75,000 + $120,000) ÷ 2] = 8.20

365 ÷ 8.20 = 44.5 days.

.

*135. d $250 – $150 = $100.

*136. b $72,000 – $24,000 + $8,000 + $1,000 = $57,000.

**DERIVATIONS** **— Computational (cont.)**

**No. Answer Derivation**

*137. b $34,140 + $5,000 – $5,200 = $33,940.

*138. c $42,400 + $900 – $1,800 + $2,900 = $44,400.

*139. b $90,000 + $1,880 – $640 – $180 + $36 = $91,096.

*140. c $35,000 + $5,400 – $4,900 = $35,500.

**DERIVATIONS** **— CPA Adapted**

**No. Answer Derivation**

- a $60,000 – $2,000 + $3,000 = $61,000.

- d Allowance for Doubtful Acct. balance $68,000 + $10,000 – $46,000 = $32,000 (before bad debt expense)

$650,000 – $600,000 – $32,000 = $18,000 (bad debt expense).

- d $104,000 – $84,000 + $69,000 = $89,000

- b $180,000 + $26,000 – $190,000 = $16,000.

- c Conceptual.

- d $750,000 × .04 = $30,000.

- c $600,000 × .75 = $450,000 present value

$450,000 × .10 = $45,000 (2014 interest)

($450,000 + $45,000) × .10 = $49,500 (2015 interest).

- c $400,000 × 12% × 2 ÷ 12 = $8,000.

- b Conceptual.

*150. a $18,650 + $3,900 – $2,750 = $19,800.

*151. a $37,200 + $43,700 – $49,700 = $31,200 (4/30 balance per bank)

$31,200 – $6,000 = $25,200.

**BRIEF Exercises**

**BE7-152**

Telfer Co. uses the gross method to record sales made on credit. On July 1, 2014, it made sales of 75,000 with terms 2/10 n/30. On July 9, 2014, Telfer received full payment for the July 1 sale. Prepare the required journal entries for Telfer Co.

**Solution 7-152**

July 1 Accounts Receivable……………………………………….. 75,000

Sales Revenue…………………………………………… 75,000

July 9 Cash….. ………………………………………………………… ……………. 73,500*

Sales Discount……………………………………………… ……………… 1,500

Accounts Receivable………………………………….. 75,000

*$75,000 – ($75,000 ´ .02) = $73,500

**BE7-153**

Sutherland Corporation sold goods to Rice Decorators for $50,000 on September 1, 2014, accepting Rice’s $50,000, 6-month, 6% note. Prepare Sutherland’s September 1 entry, December 31, annual adjusting entry, and March 1 entry for the collection of the note and interest.

**Solution 7-153**

9/1/14 Notes Receivable……………………………………….. 50,000

Sales Revenue…………………………………. 50,000

12/31/14 Interest Receivable 1,000

Interest Revenue………………………………

($50,000 ´ 6% ´ 4/12)………………………. …………….. 1,000

3/1/15 Cash…………………………………………………………. ……….. 51,500

Notes Receivable……………………………… 50,000

Interest Receivable…………………………… 1,000

Interest Revenue………………………………. 500

**BE7-154**

Kohl Company lent $49,587 to Hemingway, Inc, accepting Hemingway’s 2-year, $60,000, zero-interest-bearing note. The implied interest rate is 10%. Prepare Kohl’s journal entries for the initial transaction, recognition of interest each year, and the collection of $60,000 at maturity.

**Solution 7-154**

Notes Receivable……………………………………………………….. 60,000

Discount on Notes Receivable………………………………………………………………. 10,413

Cash………………………………………………………………… ……………………………….. 49,587

Discount on Notes Receivable……………………………………… 4,959

Interest Revenue………………………………………………..

($49,587 ´ 10%)………………………………………………… 4,959

Discount on Notes Receivable……………………………………… 5,454

Interest Revenue……………………………………………….

($49,587 + $4,959) ´ 10%………………………………….. 5,454

Cash…………………………………………………………………………. 60,000

Notes Receivable………………………………………………. 60,000

**BE7-155**

On October 1, 2014, Gomez Inc. assigns $1,600,000 of its accounts receivable to Ottawa National bank as collateral for a $1,200,000 note. The bank assesses a finance charge of 2% of the receivables assigned and interest on the note of 7%. Prepare the October 1 journal entries for both Gomez and Ottawa.

**Solution 7-155**

__Gomez, Inc.__

Cash………………………………………………………………………….. ….. 1,168,000

Interest Expense ($1,600,000 X 2%)…………………………….. ………. 32,000

Notes Payable……………………………………………………………………………. 1,200,000

__Ottawa National Bank__

Notes Receivable…………………………………………………………….. 1,200,000

Cash…………………………………………………………………………………………. 1,168,000

Interest Revenue($1,600,000 X 2%)………………………………………………….. 32,000

**BE7-156**

Hunt Incorporated sold $200,000 of accounts receivable to Gannon Factors Inc. on a with recourse basis. Gannon assesses a 2% finance charge of the amount of accounts receivable and retains an amount equal to 6% of accounts receivable for possible adjustments. Prepare the journal entries for Hunt Incorporated and Gannon Factors to record the sale of the accounts receivable to Gannon assuming that the recourse liability has a fair value of $10,000.

**Solution 7-156**

__Hunt__

Cash………………………………………………………………………………. 184,000

Due from Gannon Factors………………………………………………….. 12,000*

Loss on Sale of Receivables……………………………………………….. 14,000**

Accounts Receivable………………………………………………………………….. 200,000

Recourse Liability…………………………………………………………………………. 10,000

*6% X $200,000 = $12,000

**2% X $200,000 = $4,000 + $10,000 = __$14,000__

Accounts Receivables………………………………………………………… 200,000

Due to Customer (Hunt)………………………………………………………………. 12,000

Interest Revenue………………………………………………………. 4,000

Cash……………………………………………………………………………………….. 184,000

**Exercises**

**Ex. 7-157**—Asset classification.

Below is a list of items. Classify each into one of the following balance sheet categories:

- Cash c. Short-term Investments
- Receivables 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 7-157**

- d 3. d 5. d 7. b 9. c
- a 4. a 6. c 8. d 10. a

**Ex. 7-158**—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.

**Instructions**

(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.

**Solution 7-158**

(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. 7-159-**—Entries for bad debt expense.

A trial balance before adjustment included the following:

__ Debit __ __ Credit __

Accounts receivable $120,000

Allowance for doubtful accounts 730

Sales $510,000

Sales returns and allowances 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.

Only ** 0 ** units of this product remain