CH 03

Test Bank for Intermediate Accounting, Twelfth Canadian Edition
CHAPTER 3
THE ACCOUNTING INFORMATION SYSTEM &
MEASUREMENT ISSUES
CHAPTER LEARNING OBJECTIVES
1. Use valuation techniques to measure financial statement elements. IFRS and ASPE incorporate a
mixed-attribute measurement model including measurements that are cost-based (such as historical cost),
those that are based on current value (such as fair value), and many hybrid measures that have attributes
of both cost-based and current value measurements. Valuation techniques are used to help with
measurement of financial statement elements. Common examples include market models and income
models. Income models are widely used and include discounted cash flow methods and present value
concepts. When using models, you must determine what inputs should be used. Common inputs include
discount rates and cash flow estimates. The quality of these inputs affects the quality of the final
measurement. Accountants often use probabilities to help deal with risk and uncertainty. Given the
amount of judgement that goes into measuring financial statement elements, disclosures are very
important.
2. Use IFRS 13 to measure fair value. IFRS 13 establishes a fairly detailed body of knowledge relating
to measurement of fair value. Fair value measurement under IFRS 13 is a market-based approach that
incorporates the specific attributes of the asset/liability being measured, the valuation premise (how the
asset/liability is to be used), the principal market, and the valuation technique. Since market prices are not
always available, valuation models are used to measure the value. Inputs to these models are either
observable in the market or not. Observable inputs are most useful since they are more objective. The fair
value hierarchy establishes three levels of inputs, with level 1 being the highest and best type of input
(based on observable market prices). Because level 3 inputs are more subjective, additional disclosures
are required.
3. Understand and apply present value concepts. Present value concepts are used to acknowledge the
time value of money. There are various techniques and tools to calculate present value, including
formulas, tables, financial calculators, and spreadsheets. Inputs to the calculation include interest,
payments, number of periods, and if the calculation involves an annuity, information about whether it is
an ordinary annuity or an annuity due. Present value concepts are frequently used in measuring financial
statement elements.
4. Identify differences in accounting between ASPE and IFRS, and what changes are expected in
the near future. The main difference is that IFRS contains specific guidance
in IFRS 13 regarding fair value measurements. Under ASPE, guidance is spread throughout the body of
knowledge and is less detailed.
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Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
MULTIPLE CHOICE QUESTION

Answer No. Description
d 1 Inputs to income model
b 2 Traditional discounted cash flow approach
d 3 Expected cash flow approach
c 4 Financial measurement categories
b 5 Hybrid measurement
c 6 Current value measurement
a 7 Discounted cash flow approach
a 8 Calculate present value
b 9 Impairment loss
d 10 Fair value of a bond
b 11 Valuation premise
c 12 Highest and best use concept
a 13 Cost model
d 14 Level 1 inputs
a 15 Fair value measurement under IFRS 13
d 16 Fair value measurement under IFRS 13
b 17 Simple interest
d 18 Compound interest
a 19 Interest-on-interest
c 20 Calculate rate of interest
a 21 Calculate quarterly interest
b 22 Calculate present value
a 23 Calculate present value
a 24 Differences in accounting between ASPE and IFRS
EXERCISES
Item Description
E3-25 Calculate the present value of an annuity due
E3-26 Calculate the present value of an ordinary annuity
E3-27 Valuation of entity-specific assets
E3-28 Measurement of financial statement elements
E3-29 Transaction journal entries
E3-30 Adjusting entries
E3-31 Calculate market price of a bond
E3-32 Present value of an annuity due
PROBLEMS
Item Description
P3-33 Simple and compound interest
P3-34 Calculate bond price
MULTIPLE CHOICE QUESTION

