PVA Flashcards Preview

Financial Accounting > PVA > Flashcards

Flashcards in PVA Deck (21):
1

On November I, year I, a company purchased a new machine that it does not have to pay for until November I, year 3. The total payment on November I, year 3, 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 concept? 

present value of $1. 

2

On January I, year 2, the Carpet Company lent $100,000 to its supplier, Loom Corporation, evidenced by a note, payable in 5 years. Interest at 5% is payable annually with the first payment due on December 31, year 3. The going rate of interest for this type of loan is 10%. The parties agreed that Carpet's inventory needs for the loan period will be met by Loom at favorable prices. Assume that the present value (at the going rate of interest) of the $100,000 note is $81,000 at January I, year 2. What amount of interest income, if any, should be included in Carpet's year 2 income statement? 

$8,100 

3

Esmcnd Sank approves a 10-year loan to Matt Schweitzer. In doing so, Esmond Sank incurs $2,000 of loan origination costs (attorney fees, title insurance, wages of employees' direct work on loan origination). The loan origination fees shall be

Deferred and recognized over the life of the loan as an adjustment of yield (interest income). 

4

On November I, year I, a company purchased a new machine that it does not have to pay for until November I, year 3. The total payment on November I, year 3, 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 concept?

present value of I. 

5

On December I, year 2, Money Co. gave Home Co. a $200,000, 11% loan. Money paid proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,310, beginning January I, year 3. The repayments yield an effective interest rate of at a present value of $200,000 and 12.4% at a present value of $194,000. Money does not elect the fair value option to record this financial asset. What amount of income from this loan should Money report in its year 2 income statement? 

$2,005

6

On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its income statement for the year, What amount should World report as interest expense? 

$22,500

7

On January I of the current year, Lean Co. made an investment of $10,000. The following is the present value of $1.00 discounted at interest rate:

Periods         Present value of 1.00 discounted at 10%

1                    .909

2                   .826

3                   .751

What amount of cash will Lean accumulate in two years? 

$12,107 

8

A loan is granted in the amount of $500,000 with a stated interest rate of 10%. The lender incurs direct loan origination costs of $10,000 and charges the borrower a 3-point nonrefundable fee. The effective interest rate to the lender will be 

Greater than 10%

9

On January I, year I, Duripan Corp. invested $10,000 in 5-year certificates of deposit at 8% interest. Future value factors are as follows:

Future amount of $1 at 8% for 5 periods       1.469

Future amount of $1 at 10% for 5 periods      1.611

Future amount of an ordinary annuity of

$1 at 8% for 5 periods                                    5.867

Future amount of an ordinary' annuity of

$1 at 10% for 5 periods                                  6.105

What will be the maturity value of these CDs, assuming that the market interest rate at maturity is 10%?

$14,690

10

Able, Inc. had the following amounts of long-term debt outstanding at December 31, year I:

14 1/2% term note, due year 2                     $ 3,000 

11 1/8% term note, due year 5                       107,000

8% note, due in 11 equal annual  

principal payments, plus interest

beginning December 31, year 2                  110,000

7% guaranteed debentures, due year 6      100,000

Totl.                                                          $320,000

Assume Able does not elect the fair value option to value financial liabilities. Able's annual sinking-fund requirement on the guaranteed debentures is $4,000 per year. What amount should Able report as current maturities of long-term debt in its December 31, year I balance sheet? 

$13,000 

11

On January I, year I, Robert Harrison signed an agreement to operate as a franchisee of Perfect Pizza, Inc. for an initial franchise fee of $40,000. Of this amount, $15,000 was paid when the agreement was signed and the balance is payable in five annual payments of $5,000 each beginning January I, year 2. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. Harrison's credit rating indicates that he can borrow money at 12% for a loan of this type. Information on present and future value factors is as follows: Present value of $1 at 12% for 5 periods        .567

Future amount of $1 at 12% for 5 periods      1.762

Present value of an ordinary annuity of $1

at 12% for 5 periods                                      3.605 

Harrison should record the acquisition cost of the franchise on January I, year I, at 

$33,025

12

Under IFRS, which statement about borrowing costs is true?

I. Borrowing costs must always be capitalized.

Il. Borrowing costs can never be capitalized.

