6. Ann Ruth Wants to Invest a Certain Sum of Money at the End of Each Year for Five Years

1. 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.
2. 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, 2010, the present value of that sum decreases as the date draws closer to December 31, 2010.
3. 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.
4. Which statement 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 1.00000 from the ordinary annuity table value for one more period.
The factor for the present value of an annuity due is found by adding 1.00000 to the ordinary annuity table value for one less period.
5. Ed Sloan 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.

6. Ann Ruth wants to invest a certain sum of money at the end of each year for five years. The investment will earn 6% compounded annually. At the end of five years, she will need a total of $40,000 accumulated. How should she compute her required annual investment?
$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.
7. 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).
8. 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.
9. In accounting for compensated absences, the difference between vested rights and accumulated rights is
vested rights are normally for a longer period of employment than are accumulated rights.
vested rights are not contingent upon an employee's future service.
vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose.
vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation.

10. An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee's (Points: 6)
portion of FICA taxes, and unemployment taxes.
and employer's portion of FICA taxes, and unemployment taxes.
portion of FICA taxes, unemployment taxes, and any voluntary deductions.
portion of FICA taxes, and any voluntary deductions.
11. Which of these is not included in an employer's payroll tax expense? (Points: 6)
F.I.C.A. (social security) taxes
Federal unemployment taxes
State unemployment taxes
Federal income taxes
12. Which of the following is a condition for accruing a liability for the cost of compensation for future absences? (Points: 6)
The obligation relates to the rights that vest or accumulate.
Payment of the compensation is probable.
The obligation is attributable to employee services already performed.
All of these are conditions for the accrual.
13. A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should ______. (Points: 6)
be accrued during the period when the compensated time is expected to be used by employees
be accrued during the period following vesting
be accrued during the period when earned
not be accrued unless a written contractual obligation exists
14. The amount of the liability for compensated absences should be based on
1. the current rates of pay in effect when employees earn the right to compensated absences.
2. the future rates of pay expected to be paid when employees use compensated time.
3. the present value of the amount expected to be paid in future periods. (Points: 6)
1
2
3
Either 1 or 2 is acceptable.

15. Which of the following is the proper way to report a gain contingency? (Points: 6)
As an accrued amount.
As deferred revenue.
As an account receivable with additional disclosure explaining the nature of the contingency.
As a disclosure only.
16. Which of the following contingencies need not be disclosed in the financial statements or the notes thereto? (Points: 6)
Probable losses not reasonably estimable
Environmental liabilities that cannot be reasonably estimated
Guarantees of indebtedness of others
All of these must be disclosed.
17. Theoretically, the costs of issuing bonds could be ______. (Points: 6)
expensed when incurred
reported as a reduction of the bond liability
debited to a deferred charge account and amortized over the life of the bonds
Any of these
18. The printing costs and legal fees associated with the issuance of bonds should (Points: 6)
be expensed when incurred.
be reported as a deduction from the face amount of bonds payable.
be accumulated in a deferred charge account and amortized over the life of the bonds.
not be reported as an expense until the period the bonds mature or are retired.
19. Treasury bonds should be shown on the balance sheet as (Points: 6)
an asset.
a deduction from bonds payable issued to arrive at net bonds payable and outstanding.
a reduction of stockholders' equity.
both an asset and a liability.

20. An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition (Points: 6)
any costs of issuing the bonds must be amortized up to the purchase date.
the premium must be amortized up to the purchase date.
interest must be accrued from the last interest date to the purchase date.
all of these.
21. The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as (Points: 6)
an adjustment to the cost basis of the asset obtained by the debt issue.
an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument.
an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt.
a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.
22. A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2006. Interest is paid on June 30 and December 31. The proceeds from the bonds are $4,901,036. What is interest expense for 2007, using straight-line amortization? (Points: 6)
$385,052
$390,000
$392,298
$394,948
23. On January 1, 2007, Foley Co. sold 12% bonds with a face value of $600,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $646,200 to yield 10%. Using the effective-interest method of amortization, interest expense for 2007 is (Points: 6)
$60,000.
$64,436.
$64,620.
$72,000.

24. On January 2, 2007, a calendar-year corporation sold 8% bonds with a face value of $600,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $553,600 to yield 10%. Using the effective-interest method of computing interest, how much should be charged to interest expense in 2007? (Points: 6)
$48,000
$55,360
$55,544
$60,000
25. On January 1, 2001, Gonzalez Corporation issued $4,500,000 of 10% ten-year bonds at 103. The bonds are callable at the option of Gonzalez at 105. Gonzalez has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective-interest method).
On December 31, 2007, when the fair market value of the bonds was 96, Gonzalez repurchased $1,000,000 of the bonds in the open market at 96. Gonzalez has recorded interest and amortization for 2007. Ignoring income taxes and assuming that the gain is material, Gonzalez should report this reacquisition as (Points: 6)
a loss of $49,000.
a gain of $49,000.
a loss of $61,000.
a gain of $61,000.
26. Pryor Corporation issued a 100% stock dividend of its common stock which had a par value of $10 before and after the dividend. At what amount should retained earnings be capitalized for the additional shares issued? (Points: 6)
There should be no capitalization of retained earnings.
Par value
Market value on the declaration date
Market value on the payment date
27. The issuer of a 5% common stock dividend to common stockholders preferably should transfer from retained earnings to contributed capital an amount equal to the (Points: 6)
market value of the shares issued.
book value of the shares issued.
minimum legal requirements.
par or stated value of the shares issued.

