Question and Answer - 5

For each engagement described below, indicate whether the engagement is likely to be
conducted under international auditing standards, U.S. generally accepted auditing standards, or
PCAOB auditing standards. a. An audit of a U.S. private company with no public equity or debt.
b. An audit of a German private company wit
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Discuss why the adoption of international accounting and auditing standards might be beneficial
to investors and auditors.
Patel, CPA, has completed the audit of the financial statements of Bellamy Corporation as of and
for the year ended December 31, 2011. Patel also audited and reported on the Bellamy financial
statements for the prior year. Patel drafted the following report for 2011. We have audited the
balance sheet and statements of
The CPA firm of Bigelow, Barton, and Brown was expanding rapidly. Consequently, it hired
several junior accountants, including a man named Small. The partners of the firm eventually
became dissatisfied with Small's production and warned him they would be forced to discharge
him unless his output increased significantly
Distinguish between a qualified opinion, an adverse opinion, and a disclaimer of opinion, and
explain the circumstances under which each is appropriate.
What type of opinion should an auditor issue when the financial statements are not in accordance
with GAAP because such adherence would result in misleading statements?
List the four parts of the Code of Professional Conduct, and state the purpose of each.
After accepting an engagement, a CPA discovers that the client's industry is more technical than
he realized and that he is not competent in certain areas of the operation. What are the CPA's
options?
Distinguish between the auditor's potential liability to the client, liability to third parties under
common law, civil liability under the securities laws, and criminal liability. Describe one
situation for each type of liability in which the auditor can be held legally responsible.
Ann Archer serves on the audit committee of JKB Communications, Inc., a telecommunications
start-up company. The company is currently a private company. One of the audit committee's
responsibilities is to evaluate the external auditor's independence in performing the audit of the
company's financial statements. In cond
The following situations involve the provision of nonaudit services. Indicate whether providing
the service is a violation of AICPA rules or SEC rules including Sarbanes-Oxley requirements on
independence. Explain your answer as necessary. a. Providing bookkeeping services to a public
company. The services were preappr
What is meant by contributory negligence? Under what conditions will this likely be a successful
defense?
Whitlow & Company is a brokerage firm registered under the Securities Exchange Act of 1934.
The act requires such a brokerage firm to file audited financial statements with the SEC annually.
Mitchell & Moss, Whitlow's CPAs, performed the annual audit for the year ended December 31,
2011, and rendered an unqualified opi
Why is there a special need for ethical behavior by professionals? Why do the ethical
requirements of the CPA profession differ from those of other professions?
Multiple Choice Questions The following questions concern possible violations of the AICPA
Code of Professional Conduct. Choose the best response. a. In which one of the following
situations would a CPA be in violation of the AICPA Code of Professional Conduct in
determining the audit fee? (1) A fee based on whether t
Describe an ethical dilemma. How does a person resolve an ethical dilemma?
State several factors that have affected the incidence of lawsuits against CPAs in recent years.
What five circumstances are required for a standard unqualified report to be issued?
Distinguish between business failure and audit risk. Why is business failure a concern to
auditors?
Distinguish between a report qualified as to opinion only and one with both a scope and opinion
qualification.
Distinguish between "fraud" and "constructive fraud."
Distinguish between an unqualified report with an explanatory paragraph or modified wording

and a qualified report. Give examples when an explanatory paragraph or modified wording
should be used in an unqualified opinion.
The U.S. Securities and Exchange Commission (SEC) is an independent, nonpartisan, quasi-
judicial regulatory agency with responsibility for administering the federal securities laws.
Publicly traded companies must electronically file a variety of forms or reports with the SEC (for
example, annual financial statements).
Barbara Whitley had great expectations about her future as she sat in her graduation ceremony in
May 2010. She was about to receive her Master of Accountancy degree, and next week she
would begin her career on the audit staff of Green, Thresher & Co., CPAs. Things looked a little
different to Barbara in February 2011.
Jackson is a sophisticated investor. As such, she was initially a member of a small group that was
going to participate in a private placement of $1 million of common stock of Clarion
Corporation. Numerous meetings were held between management and the investor group.
Detailed financial and other information was supplie
Explain how materiality differs for failure to follow GAAP and for lack of independence.
The Howard Mobile Home Manufacturing Company is audited by Olson and Riley, CPAs.
Howard Mobile Home has decided to issue stock to the public and wants Olson and Riley to
perform all the audit work necessary to satisfy the requirements for filing with the SEC. Olson
and Riley has never had a client go public before. R
Why is an auditor's independence so essential?
What are the purposes of the opinion paragraph in the auditor's report? Identify the most
important information included in the opinion paragraph.
Contrast the auditor's liability under the Securities Act of 1933 with that under the Securities
Exchange Act of 1934.
The International Ethics Standards Board for Accountants (IESBA) Handbook of the Code of
Ethics for Professional Accountants is available for free download from the IFAC website
(www.ifac.org). Similarly, the AICPA's Code of Professional Conduct is searchable at the
AICPA's website (www.aicpa.org). Required a. Compare
In order to expand its operations, Barton Corp. raised $5 million in a public offering of common
stock, and also negotiated a $2 million loan from First National Bank. In connection with this
financing, Barton engaged Hanover & Co., CPAs to audit Barton's financial statements. Hanover
knew that the sole purpose of the
Describe the information included in the introductory, scope, and opinion paragraphs in a
separate audit report on the effectiveness of internal control over financial reporting. What is the
nature of the additional paragraphs in the audit report?
The following relate to auditors' independence: Required a. Why is independence so essential for
auditors? b. Compare the importance of independence of CPAs with that of other professionals,
such as attorneys. c. Explain the difference between independence in appearance and of mind. d.
Assume that a partner of a CPA
What consulting or nonaudit services are prohibited for auditors of public companies? What
other restrictions and requirements apply to auditors when providing nonaudit services to public
companies?
In 2006, Arnold Diaz was a bright, upcoming audit manager in the South Florida office of a
national public accounting firm. He was an excellent technician and a good "people person."
Arnold also was able to bring new business into the firm as the result of his contacts in the
rapidly growing Hispanic business community
What is the purpose of the AICPA's Code of Professional Conduct restriction on commissions as
stated in Rule 503?
Explain how an engagement letter might affect an auditor's liability to clients under common
law.
Several types of opinions are described in a. through i. below. For each opinion, select the
appropriate description of that opinion from the list numbered 1 through 9 below that
corresponds with the type of opinion. Types of Opinion a. Unqualified opinion with an
explanatory paragraph for change in consistency b. Disc
For the following independent situations, assume that you are the audit partner on the
engagement: 1. In the last 3 months of the current year, Oil Refining Company decided to change
direction and go significantly into the oil drilling business. Management recognizes that this
business is exceptionally risky and could
What organization is responsible for developing ethics standards at the international level? What
are the fundamental principles of the international ethics standards?
Multiple Choice Questions The following questions deal with liability under the 1933 and 1934
securities acts. Choose the best response. a. Major, Major, & Sharpe, CPAs, are the auditors of
MacLain Technologies. In connection with the public offering of $10 million of MacLain
securities, Major expressed an unqualified
The SEC Enforcement Division investigates possible violations of securities laws, recommends
SEC action when appropriate, either in a federal court or before an administrative law judge, and
negotiates settlements. Litigation Releases, which are descriptions of SEC civil and selected
criminal suits in the federal court
Lauren Yost & Co., a medium-sized CPA firm, was engaged to audit Stuart Supply Company.
Several staff were involved in the audit, all of whom had attended the firm's in-house training
program on effective auditing methods. Throughout the audit, Yost spent most of her time in the
field planning the audit, supervising th
Distinguish between independence of mind and independence in appearance. State three

