Intermediate Accounting 11th Canadian Edition Volume 2nd Edition by Donald E. Kieso -Test Bank
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Sample Test
CHAPTER 3
THE ACCOUNTING INFORMATION SYSTEM&
MEASUREMENT ISSUES
CHAPTER
LEARNING OBJECTIVES
1. Understand
basic accounting terminology and explain double-entry rules.It is
important to understand the following terms: (1) event, (2) transaction,
(3)account, (4) permanent and temporary accounts, (5) ledger, (6) journal, (7)
posting,(8) trial balance, (9) adjusting entries, (10) financial statements,
(11) closingentries, and (12) reversing entries.
The left side of any account is the debit side; theright side is
the credit side. All asset and expense accountsare increased on the left or
debit side and decreased onthe right or credit side. Conversely, all liability
and revenueaccounts are increased on the right or credit sideand decreased on
the left or debit side. Shareholders’equity accounts, Common Stock, and
Retained Earningsare increased on the credit side, whereas Dividends
isincreased on the debit side.
2.Explain
how transactions affect the accounting equation.In a
double-entry accounting system, for every debit there must be a credit, and
viceversa. This leads us to the basic accounting equation for corporations:
Assets =Liabilities + Shareholders’ Equity. The effect of individual
transactions on the statementof financial position can be explained using the
basic accounting equation. Theshareholders’ equity portion of the equation can
also be expanded to illustrate theeffect of transactions on components of
equity such as common shares and retainedearnings. Whenever a transaction
occurs, the elements of the equation change, butthe equality of the two sides
of the equation remains unaffected.
3. 3. Identify the steps in the
accounting cycle and the steps in the recordingprocess.The
basic steps in the accounting cycle are (1) identification and measurement
oftransactions and other events, (2) journalizing, (3) posting, (4) the
unadjusted trialbalance, (5) adjustments, (6) the adjusted trial balance, (7)
statement preparation, and(8) closing. The first three steps in the accounting
cycle form the basis of the recordingprocess used by most medium-sized
companies on a daily basis. The simplestjournal form is a chronological listing
of transactions and events that are expressed asdebits and credits to
particular accounts. The items entered in a general journal mustthen be
transferred (posted) to the general ledger.
To help prepare financial statements, an unadjusted trial
balance should be preparedat the end of a specific period (usually a month,
quarter, or year) after theentries have been recorded in the journals and
posted to the general ledger.
4.Explain
the reasons for and prepare adjusting entries.Adjustments achieve
a proper matching of revenues and expenses, which is needed todetermine the
correct net income for the current period and to achieve an accuratestatement
of the end-of-the-period balances in assets, liabilities, and owners’
equityaccounts. When preparing adjusting journal entries, you must first
determine howthe original transaction was recorded. For example, was an asset
created earlier in thefiscal year (such as prepaid rent) when the initial
payment was made? If so, an adjustmentfor the related expense is required.
Alternatively, if a statement of comprehensiveincome account was used
initially, an adjustment may be required to set up theproper statement of
financial position account at the end of the period.
5.Explain how the type of ownership structure
affects the financial statements.The type of ownership
structure that a business enterprise uses determines the typesof accounts that
are part of the equity section. In a corporation, ordinary or commonshares,
contributed surplus, retained earnings, and accumulated other
comprehensiveincome are commonly shown separately on the statement of financial
position. In aproprietorship or partnership, a capital account is used to
indicate the investment inthe company by the owner(s). A drawings or withdrawal
account may be used to indicatewithdrawals by the owner(s). These two accounts
are grouped or netted underowners’ equity.
6.Prepare
closing entries and consider other matters relating to the closingprocess.In
the closing process, all of the revenue and expense account balances (income
statementitems) are transferred to a clearing account called Income Summary,
which isused only at the end of the fiscal year. Revenues and expenses are
matched in theIncome Summary account. The net result of this matching, which
represents the netincome or net loss for the period, is then transferred to a
shareholders’ equity account(Retained Earnings for a corporation and capital
accounts for proprietorships andpartnerships).Reversing entries may be used for
reversingaccrued revenues and accrued expenses. Prepaymentsmay also be reversed
if the initial entry to record thetransaction is made to an expense or revenue
account.
7. Use
valuation techniques to measure financial statement elements.IFRS
and ASPE incorporate a mixed-attribute measurementmodel including measurements
that are cost-based(such as historical cost), those that are based on
currentvalue (such as fair value), and many hybrid measures that have
attributes of both cost-based and current value measurements.Valuation
techniques are used to help withmeasurement of financial statement elements.
Commonexamples include market models and income models.Income models are widely
used and include discountedcash flow methods and present value concepts. Whenusing
models, you must determine what inputs shouldbe used. Common inputs include
discount rates and cashflow estimates. The quality of these inputs affects
thequality of the final measurement. Accountants often useprobabilities to help
deal with risk and uncertainty.
