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488669444 Intermediate Accounting 2 Theory Reviewer
Financial Accounting and Reporting (Ateneo de Naga University)
Studocu is not sponsored or endorsed by any college or university
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CHAPTER 47: LIABILITIES
QUESTION 47-8 Multiple choice (IAA)
1. The most common type of liability
a. One that comes into existence due to a loss contingency.
b. One that must be estimated.
c. One that comes into existence due to a gain contingency.
d. One to be paid in cash and for which the amount and timing are known.
2. Which is not a characteristic of a liability?
a. It represents a transfer of an economic resource.
b. It must be payable in cash.
c. It arises from present obligation to other entity.
d. It results from past event.
3. Classifying liabilities as either current or noncurrent helps creditors assess
a. Profitability
b. The relative risk of an entity's liabilities
c. The degree of an entity's liabilities
d. The amount of an entity's liabilities
4. Short-term obligations are reported as noncurrent if
a. The entity has a long-term line of credit.
b. The entity has tentative plan to issue long-term bonds payable.
c. The entity has the discretion to refinance as long-term.
d. The entity has the ability to refinance on a long-term basis.
5. Which situation would not require that noncurrent liabilities be reported as current?
a. The long-term debt is callable by the creditor.
b. The creditor has the right to demand payment due to a contractual violation.
c. The long-term debt matures within the upcoming year.
d. All of these require the current classification.
6. Which of the following represents a liability?
a. The obligation to pay for goods that an entity expects to order from suppliers next year
b. The obligation to provide goods that customers have ordered and paid for
during the current year
c. The obligation to pay interest on a five-year note payable that was issued the last day
of the year
d. The obligation to distribute an entity's own shares
7. Which does not meet the definition of a liability?
a. The signing of a an employment contract at fixed salary
b. An obligation to provide goods or services in the
c. A note payable with no specified maturity date
d. An obligation that is estimated in amount future
8. Which of the following is a characteristic of a current liability but not a noncurrent
liability?
a. Unavoidable obligation
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b. Present obligation to transfer an economic resource
c. Settlement is expected within the normal operating cycle or within 12
months, whichever is longer
d. The obligating event has already occurred
9. Which is not a characteristic of a liability?
a. Present obligation
b. Arises from past event
c. Results in a transfer of economic resource
d. Liquidation is reasonably expected to require use of current assets
10. Which of the following is not an acceptable presentation of current liabilities?
a. Listing current liabilities in the order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against current assets
d. Showing current liabilities in the order of liquidation
QUESTION 47-9 Multiple choice (IAA)
1. Among the short-term obligations at year-end are notes, renewable for another 90-day
period. What day classification of the notes payable? 90-day
a. Current liabilities
b. Deferred credits
c. Noncurrent liabilities
d. Intermediate debt
2. At year-end, an entity has 120-day note payable outstanding. The entity has followed
the policy of replacing the note rather than repaying it over the last three years The
entity's treasurer says that this policy is expected to continue indefinitely, and the
arrangement is acceptable to the bank to which the note was issued. What is the
proper classification of the note in the year-end statement of financial position?
a. Dependent on the intention of management
b. Dependent on the actual ability to refinance
c. Current liability, unless specific refinancing criteria are met
d. Noncurrent liability
3. An entity had a note payable due next year. After the end of reporting period and before
the issuance of the current year financial statements, the entity issued long-term bonds
payable. Proceeds from the bonds were used to repay the note when due. How should
the entity classify the note payable at current year-end?
a. Current liability with separate disclosure of the note refinancing
b. Current liability with no disclosure required
c. Noncurrent liability with separate disclosure of the note refinancing
d. Noncurrent liability with no separate disclosure required
4. An entity has a loan due for repayment in six months' time, but the entity has the option
to refinance for repayment two years later. The entity plans to refinance this loan. In
which section of the statement of financial position should this loan be presented?
a. Current liability
b. Current asset
c. Noncurrent liability
d. Noncurrent asset
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5. At year-end, an entity classified a note payable as current liability. Under what condition
could the entity reclassify the note payable from current to noncurrent?
a. If the entity has the intent and ability to reclassify the note before the end of reporting
period.
b. If the entity has executed an agreement to refinance the note before issuance of the
financial statements.
c. If the entity has the intent and ability to reclassify the note before the issuance of the
financial statements.
d. If the entity has executed an agreement to refinance the note before the end
of reporting period.
QUESTION 47-10 Multiple choice (AICPA Adapted)
1. The most relevant measurement of liabilities at initial recognition should always reflect
a. The expectation of the management
b. Historical cost
c. The credit standing of the entity
d. The single most likely minimum possible amount
2. Which statement best describes the term liability?
a. An excess of equity over current assets
b. Resources to meet financial commitments when due
c. The residual interest in the assets of the entity
d. A present obligation arising from past event
3. What is the relationship between present value and liability?
a. Present value is used to measure certain liabilities.
b. Present value is not used to measure liabilities.
c. Present value is used to measure all liabilities.
d. Present value is used to measure current liabilities.
4. If a long-term debt becomes callable due to the violation of a loan covenant
a. The debt may continue to be classified as noncurrent.
b. The debt should be reclassified as current.
c. Cash must be reserved to pay the debt.
d. Retained earnings must be restricted.
5. What is the classification of debt callable by the creditor?
a. Noncurrent liability
b. Current liability
c. Current liability if the creditor intends to call the debt within one year
d. Current liability if it is probable that the creditor will call the debt within one year
QUESTION 47-11 Multiple choice (IAA)
1. Advance payments from customers represent
a. Liabilities until the product is provided.
b. A component of shareholders' equity.
c. Assets until the product is provided.
d. Revenue upon receipt of the advance payment.
2. Revenue associated with gift card sales is recognized
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a. When the gift card is sold.
b. No later than the last day of the reporting period.
c. When the probability of gift card redemption is viewed as remote.
d. Under no circumstances
3. All else equal, a large increase in unearned revenue in the current period would be
expected to produce what effect on revenue in a future period?
a. Large increase in future revenue
b. Large decrease in future revenue
c. No effect
d. Large decrease because unearned revenue indicates collection problems
4. When a customer advance has been previously received, the appropriate journal entry
includes
a. A debit to revenue and credit to liability
b. A debit to revenue and credit to asset
c. A debit to asset and credit to revenue
d. A debit to liability and credit to revenue
5. When refundable deposit is received, cash is increased with a corresponding increase in
a. Current liability
b. Revenue
c. Shareholders' equity
d. Noncurrent liability
QUESTION 47-12 Multiple choice (AICPA Adapted)
1. A department store received cash and issued a gift certificate that is redeemable in
merchandise. When the gift certificate was issued
a. Deferred revenue account should be decreased
b. Deferred revenue account should be increased
c. Revenue account should be decreased
d. Revenue account should be increased
2. A retail store received cash and issued gift certificates that are redeemable in
merchandise. How would the deferred revenue account be affected by the redemption
and no redemption of certificates, respectively?
a. Decrease and No effect
b. Decrease and Decrease
c. No effect and No effect
d. No effect and Decrease
3. An entity received an advance payment for special order goods that are to be
manufactured and delivered within six months. How should the advance payment be
reported?
a. Deferred charge
b. Contra asset account
c. Current liability
d. Noncurrent liability
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4. At year-end, an entity sold refundable merchandise coupons. The entity received a
certain amount for each coupon redeemable next year for merchandise with a certain
retail price. At year-end, how should the entity report these coupon transactions?
a. Unearned revenue at the merchandise's retail price
b. Unearned revenue at the cash received
c. Revenue at the merchandise's price
d. Revenue at the cash received
5. How would the proceeds received from the advance sale of nonrefundable tickets for a
theatrical performance be reported in the statement of financial position before the
performance?
a. Revenue for the entire proceeds
b. Revenue to the extent of related costs expanded
c. Unearned revenue to the extent of related costs expended
d. Unearned revenue for the entire proceeds
6. Magazine subscriptions collected in advance should be accounted for as
a. A contra account to magazine subscriptions receivable
b. Deferred revenue in the liability section
c. Deferred revenue in the shareholders' equity section
d. Magazine subscription revenue in the income statement in the period collected
7. Under a royalty agreement with another entity, an entity will receive royalties from the
assignment of a patent for four years. The royalties received in advance should be
reported as revenue
a. In the period received
b. In the period earned
c. Evenly over the life of the agreement royalty
d. At the date of the royalty agreement
8. An entity is a retailer of home appliances and offers a service contract on each
appliance sold. Collections received for service contracts should be recorded as an
increase in a
a. Deferred revenue account
b. Sales contracts receivable valuation account
c. Shareholders' equity valuation account
d. Service revenue account
9. An entity sells appliances that include a warranty. Service calls under the warranty are
three-year performed by an independent mechanic under a contract with the entity.
