INTERMEDIATE ACCOUNTING FINAL PAPER
2026 EXAM STUDY GUIDE WITH VERIFIED
SOLUTIONS
◉ On March 31, 2016, the Freeman Company leased a machine. The
lease agreement requires Freeman to pay 10 annual payments of
$6,000 on each March 31, with the first payment due on March 31,
2016. Assuming an interest rate of 10% and that this lease is treated
as an installment sale, Freeman will initially value the machine by
multiplying $6,000 by which of the following factors?. Answer: -
Present value of an annuity due of $1 at 10% for 10 periods
- Present value of an annuity due of $1 at 10% for 10 periods. The
calculation is how much is recorded today, the present value of equal
payments that start today (annuity due).
◉ The Stacey Mack Corporation used the expected cash flow
approach to determine the present value of a future obligation to be
paid in four years. Estimated future payment possibilities were as
follows:
Possible payment Probability
$50 million 20%
70 million 40%
90 million 40%
,The risk-free interest rate is 5%. What is the estimated present value
of the future obligation?. Answer: 60.88 million
$60.880 million. 0.82270 (present value of $1 in 4 periods at 5%) x
$74 million [($50 million x 0.20) + ($70 million x 0.40) + ($90
million x 0.40)].
◉ Start of chapter 14. Answer: start of chapter 14
◉ The price of a corporate bond is the present value of its face
amount at the market or effective rate of interest plus. Answer: -
Plus the present value of all future interest payments at the market
or effective rate of interest.
- The price of a bond is equal to the present value of all future cash
outflows, principal and interest, using the market or effective rate
◉ When a bond issue sells for less than its face value, the market
rate of interest is. Answer: - Higher than the stated rate of interest.
- Higher than the stated rate of interest. The discount created will be
amortized to generate additional interest expense (recognized over
the life of the bond). This is added to the interest expense created by
the periodic interest payments (computed at the stated rate of
,interest) to increase the total interest expense to that of the market
rate of interest
◉ On June 30, 2016, Mabry Corporation issued $5 million of its 8%
bonds for $4.6 million. The bonds were priced to yield 10%. The
bonds are dated June 30, 2016. Interest is payable semiannually on
December 31 and July 1. If the effective interest method is used, by
how much should the bond discount be reduced for the 6 months
ended December 31, 2016?. Answer: 30,000
- $30,000: Under the effective interest method, the interest expense
is computed as the beginning book value of the debt times the yield
interest rate. The difference between the interest expense and the
interest payment represents the amortization of the discount. Here,
the interest expense is $230,000 ($4,600,000 x .10 x 6/12) and the
interest payment is $200,000 ($5,000,000 x .08 x 6/12
◉ A discount on bonds should be reported on the balance sheet:.
Answer: - As a reduction of the face amount of the bond.
- A discount on bonds is a contra liability account and therefore
deducted from the face amount when presented on the balance
sheet.
, ◉ If bonds are issued between interest dates the entry to record the
issuance of the bonds will:. Answer: - Include a credit to accrued
interest payable
- Include a credit to accrued interest payable. When bonds are issued
between interest payment dates, the cash received is made up of two
components: the price of the bond and the interest accrued, but
unpaid, since the last interest payment date. The credit relating to
the accrued interest portion is interest payable
◉ On January 1, 2016, Blair Company sold $800,000 of 10% ten-
year bonds. Interest is payable semiannually on June 30 and
December 31. The bonds were sold for $708,000, priced to yield
12%. Blair records interest at the effective rate. Blair should report
bond interest expense for the six months ended June 30, 2016 in the
amount of:. Answer: 42,480
- $42,480: Under the effective interest method, the interest expense
is computed as the beginning book value of the debt times the yield
interest rate. ($708,000 × .12 × 6/12).
◉ In a bond amortization table for bonds issued at a discount:.
Answer: - The total effective interest over the term to maturity is
equal to the amount of the discount plus the total cash interest paid.