activities that may not affect independence of mind but are likely to affect independence in
appearance.
What potential sanctions does the SEC have against a CPA firm?
State the objective of the audit of financial statements. In general terms, how do auditors meet
that objective?
Marie Janes encounters the following situations in doing the audit of a large auto dealership.
Janes is not a partner. 1. The sales manager tells her that there is a sale (at a substantial discount)
on new cars that is limited to long-established customers of the dealership. Because her firm has
been doing the audit fo
Multiple Choice Questions The following questions concern unqualified audit reports. Choose
the best response. a. Which of the following statements about a combined report on the financial
statements and internal control over financial reporting is correct? (1) The auditor's opinion on
internal control is for the same
In what ways can the profession positively respond to and reduce liability in auditing?
List the seven parts of a standard unqualified audit report and explain the meaning of each part.
How do the parts compare with those found in a qualified report?
What are the six core ethical values described by the Josephson Institute? What are some other
sources of ethical values?
Compare and contrast traditional auditors' legal responsibilities to clients and third-party users
under common law. How has that law changed in recent years?
Sarah Robertson, CPA, had been the auditor of Majestic Co. for several years. As she and her
staff prepared for the audit for the year ended December 31, 2010, Herb Majestic told her that he
needed a large bank loan to "tide him over" until sales picked up as expected in late 2011. In the
course of the audit, Robertson
The following are situations that may violate the Code of Professional Conduct. Assume, in each
case, that the CPA is a partner. 1. Contel, CPA, advertises in the local paper that his firm does
the audit of 14 of the 36 largest community banks in the state. The advertisement also states that
the average audit fee, as a
The following tentative auditor's report was drafted by a staff accountant and submitted to a
partner in the accounting firm of Better & Best, CPAs: AUDIT REPORT To the Audit
Committee of American Broadband, Inc. We have examined the consolidated balance sheets of
American Broadband, Inc. and subsidiaries as of Decembe
Each of the following situations involves possible violations of the AICPA's Code of
Professional Conduct. For each situation, state whether it is a violation of the Code. In those
cases in which it is a violation, explain the nature of the violation and the rationale for the
existing rule. a. The audit firm of Miller
Ray, the owner of a small company, asked Holmes, a CPA, to conduct an audit of the company's
records. Ray told Holmes that an audit was to be completed in time to submit audited financial
statements to a bank as part of a loan application. Holmes immediately accepted the engagement
and agreed to provide an auditor's re
Is the auditor's liability affected if the third party was unknown rather than known? Explain.
For the following independent situations, assume that you are the audit partner on the
engagement: 1. During your audit of Raceway.com, Inc., you conclude that there is a possibility
that inventory is materially overstated. The client refuses to allow you to expand the scope of
your audit sufficiently to verify whether
List the three conditions that require a departure from an unqualified opinion and give one
specific example of each of those conditions.
Assume that an auditor makes an agreement with a client that the audit fee will be contingent
upon the number of days required to complete the engagement. Is this a violation of the Code of
Professional Conduct? What is the essence of the rule of professional ethics dealing with
contingent fees, and what are the reason
Multiple Choice Questions The following questions concern unqualified audit reports with an
explanatory paragraph or modified wording. Choose the best response. a. An entity changed
from the straight-line method to the declining-balance method of depreciation for all newly
acquired assets. This change has no material e
How does the prudent person concept affect the liability of the auditor?
Many people believe that a CPA cannot be truly independent when payment of fees is dependent
on the management of the client. Explain two approaches that could reduce this appearance of
lack of independence.
Describe what is meant by reports involving the use of other auditors. What are the three options
available to the principal auditor and when should each be used?
The following is an auditor's report prepared in accordance with International Standards on

Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB):
INDEPENDENT AUDITOR'S REPORT To the Shareholders of Les Meridian, Inc. We have
audited the accompanying financial statements of Les Mer
A careful reading of an unqualified report indicates several important phrases. Explain why each
of the following phrases or clauses is used rather than the alternative provided: Required a. "The
financial statements referred to above present fairly in all material respects the financial position"
rather than "The fin
Doyle and Jensen, CPAs, audited the accounts of Regal Jewelry, Inc., a corporation that imports
and deals in fine jewelry. Upon completion of the audit, the auditors supplied Regal Jewelry with
20 copies of the audited financial statements. The firm knew in a general way that Regal Jewelry
wanted that number of copies
When an auditor discovers more than one condition that requires departure from or modification
of the standard unqualified report, what should the auditor's report include?
The client has restated the prior-year statements because of a change from LIFO to FIFO. How
should this be reflected in the auditor's report?
The national stock exchanges require listed companies to have an independent audit committee.
Required a. Describe an audit committee. b. What are the typical functions performed by an audit
committee? c. Explain how an audit committee can help an auditor be more independent. d.
Describe the nature of the audit firm's
Multiple Choice Questions The following questions concern CPA firms' liability under common
law. Choose the best response. a. Sharp, CPA, was engaged by Peters & Sons, a partnership, to
give an opinion on the financial statements that were to be submitted to several prospective
partners as part of a planned expansion o
International Standards on Auditing (ISAs) are issued by the International Auditing and
Assurance Standards Board (IAASB). Use the IAASB web site (www.ifac.org/IAASB/) to learn
more about the IAASB and its standard-setting activities. Required a. What is the objective of
the IAASB? Who uses International Standards on
Define materiality as it is used in audit reporting. What conditions will affect the auditor's
determination of materiality?
For each of the following procedures taken from the quality control manual of a CPA firm,
identify the applicable element of quality control from Table 2-4. a. Appropriate accounting and
auditing research requires adequate technical reference materials. Each firm professional has
online password access through the f
Discuss why many CPA firms have willingly settled lawsuits out of court. What are the
implications to the profession?
How does the auditor's opinion differ between scope limitations caused by client restrictions and
limitations resulting from conditions beyond the client's control? Under which of these two will
the auditor be most likely to issue a disclaimer of opinion? Explain.
The ISAs allow an auditor to include either of the following phrases in the auditor's opinion
paragraph: (1) "The financial statements present fairly in all material respects . . ." (2) "The
financial statements give a true and fair view of". Discuss whether the ASB should adopt a
similar option for U.S. audit standard
Explain how the rules concerning stock ownership apply to partners and professional staff. Give
an example of when stock ownership would be prohibited for each.
Multiple Choice Questions The following questions concern audit reports other than unqualified
audit reports with standard wording. Choose the best response. a. The annual audit of
Midwestern Manufacturing revealed that sales were accidentally being recorded as revenue when
the goods were ordered, instead of when they
What are the purposes of the scope paragraph in the auditor's report? Identify the most important
information included in the scope paragraph.
Under Section 11 of the Securities Act of 1933 and Section 10(b), Rule 10b-5, of the Securities
Exchange Act of 1934, a CPA may be sued by a purchaser of registered securities. The following
items relate to what a plaintiff who purchased securities must prove in a civil liability suit against
a CPA. The plaintiff secur
Chen, CPA, is the auditor for Greenleaf Manufacturing Corporation, a privately owned company
that has a June 30 fiscal year. Greenleaf arranged for a substantial bank loan that was dependent
on the bank's receiving, by September 30, audited financial statements that showed a current
ratio of at least 2 to 1. On Septemb
Summarize the restrictions on advertising by CPA firms in the rules of conduct and
interpretations.
Why must the Marshall-Lerner condition be satisfied for an open economy's aggregate demand
curve to be more elastic than if the economy were closed?
Lawsuits against CPA firms continue to increase. State your opinion of the positive and negative
effects of the increased litigation on CPAs and on society as a whole.
State the allowable forms of organization a CPA firm may assume.
A common type of lawsuit against CPAs is for the failure to detect a fraud. State the auditor's
responsibility for such discovery. Give authoritative support for your answer.
Distinguish between changes that affect consistency and those that may affect comparability but
not consistency. Give an example of each.
What is meant when we say that the automatic income adjustment mechanism brings about
incomplete adjustment in the balance of trade or payments?
What is the role of expectations and the risk premium in the asset market or portfolio balance
approach? Why was there no risk premium in the monetary approach?
How does a flexible exchange rate system in general adjust balanceâ€ofâ€payments