Based on experience, warranty costs are expected to be incurred for each machine
sold. When should the entity recognize the warranty costs?
a. Evenly over the life of the warranty
b. When the service calls are performed
c. When payments are made to the mechanic
d. When the machines are sold
10. At the end of the current year, an entity received an advance payment of 60% of the
sales price for special order goods to be manufactured and delivered within five
months. At the same time, the entity subcontracted for production of the special order
goods at a price equal to 40% of the main contract price. What liabilities should be
reported in the year-end statement of financial position?
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a. None
b. Deferred revenue equal to 60% of the main contract price and payable to subcontractor
equal to 40% of the main contract price
c. Deferred revenue equal to 60% of the main contract price and no payable to
subcontractor
d. No deferred revenue but payable to subcontractor is reported at 40% of the main
contract price
QUESTION 47-13 Multiple choice (IAA)
1. The cost of customer premium offer should be charged to expense
a. When the related product is sold.
b. When the premum offer expires.
c. Over the life cycle of the product.
d. When the premium is claimed.
2. The accounting concept that requires recognition of a liability for customer premium
offer is
a. Time period
b. Prudence
c. Historical cost
d. Matching principle
3. Accounting for cost of incentive program for frequent customer purchases involves
a. Recording an expense and a liability each period.
b. Recording a liability and a reduction of revenue.
c. Recording an expense and an asset reduction.
d. Recording an expense and revenue each period.
4. Accounting for cost of customer incentive program
a. Requires probability estimation.
b. Follows the matching principle.
c. Is a loss contingency situation.
d. All of these are correct.
5. Providing a monetary rebate program
a. Is accounted for similarly to a premium offer
b. Creates an expense for the seller in the period of sale.
c. Creates a liability for the seller at the time of sale.
d. All of these are correct.
QUESTION 47-14 Multiple choice (IAA)
1. The accrual approach in accounting for warranty
a. Is required for income tax reporting.
b. Is frequently justified on the basis of expediency.
c. Finds the expense account being charged when the seller performs in compliance with
the warranty.
d. Should be used whenever the warranty is an integral and inseparable part of
the sale.
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2. Which of the following best describes the accrual approach of accounting for warranty
cost?
a. Expensed when paid
b. Expensed when warranty claims are certain
c. Expensed based on estimate in year of sale
d. Expensed when incurred
3. Which of the following best describes the expense as incurred approach of accounting
for warranty cost?
a. Expensed based on estimate in year of sale
b. Expensed when liability is accrued
c. Expensed when warranty claims are certain
d. Expensed when incurred
4. What is the classification of the estimated warranty liability in a three-year warranty?
a. Noncurrent
b. Current
c. Partly current and partly noncurrent
d. No need for disclosure
5. Which of the following is a characteristic of the accrual of warranty but not the sale of
warranty?
a. Warranty liability
b. Warranty expense
c. Unearned warranty revenue
d. Warranty revenue
CHAPTER 48: PROVISION
QUESTION 48-10 Multiple Choice (PAS 37)
1. Which is the correct definition of a provision?
a. A possible obligation arising from past event
b. A liability of uncertain timing or amount
c. A liability which cannot be easily measured
d. An obligation to transfer funds to an entity
2. A provision shall be recognized as liability when
a. An entity has a present obligation as a result of a past event.
b. It is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation.
c. The amount of the obligation can be measured reliably.
d. All of these are required for the recognition of a provision as liability.
3. A legal obligation is an obligation that is derived from all of the following, except
a.
b.
c.
d.
Legislation
A contract
Other operation of law
An established pattern of past practice
4. A constructive obligation is an obligation
I. That is derived from an entity's action that the entity will accept certain responsibilities
because of past practice, published policy or current statement.
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II. The entity has created a valid expectation in other parties that it will discharge those
responsibilities.
a. I only
b. II only
c. Both I and II
d. Either I or I
5. It is an event that creates a legal or constructive obligation because the entity has no other
realistic alternative but to settle the obligation.
a. Obligating event
b. Past event
c. Subsequent event
d. Current event
6. An outflow of resources embodying economic benefits is regarded as "probable" when
a. The probability that the event will occur is greater than the probability that
the event will not occur.
b. The probability that the event will not occur is greater than the probability that the
event will occur.
c. The probability that the event will occur is the same as the probability that the event
will not occur.
d. The probability that the event will occur is 90% likely.
7. Where there is a continuous range of possible outcomes, and each point in that range is as
likely as any other, the range to be used is the
a. Minimum
b. Maximum
c. Midpoint
d. Sum of the minimum and maximum
8. When the provision involves a large population of items, the estimate of the amount
a. Reflects the weighting of all possible outcomes by their associated
probabilities.
b. Is determined as the individual most likely outcome.
c. May be the individual most likely outcome adjusted for the effect of other possible
outcomes.
d. Midpoint of the possible outcomes.
9. When the provision arises from a single obligation, the estimate of the amount
a. Reflects the weighting of all possible outcomes by their associated probabilities.
b. Is determined as the individual most likely outcome.
c. Is the individual most likely outcome adjusted for the effect of other possible
outcomes.
d. Midpoint of the possible outcomes.
10. Which statement is incorrect where the expenditure required to settle a provision is
expected to be reimbursed by another party?
a. The reimbursement shall be recognized only when it is virtually certain that the
reimbursement would be received if the entity settles the obligation.
b. The amount of the reimbursement shall not exceed the amount of the provision.
c. In the income statement, the expense relating to the provision may be presented net of
the reimbursement.
d. The reimbursement shall not be treated as separate asset but “netted”
against the estimated liability for the provision.
QUESTION 48-11 Multiple Choice (PAS 37)
1. Which statement is not true in relation to the measurement of a provision?
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a.
a.
b.
b.
The risks and uncertainties that inevitably surround many events and circumstances
Onerous
contract
Executed
shall be taken
into account in reaching the bestc.estimate
of contract
a provision.
Executory
Sale contract
Where thecontract
effect of the time value of money is d.
material,
the amount of a provision
shall be the present value of the expenditure expected to settle the obligation.
c.
Future events
that under
may affect
the amount
required
to settle
obligation
be
represent
the the
"least
net costshall
of exiting
5. The unavoidable
costs
an onerous
contract
reflected
in
the
amount
of
the
provision
where
there
is
sufficient
objective
evidence
from the contract" which is equal to
that the future events will occur.
d.