1. Inputs to income models include which of the following?
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a) using a risk-free and risk-adjusted interest rate

b) adjusting cash flows and the discount rate in the same calculation
c) actual cash flows
d) time value of money
Answer: d
Difficulty: Easy
Learning Objective: Use valuation techniques to measure financial statement elements.
Section Reference: Measuring Financial Statement Elements
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
2. Under the traditional discounted cash flow approach,

a) the model is best used when cash flows are uncertain.
b) the stream of contracted cash flows is discounted.
c) the risk-free discount rate is used.
d) the method is best used when cash flows are variable.
Answer: b
Difficulty: Easy
AACSB: Analytic
3. Under the expected cash flow approach,

a) the model is best used where the element being measured does not have variable cash flows.
b) the projected cash flows reflect the certainty in terms of amount and timing.
c) the discount rate is adjusted to accommodate the riskiness of the cash flows.
d) the cash flow uncertainty is dealt with by using probabilities.
Answer: d
Difficulty: Easy
AACSB: Analytic
4. Which of the following is not a category to measure financial statement elements?

a) cost-based measures.
b) hybrid measures.
c) cash flow measures.
d) current value measures.
Answer: c
3-3
Difficulty: Easy
AACSB: Analytic
5. Which of the following is an example of an item that would be measured under the hybrid
measurement categorization?
a) investment properties.
b) inventory measured at the lower of cost and net realizable value.
c) biological assets.
d) financial instruments carried at cost.
Answer: b
Difficulty: Easy
AACSB: Analytic
6. Which of the following is an example of an item that would be measured under the current value
measurement categorization?
a) inventory using various cost flow assumptions.
b) inventory measured at the lower of cost and net realizable value.
c) biological assets.
d) financial instruments carried at cost.
Answer: c
Difficulty: Easy
AACSB: Analytic
7. Which of the following is true regarding the traditional discounted cash flow approach?
a) The discount rate is adjusted to accommodate the riskiness of the cash flows.
b) The cash flows have been adjusted to accommodate their riskiness.
c) This model is best used where cash flows are fairly uncertain.
d) Both a) and c) are correct.
Answer: a
Difficulty: Easy
3-4

AACSB: Analytic
Use the following data for questions 8–9.
8. Frontier Landscaping owns some equipment that is used in their operations. Management estimates
that the equipment will last another three years and will generate the following future cash flows at the
end of each year.
Year 1 Year 2 Year 3
$4,000 $6,000 $7,000

Calculate the present value of each of these future cash flows given a 4% discount rate.
a) $15,617
b) $9,394
c) $18,135
d) $35,165
Answer: a
Difficulty: Medium
CPA: Finance
CPA: Management Accounting
Bloomcode: Application
AACSB: Analytic
Feedback: ($4,000 x .96154) + ($6,000 x .92456) + ($7,000 x .88900) = $15,617
9. Frontier Landscaping owns some equipment that is used in their operations. Management estimates
that the equipment will last another three years and will generate the following future cash flows at the
end of each year.
Year 1 Year 2 Year 3
$4,000 $6,000 $7,000

Assuming Frontier Landscaping’s equipment has a carrying value of $16,000, how much of an
impairment loss must Frontier record?
a) none as there is no impairment.
b) $383
c) $6,606
d) $2,518
Answer: b
Difficulty: Medium
3-5

AACSB: Analytic
Feedback: $16,000 – [($4,000 x .96154) + ($6,000 x .92456) + ($7,000 x .88900)] = $383
10. Billow Company has issued a 3% bond that is payable in 5 years and has a face value of $100,000.
The risk-adjusted market rate is 4%. Calculate the fair value of the bond.
a) $82,193
b) $13,355
c) $68,838
d) $95,548
Answer: d
Difficulty: Medium
CPA: Finance
AACSB: Analytic
Feedback: ($100,000 x .82193) + ($100,000 x .03 x 4.45182) = $95,548
11. Valuation premise does not refer to

a) the perceived value of the asset/liability.
b) the actual use of the asset/liability.
c) the highest and best use valuation in the market.
d) how the asset/liability is to be used.
Answer: b
Difficulty: Easy
Learning Objective: Use IFRS 13 to measure fair value.
Section Reference: Measuring Fair Value Using IFRS 13
Bloomcode: Comprehension
AACSB: Analytic
12. The highest and best use concept values the asset based on the highest value that the market would
place on the asset, considering all possible uses that are
a) physically possible.
b) legally permissible.
c) financially feasible.
d) economically intolerable.
Answer: c
Difficulty: Easy
3-6