8. Use
IFRS 13 to measure fair value.IFRS 13 establishes a fairly
detailed body of knowledgerelating to measurement of fair value. Fair value
measurementunder IFRS 13 is a market-based approachthat incorporates the
specific attributes of the asset/liability being measured, the valuation
premise (how theasset/liability is to be used), the principal market, and
thevaluation technique. Since market prices are not alwaysavailable, valuation
models are used to measure the value.Inputs to these models are either
observable in the marketor not. Observable inputs are most useful since theyare
more objective. The fair value hierarchy establishesthree levels of inputs,
with level 1 being the highest andbest type of input (based on observable
market prices).Because level 3 inputs are more subjective, additional
disclosuresare required.
9. Identify
differences in accounting between ASPE and IFRS, and what changes are expected
in the near future.The main difference is that IFRS contains
specific guidance
in IFRS 13 regarding fair value measurements.Under ASPE,
guidance is spread throughout the body ofknowledge and is less detailed.
10.
Prepare a 10-column work sheet and
financial statements (Appendix 3A).The 10-column work sheet
provides columns for thefirst trial balance, adjustments, adjusted trial
balance,statement of comprehensive income, and statement offinancial position.
The work sheet does not replace thefinancial statements. Instead, it is the
accountant’s informaldevice for accumulating and sorting the informationthat is
needed for the financial statements.
11.
Understand and apply present value
concepts (Appendix 3B).Present
value concepts are used to acknowledge the timevalue of money. There are
various techniques and toolsto calculate present value, including formulas,
tables,financial calculators, and spreadsheets. Inputs to thecalculation
include interest, payments, number of periods,and if the calculation involves
an annuity, informationabout whether it is an ordinary annuity or an annuity
due.Present value concepts are frequently used in measuringfinancial statement
elements.
Multiple Choice QUESTIONS—Conceptual
Answer
No. Description
d
1. Purpose of an accounting system
b
2. Definition of transaction
d
3. Purpose of an accounting system
b
4. Identification of a temporary account
d
5. Accounting equation
a
6. Accounting equation
a
7. Criteria for recording transactions
c
8. Internal event
b
9. Definition of journal
c
10. Impact of transaction on the accounting
equation
d
11. Transaction analysis
c
12. Transaction analysis
c
13. Event recording
c
14. Double-Entry Accounting System
c
15. Event recording
b
16. Trial balance
d
17. Trial balance
c
18. Trial balance
d
19. Uses of adjusting entries
c
20. Adjusting for accrued expenses
d
21. Adjusting for accrued revenues
d
22. Adjusting entries
c
23. Factors to consider in estimating
depreciation
b
24. Contra-asset account
a
25. Effect of not recording depreciation
c
26. Adjusting for bad debts
c
27. Definition of accrued revenue
b
28. Closing process
c
29. Closing process
c
30. Balance Sheet
c
31. Closing process
b
32. Definition of unearned revenue
c
33. Closing process
a
34. Fair value adjustments for investments
d
35. Closing process
c
36. Closing net income or loss
b
37. Post-closing trial balance
a
38. Trial balance – correct statement
a
39. Effect of understating ending inventory
a
40. Discounted Cash Flow approach
a
41. Fair value measurement under IFRS 13
d
42. Fair value measurement under IFRS 13
c
43. Differences in accounting between ASPE
and IFRS
a
44. Differences in accounting between ASPE
and IFRS
Multiple Choice QUESTIONS—Computational
Answer
No. Description
c
45. Adjusting entry for prepaid lease
a
46. Adjusting entry for interest receivable
c
47. Adjusting entry for interest expense
d
48. Adjusting entry for bad debts
b
49. Adjusting entry for bad debts
b
50. Adjusting entry for unearned rent
c
51. Adjusting entry for interest receivable
d
52. Calculate property tax adjustment
c
53. Calculate balance in unearned revenue
c
54. Adjusting entry for investments
d
55. Adjusting entry for investments
c
56. Calculate cash received for interest
a
57. Calculate cash paid for salaries
c
58. Calculate cash paid for insurance
c
59. Calculate insurance expense
a
60. Calculate interest revenue
b
61. Calculate salary expense
c
62. Valuation of entity-specific asset
c
63. Calculate accrued interest payable
c
64. Calculate balance of unearned revenues
b
65. Calculate prepaid insurance
c
66. Calculate interest receivable
c
67. Calculate accrued salaries
c
68. Calculate royalty revenue
c
69. Closing entry
b
*70. Calculate present value
a
*71. Calculate present value
*This topic is dealt with in an Appendix to the chapter.
Exercises
Item
Description
E3-72
Definitions
E3-73
The accounting cycle
E3-74
Adjusting entries
E3-75
Recordable events
E3-76
Adjusting entries
E3-77
Calculation of expense
E3-78
Adjusting and Closing Entries
E3-79
Valuation of Equipment under IFRS 13
E3-80
Calculation of expense
E3-81
Calculation of revenue
E3-82
Type of ownership structure
E3-83
Valuation of Entity-Specific assets
E3-84
Measurement of financial statement elements
E3-85
Transaction journal entries
E3-86
Adjusting entries
*E3-87
Calculate market price of a bond
*E3-88
Present value of an annuity due
PROBLEMS
Item
Description
P3-89
Adjusting entries and calculation of pre-tax income
P3-90
Adjusting entries
P3-91
Adjusting and closing entries
P3-92
Closing entries
P3-93
Accrual accounting
P3-94
Accrual accounting
*P3-95
Adjusting entries
P3-96
Trial balance correction
P3-97
Accrual accounting
P3-98
Ten-column work sheet
*P3-99
Preparation of financial statements
*This topic is dealt with in an Appendix to the chapter.