Gains
expected
disposal of assets shall be taken into account in
a. Cost
of from
fulfilling
the contract
measuring
a provision.
b. Penalty
arising
from failure to fulfill the contract
c. Lower of the cost of fulfilling the contract or the penalty arising from failure
2. Provisions
shall
discounted if the effect of the time value of money is material. Which of
to fulfill
thebe
contract
the
incorrect
thecontract
discount
d. following
Higher of is
the
cost of regarding
fulfilling the
orrate?
the penalty arising from failure to fulfill the
contract
a. Reflects current market assessment of the time value of money
QUESTION 48-12 Multiple Choice (PAS 37)
b. Reflects risks specific to the liability
c. 1.
Does
notisreflect
risks
futureprogram
cash flowthat
estimates
have been
adjusted by the
This
defined
asfor
a which
structured
is planned
and controlled
d. management
Is a post-taxthat
discount
rate
materially changes either the scope of a business of an entity or the
manner in which that business is conducted.
3. Which statement is incorrect concerning recognition of a provision?
a. Restructuring
a. Liquidation
Provisions shall be reviewed at the end of each reporting period and adjusted to reflect
b.
the current best estimate.
c. Recapitalization
b.
A
provision
shall be used only for expenditures for which the provision was originally
d. Corporate
revamp
recognized.
c. 2.
Provisions
shall
be as
recognized
forinclude
futureall
operating
losses.except
Events that
qualify
restructuring
of the following,
d. If an entity has an onerous contract, the present obligation under the contract shall be
recognized and measured as a provision.
a. Sale or termination of business
b. Closure of business location in a region or relocation of business from one location to
4. It is another
a contract in which the unavoidable costs of meeting the obligation under the contract
exceed
the economic
benefits
to be received
the contract.
c. Change
in management
structure
such asunder
elimination
of a layer of management
d. Fundamental reorganization of an entity that has an immaterial and
insignificant
impact
on
the
operations.
3. Which is a cost of restructuring?
a.
b.
c.
d.
Cost of retraining or relocating continuing staff
Marketing or advertising cost
Investment in new system and distribution network
Cost of relocating business activities from one location to another
4. It is the abusive practice of manipulation and creative accounting by dumping all
kinds of provisions under the banner of provision for restructuring.
a.
b.
c.
d.
Big bath provision
Creative accounting
Cookie jar
General reserve
QUESTION 48-13 Multiple Choice (IFRS)
1. For which of the following should a provision be recognized?
a.
b.
c.
d.
Future operating losses
Obligations under insurance contracts
Reductions in fair value of financial instruments
Obligations for plant decommissioning costs
2. Provisions shall be recognized for all of the following, except
a. Cleaning-up costs of contaminated land when an oil entity has a published policy that it
will undertake to clean up all contamination that it causes.
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b. Restructuring costs after a binding sale agreement has been signed.
c. Rectification costs relating to defective products sold.
d. Future refurbishment costs due to introduction of a new computer system.
3. An entity is closing one of its operating divisions, and the conditions for making
restructuring provision have been met. The closure will happen in the first quarter of the next
financial year.
At the current year-end, the entity has announced the formal plan publicly and is calculating
the restructuring provision.
Which of the following costs should be included in the restructuring provision?
a. Retraining staff continuing to be employed
b. Relocation costs relating to staff moving to other divisions
c. Contractually required costs of retiring staff being made redundant from the
division being closed
d. Future operating losses of the division being closed up to the date of closure
4. An entity operates chemical plants. The published policies include a commitment to making
good any damage caused to the environment by the operations. The entity has always
honored this commitment.
Which of the following scenarios would give rise to an environmental provision?
a. On past experience it is likely that a chemical spill which would result in having to pay
fines and penalties will occur in the next year.
b. Recent research suggests there is a possibility that the entity's actions may damage
surrounding wildlife.
c. The government has outlined plans for a new law requiring all environmental damage
to be rectified.
d. A chemical spill from one of the entity’s plants has caused harm to the
surrounding
area
and
wildlife.
5. An entity has been served a legal notice at year-end by the Department of Environment
and Natural Resources to fit smoke detectors in its factory on or before middle of next year.
The cost of fitting smoke detector can be measured reliably.
How should the entity treat this in the financial statements at year-end?
a. Recognize a provision for the current year equal to the estimated amount.
b. Recognize a provision for the current year equal to one-half only of the estimated
amount.
c. No provision is recognized at year-end because there is no present obligation
for the future expenditure since the entity can avoid the future expenditure
by changing the method of operations but disclosure is required.
d. Ignore the event.
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CHAPTER 49: CONTINGENT LIABILITY AND CONTINGENT
ASSET
QUESTION 49-5 Multiple choice (IAA)
1. Contingent liabilities will or will not become actual liabilities depending on
a. Whether probable and measurable.
b. The degree of uncertainty.
c. The present condition suggesting a liability.
d. The outcome of a future event.
2. A contingent liability shall be recognized when
a. Any lawsuit is actually filed against an entity.
b. It is certain that funds are available to pay the amount of the claim.
c. It is probable that a liability has been incurred but the amount cannot be reliably
measured.
d. The amount of the loss can be reliably measured and it is probable prior to
issuance of financial statements that a liability has been incurred.
3. How should a contingent liability be reported in the financial statements when it is
reasonably possible?
a. As a deferred liability
b. As an accrued liability
c. As a disclosure only
d. As an account payable
4. Disclosure usually is not required for
a. Contingent gain that is probable and measurable.
b. Contingent loss that is possible and measurable.
c. Contingent loss that is probable and cannot be reliably measured
d. Contingent loss that is remote and measurable
5. Reporting in the financial statements is required for
a. Loss contingency that is probable and measurable
b. Gain contingency that is probable and measurable
c. Loss contingency that is possible and measurable
d. All loss contingencies
6. A contingent liability
a. Definitely exists as a liability but the amount and due date are indeterminable.
b. Is accrued even though not reasonably estimated.
c. Is the result of a loss contingency.
d. Is not recognized in the financial statements.
7. A contingent liability is
a. An estimated liability.
b. An event which is not recognized because it is not probable that an outflow
will be required or the amount cannot be reliably estimated.
C. A potential large liability.
d. A potential small liability.
8. Which statement is incorrect concerning a contingent liability?
a. A contingent liability is not recognized.
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b. A contingent liability is disclosed only.
c. No disclosure is required for remote contingent liability,
d. A contingent liability is both probable and measurable.
9. A contingent liability
a. Has a most probable value of zero but may require a payment if a given
future event occurs.
b. Definitely exists as a liability.
c. Is reported as current liability,
d. Is not disclosed in the financial statements.
10. Which of the following is not considered when evaluating whether or not to record a
liability for pending litigation?
a. Time period of the underlying cause of action
b. The type of litigation involved
c. The probability of an unfavorable outcome
d. The ability to make a reliable estimate of the loss
QUESTION 49-6 Multiple choice (IAA 37)
1. Contingent asset is usually recognized when
a. Realized
b. Occurrence is reasonably possible and the amount can be reliably measured
c. Occurrence is probable and measurable
d. The amount can be reliably measured
2. Which is the proper treatment of contingent asset?
a. An accrued account
b. Deferred income
c. An account receivable
d. A disclosure only
3. Gain contingency that is remote and measurable
a. Must be disclosed in a note to financial statements
b. May be disclosed in a note to financial statements.
c. Must be reported in the body of the financial statements
d. Should not be reported or disclosed.
4. A probable and measurable contingent asset should be
a. Recognized and disclosed.
b. Classified as an appropriation of retained earnings
c. Disclosed but not recognized.
d. Neither recognized nor disclosed.