disequilibria? How does a fixed exchange rate system in general adjust
balanceâ€ofâ€payments disequilibria? Why is the choice between these two basic types of
adjustment systems important?
What is demand for money according to the monetary approach to the balance of payments?
What is the supply of money of the nation? What is meant by the monetary base of the nation?
The money multiplier?
What is the relative purchasingâ€power parity theory? Do empirical tests confirm or reject the
relative purchasing power parity theory?
What is meant by dirty floating? How well is the present managed floating system operating?
What is the purchasingâ€power parity theory? What are its uses? What is the absolute
purchasingâ€power parity theory? Why is this not acceptable?
How are exchange rates determined under the gold standard?
What was agreed on at the Jamaica Accords?
What is meant by a crawling peg system? How can such a system overcome the disadvantage of
an adjustable peg system?
How can a nation use fiscal and monetary policies to correct unemployment and a
balanceâ€ofâ€payments deficit with flexible exchange rates and imperfect capital mobility?
with perfect international capital mobility?
How was adjustment to balanceâ€ofâ€payments disequilibria under the gold standard

explained by Hume? How did adjustment actually take place under the gold standard?
What are the two main types of advantage of a flexible as opposed to a fixed exchange rate
system? What are the specific advantages subsumed under each main type of advantage of a
flexible exchange rate system?
What is the relative importance of stock adjustments in financial assets as compared with
adjustments in trade flows for exchange rate changes in the short run and in the long run
according to the portfolio approach?
What are the characteristics of a good international monetary system? How can an international
monetary system be evaluated?
What is meant by a closed economy? By desired or planned investment, consumption, and

saving? What is meant by investment being exogenous? What are a consumption function, a
saving function, and an investment function?
What is the role of expectations and uncovered interest arbitrage in the monetary approach to the
balance of payments?
What is the multiplier formula for an autonomous increase in investment in Nation 1? In Nation
2? How are foreign repercussions related to international business cycles?
How does the effect of a monetary shock on the nation's aggregate demand differ under fixed and
flexible exchange rates from the case of a realâ€sector shock?
Why is it important to examine the relationship between prices and output in our analysis of
openâ€economy macroeconomics? How are prices incorporated into the analysis of
openâ€economy macroeconomics?
What is meant by direct controls? Trade controls? Exchange controls? Explain how the most
important forms of trade and exchange controls operate to affect the nation's balance of
payments.
Why is a reduction in the general price level for a given money supply shown as a movement
down a given aggregate demand curve, while an increase in the money supply for a given price
level is shown as a shift in the aggregate demand curve?
Do empirical tests support or reject the monetary and portfolio approaches?
How is an open economy's aggregate demand curve derived under flexible exchange rates? Why
is this more elastic than if the nation were a closed economy or for an open economy with fixed
exchange rates?
What do the MPC and the MPS measure?
Suppose that a nation's nominal GDP = 100, V = 4, and Ms = 30. Explain why this nation has a
deficit in its balance of payments.
What is the Marshall-Lerner condition for a stable foreign exchange market? For an unstable
market? for a depreciation to leave the nation's balance of payments unchanged?
What does the aggregate supply curve show? How does the longâ€run aggregate supply curve
differ from the short run aggregate supply curve?
How does the monetary approach explain the process by which a balance of payments
disequilibrium is corrected under a flexible exchange rate system? How does this differ from the
case of fixed exchange rates?
Under what conditions would Equation (17-8) not hold in the real world?
What are the criticisms faced by the policy mix of using fiscal policy to achieve internal balance
and monetary policy to achieve external balance? What happens when the additional objectives
of price stability and growth are recognized as separate goals?
What are the major problems facing the world today? What is being proposed to solve them?
What is meant by elasticity pessimism? How did it arise?
What is meant by an international monetary system? How can international monetary systems be
classified?
How are trade deficits and trade surpluses automatically eliminated under the gold standard?
What is meant by speculation? How can speculation take place in the spot, forward, futures, or
options markets? Why does speculation not usually take place in the spot market? What is
stabilizing speculation? Destabilizing speculation?
What is meant by exports being exogenous? What is meant by MPM, APM, and nY?
What are the alleged advantages of a fixed over a flexible exchange rate system? How would the
advocates of flexible exchange rates reply?
How does the automatic income adjustment mechanism operate to bring about adjustment in a
nation's balance of payments? What are the variables that we hold constant to isolate the income
adjustment mechanism?
How do the monetary and the asset market or portfolio balance approaches explain the
overshooting in exchange rates that is often observed in foreign exchange markets today?
How is the nation's demand curve for foreign exchange derived? What determines its elasticity?
What does the aggregate demand curve in a closed economy show? How is it derived? Why is it
downward sloping?
How is the nation's supply curve of foreign exchange derived? What determines its elasticity?
What is meant by a currency passâ€through? What is its relevance for international