MULTIPLE CHOICE–Conceptual
1.Which of the following statements is true regarding accounting
information systems?
1. a)
Both large and small firms should use the same type of accounting system.
2. b)
All firmsshould have the same types of transactions.
3. c)
The volume of data to be handled should not vary between firms.
4. d)
The kind of information that management requires of an accounting system will
vary, depending on the type of firm.
Answer: d
Difficulty: Easy
Learning Objective: Understand basic accounting terminology and
explain double-entry rules.
Section Reference: Basic Terminology and Double-Entry Rules
CPA: Financial Reporting
Bloomcode: Comprehension
2.An external event involving a transfer or exchange between two
or more entities or parties is called a(n)
1. a)
account.
2. b)
transaction.
3. c)
ledger.
4. d)
accounting system.
Answer: b
Difficulty: Easy
Learning Objective: Understand basic accounting terminology and
explain double-entry rules.
Section Reference: Basic Terminology and Double-Entry Rules
CPA: Financial Reporting
Bloomcode: Comprehension
3.Factors that shape an accounting system include the
1. a)
nature of the business.
2. b)
size of the firm.
3. c)
volume of data to be handled.
4. d)
All of these answer choices are correct.
Answer: d
Difficulty: Easy
Learning Objective: Understand basic accounting terminology and
explain double-entry rules.
Section Reference: Basic Terminology and Double-Entry Rules
CPA: Financial Reporting
Bloomcode: Comprehension
4. An
example of a temporary account is
a)Unearned Revenue.
b)Salary Expense.
c)Inventory.
d)Retained Earnings.
Answer: b
Difficulty: Medium
Learning Objective: Understand basic accounting terminology and
explain double-entry rules.
Section Reference: Basic Terminology and Double-Entry Rules
CPA: Financial Reporting
Bloomcode: Comprehension
5.Which of the following equations is correct?
a)Assets plus Liabilities = Equity.
b)Assets = Liabilities minus Equity.
c)Liabilities = Assets plus Equity.
d)Equity = Assets minus Liabilities.
Answer: d
Difficulty: Easy
Learning Objective: Explain how transactions affect the
accounting equation.
Section Reference: Accounting Equation
CPA: Financial Reporting
Bloomcode: Comprehension
6. The
accounting equation must remain in balance
7. a)
throughout each step in the accounting cycle.
8. b)
only when journal entries are recorded.
9. c)
only at the time the trial balance is prepared.
10.
d) only when formal financial statements are prepared.
Answer: a
Difficulty: Medium
Learning Objective: Explain how transactions affect the
accounting equation.
Section Reference: Accounting Equation
CPA: Financial Reporting
Bloomcode: Comprehension
7. Which
of the following criteria does NOT have to be met before an event or
transaction should be recorded for accounting purposes?
8. a)
The event or transaction must be an external event.
9. b)
The event or transaction can be measured objectively in financial terms.
10.
c) The event or transaction is relevant and reliable.
11.
d) The event or transaction must meet the definition of an
element.
Answer: a
Difficulty: Medium
Learning Objective: Explain how transactions affect the
accounting equation.
Section Reference: Accounting Equation
CPA: Financial Reporting
Bloomcode: Comprehension
8. Which
of the following is an internal event?
9. a)
sale of goods or services
10.
b) payment of dividends
11.
c) using raw materials in production
12.
d) purchase of materials
Answer: c
Difficulty: Medium
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
9.The book of original entry where transactions and other
selected events are first recorded is called the
1. a) ledger.
2. b)
journal.
3. c)
account.
4. d)
statement of financial position.
Answer: b
Difficulty: Medium
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
10.The debit and credit analysis of a transaction normally takes
place
1. a)
before an entry is recorded in a journal.
2. b)
when the entry is posted to the ledger.
3. c)
when the trial balance is prepared.
4. d)
when the financial statements are prepared.
Answer: c
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Knowledge
11.Performing a service for a client on account will
1. a)
increase one asset and decrease another asset.
2. b)
decrease an asset and decrease a liability.
3. c)
increase an asset and decrease equity.
4. d)
increase an asset and increase equity.
Answer: d
Difficulty: Medium
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
12.The account credited for a receipt of cash on account is
1. a)
Cash.
2. b)
Service Revenue.
3. c)
Accounts Receivable.
4. d)
Accounts Payable.
Answer: c
Difficulty: Medium
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
13.Some events are NOT recorded in the accounting information
system because
1. a)
the service has been provided but the cash has not yet been received.
2. b)
the service has not been provided but the cash has already been received.
3. c)
their measurement is too complex.
4. d)
the amounts are not material.
Answer: c
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
14.The double-entry accounting system means
1. a)
each transaction is recorded with two journal entries.
2. b)
each item is recorded in a journal entry, then in a general ledger account.
3. c)
the dual effect of each transaction is recorded with debits and credits of
equal amount.
4. d)
None of these answer choices is correct.
Answer: c
Difficulty: Medium
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
15.
Which of the following criteria must be met before an event or
item should be recorded for accounting purposes?