5. Which is the proper way to report a contingent asset receipt of which is virtually certain?
a. As an asset
b. As unearned revenue
c. As a disclosure only
d. No disclosure and no accrual
QUESTION 49-7 Multiple choice (AICPA Adapted)
1. An entity did not record an accrual for a present obligation but disclose the nature of the
obligation and the range of the loss. How likely is the loss?
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a. Remote
c. Probable
b. Reasonably possible
d. Certain
2. The likelihood that the future event will or will not occur can be expressed by a range of
outcome. Which range means that the future event occurring is very slight?
a. Probable
b. Reasonably possible
c. Certain
d. Remote
3. An expropriation of asset which is imminent and for which the loss can be reasonably
estimated should be
a. Accrued
b. Disclosed
c. Accrued and disclosed
d. Ignored
4. A present obligation that is probable and for which the amount can be reliably estimated
should
a. Not be accrued but disclosed.
b. Be accrued by debiting retained earnings and crediting a liability
c. Be accrued by debiting an expense and crediting retained earnings.
d. Be accrued by debiting an expense and crediting a liability.
5. General or unspecified contingencies should
a. Be accrued in the financial statements and disclosed.
b. Not be accrued and need not be disclosed.
c. Not be accrued but should be disclosed.
d. Be accrued but need not be disclosed.
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CHAPTER 50: BONDS PAYABLE
QUESTION 50-3 Multiple Choices (PFRS 9)
1. Bond payable not designated at fair value through profit loss shall be measured initially at
A. Fair value
B. Fair value plus bond issue cost
C. Fair value minus bond issue cost
D. Face amount
2. After initial recognition, bonds payable shall be measured at
A. Amortized cost using the effective interest method.
B. Fair value through profit or loss by irrevocable designation.
C. Amortized cost using the effective interest method on fair value through other
comprehensive income.
D. Amortized cost using the effective interest method or fair value through
profit
or
loss
by
irrevocable
designation.
3. The amortized cost of bond payable means
A. Face amount plus premium on bands payable
B. Face amount minus discount on bonds payable
C. Face amount minus bond issue cost
D. Face amount plus premium on bonds payable or minus discount on bonds
payable
4. Which statement is true about the fair value option for measuring bonds payable?
A. The effective interest method of amortization must be used to calculate interest
expense.
B. Discount or premium is disclosed in the notes to the financial statements.
C. The fair value of the bond and the principal obligation value must be
disclosed.
D. If the fair value option is elected, it must be applied to all bonds.
QUESTION 50-4 Multiple Choice (IAA)
1. Most corporate bond are
A. Mortgage bonds
B. Debenture bonds
C. Secured Bonds
D. Collateral bonds
2. The method used to pay interest depends on whether the bonds are
A. Registered or coupon
C.
In
debentured
B. Mortgaged or unmortgaged
debentured
D. Callable or redeemable
or
3. Zero-coupon bonds
A. Offer a return in the form of a deep discount off the face amount
B. Result in zero interest expense for the issuer
C. Result in zero interest revenue for the investor
D. Are reported as shareholders’ equity by the issuer
4. Bonds payable should be reported as noncurrent at
A. Face amount less any less any unamortized discount or plus any
unamortized premium
B. Current market price
C. Face amount less any unamortized premium or plus any unamortized discount
D. Face amount less accrued interest since the last interest payment date
5. In the amortization of discount on bonds payable
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A. The interest expense is less with each successive interest payment
B. The total effective interest is equal to the amount of the discount plus the
total cash interest paid
C. The carrying amount of the bonds payable declines eventually to face amount
D. The reduction in the discount is less with each successive interest payment
6. An amortization schedule for bands issued at a premium
A. Summarizes the amortization of the premium on bonds payable, a contra-asset
account
B. Is reported in the statement of financial position
C. Is a schedule that reflects the changes in the bonds payable over the term
maturity
D. All of these are correct
7. When bonds are retired prior to maturity date
A. GAAP has been violated
B. An ordinary gain or loss is probably reported
C. An extraordinary gain or loss is reported
D. A gain or loss is not reported
8. An entity has bonds outstanding in which the market rate of interest has risen. The entity
elected the fair value option. What will the entity report for the year?
A. Interest expense and a gain
B. Interest expense and a loss
C. A gain and no interest expense
D. A loss and no interest expense
9. The discount on bonds payable is reported as
A. A prepaid expense
B. An expense account
C. A current liability
D. A contra liability
10. To evaluate the risk and quality of an individual bond issue, investors rely heavily on
A. Bond ratings provided by investment houses
B. Newspaper articles
C. Bond interest payments
D. The audit report
QUESTION 50-5 Multiple Choice (AICPA Adapted)
1. Bonds that mature on a single date are called
A. Term bonds
B. Serial bonds
C. Callable bonds
D. Convertible bonds
2. Bonds issued with scheduled maturities at various dates are called
A. Convertible bonds
C. Serial bonds
B. Terms bonds
D. Callable bonds
3. Debentures are
A. Unsecured bonds
B. Secured bonds
C. Ordinary bonds
D. Serial bonds
4. How would the amortization of premium on bonds payable affect the carrying amount of
bond and net income, respectively?
A. Increase and Decrease
C. Decrease and Decrease
B. Increase and Increase
D. Decrease and Increase
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5. How would the amortization of discount on bonds payable affect the carrying amount of
bond and net income, respectively?
A. Increase and Decrease
C. Decrease and Decrease
B. Increase and Increase
D. Decrease and Increase
6. Unamortized bond discount should be reported as
A. Direct deduction from the face amount of the bond
B. Direct deduction from the present value of the bond
C. Deferred charge
D. Part of the bond issue cost
7. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is
sold on June 1, the amount of cash received by the issuer will be
A. Decreased by accrued interest from June 1 to November 1
B. Decreased by accrued interest from May 1 to June 1
C. Increased by accrued interest from June 1 to November 1
D. Increased by accrued interest from May 1 to June 1
8. The issuer of a bond sold at face amount with interest payable February 1 and August 1
should report
A. Liability for accrued interest
B. An addition to bonds payable
C. Increase in deferred charge
D. Contingent liability
9. A bond issued on June 1 has interest payment dates of April 1 and October 1. Bond interest
expense for the current year ended December 31 is for a period of
A. Three months
B. Four months
C. Six months
D. Seven months
10. A bond was issued at a discount with a call provision When the bond issuer exercised the
call provision on a interest date, the amount of bond liability derecognition should have equal
the
A. Call price
B. Call price less unamortized discount
C. Face amount less unamortized discount
D. Face amount plus unamortized discount
QUESTION 50-6 Multiple Choice (IAA)
1. When bonds are sold between interest dates, any accrued interest is credited to
A. Interest payable
B. Interest revenue
C. Interest receivable
D. Bonds payable
2. Which statement is true about accrued interest on bonds sold between interest dates?
A. The accrued interest is computed at the effective rate.
B. The accrued interest will be paid to the seller when the bonds mature.
C. The accrued interest is extra income to the buyer.
D. All of the statements are not true.
3. Which statement is true about a premium on bonds payable?
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A. The premium or bonds payable is a contra shareholders' equity account.
B. The premium on bonds payable is an account that appears only on the books of the
investor.
C. The premium on bonds payable increases when amortization entries are made until
maturity date.
D. The premium on bonds payable decreases when amortization entries are
made until the balance reaches zero at maturity date.
4. The amortization of discount on bonds payable
A. Decreases the face amount of bonds payable.
B. Decreases the amount of interest expense.
C. Decreases the carrying amount of bonds payable.
D. Increases the carrying amount of bonds payable.
5. The carrying amount of a bond liability is
A. Call price of the bond plus bond discount or minus bond premium
B. Face amount of the bond plus related premium or minus related discount.
C. Face amount of the bond plus related discount or minus related premium.
D. Maturity value of the bond plus related discount or minus related premium.
6. The proceeds from the issue of the bonds payable
A. Will always be equal to the face amount.
B. Will always be less than the face amount.
C. Will always be more than the face amount.
D. May be equal, more or less than the face amount depending on market
interest rate.