AACSB: Analytic
13. The cost model attempts to reflect the amount that would be required to
a) replace the asset’s service capacity.
b) value older financial assets where there is no longer a market for the asset.
c) value the asset.
d) value older non-financial assets where there is a market for the asset.
Answer: a
Difficulty: Easy
AACSB: Analytic
14. Level 1 inputs

a) are the lowest-quality inputs but provide the best-quality fair value.
b) are used when level 3 inputs are not available.
c) are generally not observable in various markets.
d) are more objective.
Answer: d
Difficulty: Easy
AACSB: Analytic
15. A fair value measure under IFRS 13 is based on which view of fair value?
a) market participant view
b) shareholder view
c) fair value view
d) unbiased view
Answer: a
Difficulty: Easy
AACSB: Analytic
16. In order to measure fair value under IFRS13, an entity must determine
a) the item being measured, and how the item could or would be used.
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b) the market the item would be (or is) bought and sold in.
c) which fair value model is being used to value the item.
d) all of the above
Answer: d
Difficulty: Easy
CPA: Finance
AACSB: Analytic
Use the following data for questions 17–19.
17. Branson Company deposited $5,800 in an account paying 2.5% annual interest. How much simple
interest would Branson earn in 3 years?
a)$5,945
b) $435
c) $145
d) $446
Answer: b
Difficulty: Medium
Learning Objective: Understand and apply present value concepts.
Section Reference: Present Value Concepts
CPA: Finance
AACSB: Analytic
Feedback: $5,800 x .025 x 3 = $435
18. Branson Company deposited $5,800 in an account paying 2.5% annual interest. How much
compound interest would Branson earn in 3 years?
a)$6,235
b) $435
c) $145
d) $446
Answer: d
Difficulty: Medium
CPA: Finance
AACSB: Analytic
Feedback: ($5,800 x 1.07689) – $5,800 = $446
3-8
19. Branson Company deposited $5,800 in an account paying 2.5% annual interest. How much interest-
on-interest would Branson earn in 3 years?
a) $11
b) $33
c) $5.50
d) $22
Answer: a
Difficulty: Medium
CPA: Finance
AACSB: Analytic
Feedback: ($5,800 x 1.07689) - ($5,800 x .025 x 3) - $5,800 = $11
20. Fiddler Company has a loan balance of $853.02 and must make equal payments of $100 at the end of
each of the next 10 months. What is the monthly rate of interest that Fiddler Company is paying?
a) 2%
b) 2.5%
c) 3%
d) 4%
Answer: c
Difficulty: Medium
CPA: Finance
Feedback: $853.02 / $100 = 8.5302 which is PV factor of an ordinary annuity at 3% for 10 periods.
21. Helvetica Corporation is interested in leasing a piece of machinery that has a fair value of $150,000.
The market rate for financing is 8% and Helvetica plans to lease the machinery for the next five years.
Calculate the quarterly lease payments.
a)$ 9,174
b) $15,278
c) $31,824
d) $37,569
Answer: a
Difficulty: Medium
CPA: Finance
AACSB: Analytic
Feedback: PV of an ordinary annuity = $150,000 / 16.35143 = $9,174 given i = 2%, n = 20 periods.
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22. Barkley Company will receive $400,000 in a future year. If the future receipt is discounted at an
interest rate of 8%, its present value is $252,068. In how many years is the $400,000 received?
a) 5 years
b) 6 years
c) 7 years
d) 8 years
Answer: b
Difficulty: Medium
CPA: Finance
AACSB: Analytic
Feedback: $252,068 ÷ $400,000 = 0.63017; 0.63017 is PV factor for 6 years at 8%
23. Pearson Corporation makes an investment today (January 1, 2020). They will receive $9,000 every
December 31 for the next six years (2020–2025). If Pearson wants to earn 12% on the investment, what is
the most they should invest on January 1, 2020?
a) $37,003
b) $41,443
c) $73,036
d) $81,801
Answer: a
Difficulty: Medium
CPA: Finance
AACSB: Analytic
Feedback: $9,000 × 4.11141 = $37,003
24. The main difference in the accounting for measurement issues between IFRS and ASPE is that
a) IFRS has a well-developed framework for measuring fair values (IFRS13), whereas ASPE does not.
b) there is no difference between accounting for measurement issues between these standards.
c) guidance under ASPE is concentrated in a single area of the ASPE body of knowledge.
d) IFRS requires explicit disclosure of fair value amounts, whereas these disclosures under ASPE are
optional.
Answer: a
Difficulty: Easy
Learning Objective: Identify differences in accounting between ASPE and IFRS, and what changes are
expected in the near future.
Section Reference: IFRS/ASPE Comparison
3-10