16.
a) The event or item can be measured objectively in financial
terms.
17.
b) The event or item is relevant and reliable.
18.
c) The event or item is an element.
19.
d) All of these must be met.
Answer: c
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Knowledge
16.A trial balance
1. a) is
a list of all the accounts in the ledger.
2. b) is
a list of all the accounts and their balances at a specific date.
3. c)
cannot be used in the preparation of financial statements.
4. d)
cannot be used as a basis for preparation of adjusting entries.
Answer: b
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
17.A trial balance will NOT balance if
1. a) an
amount is posted to the wrong account.
2. b) a
transaction has been entered twice.
3. c) a
transaction has been omitted.
4. d)
only the debit side of a journal entry has been posted.
Answer: d
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
18.
The main purpose of a trial balance is
19.
a) to serve as a basic internal control.
20.
b) to assist in preparation of the financial statements.
21.
c) to prove the mathematical equity of debits and credits after
posting.
22.
d) to uncover errors in journalizing and posting.
Answer: c
Difficulty: Medium
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
19.
Adjusting entries are necessary to
1.obtain a proper matching of revenue and expense.
2.achieve an accurate statement of assets and equities.
3.adjust assets and liabilities to their fair market value.
1. a) 1
2. b) 2
3. c) 3
4. d) 1 and
2
Answer: d
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
20.If, during an accounting period, an expense item has been
incurred and consumed but not yet paid for or recorded, then the end-of-period
adjusting entry would involve
1. a) a
liability account and an asset account.
2. b) an
asset or contra-asset and an expense account.
3. c) a
liability account and an expense account.
4. d) a
receivable account and a revenue account.
Answer: c
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
21.For adjusting entries relating to accrued revenues,
1. a) a
liability-revenue account relationship exists.
2. b)
the adjusting entry involves a credit to an asset account and a debit to a
revenue account.
3. c) if
an adjustment is not made, assets will be overstated.
4. d)
before adjustment, both assets and revenues are understated.
Answer: d
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
22.
Which of the following would NOTbe a correct form for an
adjusting entry?
23.
a) a debit to a revenue and a credit to a liability
24.
b) a debit to an expense and a credit to a liability
25.
c) a debit to a liability and a credit to a revenue
26.
d) a debit to an asset and a credit to a liability
Answer: d
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
23.Which of the following must be considered in estimating
depreciation on an asset for an accounting period?
1. a)
only the original cost of the asset
2. b)
only the asset’s useful life
3. c)
both the original cost of the asset and its useful life
4. d)
the decline in its fair market value
Answer: c
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
24.The type of account and normal balance of “Accumulated
Depreciation, Equipment” is
1. a)
Asset, Credit.
2. b)
Contra-asset, Credit.
3. c)
Contra-asset, Debit.
4. d)
Liability, Credit.
Answer: b
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
25.If the accountant forgets to record an adjustment for
Accumulated Depreciation, Building at the end of the accounting period, this
will cause
1. a) an
overstatement of assets.
2. b) an
understatement of assets.
3. c) an
overstatement of expenses.
4. d) an
overstatement of liabilities.
Answer: a
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
26.An adjusting entry for bad debts will generally
1. a)
increase an expense account and decrease an asset account.
2. b)
increase an expense account and increase an asset account.
3. c)
increase an expense account and increase a contra-asset account.
4. d)
increase an expense account and increase a liability account.
Answer: c
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
27.An accrued revenue can best be described as an amount
1. a)
collected and currently matched with expenses.
2. b)
collected and not currently matched with expenses.
3. c)
not collected and currently matched with expenses.
Answer: c
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
28.
What account are revenues and expenses transferred to at the end
of the accounting cycle?
29.
a) Comprehensive Income
30.
b) Retained Earnings
31.
c) Accumulated Other Comprehensive Income
32.
d) Income Summary
Answer: b
Difficulty: Medium
Learning Objective: Explain how the type of ownership structure
affects the financial statements.
Section Reference: Financial Statements and Ownership Structure
CPA: Financial Reporting
Bloomcode: Comprehension
29.
Which of the following is NOT an account appearing in the equity
section of a corporation’s statement of financial position?
30.
a) Contributed Surplus
31.
b) Common Shares
32.
c) Owner’s Equity
33.
d) Accumulated Other Comprehensive Income
Answer: c
Difficulty: Medium
Learning Objective: Explain how the type of ownership structure
affects the financial statements.
Section Reference: Financial Statements and Ownership Structure
CPA: Financial Reporting
Bloomcode: Comprehension
30.
Zack Jones operates a sole proprietorship, selling sporting
equipment. He has recently prepared financial statements for the fiscal year
end of the business. Which equity accounts would you expect to see on the
balance sheet?
a)Common Shares, Dividends, and Owner’s Equity
b)Common Shares, Capital, and Withdrawals
c)Capital and Withdrawals, grouped or added under Owner’s Equity
d)Owner’s Equity and Dividends, netted together as Retained
Earnings
Answer: c
Difficulty: Easy
Learning Objective: Explain how the type of ownership structure
affects the financial statements.
Section Reference: Financial Statements and Ownership Structure
CPA: Financial Reporting
Bloomcode: Comprehension
31.