Ill. Borrowing costs must be capitalized if they meet certain criteria. IV. Borrowing costs must be expensed if they do not meet certain criteria.

III and IV

13

On October I, year I, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note's market rate of interest was 11%,. Fleur recorded the purchase at the note's face amount. All of the merchandise was sold by December I, year I. Fleur's year I financial statements reported interest payable and interest expense on the note for 3 months at 16%. All amounts due on the note were paid February I, year 2. Fleur's year I cost of goods sold for the holiday merchandise was 

Understated by the difference between the note's face value and the note's October 1, year 1 present value.

14

On October I, year I, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note's market rate of interest was 11%. Fleur recorded the purchase at the note's face amount. All of the merchandise was sold by December I, year I. Fleur's year I financial statements reported interest payable and interest expense on the note for 3 months at 16%. All amounts due on the note were paid February I, year 2. As a result of Fleur's accounting treatment of the note, interest, and merchandise, which of the following items was reported correctly?

a. 12/31/Y1 retained earnings and 12/31/Y1 interest payable

b. Neither

c. 12/31/Y1 retained earnings

d. 12/31/Y1 interest payable

12/31/Y1 interest payable

15

Which of the following transactions would require the use of the present value of an annuity due concept in order to calculate the present value of the asset obtained or liability owed at the date of incurrence?

a. A 10-year bond is issued on January 2 with interest payable semiannually on July I and January I yielding 7%.

b. A capital lease is entered into with the initial lease payment due I month subsequent to the signing of the lease agreement.

c. A 10-year bond is issued on January 2 with interest payable semiannually on July I and January I yielding 9%

d. 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 upon the signing of the lease agreement. 

16

On January I, year 2, Ott Company sold goods to Fox Company. Fox signed a noninterest bearing note requiring payment of $60,000 annually for seven years. The first payment was made on January I, year 2. 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 of

                Present value of         ordinary annuity of

 Periods    1 at 10%                      1 at 10%

6              .56                              4.36

7               .51                              4.87

Ott should record sales revenue in January year 2 of

$321,600

17

January I, year I, Beal Corporation adopted a plan to accumulate funds for a new plant building to be erected beginning July I, year 6, at an estimated cost of $1,200,000. Beal intends to make five equal annual deposits in a fund that will earn interest at compounded annually. The first deposit is made on July I, year I. Present value and future amount factors are as follows:

Present value of 1 at 8% for 5 periods         0.68 

Present value of 1 at 8% for 6 periods         0.63

Future amount of ordinary' annuity of

1 at 8% for 5 periods                                   5.87

Future amount of annuity in advance of

1 at 8% for 5 periods                                   6.34

Beal should make five annual deposits (rounded) of    

$189,300

18

On January I, year I, Mill Co. exchanged equipment for a $200,000 noninterest-bearing note due on January I, year 4. The prevailing rate of interest for a note of this type at January I, year I, was 10%. The present value of $1 at for three periods is 0.75. What amount of interest revenue should be included in Mill's year 2 income statement?

$16,500

19

White Airlines sold a used jet aircraft to Brown Company for $300,000, accepting a 5-year 6% note for the entire amount. Brown's incremental borrowing rate was 14%. The annual payment of principal and interest on the note was to be $189,930. The aircraft could have been sold at an established cash price of $651,460. The present value of an ordinary annuity of $1 at for five periods is 3.99. The aircraft should be capitalized on Brown's books at 

$651,460

20

On December 27, year I, Holden Company sold a building, receiving as consideration a $400,000 noninterest bearing note due in 3 years. The building cost $380,000 and the accumulated depreciation was $160,000 at the date of sale. The prevailing rate of interest for a note of this type was 12%. The present value of $1 for three periods at 12% is 0.71. In its year I income statement, how much gain or loss should Holden report on the sale?

$ 64,000 gain. 

21

On January I, year 2, Dorr Company borrowed $200,000 from its major customer, Pine Corporation, evidenced by a note payable in 3 years. The promissory note did not bear interest. Dorr agreed to supply Pine's inventory needs for the loan period at favorable prices. The going rate of interest for this type of loan is 14%. Assume that the present value (at the going rate of interest) of the $200,000 note is $135,000 at January I, year 2. What amount of interest expense should be included in Dorr's year 2 income statement? 

$18,900