28. The balance in Common Stock Dividend Distributable should be reported as a(n) (Points: 6)
deduction from common stock issued.
addition to capital stock.
current liability.
contra current asset.
29. A feature common to both stock splits and stock dividends is (Points: 6)
a transfer to earned capital of a corporation.
that there is no effect on total stockholders' equity.
an increase in total liabilities of a corporation.
a reduction in the contributed capital of a corporation.
30. Which one of the following disclosures should be made in the equity section of the balance sheet, rather than in the notes to the financial statements? (Points: 6)
Dividend preferences
Liquidation preferences
Call prices
Conversion or exercise prices
31. The rate of return on common stock equity is calculated by dividing (Points: 6)
net income less preferred dividends by average common stockholders' equity.
net income by average common stockholders' equity.
net income less preferred dividends by ending common stockholders' equity.
net income by ending common stockholders' equity.
32. The payout ratio can be calculated by dividing (Points: 6)
dividends per share by earnings per share.
cash dividends by net income less preferred dividends.
cash dividends by market price per share.
dividends per share by earnings per share and dividing cash dividends by net income less preferred dividends.

33. Windsor Company has outstanding both common stock and nonparticipating, non-cumulative preferred stock. The liquidation value of the preferred is equal to its par value. The book value per share of the common stock is unaffected by (Points: 6)
the declaration of a stock dividend on preferred payable in preferred stock when the market price of the preferred is equal to its par value.
the declaration of a stock dividend on common stock payable in common stock when the market price of the common is equal to its par value.
the payment of a previously declared cash dividend on the common stock.
a 2-for-1 split of the common stock.
34. Quayle Corporation had two issues of securities outstanding: common stock and an 8% convertible bond issue in the face amount of $16,000,000. Interest payment dates of the bond issue are June 30th and December 31st. The conversion clause in the bond indenture entitles the bondholders to receive forty shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2007, the holders of $2,400,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $1,000,000. In applying the book value method, what amount should Quayle credit to the account "paid-in capital in excess of par," as a result of this conversion? (Points: 6)
$330,000
$160,000
$1,440,000
$720,000
35. Investments in debt securities should be recorded on the date of acquisition at (Points: 6)
lower of cost or market.
market value.
market value plus brokerage fees and other costs incident to the purchase.
face value plus brokerage fees and other costs incident to the purchase.
36. An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a (Points: 6)
debit to Available-for-Sale Securities.
debit to the discount account.
debit to Interest Revenue.
none of these.

37. Which of the following is correct about the effective-interest method of amortization? (Points: 6)
The effective interest method applied to investments in debt securities is different from that applied to bonds payable.
Amortization of a discount decreases from period to period.
Amortization of a premium decreases from period to period.
The effective-interest method produces a constant rate of return on the book value of the investment from period to period.
38. The realization of income on installment sales transactions involves (Points: 6)
recognition of the difference between the cash collected on installment sales and the cash expenses incurred.
deferring the net income related to installment sales and recognizing the income as cash is collected.
deferring gross profit while recognizing operating or financial expenses in the period incurred.
deferring gross profit and all additional expenses related to installment sales until cash is ultimately collected.
39. A manufacturer of large equipment sells on an installment basis to customers with questionable credit ratings. Which of the following methods of revenue recognition is least likely to overstate the amount of gross profit reported? (Points: 6)
At the time of completion of the equipment (completion of production method)
At the date of delivery (sales method)
The installment-sales method
The cost-recovery method
40. A seller is properly using the cost-recovery method for a sale. Interest will be earned on the future payments. Which of the following statements is not correct? (Points: 6)
After all costs have been recovered, any additional cash collections are included in income.
Interest revenue may be recognized before all costs have been recovered.
The deferred gross profit is offset against the related receivable on the balance sheet.
Subsequent income statements report the gross profit as a separate item of revenue when it is recognized as earned.

41. According to the FASB, immediate recognition of a liability (referred to as the minimum liability) is required when the accumulated benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the accumulated benefit obligation, the Board (Points: 6)
requires recognition of an asset.
requires recognition of an asset if the excess fair value of plan assets exceeds the corridor amount.
recommends recognition of an asset but does not require such recognition.
does not permit recognition of an asset.
42. Which of the following disclosures of pension plan information would not normally be required by Statement of Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits"? (Points: 6)
The major components of pension expense
The amount paid from the pension fund to retirees during the period
The funded status of the plan and the amounts recognized in the financial statements
The rates used in measuring the benefit amounts
43. The main purpose of the Pension Benefit Guaranty Corporation is to ______. (Points: 6)
require minimum funding of pensions
require plan administrators to publish a comprehensive description and summary of their plans
administer terminated plans and to impose liens on the employer's assets for certain unfunded pension liabilities
all of these
44. If the lease were nonrenewable, there was no purchase option, title to the building does not pass to the lessee at termination of the lease and the lease were only for eight years, what type of lease would this be for the lessee? (Points: 6)
Sales-type lease
Direct-financing lease
Operating lease
Capital lease

45. Huffman Company leases a machine from Lincoln Corp. under an agreement which meets the criteria to be a capital lease for Huffman. The six-year lease requires payment of $102,000 at the beginning of each year, including $15,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at 8% is 4.99271. Huffman should record the leased asset at (Points: 6)
$509,256.
$488,661.
$434,366.
$416,799.
46. Stone Company changed its method of pricing inventories from FIFO to LIFO. What type of accounting change does this represent? (Points: 6)
A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.
A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.
A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be restated.
A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be restated.
47. Which of the following is (are) the proper time period(s) to record the effects of a change in accounting estimate? (Points: 6)
Current period and prospectively
Current period and retrospectively
Retrospectively only
Current period only
48. When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a (Points: 6)
change in accounting principle.
change in accounting estimate.
prior period adjustment.
correction of an error.