Marvin holds 10% of the common shares of Pink Limited. For the
2017 fiscal year end, all shareholders received a cash payment to represent
their share in the net income of Pink Limited. How would this cash payment be
reported in the equity section of Pink Limited’s financial statements?
32.
a) as a reduction in the Owner’s Equity account
33.
b) as an owner withdrawal, reducing Shareholder’s Equity of Pink
Limited
34.
c) as a dividend, reducing Shareholder’s Equity of Pink Limited
d)This payment would not impact the equity section of the
financial statements.
Answer: c
Difficulty: Easy
Learning Objective: Explain how the type of ownership structure
affects the financial statements.
Section Reference: Financial Statements and Ownership Structure
CPA: Financial Reporting
Bloomcode: Comprehension
32.An unearned revenue can best be described as an amount
1. a)
collected and currently matched with expenses.
2. b)
collected and not currently matched with expenses.
3. c)
not collected and currently matched with expenses.
4. d)
not collected and not currently matched with expenses.
Answer: b
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
33.Which type of account is always debited during the closing
process?
1. a)
dividends
2. b)
expense
3. c)
revenue
4. d)
retained earnings
Answer: c
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
34.Which of the following statements is INCORRECT regarding fair
value adjustments for investments?
1. a)
Both FV–NI investments and FV–OCI investments could include equity investments
orinvestments in debt securities.
2. b)
FV–OCI investments exclude debt securities.
3. c) At
each period end, an estimate is made of the fair value of both FV–NI and FV–OCI
investments.
4. d) An
adjusting entry is required to record a holding gain or loss on FV–NI
investments.
Answer: a
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Comprehension
35.In the closing process, all the revenue and expense accounts
are transferred to a clearing or suspense account called
1. a)
Other Comprehensive Income.
2. b)
Common Shares.
3. c)
Retained Earnings.
4. d)
Income Summary.
Answer: d
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
36.A corporation’s net income or loss is closed at year end to
1. a)
Accumulated Other Comprehensive Income.
2. b)
Common Shares.
3. c)
Retained Earnings.
4. d)
Other Comprehensive Income.
Answer: c
Difficulty: Medium
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
37.A post-closing trial balance
1. a)
includes temporary accounts only.
2. b)
includes permanent accounts only.
3. c)
includes both temporary and permanent accounts.
4. d)
may include expense accounts.
Answer: b
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
38.Which of the following statements about the trial balanceis
correct?
1. a)
The debits and credits must balance.
2. b)
The equality of credits and debits ensures that no errors were made.
3. c)
The post-closing trial balance includes temporary accounts only.
4. d)
The post-closing trial balance is used to prepare the financial statements.
Answer: a
Difficulty: Medium
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
39.If the inventory account at the end of the year is
understated, the effect will be to
1. a)
overstate the cost of goods sold.
2. b)
understate the net purchases.
3. c)
overstate the gross profit on sales.
4. d)
overstate the goods available for sale.
Answer: a
Difficulty: Medium
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Comprehension
40.
Which of the following is true regarding the traditional
discounted cash flow approach?
41.
a) The discount rate is adjusted to accommodate the riskiness of
the cash flows.
42.
b) The cash flows have been adjustment to accommodate their
riskiness.
43.
c) This model is best used where cash flows are fairly
uncertain.
44.
d) Both a) and c) are correct.
Answer: a
Difficulty: Medium
Learning Objective: Use valuation techniques to measure
financial statement elements.
Section Reference: Measuring Financial Statement Elements
CPA: Financial Reporting
Bloomcode: Knowledge
41.
A fair value measure under IFRS 13 is based on which view of
fair value?
42.
a) market participant view
43.
b) shareholder view
44.
c) fair value view
45.
d) unbiased view
Answer: a
Difficulty: Hard
Learning Objective: Use IFRS 13 to measure fair value.
Section Reference: Measuring Fair Value Using IFRS 13
CPA: Financial Reporting
Bloomcode: Knowledge
42.
In order to measure fair value under IFRS13, an entity must
determine
43.
a) the item being measured, and how the item could or would be
used.
44.
b) the market the item would be (or is) bought and sold in.
45.
c) which fair value model is being used to value the item.
46.
d) all of the above
Answer: d
Difficulty: Medium
Learning Objective: Use IFRS 13 to measure fair value.
Section Reference: Measuring Fair Value Using IFRS 13
CPA: Financial Reporting
CPA: Finance
CPA: Management Accounting
Bloomcode: Knowledge
43.
Under ASPE, Other Comprehensive Income (OCI) and Accumulated
Other Comprehensive Income (AOCI) accounts
44.
a) appear as separate line items, the same as under IFRS.
45.
b) are part of accounts such as Fair Value–OCI Investments.
46.
c) are not included in financial statements.
47.
d) are measured differently than under IFRS.
Answer: c
Difficulty: Medium
Learning Objective: Identify differences in accounting between
ASPE and IFRS, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
44.
The main difference in the accounting for measurement issues
between IFRS and ASPE is that
45.
a) IFRS has a well-developed framework for measuring fair values
(IFRS13), whereas ASPE does not.
46.
b) there is no difference between accounting for measurement
issues between these standards.