competitiveness?
How does a deficit or a surplus in the nation's balance of payments arise according to the
monetary approach? Why do nations lose control over their money supply in the long run under
fixed exchange rates?
Why is monetary policy completely ineffective with perfect international capital mobility under
fixed exchange rates?
What is the Jâ€curve effect?
What is the multiplier formula for Nation 1 with foreign repercussions for an autonomous
increase in its exports that replaces domestic production in Nation 2?
What is the natural level of output?
What is the effect of increasing the allowed band of exchange rate fluctuation under a fixed
exchange rate system?
What is meant by foreign exchange risk? How can foreign exchange risks be covered in the spot,
forward, futures, or options markets? Why does hedging not usually take place in the spot
market?
How do all the automatic adjustment mechanisms operate together to correct a deficit in a
nation's balance of payments under a fixed or managed exchange rate system when the nation
operates at less than full employment? What is the disadvantage of each automatic adjustment
mechanism?
How can fiscal and monetary policies be used to achieve full employment and external balance
under fixed exchange rates and limited international capital mobility? With high international
capital mobility?
What shape of the demand and supply curves of foreign exchange will make the foreign
exchange market stable? Unstable?
What type of international monetary system operated from 1920 to 1924? What happened
between 1925 and 1931? What happened after 1931?
Which are the modern and the traditional exchange rate theories? What distinguishes them?
What is the relevance of each? What is the relationship between them?
Why is a devaluation or depreciation inflationary?
What is arbitrage? What is its result? What is triangular arbitrage? What are cross rates?
How does a depreciation or devaluation of a nation's currency operate to eliminate or reduce a

deficit in its current or balance of payments?
Why is fiscal policy effective but monetary policy ineffective under fixed exchange rates? Why
is the opposite true under flexible rates?
How does the effect of a realâ€sector shock on the nation's aggregate demand differ under fixed
and flexible exchange rates?
How does an increase in government expenditures affect the AD curve? Why? To what kind of
fiscal policy does this refer?
What was meant by the dollar shortage? Dollar glut? What were Roosa bonds? What was the
purpose of the Interest Equalization Tax and the Foreign Direct Investment Program?
What is meant by automatic monetary adjustments? How do they help to adjust

balanceâ€ofâ€payments disequilibria?
What does the EE curve in the Swan diagram show? What does the YY curve show? What are
the four zones of external and internal imbalance defined by these two curves? What does the
point of intersection of the EE and YY curves show?
What additional theoretical and empirical work needs to be done? What is likely to be the
outcome of this additional work in the foreseeable future?
What happens to the trade balance of a deficit nation if it allows its currency to depreciate or
devalue from a position of full employment? How can real domestic absorption be reduced?
Why is a depreciation or devaluation of the nation's currency not feasible to eliminate a deficit if
the nation's demand supply curves of foreign exchange are inelastic?
What effects do expansionary and contractionary fiscal policies have on the IS curve? What
effects do easy and tight monetary policies have on the LM curve? Do fiscal and monetary
policies directly affect the BP curve? What would cause the BP curve to shift down? to shift up?
What is meant by foreign repercussions? When is it not safe to ignore them?
If the positive interest rate differential in favor of a foreign monetary center is 4 percent per year
and the foreign currency is at a forward discount of 2 percent per year, roughly how much would
an interest arbitrageur earn from the purchase of foreign threeâ€month treasury bills if he or she
covered the foreign e

What is meant by the European Monetary System? How has it functioned since its
establishment? What is the European Monetary Union? The euro? What is the function of the
European Central Bank?
What is meant by the elasticity approach? The absorption approach? In what way does the
absorption approach integrate the automatic price and income adjustment mechanisms?
What determines the value of the exchange rate and its change under a flexible exchange rate
system according to the monetary approach? How does a managed floating exchange rate system
compare with a flexible and fixed exchange rate system from the point of view of the monetary
approach?
What does the IS curve show? Why is it negatively inclined? What does the LM curve show?
What is meant by the transaction and speculative demands for money? Why is the LM curve
usually positively inclined? What does the BP curve show? Why is it usually positively inclined?
What determines the slope of the BP curve? Und
On the basis of the theoretical and empirical evidence available, indicate what overall conclusion
can be reached on whether a flexible or a fixed exchange rate system is preferred.
What is meant by a spot transaction and the spot rate? A forward transaction and the forward
rate? What is meant by a forward discount? Forward premium? What is a currency swap? What
is a foreign exchange futures? A foreign exchange option?
What does the IB curve show? Why is it positively inclined? What does the EB curve show?
Why is it positively inclined? Why is the EB curve usually flatter than the IB curve? Why should
the nation use fiscal policy to achieve internal balance and monetary policy to achieve external
balance? What happens if the nation d
How is the equilibrium level of national income determined in a closed economy? How is the
size of the closed economy multiplier (k) determined?
What are the advantages and the disadvantages of direct controls? Why do direct controls to
affect the nation's balance of payments require international cooperation to be effective?
What is meant by the principle of effective market classification? Why is it crucial that nations
follow this principle?
Why may elasticity pessimism be unjustified? What is the prevailing view today as to the
stability of foreign exchange markets and the elasticity of the demand and supply curves of
foreign exchange?
How is an open economy's aggregate demand curve derived under fixed exchange rates? Why is
this more elastic than if the nation were a closed economy?
What is meant by a managed floating exchange rate system? How does the policy of leaning
against the wind operate? What is the advantage of a managed floating system with respect to a
freely floating exchange rate system and a fixed exchange rate system?
What is meant by the asset market or portfolio balance approach? In what ways does it differ
from the monetary approach?
What was the Smithsonian Agreement? What is meant by the European snake? The dollar
standard? Adjustment, liquidity, confidence?
Why do nations need policies to adjust balanceâ€ofâ€payments disequilibria? Which are the
most important objectives of nations?
What is meant by an optimum currency area or bloc?
How is the equilibrium level of national income determined in a small open economy? What is
the value of the foreign trade multiplier (k')?
Using an aggregate demand and an aggregate supply framework, explain why a nation must
necessarily be in shortâ€run equilibrium if it is in longâ€run equilibrium. How can the nation
be in shortâ€run equilibrium without being in longâ€run equilibrium?
What policies can nations utilize to achieve their objectives? How do these policies operate to
achieve the intended objectives?
Why is the measure of the balanceâ€ofâ€payments deficit or surplus not strictly appropriate
under a flexible exchange rate?
How large are the potential benefits from greater macroeconomic policy coordination? How
likely is it that we will see much greater macroeconomic policy coordination among the leading
industrial nations in the foreseeable future?
Why will a depreciation of the deficit nation's currency increase rather than reduce the
balanceâ€ofâ€payments deficit when the foreign exchange market is unstable?
How can a nation's output temporarily deviate from its natural level? Why and how a nation
does's output return to its longâ€run natural level?
What is the primary determinant of consumption spending in the Keynesian model? Does this
differ from the Classical view?
What is meant by an adjustable peg system? What are the advantages and disadvantages of an
adjustable peg system with respect to a system of permanently fixed exchange rates?
What are the main advantages and disadvantages of an optimum currency area? What are the
conditions required for the establishment of an optimum currency area?
How is the value of the SDR determined today? What additional credit facilities have been set up
by the IMF?
What is meant by international macroeconomic policy coordination? Why is it needed? How