7. An extinguishment of bonds payable originally issued at a premium is made by purchase of
the bonds between interest dates. Which statement is true at the time of extinguishment?
A. Any costs of issuing the bonds payable must be amortized up to the purchase date.
B. The premium on bonds payable must be amortized up to the purchase date.
C. Interest must be accrued from the last interest date to the purchase date.
D. All of these statements are true.
8. When bonds are retired prior to maturity with proceeds from a new bond issue, any gain or
loss from the early extinguishment should be
A. Amortized over the remaining original life of the retired bond issue.
B. Amortized over the life of the new bond issue.
C. Recognized in retained earnings
D. Recognized in income from continuing operations. 624
9. An entity neglected to amortize the discount on outstanding bonds payable. What is the
effect of the failure to record discount amortization on interest expense and bond carrying
amount, respectively?
A. Understated and understated
B. Understated and overstated
C. Overstated and overstated
D. Overstated and understated
10. An entity neglected to amortize the premium on outstanding bonds payable. What is the
effect of the failure to record premium amortization on interest expense and bond carrying
amount, respectively?
A. Understated and understated
B. Understated and overstated
C. Overstated and overstated
D. Overstated and understated
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CHAPTER 51: EFFECTIVE INTEREST METHOD
QUESTION 51-5 Multiple choice (LAA)
1. What is the interest rate written on the face of the bond
a. Coupon rate
b. Nominal rate
c. Stated rate
d. Coupon rate, nominal rate or stated rate
2. What is the rate of interest actually incurred?
a. Market rate
b. Yield rate
C. Effective rate
d. Market, yield or effective rate
3. When the effective interest method is used, the periodic amortization would
a. Increase if the bonds were issued at a discount
b. Decrease if the bonds were issued at a premium
C. Increase if the bonds were issued at a premium
d. Increase if the bonds were issued at either a discount or a premium
4. A discount on bond payable is charged to interest expense
a. Equally over the life of the bond
b. Only in the year the bond is issued
c. Using the effective interest method
d. Only in the year the bond matures
5. Under the effective interest method of amortization, the interest expense is equal to
a. The stated rate of interest multiplied by the face amount of the bonds.
b. The market rate of interest multiplied by the face amount of the bonds.
c. The stated rate of interest multiplied by the beginning carrying amount of the bonds.
d. The market rate of interest multiplied by the beginning carrying amount of
the bonds.
6. When interest expense for the current year is more than interest paid, the bonds were
issued at
a. A discount
b. A premium
c. Face amount
d. An indeterminable amount
7.When interest expense for the current year is less than interest paid, the bonds were issued
at
a. A discount
b. A premium
c. Face amount
d. An indeterminable amount
8. Bond issue cost
a. Is included in the measurement of the bonds payable measured at amortized cost.
b. Is amortized using the interest method over the life of the bonds payable.
c. Will effectively increase the
d. All of these relate to bond issue cost. market rate of interest.
9. Bonds usually sell at
a. Maturity amount
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b. Face amount
C. Present value
d. Statistical expected value
10. Which statement is true about bonds payable?
a. The specific provisions of a bond issue are described in a document called
bond indenture.
b. Periodic interest expense is the stated interest rate times the amount of bond
outstanding
c. Bonds will sell for a premium when the market rate of interest exceeds stated rate.
d. The initial sale price of bond represents the sum of all future cash outflows.
QUESTION 51-6 Multiple choice (IAA)
1.When bonds are sold at a premium, at each subsequent interest payment date, the cash
paid is
a. Less than the effective interest
b. Equal to the effective interest
c. Greater than the effective interest
d. More than if the bonds had been sold at a discount
2.When bonds are sold at a discount, at each subsequent interest payment date, the cash
paid in
a. More than the effective interest
b. Less than the effective interest
c. Equal to the effective interest
d. More than if the bonds had been sold at a premium
3. When bonds are sold at a discount, at each interest payment date, the interest expense
a. Increases
b. Decreases
c. Remains the same
d. Is equal to the change in carrying amount
4. When bonds are sold at a premium, at each interest payment date, the interest expense
a. Remains constant
b. Is equal to the change in carrying amount
c. Increases
d. Decreases
5. Interest expense is
a. The effective rate times the carrying amount of the bond during the
interest period.
b. The stated rate times the face amount of the bond.
c. The effective rate times the face amount of the bond.
d. The stated interest rate times the carrying amount.
QUESTION 51-7 Multiple choice (AICPA Adapted)
1. What is the effective interest rate of a bond measured at amortized cost?
a. The stated rate of the bond.
b. The interest rate currently charged by the entity or by fathers for similar bond.
c. The interest rate that exactly discounts estimated future cash payments
through the expected life of the bond or when appropriate, a shorter period
to the net carrying amount of the bond.
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d. The basic risk-free interest rate that is derived from observable government bond
prices.
2. For a bond issue which sells for less than face amount, the market rate of interest is
a. Dependent on rate stated on the bond
b. Equal to rate stated on the bond
c. Less than rate stated on the bond
d. Higher than rate stated on the bond
3. What is the market rate of interest for a bond issue which sells for more than face amount?
a. Less than rate stated on the bond
b. Equal to rate stated on the bond
C. Higher than rate stated on the bond
d. Independent of rate stated on the bond
4. If bonds are issued at a premium, this indicates that
a. The yield rate of interest exceeds the nominal rate
b. The nominal rate of interest exceeds the yield rate
c. The yield and nominal rates coincide
d. No necessary relationship exists between the two rates
5. Which statement is true for a bond maturing on a single date when the effective interest
method of amortizing bond discount is used?
a. Interest expense as a percentage of the bond carrying amount varies from period to
period
b. Interest expense increases each six-month period
c. Interest expense remains constant each six-month period
d. Nominal interest rate exceeds effective interest rate carrying
6. The market price of a bond issued at a discount is the present value of the principal amount
at the market rate of interest
a. Less the present value of all future interest payments at the market rate of interest.
b. Less the present value of all future interest payments at the rate of interest stated on
the bond.
c. Plus the present value of all future interest payments at the market rate of
interest.
d Plus the present value of all future interest payments at the rate of interest stated on
the bond
7. In theory, the proceeds from the sale of a bond would be equal to
a. The face amount of the bond
b. The present value of the principal amount due at the end of the life of the
bond plus the present value of the interest payments made during the life
of the bond
c. The face amount of the bond plus the present value of the interest payments made
during the life of the bond
d. The sum of the face amount of the bond and the periodic interest payments.
8. Under international accounting standard, the valuation method used for bonds payable is
a. Historical cost
b. Discounted cash flow valuation at current yield rate
c. Maturity amount
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d. Discounted cash flow valuation at yield rate at issuance
9. How should an entity calculate the net proceeds to be received from bond issuance?
a. Discount the bonds at the stated rate of interest.
b. Discount the bonds at the market rate of interest
c. Discount the bonds at the stated rate of interest and deduct bond issuance cost
d. Discount the bonds at the market rate of interest and deduct bond
issuance cost.
10. An entity issued a bond with a stated rate of interest that is less than the effective interest
rate on the date of issuance. The bond was issued on one of the interest payment dates. What
should entity report on the first interest payment date?
a. An interest expense that is less than the cash payment made to bondholders.
b. An interest expense that is greater than the cash payment made to
bondholders.
c. A debit to discount on bond payable.
d. A debit to premium on bond payable.