47.
c) guidance under ASPE is concentrated in a single area of the
ASPE body of knowledge.
48.
d) IFRS requires explicit disclosure of fair value amounts,
whereas these disclosures under ASPE are optional.
Answer: a
Difficulty: Medium
Learning Objective: Identify differences in accounting between
ASPE and IFRS, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
MULTIPLE CHOICE QUESTIONS–Computational
45.On September 1, 2017, BrownCorp. made the annual lease
payment of $12,000 for its fleet of delivery trucks. The payment covered the
period September 1, 2017 to August 31, 2018. Assuming the entire amount had
originally been debited to Lease Expense, the required adjustment at December
31, 2017 is
1. a)
debit Lease Expense and credit Prepaid Lease $4,000.
2. b)
debit Prepaid Lease and credit Lease Expense $4,000.
3. c)
debit Prepaid Lease and credit Lease Expense $8,000.
4. d)
debit Lease Expense and credit Prepaid Lease $8,000.
Answer: c
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare adjusting
entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $12,000 – ($12,000 x 4 ÷ 12) = $8,000
46.White Resources determines that it has NOT yet recorded the
2017accrual for Interest Revenue to be received in 2018. Assuming the amount to
be recorded for 2017 is $2,000, the required adjustment at December 31, 2017 is
1. a)
debit Interest Receivable and credit Interest Revenue $2,000.
2. b)
debit Interest Revenue and credit Interest Receivable $2,000.
3. c) debit
Interest Payable and credit Interest Revenue $2,000.
4. d)
Silly question: no adjusting entry is required.
Answer: a
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: No calculation necessary ($2,000 is figure given in
the question.)
47.On November 1, 2017, GreenCorp. purchased equipment by
signing a 5-month, 7% note for $120,000. The December 31, 2017adjusting entry
required in connection with this note is
400.
a) debit Interest Expense and credit Interest Payable, $8,400.
401.
b) debit Interest Expense and credit Interest Payable, $3,500.
402.
c) debit Interest Expense and credit Interest Payable, $1,400.
403.
d) debit Interest Expense and credit Cash, $1,400.
Answer: c
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $120,000 x 7% × 2 ÷ 12 = $1,400
48.Blue Corp.’s account balances at December 31, 2017 included
Accounts Receivable, $385,000 debit; Allowance for Doubtful Accounts, $2,500
credit. From a review of the receivables, Blue estimates that $14,000of the
December 31 receivables will be uncollectible. The required adjusting entry
would include a credit to the allowance account for
500.
a) $2,500.
501.
b) $16,500.
502.
c) $14,000.
503.
d) $11,500.
Answer: d
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare adjusting
entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $14,000 – $2,500= $11,500
49.
YellowCorp.’s account balances at December 31, 2017included
Accounts Receivable, $720,000 debit; Allowance for Doubtful Accounts,
$800debit.Sales during 2017were $1,840,000. It is estimated that 2% of sales
will be uncollectible. The required adjusting entry would include a credit to
the allowance account for
50.
a) $28,800.
51.
b) $36,800.
52.
c) $14,400.
53.
d) $30,600.
Answer: b
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $1,840,000 × 2% = $36,800. (ADA balance is irrelevant)
50.
On September 1, 2017, Black Corporation received $36,000 cash
from a tenant for one year’s rent in advance, and recorded the transaction with
a credit to Rent Revenue. The December 31, 2017required adjusting entry in
connection with this would be
51.
a) debit Rent Revenue and credit Unearned Rent, $12,000.
52.
b) debit Rent Revenue and credit Unearned Rent, $24,000.
53.
c) debit Unearned Rent and credit Rent Revenue, $12,000.
54.
d) debit Cash and credit Unearned Rent, $6,000.
Answer: b
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: 8 ÷ 12 × $36,000 = $24,000
51.
On October 31, 2017, Pink Inc. lent $42,000 to Zinc Inc. in
return for a three-month, 3.5% interest-bearing note. What adjusting entry
should Pink Inc. make on December 31, 2017, in connection with this note?
52.
a) Debit Interest Receivable and credit Interest Revenue,
$367.50.
53.
b) Debit Cash and credit Interest Revenue, $245.
54.
c) Debit Interest Receivable and credit Interest Revenue, $245.
55.
d) Debit Interest Revenue and credit Interest Receivable,
$122.50.
Answer: c
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $42,000 x 3.5% x 2 ÷ 12 = $245
52.
Lime Limited has received its invoice for $75,000 for property
taxes for the calendar year 2017. The invoice was received and paid in June
2014 and the entire amount was debited to Property Tax Expense. Assuming Lime
does NOT prepare interim financial statements, the required adjustment on
December 31, 2017 related to the property taxes is
53.
a) debit Property Tax Expense and credit Prepaid Property Tax
$31,250.
54.
b) debit Prepaid Property Tax and credit Property Tax Expense
$37,500.
55.
c) debit Property Tax Expense and credit Prepaid Property Tax
$37,500.
56.
d) Silly question: no adjusting entry is required.
Answer: d
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: No calculation necessary (No adjusting entry is
required as FS are not prepared.)
53.
On December 10, 2017 Peach Inc. received a cheque for $54,500
from a customer for services that Peach will be performing in December 2017 and
January 2018. By December 31, 2017, Peach had earned 40% of that amount.