does it operate?
Why has V2 been far more stable then V1 in recent years?
(From the appendix.) As our economy becomes more "open" (i.e., more closely tied to other
economies in the world), how does this change the Fed's monetary policy targeting preference?
When banks were recently allowed to pay interest on checkable deposits, what did that do to the
effectiveness of monetary policy?
What are some criticisms of the way "employment" is measured?
Describe the main difference between Keynes and the Classics regarding how the economy
operates.
What effect did the stock market crashes of 1987 and 2001 have on consumption? Does the
Keynesian theory of consumption account for this?
Would a fixed-rate monetary policy have been effective in recent years? What kind of rule has
the Fed appeared to follow recently?
Can monetary policy change the real rate of interest?
What is the Quantity Theory? How does it differ from the equation of exchange?
Is the rise in inflation that began in 2008 only a monetary phenomenon, as purported by the
Monetarists?
What happened to the Phillips curve in the late 1990s?
What is Say's law? What underlies it?
What is the Keynesian rationale for a short-run Phillips curve?
Describe the lags in the conduct of monetary policy. Do these lags make monetary policy
ineffective?
An increasing number of people receive substantial income from variable-rate assets (for
example, CDs that are rolled over regularly at maturity with a new deposit rate, functioning
essentially as a single variable-rate asset). How does this affect the slope of the IS curve?
Consider a simple economy in which investment is constant and equal to $100 billion. There is
no government or foreign sector, and the price level is constant. Consumption is C = $40 billion
+ 0.75Y. a. What is the value of the marginal propensity to consume? b. What is consumption at
an output of $1,000 billion? c
Describe the role of monetary policy in a world of rational expectations and perfectly flexible
wages and prices.
What practical good is a lagging indicator like the unemployment rate?
Under what conditions does complete crowding out occur?
Why is the LM curve positively sloped? Isn't it against economic theory to have income and
interest rates positively related?
Does evidence of the past 20 years support the existence of a short-run Phillips curve tradeoff?
What do statistical investigations indicate are the primary determinants of money demand? What
is meant by the stability of the money demand function?
Does recent evidence support the assumption of stability in V1?
Does instability in investment spending indicate that business decision-makers are irrational?
What are the similarities between the modern Monetarists and the Classical economists? How do
they differ?
In the ISLM model, under what conditions does monetary policy have the greatest impact on
equilibrium income? Under what conditions is it completely ineffective?
How would you portray the stock market crash of 2001 in terms of ISLM and AD?
(From the appendix.) Do Keynesians prefer the Fed to target the interest rate or the money
supply? Why not target both?
What is the natural rate of interest, and what can cause it to change?
Describe the Keynesian position on the stability of the private sector.
Suppose income tax law is changed to make mortgage interest payments no longer tax
deductible. How would that impact the effectiveness of monetary policy?
You are a Classical economist. What policy would you recommend to reduce inflation?
By using the ISLM model describe how the financial market influences the size of the simple
Keynesian expenditure model. Under what conditions does complete crowding out occur?
What is the main Keynesian critique of New Classical macroeconomics?
Contrast the formation of rational and adaptive expectations. Are rational expectations always
more accurate?
In what markets does the assumption of rational expectations appear to be most relevant?
Consider a simple economy with exogenously determined taxes, investment, and government
expenditure. T = $1,025 billion, G = $1,332 billion, and I = $650 billion. Autonomous
consumption is $110 billion, and the marginal propensity to consume is 0. 8. NX = 0. a. What is
the consumption function in this economy? b. Com
Discuss the Keynesian view of the transmission mechanism between money and aggregate
demand. How does it compare with the Monetarist view?
In the ISLM framework, what assumptions lead to impotent monetary policy? Are these
conditions likely to occur in the real world?
From the Monetarists' perspective, how does the economy respond to a decline in exogenous
investment?
How would Monetarists deal with rapid inflation? Could this bring on a severe recession?
What is the usefulness of a model when it ignores so much of what goes on in the real world?
"A faster-growing money supply leads to higher interest rates." Can this be?
Do the stock market crashes of 1987 and 2001 indicate the inherent instability of the private
sector?
Are consumers and workers rational?
Why do the Keynesians stress the use of V1 while the Monetarists stress V2?
Interest rates fluctuate more than seems appropriate for their classical task of equating saving and
investment. How did Irving Fisher explain this?
As a nation becomes more "financially sophisticated," how might this, by affecting the slope of
the LM curve, make the economy more or less stable?
Explain how fully anticipated monetary policy can affect real economic activity.
What happened to the Phillip's curve in the late 2000s?
How are V1 and V2 likely to change in the next 20 years?
In what ways does monetary policy affect household and business decision-making?
How is the interest rate determined in the Keynesian model? How does monetary policy work in
the model?
By using the ISLM framework analyze the impact of these events on equilibrium income and
interest rates: (a) An increase in money demand (b) A decline in autonomous consumption (c)
An increase in government expenditure.
Should wages be made more flexible in some way?
What determines the real rate of interest? How does it respond to changes in inflationary
expectations?
Using aggregate demand and supply, discuss an adverse oil shock, i.e., shortage of oil.
In the ISLM model, do variations in the interest rate bring about full employment?
Could the fiscal policies of the 1990s be characterized as Keynesian? How about Bush's 2003 tax
cuts?
The opening paragraph of Chapter 29 describes a seeming paradox: "bad news," in that the
Purchasing Management Index fell, caused bond prices to rise. How can you explain that?
Can the Fed influence inflationary expectations as part of a stabilization policy?
Briefly discuss how accounting convergence efforts addressing liabilities are related to the
IASB/FASB conceptual framework project.
A company proposes to include in its SEC registration statement a balance sheet showing its
subordinate debt as a portion of stockholdersâ€™ equity. Will the SEC allow this? Why or why
not?
Will the amortization of Discount on Bonds Payable increase or decrease Bond Interest
Expense? Explain.
What is the aggregate supply curve like in the New Classical macroeconomics? What does that
imply about the Phillips curve?
"The unemployment rate figure released today was down sharply from last month's figure, three-
tenths of a percent. This surprise caused bond prices to tumble." Explain the causation here.
What are the two methods of amortizing discount and premium on bonds payable? Explain each.
(Analysis of Alternatives) Assume that Wal-Mart, Inc. has decided to surface and maintain for
10 years a vacant lot next to one of its discount-retail outlets to serve as a parking lot for
customers. Management is considering the following bids involving two different qualities of
surfacing for a parking area of 12,000
At December 31, 2011, Hyasaki Corporation has the following account balances: Bonds payable,
due January 1, 2019 $2,000,000 Discount on bonds payable 88,000 Bond interest payable 80,000
Show how the above accounts should be presented on the December 31, 2011, balance sheet,
including the proper c
PepsiCo, Inc. based in Purchase, New York, is a leading company in the beverage industry.
Assume that the following events occurred relating to PepsiCoâ€™s long-term debt in a recent
year. 1. The company decided on February 1 to refinance $500 million in short-term 7.4% debt
to make it long-term 6%. 2. $780 million of
What are the considerations in imputing an appropriate interest rate?
Assume the bonds in BE14-2 were issued at 103. Prepare the journal entries for (a) January 1, (b)
July 1, and (c) December 31. Assume The Colson Company records straight-line amortization
semiannually.
(Classification) The following items are found in the financial statements. (a) Discount on bonds
payable (b) Interest expense (credit balance) (c) Unamortized bond issue costs (d) Gain on
repurchase of debt (e) Mortgage payable (payable in equal amounts over next 3 years) (f)
Debenture bonds payable (maturing in 5 yea
(Various Time Value Situations) Using the appropriate interest table, provide the solution to each
of the following four questions by computing the unknowns. (a) What is the amount of the
payments that Tom Brokaw must make at the end of each of 8 years to accumulate a fund of
$70,000 by the end of the eighth year, if t
(Amortization Schedulesâ€”Straight-Line) Spencer Company sells 10% bonds having a maturity

