Becker CPA Review, PassMaster Questions
Lecture: Financial 5
2
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Present Values & Annuities
CPA-05223
Type1 M/C
A-D
Corr Ans: B
PM#12
F 5-01
1.
CPA-05223 Released 2006 Page 3
On January 1 of the current year, Lean Co. made an investment of $10,000.
The following is the present
value of $1.00 discounted at a 10% interest rate:
Present value of $1.00
Periods
discounted at 10%
1
.909
2
.826
3
.751
What amount of cash will Lean accumulate in two years?
a. $12,000
b. $12,107
c. $16,250
d. $27,002
CPA-05223
Explanation
Choice "b" is correct.
The problem with this question is that there is a discount rate but not an interest
rate available.
The normal present value formula can be expressed as:
Present value = Future amount x present value factor
$10,000 = Future amount x .826 (the present value factor is the discount rate for 2 years)
Future amount = $10,000 / .826 = $12,107
Choice "a" is incorrect.
If the interest rate, rather than the discount rate, was 10% and the interest was
not compounded, the $10,000 would accumulate to $12,000 ($1,000 of interest each year).
However,
that calculation does not coincide with the facts of the question (the discount rate is 10% and the interest
is compounded).
Choice "c" is incorrect.
If Lean had invested $10,000 at a rate around 10%, it is not expected that the
investment could accumulate to anything like $16,250.
$10,000 invested at 10% would only amount to
slightly more than $12,000.
Choice "d" is incorrect, per the above calculation and explanation.
Accounting for Leases
CPA-00395
Type1 M/C
A-D
Corr Ans: B
PM#1
F 5-02
2.
CPA-00395 FARE R03 #2
Page 16
Douglas Co. leased machinery with an economic useful life of six years.
For tax purposes, the
depreciable life is seven years.
The lease is for five years, and Douglas can purchase the machinery at
fair value at the end of the lease.
What is the depreciable life of the leased machinery for financial
reporting?
a. Zero.
b. Five years.
c. Six years.
d. Seven years.
CPA-00395
Explanation
Choice "b" is correct.
Assets acquired under capital lease are depreciated using the same theory as
purchased assets.
The purchase option is for " fair value."
It is not a "bargain purchase option" therefore