Assuming the appropriate year-end adjustments were made, the 2017 balance in
Peach’s Unearned Revenue account will be
54.
a) $21,800.
55.
b) $27,250.
56.
c) $32,700.
57.
d) zero.
Answer: c
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $54,500 x 60% = $32,700
54.
On May 15, 2017, Grey Corp. purchased 1,000 common shares of
Regal Bank for $32,000, as a Fair Value through Other Comprehensive Income
(FV–OCI) equity investment. At December 31, 2017, the fair value of these
shares was $35,400. The required adjusting entry to reflect this fact is
55.
a) debit Fair value–OCI Investment, credit Holding Gain on
Investment (OCI) $35,400.
56.
b) debit Holding Gain on Investment (OCI), credit Fair value–OCI
Investment $35,400.
57.
c) debit Fair value–OCI Investment, credit Holding Gain on
Investment (OCI) $3,400.
58.
d) debit Holding Loss on Investment (OCI), credit Fair value–OCI
Investment $3,400.
Answer: c
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $35,400 – $32,000 = $3,400 gain
55.
On May 15, 2017, Cream Corp. purchased 1,000 common shares of
Regal Bank for $32,000, as a Fair Value through Net Income (FV–NI) equity
investment. At December 31, 2017, the fair value of these shares was $30,800.
The required adjusting entry to reflect this fact is
56.
a) debit Fair value–Net Income Investment, credit Holding Gain
on Investment (OCI) $30,800.
57.
b) debit Holding Gain on Investment (OCI), credit Fair value–Net
Income Investment $30,800.
58.
c) debit Fair value–Net Income Investment, credit Investment
Income $21,200.
59.
d) debit Investment Loss, credit Fair value–Net Income
Investment $1,200.
Answer: d
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $30,800 – $32,000 = $1,200 loss
Use the following information for questions 56–58.
Orange Corpreported the following items on its calendar 2017
statement of comprehensive income:
Interest revenue……………………………………………………
$84,200
Salaries expense…………………………………………………..
72,000
Insurance expense………………………………………………..
10,600
As well, their statements of financial position showed the
following balances:
December 31, 2016 December
31, 2017
Accrued interest receivable………………….. …..
$10,100
$8,800
Accrued salaries payable……………………… ………
9,800
5,400
Prepaid insurance……………………………….. ………
1,500
1,600
56.The cash received for interest during 2017was
800.
a) $78,800.
801.
b) $84,200.
802.
c) $82,900.
803.
d) $74,100.
Answer: c
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $8,800 + $84,200 – $10,100 = $82,900
57.
The cash paid for salaries during 2017was
58.
a) $67,600.
59.
b) $72,000.
60.
c) $77,400.
61.
d) $81,800.
Answer: a
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $5,400 + $72,000 – $9,800 = $67,600
58.
The cash paid for insurance premiums during 2017was
59.
a) $9,100.
60.
b) $9,000.
61.
c) $10,700.
62.
d) $10,600.
Answer: c
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $10,600 +$1,600 –$1,500 = $10,700
Use the following information for questions 59–61.
During calendar 2017, PurpleCorp. paid or collectedthe following
items:
Insurance premiums paid……………………………………….
$ 14,200
Interest collected (revenue)……………………………………
21,700
Salaries paid…………………………………………………………
131,300
As well, their statements of financial position showed the
following balances:
December 31, 2017 December
31, 2018
Prepaid Insurance……………………………….. …… $
1,400
$ 1,500
Interest Receivable……………………………… ………
2,800
2,100
Salaries Payable…………………………………. …….
14,700
12,900
59.
The insurance expense on the 2017statement of comprehensive
income was
60.
a) $12,700.
61.
b) $12,800.
62.
c) $14,100.
63.
d) $14,200.
Answer: c
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $14,200 –$1,500 +$1,400 = $14,100
60.
The interest revenue on the 2017 statement of comprehensive
incomewas
61.
a) $22,400.
62.
b) $21,700.
63.
c) $19,600.
64.
d) $21,000.
Answer: a
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $21,700 –$2,100 + $2,800 = $22,400
61.
The salary expense on the 2017 statement of comprehensive income
was
62.
a) $118,400.
63.
b) $133,100.
64.
c) $131,300.
65.
d) $116,600.
Answer: b
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $131,300 – $12,900 + $14,700 = $133,100
62.
Amazing Company acquires a trade namefrom Fantastic Ltd.Amazing
estimates it will receive $7,200 per year from the name over the next 9
years.Using a discount rate of 4%, what is the value in use to Amazing of this
trade name?
63.
a) $45,528
64.
b) $58,398
65.
c) $53,534
66.
d) $55,676
Answer: c
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $7,200 x 7.43533 = $53,534
63.
On September 1, 2017 Culver Corp. issued a 9% note payable to
National Bank for $750,000, payable in three equal annual principal payments of
$250,000, plus interest. On this date, the bank’s prime rate was 8%. The first
payment for interest and principal was made on September 1, 2018. At December
31, 2018, Culver should record accrued interest payable of
64.
a) $13,333.
65.
b) $22,500.
66.
c) $15,000.