AACSB: Analytic
EXERCISES
Ex. 3-25
Raleigh Inc. is considering leasing a piece of equipment with a fair value of $108,000 for three years. The
current market interest rate for financing the equipment is 5% compounded semi-annually. Calculate the
semi-annual lease payment assuming that the payment is made at the beginning of the period (round to
the nearest dollar).
Solution 3-25
Present value of an annuity due of $108,000 for six periods at 2.5% ($108,000 / 5.64583) = $19,129.
Difficulty: Medium
CPA: Finance
AACSB: Analytic
Ex. 3-26
Raleigh Inc. is considering leasing a piece of equipment with a fair value of $108,000 for three years. The
current market interest rate for financing the equipment is 5% compounded semi-annually. Calculate the
semi-annual lease payment assuming that the payment is made at the end of the period (round to the
nearest dollar).
Solution 3-26
Present value of an ordinary annuity of $108,000 for six periods at 2.5% ($108,000 / 5.50813) = $19,607.
Difficulty: Medium
CPA: Finance
AACSB: Analytic
Ex. 3-27 Expected Cash Flow Approach

Assume that Picnic Paper Co. has several minor lawsuits outstanding. To determine the amount of
liability to recognize on the statement of financial position, Picnic decides to use expected cash flow
techniques. Based on discussions with their lawyers, Picnic has developed the following cash flow
estimates, and related probabilities:
3-11
Year Cash Flow Estimate Probability Assessment

2020 $2,300 30%
$4,500 45%
$8,200 25%
2021 $3,200 20%

$5,400 50%
$7,100 30%
Instructions
Based on these estimates, and assuming a risk-free rate of 5%, what is the present value of expected cash
flows that Picnic should record on their statement of financial position for 2020?
Solution 3-27
Year Cash Flow Estimate Probability Assessment Expected Cash Flow
2020 $2,300 30% $690
$4,500 45% $2,025
$8,200 25% $2,050
$4,765
2021 $3,200 20% $640

$5,400 50% $2,700
$7,100 30% $2,130
$5,470
Year Expected Cash Flow PV Factor i-5% Present Value

2020 $4,765 0.95238 $4,538.09
2021 $5,470 0.90703 $4,961.45
Total $9,499.54
Difficulty: Medium
AACSB: Analytic
Ex. 3-28 Your client, Bench Company, has a few minor lawsuits outstanding. Your main contact,
Michael Wood, has heard that, though their amount is unknown, these lawsuits must be recorded on the
financial statements. Explain briefly for Mr. Wood, the cash flow approach you would take to
determining the amount to record on Bench Company’s financial statements.
Solution 3-28
The stream of expected cash flows related to Bench Company’s expected lawsuits will be paid out at a
future time. To account for the time value of money, these cash flows are discounted to the present, using
the discount rate reflecting the value of those dollars at present day. Two main cash flow approaches
should be considered:
Traditional Approach
The stream of cash flows is discounted, and a discount rate used to accommodate the riskiness of the cash
3-12
flows.
Expected Cash Flow Approach