value of $3,000,000 for $2,783,724. The bonds are dated January 1, 2010, and mature January 1,
2015. Interest is payable annually on January 1. Set up a schedule of interest expense and
discount amortization under the straight-li
(Pension Funding) James Qualls, newly appointed controller of KBS, is considering ways to
reduce his companyâ€™s expenditures on annual pension costs. One way to do this is to switch
KBSâ€™s pension fund assets from First Security to NET Life. KBS is a very well-respected
computer manufacturer that recently has experie
What are the general rules for measuring and recognizing gain or loss by both the debtor and the
creditor in a troubled-debt restructuring involving a modification of terms?
(Analysis of Alternatives) Homer Simpson Inc., a manufacturer of steel school lockers, plans to
purchase a new punch press for use in its manufacturing process. After contacting the
appropriate vendors, the purchasing department received differing terms and options from each
vendor. The Engineering Department has deter
Jack Thompsonâ€™s lifelong dream is to own his own fishing boat to use in his retirement. Jack
has recently come into an inheritance of $400,000. He estimates that the boat he wants will cost
$350,000 when he retires in 5 years. How much of his inheritance must he invest at an annual
rate of 12% (compounded annually) t
(Bond Theory: Price, Presentation, and Retirement) On March 1, 2011, Sealy Company sold its
5-year, $1,000 face value, 9% bonds dated March 1, 2011, at an effective annual interest rate
(yield) of 11%. Interest is payable semiannually, and the first interest payment date is September
1, 2011. Sealy uses the effective-i
(Various Time Value of Money Situations) Using a financial calculator, solve for the unknowns
in each of the following situations. (a) Wayne Eski wishes to invest $150,000 today to ensure
payments of $20,000 to his son at the end of each year for the next 15 years. At what interest rate
must the $150,000 be invested? (
(Entries for Bond Transactionsâ€”Effective-Interest) Assume the same information as in E14-4,

except that Foreman Company uses the effective-interest method of amortization for bond
premium or discount. Assume an effective yield of 9.7705%. Prepare the journal entries to
record the following. (Round to the nearest doll
What disclosures are required relative to long-term debt and sinking fund requirements?
Hong Kong Trading Co. (which uses iGAAP) is in the midst of a multi-year operational
restructuring. It reported the following information in its 2010 annual report (amounts in $, in
millions): Restructuring provision balance at 1 January 2010, $135; provisions made in the
period, $275; and unused amounts reversed, $22.
What is meant by â€œaccounting symmetryâ€ between the entries recorded by the debtor and
creditor in a troubled debt restructuring involving a modification of terms? In what ways is the
accounting for troubled-debt restructurings non-symmetrical?
Walt Frazier is settling a $20,000 loan due today by making 6 equal annual payments of
$4,864.51. Determine the interest rate on this loan, if the payments begin one year after the loan
is signed.
Access the glossary (Master Glossary) to answer the following. (a) What does the term
â€œcallable obligationâ€ mean? (b) What is an imputed interest rate? (c) What is a long-term
obligation? (d) What is the definition of â€œeffective interest rateâ€?
Itzak Perlman needs $20,000 in 4 years. What amount must he invest today if his investment
earns 12% compounded annually? What amount must he invest if his investment earns 12%
annual interest compounded quarterly?
(Analysis of Alternatives) Sally Brown died, leaving to her husband Linus an insurance policy
contract that provides that the beneficiary (Linus) can choose any one of the following four
options. (a) $55,000 immediate cash. (b) $3,700 every 3 months payable at the end of each
quarter for 5 years. (c) $18,000 immediate
Zopf Company sells its bonds at a premium and applies the effective-interest method in
amortizing the premium. Will the annual interest expense increase or decrease over the life of the
bonds? Explain.
Teton Corporation issued $600,000 of 7% bonds on November 1, 2011, for $644,636. The bonds
were dated November 1, 2011, and mature in 10 years, with interest payable each May 1 and
November 1. Teton uses the effective-interest method with an effective rate of 6%. Prepare
Tetonsâ€™ December 31, 2011, adjusting entry.
(Bond Theory: Balance Sheet Presentations, Interest Rate, Premium) On January 1, 2011,
Nichols Company issued for $1,085,800 its 20-year, 11% bonds that have a maturity value of
$1,000,000 and pay interest semiannually on January 1 and July 1. Bond issue costs were not
material in amount. Below are three presentations
What is off-balance-sheet financing? Why might a company be interested in using off-balance-

sheet financing?
McCormick Corporation issued a 4-year, $40,000, 5% note to Greenbush Company on January