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CHAPTER 52: COMPOUND FINANCIAL INSTRUMENT
QUESTION 52-6 Multiple choice (IFRS)
1. What is the principal accounting for a compound financial instrument?
a. The issuer shall classify a compound instrument as either liability or equity.
b. The issuer shall classify the liability and equity components of a compound
instrument separately as liability or equity instrument.
c. The issuer shall classify a compound instrument as a liability in its entirety, until
converted into equity,
d. The issuer shall classify a compound instrument as a liability in its entirety.
2. How are the proceeds from issuing a compound instrument allocated between the liability
and equity?
a. The liability component is measured at fair value and the remainder of the
proceeds is allocated to the equity component.
b. The proceeds are allocated to the liability and equity based on fair value.
c. The proceeds are allocated to the liability and equity based on carrying amount.
d. The proceeds are not allocated because the compound instrument is accounted for
either as liability or equity.
3. The proceeds from an issue of bonds with share warrants should not be allocated between
the liability and equity components when
a. The fair value of the warrants is not readily available.
b. The exercise of the warrants within the next reporting period seems remote.
c. The warrants issued are nondetachable.
d. The proceeds should be allocated between liability and equity under all of
these circumstances.
4. When the cash proceeds from bonds issued with share warrants exceed the fair value of the
bonds without the warrants, the excess should be credited to
a. Share premium - ordinary
b. Retained earnings
c. Liability account
d. Share premium - share warrants
5. When bonds are issued with share warrants, the equity component is equal to
a. Zero
b. The excess of the proceeds over the face amount of the bonds.
c. The market value of the share warrants.
d. The excess of the proceeds over the fair value of the bonds without the
share warrants.
QUESTION 52-7 Multiple choice (IAA)
1. A bond convertible by the holder into a fixed number of ordinary shares of the issuer is
a. A compound financial instrument
b. A primary financial instrument
c. A derivative financial instrument
d. An equity instrument
2. Convertible bonds
a. Have priority over other indebtedness.
b. Are usually secured by a mortgage.
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c. Pay interest only in the event net income is sufficient to cover the interest.
d. May be exchanged for equity shares.
3. What is the main reason for issuing convertible bond?
a. The ease with which convertible bond is sold even if the entity has a poor credit
rating.
b. The fact that equity capital has issue cost and convertible bond has none.
c. Entities can obtain financing at lower rate.
d. Convertible bond will always sell at a premium.
4. The major difference between convertible bonds and bonds issued with share warrants is
that upon exercise of the warrants
a. The shares are held by the issuer for a certain period before they are issued to the
warrant holder.
b. The holder has to pay a certain amount to obtain the shares.
c. The shares involved are restricted.
d. No share premium can be part of the transaction.
5. Convertible bonds
a. Are separated into the liability component and the expense component.
b. Allow an entity to issue debt financing at lower
c. Are separated into liability and equity components based on fair value.
d. All of the choices are correct.
6. What is the accounting for issued convertible bond?
a. The instrument should be recorded solely as bond.
b. The instrument should be recorded as either bond equity but not both.
c. The instrument should be recorded solely as equity.
d. The instrument should be recorded as part bond and part equity.
7. Issued convertible bonds are
a. Separated into liability and equity components with the liability component
recorded at fair value and the residual assigned to the equity component
b. Always recorded using the fair value option
c. Recorded at face amount for the liability along with the associated premium or
discount
d. Recorded at face amount for the liability without consideration of a premium or
discount
8. Bondholders exchange their convertible bonds for ordinary shares. The carrying amount of
these bonds was lower than market value but greater than the par value of the ordinary
shares issued. If the book value method is used, which of the following correctly states an
effect of the conversion?
a. Shareholders' equity is increased
b. Share premium is decreased
c. Retained earnings account increased
d. A loss is recognized
9. The conversion of bonds payable into ordinary shares in commonly recorded by
a. Incremental method
b. Proportional method
c. Fair value method
d. Book value or carrying amount method
10. When convertible bond is not converted but paid at maturity
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a. A gain or loss is recorded for the difference between the carrying amount of the bond
and the present value of the cash flows.
b. The amount allocated to equity is recorded as a gain.
c. The amount allocated to equity is recorded as a loss.
d. The carrying amount of the bond equal to face amount is derecognized
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CHAPTER 53: NOTE PAYABLE Debt Restructure
QUESTION 53 – 8 Multiple choice (AICPA Adapted)
1. When an entity issued a note solely in exchange for cash, the present value of the note
at issuance is equal to
A. face amount
B. face amount discounted at the prevailing interest rate
C. proceeds received
D. proceeds received discounted at the prevailing interest rate
2. if the present value of a note issued in exchange for a property is less than face
amount, the difference should be
A. Included in the cost of the asset
B. Amortized as interest expense over the life of the note
C. Amortized as interest expense over the life of the asset
D. Included in interest expense in the year issuance
3. An entity borrowed cash from a bank and issued to the bank a short-term noninterest
bearing note payable. The bank discounted the note at 10% and remitted the proceeds
of the entity. The effective interest rate paid by the entity in this transaction would be
A. Equal to the stated discount rate of 10%
B. More than the stated discount rate of 10%
C. Less than the stated discount rate of 10%
D. Independence of the stated discount rate of 10%
4. At issuance date, the present value of a promissory note is equal to the face amount if
the note
A. Bears a stated rate of interest which is realistic
B. Bears a stated rate of interest which is less than the prevailing market rate for
similar notes
C. Is noninterest bearing and the implicit interest rate is less than the prevailing
market rate for similar notes
D. Is noninterest bearing and the implicit interest rate is equal to the prevailing market
rate for similar notes
5. Which statement concerning discount on note payable is incorrect
A. Discount on note payable may be debited when entity discounts its own note with
the bank
B. The discount on note payable is a deduction from the face amount note payable
C. The discount on note payable represents interest charges applicable to future
periods
D. Amortizing the discount on note payable gradually decreases the carrying
amount of the liability over the life of the note
6. When a note payable with no ready market is exchanged for property whose fair value
is currently undeterminable
A. The present value of the note payable must be approximated using an
imputed interest rate
B. The note payable should not be recorded until the fair value of the property
becomes evident
C. The entity receiving the property should estimate a value for the property
D. Both entities involved in the transaction should negotiate a value to be assigned to
the property
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7. When a note payable is issued for property, the present value of the note is measured
by
A. The fair value of the property
B. The fair value of the note payable
C. Using an imputed interest rate to discount all future payments on the note payable
D. All of these are considered in measuring the present value of the note
payable
8. When a note payable is exchanged for property, the stated interest rate is presumed to
be fair when
A. No interest rate is stated
B. The stated interest rate is unreasonable
C. The face amount of the note is materially different from the cash sale price for
similar property
D. The stated interest rate is equal to the market rate
9. The discount resulting from the determination of the present value of a note payable
should be reported as
A. Deferred credit
B. Direct deduction from the face amount of the note
C. Deferred charge
D. Addition to the face amount of the note
10.Which statement is correct when an entity issued a note payable with no stated interest
rate in exchange for a depreciable asset?
A. The asset should be depreciated over the term of the note payable
B. If fair value is unavailable, the note payable should be recorded at present
value discounted at the market rate of interest
C. Both the note and the asset are recorded at the face amount of the note payable
D. The note payable is recorded at face amount even if the fair value of the asset is
readily available.