Use the risk-free interest rate and adjust for cash flow uncertainty with probability weighting.
Since the traditional approach is best used when cash flows are fairly certain, the expected cash flow
approach is recommended to Mr. Wood in this situation, since the amount and timing of Bench
Company’s lawsuit payouts is relatively uncertain.
Difficulty: Medium
CPA: Communication
AACSB: Communication
Ex. 3-29 Valuation under IFRS 13

Hood Company owns specialized equipment that was purchased in an acquisition of Riding Company.
The equipment has a book value of $1,800,000, but according to IFRS, it is assessed for impairment on an
annual basis. To perform this impairment test, Hood must estimate the fair value of the equipment. It has
developed the following cash flow estimates related to the equipment based on internal information. Each
cash flow estimate reflects Hood's estimate of annual cash flows over the next 7 years. The equipment is
assumed to have no residual value after the 7 years. (Assume the cash flows occur at the end of each
year.)
Year Cash Flow Estimate

1–3 $240,000
4–6 365,000
7 425,000
Hood determines, using their own assumptions, that the appropriate discount rate for this estimation is
6%. To the nearest dollar, what is the estimated fair value of the equipment?
Solution 3-29
($240,000 x 2.67301) + ($365,000 x 2.67301 x .83962) + $425,000 x .66506
= $641,522.40 + $819,174.12 + $282,650.50
= $1,743,347
Difficulty: Medium
CPA: Finance
AACSB: Analytic
Ex. 3-30 Inputs under IFRS 13

There are three levels of inputs under IFRS 13. What type of inputs are used by Hood Company in
exercise 3-85? As a result, what classification would be assigned to the specialized equipment?
3-13
Solution 3-30
Hood used unobservable internal company data in the valuation of their IFRS 13 valuation of specialized
equipment acquired upon acquisition of Riding Company. Unobservable inputs such as a company’s own
data or assumptions are considered Level 3 inputs, which are the most subjective of all three in the
hierarchy, and, hence require greater disclosures to give financial statement users greater information
about the related uncertainty. Because Level 3 inputs are in use, the asset would be classified as a Level 3
asset.
Difficulty: Hard
CPA: Communication
Bloomcode: Evaluation
AACSB: Analytic
Ex. 3-31 Calculate market price of a bond

On January 1, 2020 Lance Co. issued five-year bonds with a face value of $700,000 and a stated interest
rate of 12% payable semi-annually on July 1 and January 1. The bonds were sold to yield 10%.
Calculate the issue price of the bonds.
Solution 3-31
Present value of $700,000 discounted for 10 periods at 5% ($700,000 × .61391) = $429,737
Present value of $42,000 for 10 periods at 5% ($42,000 × 7.72173) = 324,313
Issue price of the bonds $754,050
Difficulty: Medium
CPA: Finance
AACSB: Analytic
Ex. 3-32 Present value of an annuity due

How much must be invested now to receive $30,000 for ten years if the first $30,000 is received today
and the rate is 8%?
Solution 3-32
Present value of an annuity due of $30,000 for ten periods at 8% ($30,000 × 7.24689) = $217,407.
Difficulty: Medium
CPA: Finance
AACSB: Analytic
3-14
PROBLEMS
P3-33
Flip Flop has just inherited $10,000 from a long lost relative and wants to invest it for the next 5 years.
a) Calculate Flip Flop’s interest to be received and accumulated year end balances for each year
assuming 4% annual simple interest.
b) Calculate Flip Flop’s interest to be received and accumulated year end balances for each year
assuming 4% compound interest.
Solution 3-33
a) Annual interest = $10,000 x .04 = $400 per year
Year Beginning Amount Simple InterestAccumulated Year End Balance