1, 2011, and received a computer that normally sells for $31,495. The note requires annual
interest payments each December 31. The market rate of interest for a note of similar risk is
12%. Prepare McCormickâ€™s journal entries for
Why would a company wish to reduce its bond indebtedness before its bonds reach maturity?
Indicate how this can be done and the correct accounting treatment for such a transaction.
What guidance does the Codification provide on the disclosure of long-term obligations?
Anne Boleyn will invest $5,000 a year for 20 years in a fund that will earn 12% annual interest.
If the first payment into the fund occurs today, what amount will be in the fund in 20 years? If
the first payment occurs at year-end, what amount will be in the fund in 20 years?
Distinguish between the following values relative to bonds payable: (a) Maturity value (b) Face
value (c) Market value (d) Par value
Briefly describe some of the similarities and differences between U.S. GAAP and i GAAP with
respect to the accounting for liabilities.
(Analysis of Business Problems) Jean-Luc is a financial executive with Star ship Enterprises.
Although Jean-Luc has not had any formal training in finance or accounting, he has a â€œgood
senseâ€ for numbers and has helped the company grow from a very small company ($500,000
sales) to a large operation ($45 million in
(Entries for Bond Transactionsâ€”Straight-Line) Foreman Company issued $800,000 of 10%,
20-year bonds on January 1, 2011, at 102. Interest is payable semiannually on July 1 and January
1. Foreman Company uses the straight-line method of amortization for bond premium or
discount. Prepare the journal entries to record th
How is the present value of a non-interest-bearing note computed?
Potlatch Corporation has issued various types of bonds such as term bonds, income bonds, and
debentures. Differentiate between term bonds, mortgage bonds, collateral trust bonds, debenture
bonds, income bonds, callable bonds, registered bonds, bearer or coupon bonds, convertible
bonds, commodity-backed bonds, and deep
(Various Time Value of Money Situations) Using a financial calculator, provide a solution to
each of the following situations. (a) On March 12, 2004, William Scott invests in a $180,000
insurance policy that earns 5.25% compounded annually. The annuity policy allows William to
receive annual payments, the first of whic
Dan Webster will invest $10,000 today in a fund that earns 5% annual interest. How many years
will it take for the fund to grow to $13,400?
Corinne Dunbar is investing $200,000 in a fund that earns 8% interest compounded annually.
What equal amounts can Corinne withdraw at the end of each of the next 20 years?
The financial statements of P&G are presented in Appendix 5B or can be accessed at the
bookâ€™s companion website, www.wiley.com/college/kieso. Instructions Refer to P&Gâ€™s
financial statements and the accompanying notes to answer the following questions. (a) What
criteria does P&G use to classify â€œCash and cash equ
(a) In a troubled-debt situation, why might the creditor grant concessions to the debtor? (b) What
type of concessions might a creditor grant the debtor in a troubled-debt situation?
Whiteside Corporation issues $500,000 of 9% bonds, due in 10 years, with interest payable
semiannually. At the time of issue, the market rate for such bonds is 10%. Compute the issue
price of the bonds.
Explain how a non-consolidated subsidiary can be a form of off-balance-sheet financing.
Under what circumstances a transaction would be recorded as a troubled-debt restructuring by

only one of the two parties to the transaction?

William Cullen Bryant needs $200,000 in 10 years. How much must he invest at the end of each
year, at 11% interest, to meet his needs?
Briggs and Stratton recently reported unamortized debt issue costs of $5.1 million. How should
the costs of issuing these bonds be accounted for and classified in the financial statements?
Assume the bonds in BE14-2 were issued at 98. Prepare the journal entries for (a) January 1, (b)
July 1, and (c) December 31. Assume The Colson Company records straight-line amortization
semiannually.
(Various Time Value of Money Situations) Using a financial calculator, provide a solution to
each of the following questions. (a) What is the amount of the payments that Karla Zehms must
make at the end of each of 8 years to accumulate a fund of $70,000 by the end of the eighth year,
if the fund earns 7.25% interest, c
Wie Company has been operating for just 2 years, producing specialty golf equipment for
women golfers. To date, the company has been able to finance its successful operations with
investments from its principal owner, Michelle Wie, and cash flows from operations. However,
current expansion plans will require some borro
Bayou Inc. will deposit $20,000 in a 12% fund at the end of each year for 8 years beginning
December 31, 2005. What amount will be in the fund immediately after the last deposit?
Mark Twainâ€™s VISA balance is $1,124.40. He may pay it off in 18 equal end-of-month
payments of $75 each. What interest rate is Mark paying?
Consider the loan in BE6-16. What payments must Walt Frazier make to settle the loan at the
same interest rate but with the 6 payments beginning on the day the loan is signed?
Shlee Corporation issued a 4-year, $60,000, zero-interest-bearing note to Garcia Company on

January 1, 2011, and received cash of $60,000. In addition, Shlee agreed to sell merchandise to
Garcia at an amount less than regular selling price over the 4-year period. The market rate of
interest for similar notes is 12%. Pr
Refer to the data in BE6-7. Assuming quarterly compounding of amounts invested at 12%, how
much of Jack Thompsonâ€™s inheritance must be invested to have enough at retirement to buy
the boat?
What is done to record properly a transaction involving the issuance of a non-interest-bearing

long-term note in exchange for property?
The following article appeared in the Wall Street Journal. Bond Markets Giant Commonwealth
Edison Issue Hits Resale Market With $70 Million Left Over NEW YORKâ€”Commonwealth
Edison Co.â€™s slow-selling new 91/4% bonds were tossed onto the resale market at a reduced
price with about $70 million still available from the
Janet Jackson will invest $30,000 today. She needs $222,000 in 21 years. What annual interest
rate must she earn?
What are some forms of off-balance-sheet financing?
Acadian Inc. issues $1,000,000 of 7% bonds due in 10 years with interest payable at year-end.
The current market rate of interest for bonds of similar risk is 8%. What amount will Acadian
receive when it issues the bonds?
Assume the bonds in BE14-6 were issued for $644,636 and the effective interest rate is 6%.
Prepare the companyâ€™s journal entries for (a) The January 1 issuance, (b) The July 1 interest
payment, and (c) The December 31 adjusting entry.
(Bond Theory: Amortization and Gain or Loss Recognition) Part I. The appropriate method of
amortizing a premium or discount on issuance of bonds is the effective interest method. (a) What
is the effective-interest method of amortization and how is it different from and similar to the
straight-line method of amortizati
Where can authoritative iGAAP guidance related to liabilities are found?
Luther Vandross is investing $12,961 at the end of each year in a fund that earns 10% interest. In
how many years will the fund be at $100,000?
How should discount on bonds payable be reported on the financial statements premium on
bonds payable?
(Entries for Bond Transactions) Presented below are two independent situations. 1. On January
1, 2010, Divac Company issued $300,000 of 9%, 10-year bonds at par. Interest is payable
quarterly on April 1, July 1, October 1, and January 1. 2. On June 1, 2010, Verbitsky Company
issued $200,000 of 12%, 10-year bonds dated
How are gains and losses from extinguishment of a debt classified in the income statement?
What disclosures are required of such transactions?
Samson Corporation issued a 4-year, $75,000, zero-interest-bearing note to Brown Company on