QUESTION 53 – 9 Multiple choice (IFRS)
1. In a debt restructuring considered an asset swap, the gain on extinguishment is equal
to
a. The excess of fair value of asset over carrying amount
b. Excess of carrying amount of the debt over the fair value of the asset
c. Excess of fair value of asset over the carrying amount of the debt
d. Excess of carrying amount of the debt over the carrying amount of the
asset
2. For a debt restructuring involving substantial modification of terms, it is appropriate for
a debtor to recognize a gain when the carrying amount of the debt
a. Exceeds the total future cash payments
b. Is less than the total future cash payments
c. Exceeds the present value of the future cash payments
d. Is less than the present value of future cash payments
3. For a debt restructuring involving a substantial modification of terms, which of the
following specified by the new terms would be compared to the carrying amount of the
debt to determine if the debtor should report a gain on extinguishment?
a. The total future payments
b. The present value of the new debt at the original interest rate
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c. The present value of the new debt at the modified interest rate
d. The amount of future cash payments
4. Under a debt restructuring involving substantial modification of terms, the future cash
flows under the new terms shall be discounted using
a. Original effective interest rate
b. Interest rate under the new terms
c. Market rate of interest
d. Prime interest rate
QUESTION 53 – 10 Multiple choice (IFRIC 19)
1. An entity shall initially measure equity instruments issued to extinguish a financial
liability at
a. Fair value of the equity instruments issued
b. Fair value of the liability extinguished
c. Par value of the equity instruments issued
d. Carrying amount of the liability extinguished
2. If the fair value of the equity instruments issued cannot be reliably measured, the
equity instruments issued to extinguishment a financial liability shall be measured at
a. Fair value of the liability extinguished
b. Par value of the equity instruments issued
c. Carrying amount of the liability extinguished
d. Book value of the equity instruments issued
3. If both the fair value of the equity instruments issued and the fair value of the financial
liability extinguished cannot be measured reliably, the equity instruments issued shall
be measured at
a. Carrying amount of the liability extinguished
b. Par value of the equity instruments issued
c. Carrying amount of the equity instruments issued
d. Value assigned by the Board of Directors
4. The gain or loss from extinguishment of a financial liability by issuing equity
instruments is presented as
a. other income or other expense
b. separate line item in the income statement
c. component of other comprehensive income
d. component of finance cost
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CHAPTER 54: LESSEE ACCOUNTING
QUESTION 54-6 Multiple choice (IFRS 16)
1. Under IFRS, a lessee is required to recognize
a. Right of use asset and lease liability
b. Right of use asset but not lease liability
c. Lease liability but not right of use asset
d. Neither right of use asset nor lease liability
2. The lessee may apply the operating lease model under what condition?
a. Short-term lease
b. Low value lease
c. Both short-term lease and low value lease
d. Under all circumstances
3. A short-term lease is defined as
a. Twelve months or less
b. Six months or less
c. Twelve-month lease with a purchase option
d. Two-year lease with option to terminate
4. Which statement is true about low value lease?
a. The value of an underlying asset is based on the value of the asset when new
regardless of the age of the asset.
b. The term of a low value lease may be more than twelve months.
c. An underlying asset does not qualify as low value lease if the nature of the asset is
such that the assetis typically not of low value when new.
d. All of these statements are true about low. value lease.
5. A right of use asset is initially measured at
a. Cost
b. Fair value
c. Current cost
d. Present value of expected cash inflows
6. The cost of right of use asset comprises all, except
a. The present value of lease payments
b. Lease payments made to lessor on or before commencement date
c. Initial direct cost incurred by lessee
d. Estimated cost of dismantling, removing or restoring the underlying asset
for which the lessee has no present obligation
7. The right of use asset is reported as
a. Noncurrent as separate line stem
b. Property, plant and equipment
c. Intangible asset
d. Investment property
8. A lessee with a lease containing a purchase option that is reasonably certain to be
exercised should depreciate the right of use asset over
a. Useful life of the asset
b. Lease term
c. Useful life of the asset or the lease term, whichever is shorter
d. Useful life of the asset or the lease term, whichever is longer
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9. A lease liability is measured at
a. The absolute amount of lease payments
b. The present value of lease payments
c. The present value of fixed lease payments
d. The fair value of the underlying asset
10. The lease payments include all of the following, except
a. Periodic rentals
b. Termination penalty if the lease term reflects the termination option
c. Exercise price of a purchase option that is not reasonably certain to be
exercised
d. Residual value guarantee of the lessee
QUESTION 54-7 Multiple choice (IAA)
1. Which is not included in lease payments?
a. Any payment required by a purchase option that reasonably certain to be exercised
b. Costs for services and taxes paid by and lessee
c. Required payments over the lease term
d. Amount guaranteed by a party related to the lessee
2. Which is not part of the lease payments?
a. The rental payments called for by the lease
b. Any residual value guarantee of the lessee
c. Any residual value at the end of the lease term
d. Any payment the lessee must make to purchase the underlying asset under a
purchase option that reasonably certain to be exercised
3. The lease payments include all, except
a. The residual value guarantee
b. The lessee's obligation to pay executory cost
c. The purchase option that is reasonably certain to be exercised
d. Any payment that the lessee must make upon failure to extend or renew the lease
4. What is the interest rate used when the implicit interest rate cannot be determined?
a. The prime rate
b. The lessor's published rate
c. The lessee's average borrowing rate
d. The lessee's incremental borrowing rate
5. What is the treatment of initial direct cost incurred by the lessee in a finance lease?
a. Added to the lease liability
b. Added to the carrying amount of the right of use asset
c. Expensed immediately
d. Added to the carrying amount of the right of use asset and lease liability
6. Which statement concerning residual value guarantee is appropriate for the lessee?
a. The asset and related liability should be increased by the absolute amount of the
residual value.
b. The asset and related liability should be decreased
c. by the absolute amount of the residual value. The asset and related liability should be
decreased by the present value of the residual value
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d. The asset and related liability should be increased by the present value of
the residual value.
7. In computing depreciation of a right of use asset under a lease, the lessee should deduct
a. The residual value guarantee and depreciate over the lease term.
b. An unguaranteed residual value and depreciate over the lease term.
c. The residual value guarantee and depreciate over the useful life of the asset.
d. An unguaranteed residual value and depreciate over the useful life of the asset.
8. If the residual value of a underlying asset is greater than the amount guaranteed by the
lessee
a. The lessor pays the lessee for the difference.
b. The lessee recognizes a gain at the end of the lease term.
c. The lessee has no obligation related to the residual value.
d. The lessee pays the lessor for the difference.
9. The carrying amount of the right of use asset would be periodically reduced by
a. Lease payment
b. Portion of the lease payment allocable to the interest
c. Portion of the lease payment allocable to reduction of the lease liability
d. Depreciation of the right of use asset
10. What is the cost of a right of use asset acquired in a finance lease?
a. The absolute sum of the lease payments over the lease term
b. The present value of the lease payments including executory costs discounted at an
appropriate rate
c. The present value of the lease payments exclusive of executory costs
discounted at an appropriate rate
d. The present value of the fair value of the asset discounted at an appropriate rate
QUESTION 54-8 Multiple choice (AICPA Adapted)
1. The lessee's lease liability for a finance lease would be periodically reduced by
a. Lease payment plus the depreciation of the asset
b. Lease payment less the depreciation of the asset
c. Lease payment less the portion allocable to interest
d. Lease payment
2. A six-year finance lease entered into on December 31 of the current year specified equal
annual lease payments due on December 31 of each year. The first annual lease payment
paid on December 31 of the current year consists of which of the following?
a. Interest expense
b. Lease liability
c. Both interest expense and lease liability
d. Neither interest expense nor lease liability
3. A six-year finance lease specified equal annual lease payments. The lease payment in the
fifth year applicable to the reduction of the lease liability should be
a. Less than in the fourth year
b. More than in the fourth year
c. The same as in the sixth year
d. More than in the sixth year
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4. A lessee had a ten-year finance lease requiring equal annual payments. The reduction of
the lease liability in the second year should equal
a. The current liability shown for the lease at the end of first year
b. The current liability shown for the lease at the end of second year
c. The reduction of the lease liability in the first year
d. One-tenth of the original lease liability
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QUESTION 55-5 Multiple choice (AICPA Adapted)
1. Rent received in advance by the lessor in an operating lease should be recognized
as revenue
a. When received
b. At the lease inception
c. At the lease expiration
d. In the period specified by the lease
2. When should a lessor recognize in income a nonrefundable lease bonus paid by a
lessee?
a. When received
b. At the inception of the lease
c. At the lease expiration
d. Over the lease term
3. Lease payments under an operating lease shall be recognized as an income by the
lessor on
a. Straight line basis over the lease term
b. Diminishing balance basis
c. Sum of unit’s basis
d. Cash basis
4. In an operating lease recorded by the lessor, the equal monthly rental payments
should be
a. Recorded as reduction of depreciation.
b. Allocated between reduction in lease receivable and interest expense.
c. Recorded as reduction in the lease receivable.
d. Recorded as a rental income.