2026 EXAM STUDY GUIDE WITH VERIFIED
SOLUTIONS
◉ On March 31, 2016, the Freeman Company leased a machine. The
lease agreement requires Freeman to pay 10 annual payments of
$6,000 on each March 31, with the first payment due on March 31,
2016. Assuming an interest rate of 10% and that this lease is treated
as an installment sale, Freeman will initially value the machine by
multiplying $6,000 by which of the following factors?. Answer: -
Present value of an annuity due of $1 at 10% for 10 periods
- Present value of an annuity due of $1 at 10% for 10 periods. The
calculation is how much is recorded today, the present value of equal
payments that start today (annuity due).
◉ The Stacey Mack Corporation used the expected cash flow
approach to determine the present value of a future obligation to be
paid in four years. Estimated future payment possibilities were as
follows:
Possible payment Probability
$50 million 20%
70 million 40%
90 million 40%
,The risk-free interest rate is 5%. What is the estimated present value
of the future obligation?. Answer: 60.88 million
$60.880 million. 0.82270 (present value of $1 in 4 periods at 5%) x
$74 million [($50 million x 0.20) + ($70 million x 0.40) + ($90
million x 0.40)].
◉ Start of chapter 14. Answer: start of chapter 14
◉ The price of a corporate bond is the present value of its face
amount at the market or effective rate of interest plus. Answer: -
Plus the present value of all future interest payments at the market
or effective rate of interest.
- The price of a bond is equal to the present value of all future cash
outflows, principal and interest, using the market or effective rate
◉ When a bond issue sells for less than its face value, the market
rate of interest is. Answer: - Higher than the stated rate of interest.
- Higher than the stated rate of interest. The discount created will be
amortized to generate additional interest expense (recognized over
the life of the bond). This is added to the interest expense created by
the periodic interest payments (computed at the stated rate of
,interest) to increase the total interest expense to that of the market
rate of interest
◉ On June 30, 2016, Mabry Corporation issued $5 million of its 8%
bonds for $4.6 million. The bonds were priced to yield 10%. The
bonds are dated June 30, 2016. Interest is payable semiannually on
December 31 and July 1. If the effective interest method is used, by
how much should the bond discount be reduced for the 6 months
ended December 31, 2016?. Answer: 30,000
- $30,000: Under the effective interest method, the interest expense
is computed as the beginning book value of the debt times the yield
interest rate. The difference between the interest expense and the
interest payment represents the amortization of the discount. Here,
the interest expense is $230,000 ($4,600,000 x .10 x 6/12) and the
interest payment is $200,000 ($5,000,000 x .08 x 6/12
◉ A discount on bonds should be reported on the balance sheet:.
Answer: - As a reduction of the face amount of the bond.
- A discount on bonds is a contra liability account and therefore
deducted from the face amount when presented on the balance
sheet.
, ◉ If bonds are issued between interest dates the entry to record the
issuance of the bonds will:. Answer: - Include a credit to accrued
interest payable
- Include a credit to accrued interest payable. When bonds are issued
between interest payment dates, the cash received is made up of two
components: the price of the bond and the interest accrued, but
unpaid, since the last interest payment date. The credit relating to
the accrued interest portion is interest payable
◉ On January 1, 2016, Blair Company sold $800,000 of 10% ten-
year bonds. Interest is payable semiannually on June 30 and
December 31. The bonds were sold for $708,000, priced to yield
12%. Blair records interest at the effective rate. Blair should report
bond interest expense for the six months ended June 30, 2016 in the
amount of:. Answer: 42,480
- $42,480: Under the effective interest method, the interest expense
is computed as the beginning book value of the debt times the yield
interest rate. ($708,000 × .12 × 6/12).
◉ In a bond amortization table for bonds issued at a discount:.
Answer: - The total effective interest over the term to maturity is
equal to the amount of the discount plus the total cash interest paid.