January 1, 2011, and received cash of $47,664. The implicit interest rate is 12%. Prepare
Samsonâ€™s journal entries for (a) The January 1 issuance and (b) The December 31
recognition of interest.
What is the â€œcallâ€ feature of a bond issue? How does the call feature affect the amortization
of bond premium or discount?
(Bond Issue) Donald Lennon is the president, founder, and majority owner of Wichita Medical
Corporation, an emerging medical technology products company. Wichita is in dire need of
additional capital to keep operating and to bring several promising products to final
development, testing, and production. Donald, as owne
Under what conditions of bond issuance does a discount on bonds payable arise? Under what
conditions of bond issuance does a premium on bonds payable arise?
Differentiate between a fixed-rate mortgage and a variable-rate mortgage.
What are the general rules for measuring gain or loss by both creditor and debtor in a troubled-
debt restructuring involving a settlement?
(Classification of Liabilities) Presented below are various account balances. (a) Bank loans
payable of a winery, due March 10, 2014. (The product requires aging for 5 years before sale.)
(b) Unamortized premium on bonds payable, of which $3,000 will be amortized during the next
year. (c) Serial bonds payable, $1,000,0
When is the stated interest rate of a debt instrument presumed to be fair?
Coldwell, Inc. issued a $100,000, 4-year, 10% notes at face value to Flint Hills Bank on January
1, 2011, and received $100,000 cash. The note requires annual interest payments each December
31. Prepare Coldwellâ€™s journal entries to record (a) The issuance of the note and (b) The
December 31 interest payment.
(Off-Balance-Sheet Financing) Matt Ryan Corporation is interested in building its own soda can
manufacturing plant adjacent to its existing plant in Partyville, Kansas. The objective would be
to ensure a steady supply of cans at a stable price and to minimize transportation costs. However,
the company has been experien
Devers Corporation issued $400,000 of 6% bonds on May 1, 2011. The bonds were dated
January 1, 2011, and mature January 1, 2013, with interest payable July 1 and January 1. The
bonds were issued at face value plus accrued interest. Prepare Deversâ€™s journal entries for (a)
The May 1 issuance, (b) The July 1 interest
Describe how a company would classify debt that includes covenants. What conditions must
exist in order to depart from the normal rule?
On January 1, 2011, Henderson Corporation retired $500,000 of bonds at 99. At the time of
retirement, the unamortized premium was $15,000 and unamortized bond issue costs were
$5,250. Prepare the corporationâ€™s journal entry to record the reacquisition of the bonds.
Distinguish between the following interest rates for bonds payable: (a) Yield rate (b) Nominal
rate (c) Stated rate (d) Market rate (e) Effective rate
Hollis Stacy wants to create a fund today that will enable her to withdraw $20,000 per year for 8
years, with the first withdrawal to take place 5 years from today. If the fund earns 8% interest,
how much must Hollis invest today?
(Time Value Concepts Applied to Solve Business Problems) Answer the following questions
related to Mark Grace Inc. (a) Mark Grace Inc. has $572,000 to invest. The company is trying to
decide between two alternative uses of the funds. One alternative provides $80,000 at the end of
each year for 12 years, and the other i
(Amortization Scheduleâ€”Effective-Interest) Assume the same information as E14-6. Set up a

schedule of interest expense and discount amortization under the effective-interest method.
Steve Allen invested $10,000 today in a fund that earns 8% compounded annually. To what
amount will the investment grow in 3 years? To what amount would the investment grow in 3
years if the fund earns 8% annual interest compounded semiannually?
Grupo Rana wants to withdraw $20,000 each year for 10 years from a fund that earns 8%
interest. How much must he invest today if the first withdrawal is at year-end? How much must
he invest today if the first withdrawal takes place immediately?
(Pension Funding) You have been hired as a benefit consultant by Maugarite Alomar, the owner
of Attic Angels. She wants to establish a retirement plan for herself and her three employees.
Maugarite has provided the following information: The retirement plan is to be based upon
annual salary for the last year before ret
(Various Time Value Situations) Answer each of these unrelated questions. (a) On January 1,
2003, Rather Corporation sold a building that cost $250,000 and that had accumulated
depreciation of $100,000 on the date of sale. Rather received as consideration a $275,000
noninterest-bearing note due on January 1, 2006. Ther
The Colson Company issued $300,000 of 10% bonds on January 1, 2011. The bonds are due
January 1, 2016, with interest payable each July 1 and January 1. The bonds are issued at face
value. Prepare Colsonâ€™s journal entries for (a) The January issuance, (b) The July 1 interest
payment, and (c) The December 31 adjusti
(a) From what sources might a corporation obtain funds through long-term debt? (b) What is a
bond indenture? What does it contain? (c) What is a mortgage?
On January 1, 2011, JWS Corporation issued $600,000 of 7% bonds, due in 10 years. The bonds
were issued for $559,224, and pay interest each July 1 and January 1. JWS uses the effective-
interest method. Prepare the companyâ€™s journal entries for (a) The January 1 issuance, (b)
The July 1 interest payment, and (c) The
Wasserman Corporation issued 10-year bonds on January 1, 2011. Costs associated with the
bond issuance were $160,000. Wasserman uses the straight-line method to amortize bond issue
costs. Prepare the December 31, 2011, entry to record 2011 bond issue cost amortization.
Go to the bookâ€™s companion website and use information found there to answer the
following questions related to The Coca-Cola Company and PepsiCo, Inc. (a) Compute the debt
to total assets ratio and the times interest earned ratio for these two companies. Comment on the
quality of these two ratios for both Coca-Cola
What are the types of situations that result in troubled debt?
(Various Long-Term Liability Conceptual Issues) Schrempf Company has completed a number
of transactions during 2010. In January the company purchased under contract a machine at a
total price of $1,200,000, payable over 5 years with installments of $240,000 per year. The seller
has considered the transaction as an inst
(Analysis of Lease vs. Purchase) Jose Rijo Inc. owns and operates a number of hardware stores
in the New England region. Recently the company has decided to locate another store in a
rapidly growing area of Maryland. The company is trying to decide whether to purchase or lease
the building and related facilities. Purch
Section 404(a) of the Sarbanes-Oxley Act requires management of a public company to issue a
report on internal control over financial reporting (ICOFR) as of the end of the company's fiscal
year. Many companies have reported that their ICOFR was operating effectively, while others
have reported that such controls were
The following is the description of sales and cash receipts for the Lady's Fashion Fair, a retail
store dealing in expensive women's clothing. Sales are for cash or credit, using the store's own

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For each engagement described below, indicate whether the engagement is likely to be

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Describe an ethical dilemma. How does a person resolve an ethical dilemma?

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Distinguish between "fraud" and "constructive fraud."

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Distinguish between an unqualified report with an explanatory paragraph or modified wording

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Why is an auditor's independence so essential?

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Distinguish between independence of mind and independence in appearance. State three

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The following is an auditor's report prepared in accordance with International Standards on

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State the allowable forms of organization a CPA firm may assume.

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How does a flexible exchange rate system in general adjust balanceâ€ofâ€payments

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How are exchange rates determined under the gold standard?

What was agreed on at the Jamaica Accords?

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How was adjustment to balanceâ€ofâ€payments disequilibria under the gold standard

What is meant by a closed economy? By desired or planned investment, consumption, and

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Do empirical tests support or reject the monetary and portfolio approaches?

What do the MPC and the MPS measure?

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What is meant by elasticity pessimism? How did it arise?

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What is meant by a currency passâ€through? What is its relevance for international

What is the Jâ€curve effect?

What is the natural level of output?

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Why is a devaluation or depreciation inflationary?

How does a depreciation or devaluation of a nation's currency operate to eliminate or reduce a

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What is meant by automatic monetary adjustments? How do they help to adjust

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What is meant by foreign repercussions? When is it not safe to ignore them?

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What is meant by an optimum currency area or bloc?

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What is meant by international macroeconomic policy coordination? Why is it needed? How

Why has V2 been far more stable then V1 in recent years?

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How does a flexible exchange rate system in general adjust balanceâ€ofâ€payments

How was adjustment to balanceâ€ofâ€payments disequilibria under the gold standard

What is meant by a currency passâ€through? What is its relevance for international

What is the Jâ€curve effect?