67.
d) $10,000.
Answer: c
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
CPA: Problem Solving and Decision Making
Bloomcode: Application
Feedback: ($750,000 – $250,000) × 9% × 4 ÷ 12 = $15,000
64.
Rathbone Corp. sells major household appliance service contracts
for cash. The service contracts are for a one-year, two-year, or three-year
period. Cash receipts from contracts are credited to Unearned Service Revenues.
This account had a balance of $1,100,000 at December 31, 2017 before year-end
adjustment. Service contract costs are charged as incurred to the Service Contract
Expense account, which had a balance of $325,000 at December 31, 2017.
Service contracts still outstanding at December 31, 2017 expire
as follows:
During
2018
$140,000
During
2019
210,000
During
2020
99,000
What amount should be reported as Unearned Service Revenues on
Rathbone’s December 31, 2017 statement of financial position?
1. a)
$774,000
2. b)
$325,000
3. c)
$449,000
4. d)
$124,000
Answer: c
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $140,000 + $210,000 + $99,000 = $449,000
65.
On December 1, 2017, Flynn Consulting paid $27,000 for a
three-year insurance policy (December 1, 2017 to November 30, 2020) and debited
the entire amount to Prepaid Insurance. The December 31, 2017 required
adjusting entry in connection with this policy would be
66.
a) debit Prepaid Insurance and credit Insurance Expense $750.
67.
b) debit Insurance Expense and credit Prepaid Insurance $750.
68.
c) debit Insurance Expense and credit Prepaid Insurance $26,250.
69.
d) debit Prepaid Insurance and credit Insurance Expense $26,250.
Answer: b
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $27,000 x 1 ÷ 36 = $750
66.
On June 1, 2017, Carr Corp. loaned Farr Corp. $600,000 on a 5%
note, payable in five annual instalments of $120,000 (plus interest), beginning
January 2, 2018. Interest on the note is payable on the first day of each month
beginning July 1, 2017. Farr made timely payments through November 1, 2017. On
January 2, 2018, Carr received payment of the first principal instalment plus
all interest due. At December 31, 2017, Carr’s interest receivable on this loan
is
67.
a) $0.
68.
b) $2,500.
69.
c) $5,000.
70.
d) $7,500.
Answer: c
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $600,000 × 5% × 2 ÷ 12 = $5,000
67.
Grant Limited pays all salaried employees on a biweekly basis.
Overtime pay, however, is paid in the next biweekly period. Grant accrues
salaries expense only at its December 31 year end. Data relating to salaries
earned in December 2017 are as follows:
Last payroll was paid on Dec 27, 2017, for the two-week period
ended Dec 27, 2017.
Overtime pay earned in the two-week period ended Dec 27, 2017
was $7,000.
Remaining work days in 2017 were December 28, 29, 30, on which
days there was no overtime.
The regular biweekly salaries total $100,000. Assuming a
five-day work week, Grant should
record a liability at December 31, 2017 for accrued salaries of
1. a)
$24,000.
2. b)
$29,000.
3. c)
$37,000.
4. d)
$53,000.
Answer: c
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $7,000 + ($100,000 ÷ 10 × 3) = $37,000
68.
Mark-Wall Corp.’s trademark was licensed to Rodgers Inc. for royalties
of 12% of sales of the trademarked items. Royalties are payable semi-annually
on March 15 for sales in July through December of the previous year, and on
September 15 for sales in January through June of the same year. Mark-Wall
received the following royalties from Rodgers:
March 15 September
15
During
2017
$5,000
$9,000
During
2018
8,000
6,000
Rodgers estimates that sales of the trademarked items would
total $67,000 for July through December 2018. On their statement of
comprehensive income for calendar 2018, Mark-Wall’s royalty revenue should be
40.
a) $8,040.
41.
b) $14,000.
42.
c) $14,040.
43.
d) $21,000.
Answer: c
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $6,000 + ($67,000 × 12%) = $14,040
69.Frog Corporation had revenues of $300,000, expenses of
$200,000, and dividends of $45,000. When Income Summary is closed to Retained
Earnings, the amount of the debit or credit to Retained Earnings is a
1. a)
debit of $55,000.
2. b)
debit of $100,000.
3. c)
credit of $55,000.
4. d)
credit of $100,000.
Answer: c
Difficulty: Hard
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Application
Feedback: $300,000 – $200,000 – $45,000 = $55,000
*70. 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?
a)5 years
b)6 years
c)7 years
d)8 years
Answer: b
Difficulty: Hard
Learning Objective: Understand and apply present value concepts.
Section Reference: Present Value Concepts
CPA: Finance
CPA: Management Accounting
Bloomcode: Application
Feedback: $252,068 ÷ $400,000 = 0.63017; 0.63017 is PV factor
for 6 years
*71. Pearson Corporation makes an investment today (January 1,
2014). They will receive $9,000 every December 31 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?
a)$37,003
b)$41,443
c)$73,036
d)$81,801
Answer: a
Difficulty: Hard
Learning Objective: Understand and apply present value concepts.
Section Reference: Present Value Concepts
CPA: Finance
CPA: Management Accounting
Bloomcode: Application
Feedback: $9,000 × 4.11141 = $37,003
EXERCISES
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