1 $10,000 $400 $10,400
2 10,400 400 10,800
3 10,800 400 11,200
4 11,200 400 11,600
5 11,600 400 12,000
b) Annual interest is earned on the principal and interest.
Year Beginning Amount Compound Interest Accumulated Year End Balance

1 $10,000 $10,000 x .04 = 400 $10,400
2 10,400 10,400 x .04 = 416 10,816
3 10,816 10,816 x .04 = 433 11,249
4 11,249 11,249 x .04 = 450 11,699
5 11,699 11,699 x .04 = 468 12,167
Difficulty: Medium
CPA: Finance
AACSB: Analytic
P3-34
Blast from the Past issued 10-year bonds with a coupon rate of 3% paid semi-annually and a face value of
$500,000. The market interest rate is 5%.
a) Calculate the present value of the bonds using PV tables assuming payments are made at the end of
the period (round answer to the nearest dollar).
b) Calculate the present value of the bonds using PV tables assuming payments are made at the
beginning of the period (round answer to the nearest dollar).
Solution 3-34
a) Present value of the face value amount of $500,000 for 20 periods at 2.5% ($500,000 x .61027) =
$305,135.
3-15
Present value of an ordinary annuity of $7,500 ($500,000 x 1.5%) for 20 periods at 2.5% ($7,500 x
15.58916) = $116,919.
Total Present Value = $305,135 + $116,919 = $422,054.
b) Present value of the face value amount of $500,000 for 20 periods at 2.5% ($500,000 x .61027) =
$305,135.
Present value of an annuity due of $7,500 ($500,000 x 1.5%) for 20 periods at 2.5% ($7,500 x 15.97889)
= $119,842.
Total Present Value = $305,135 + $119,842 = $424,977.
Difficulty: Medium
CPA: Finance
AACSB: Analytic
LEGAL NOTICE
Copyright © 2019 by John Wiley & Sons Canada, Ltd. or related companies. All rights
reserved.
3-16
The data contained in these files are protected by copyright. This manual is furnished under
licence and may be used only in accordance with the terms of such licence.
The material provided herein may not be downloaded, reproduced, stored in a retrieval system,
modified, made available on a network, used to create derivative works, or transmitted in any
form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise
without the prior written permission of John Wiley & Sons Canada, Ltd.
MMXVIII xi F2
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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

MULTIPLE CHOICE QUESTION

MULTIPLE CHOICE QUESTION

a) using a risk-free and risk-adjusted interest rate

2. Under the traditional discounted cash flow approach,

3. Under the expected cash flow approach,

4. Which of the following is not a category to measure financial statement elements?

CPA: Financial Reporting

Use the following data for questions 8–9.

Year 1 Year 2 Year 3

$4,000 $6,000 $7,000

Year 1 Year 2 Year 3

$4,000 $6,000 $7,000

Section Reference: Measuring Financial Statement Elements

11. Valuation premise does not refer to

CPA: Financial Reporting

14. Level 1 inputs

Use the following data for questions 17–19.

CPA: Financial Reporting

Ex. 3-27 Expected Cash Flow Approach

Year Cash Flow Estimate Probability Assessment

2021 $3,200 20%

2021 $3,200 20% $640

Year Expected Cash Flow PV Factor i-5% Present Value

Expected Cash Flow Approach

Ex. 3-29 Valuation under IFRS 13

Year Cash Flow Estimate

Ex. 3-30 Inputs under IFRS 13

Ex. 3-31 Calculate market price of a bond

Ex. 3-32 Present value of an annuity due

a) Annual interest = $10,000 x .04 = $400 per year

Year Beginning Amount Simple InterestAccumulated Year End Balance

b) Annual interest is earned on the principal and interest.

Year Beginning Amount Compound Interest Accumulated Year End Balance

Total Present Value = $305,135 + $116,919 = $422,054.

Total Present Value = $305,135 + $119,842 = $424,977.

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