5. Which statement characterizes an operating lease?
a. The lessee records depreciation and interest.
b. The lessee records a lease obligation
c. The lessor transfers title of the underlying asset to the lessee for the duration
of the lease term.
d. The lessor records depreciation and lease revenue.
QUESTION 55-6 Multiple choice (IFRS)
1. The classification of a lease is normally carried out
a. At the end of the lease term
b. After a "cooling off" period of one year
c. At the inception of the lease
d. When the entity deems it necessary
2. The classification of a lease on the part of lessor as either operating or finance
lease is based on
a. The length of the lease.
b. The transfer of the risks and rewards of ownership.
c. The lease payments being at least 50% of fair value.
d. The economic life of the underlying asset.
3. All of the following situations would prima facie lead to a lease being classified as a
finance lease, except
a. Transfer of ownership to the lessee.
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b. Option to purchase at a value below the fair value of
c. the underlying asset. The lease term is for a major part of the asset's life.
d. The present value of the lease payments is 50% of the fair value of
the asset.
4. In case of lease of land and building, the lease payments should be split
a. According to relative fair value of the two elements.
b. Based on the useful life of the two elements.
c. Using the sum of digits method.
d. According to method devised by the entity.
5. Where there is a lease of land and building and the title to the land is not
transferred, generally the lease is treated as if
a. The land is finance lease.
b. The land is finance and the building is operating.
c. The land is operating and the building is finance.
d. The land and building are an operating lease.
QUESTION 55-7 Multiple choice (IAA)
1. The accounting concept that is principally used to clave leases are operating and
finance on the part of lesNar
a. Substance over form
b. Prudence
c. Neutrality
d. Completeness
2. Which is correct regarding lease capitalization criteria
a. The lease transfers ownership to the lessor.
b. The lease contains a purchase option
c. The lease term is equal to at least 75% life of the underlying asset.
d. The lease payments are 90% of fair value of asset
3. Which condition would require lease capitalization?
a. The lease does not transfer title to the lessee.
b. There is an uncertain purchase option.
c. The present value of the lease payments is significantly more than
the fair value of the asset.
d. The lease term is below the useful life of asset
4. One of the four determinative criteria for a finance lease specifies that the lease
term be equal to or greater than
a. The economic life of the underlying asset.
b. 90 percent of the economic life of the asset.
c. 75 percent of the economic life of the asset.
d. 50 percent of the economic life of the asset.
5. One of the four determinative criteria for a finance lease is that the present value at
the beginning of the lease term of the lease payments equals or exceeds
a. The fair value of the underlying asset
b. 90 percent of the fair value of the underlying asset
c. 75 percent of the fair value of the underlying asset
d. 50 percent of the fair value of the underlying asset
QUESTION 55-8 Multiple choice (IFRS)
1. Gross investment in the lease is equal to
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a. Sum of the lease payments receivable by a lessor under a finance
lease and any unguaranteed residual value accruing to the lessor.
b. The lease payments under a finance lease of the lessor.
c. Present value of lease payments under a finance lease of the lessor and any
unguaranteed residual value.
d. Present value of the lease payments under a finance lease of the lessor.
2. Net investment in a direct financing lease is equal to
a. Cost of the asset
b. Cost of the asset plus initial direct cost paid by the lessor
c. Cost of the asset minus guaranteed residual value
d. Cost of the asset plus unguaranteed residual value
3. Which is the correct accounting treatment for a finance lease in the accounts of a
lessor?
a. Treat as a noncurrent asset equal to net investment in lease and recognize all
finance payments in income statement.
b. Treat as a receivable equal to gross amount receivable on lease and recognize
finance payments in cash by reducing debt.
c. Treat as a receivable equal to net investment in the lease and
recognize finance payments by reducing debt and taking interest to
income statement.
d. Treat as a receivable equal to net investment in the lease and recognize
finance payments in cash by reduction of debt.
4. Lessors shall recognize asset held under a finance lease as a receivable at an
amount equal to the
a. Gross investment in the lease
b. Net investment in the lease
c. Gross rentals
d. Residual value, whether guaranteed or unguaranteed
5. The lease receivable in a direct financing lease is
a. The gross amount of lease payments.
b. The difference between the gross rentals and the fair value of the leased
asset.
c. The present value of lease payments.
d. The cost of the asset less any accumulated depreciation
6. The primary difference between a direct financing lease and a sales type lease is
the
a. Manner in which rental collections are recorded as
b. Depreciation recorded each year by the lessor.
c. Recognition of the manufacturer or dealer profit at rental income.
the inception of the lease.
d. Allocation of initial direct costs incurred by the lessor over the lease term.
7. All of the following would be included in the lease receivable, except
a. Guaranteed residual value
b. Unguaranteed residual value
c. A purchase option that is reasonably certain
d. All would be included
8. Under a direct financing lease, the excess of aggregate rentals over the cost of the
underlying asset should be recognized as income of the lessor
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a. In increasing amounts during the term of the lease
b. In constant amounts during the term of the lease
c. In decreasing amounts during the term of the lease,
d. After the cost of the underlying asset has been fully recovered through rentals
9. In a direct financing lease, unearned interest income
a. Should be amortized over the lease term using the interest method.
b. Should be amortized over the lease term using the straight-line method.
c. Does not arise.
d. Should be recognized at the lease expiration.
10. Which statement is true regarding initial direct costs incurred by the lessor?
a. In a direct financing lease, initial direct costs are added to the net investment
in the lease.
b. In a sales type lease, initial direct costs are expensed as component of cost of
goods sold.
c. In an operating lease, initial direct costs incurred by the lessor are deferred
and allocated over the lease term.
d. All of these statements are correct.
QUESTION 55-9 Multiple choice (IFRS)
1. Under a sales type lease, what is the meaning of grows investment in the lease?
a. Present value of lease payments
b. Absolute amount of lease payments
c. Present value of lease payments plus present value
d. Sum of absolute amount of lease payments of unguaranteed residual
value unguaranteed residual value
2. Net investment in a sales type lease is equal to
a. Gross investment in the lease less unearned finance income
b. Cost of the underlying asset
c. The lease payments
d. The lease payments less unguaranteed residual value
3. Which statement characterizes a sales type lease?
a. The lessor recognizes only interest revenue over the useful life of the asset.
b. The lessor recognizes only interest revenue over the
c. The lessor recognizes a dealer profit at lease inception lease term.
and interest revenue over the lease term.
d. The lessor recognizes a dealer profit at lease inception and interest revenue
over the useful life of the asset.
4. The profit on a finance lease transaction for lessors who are manufacturers or
dealers should
a. Not be recognized separately from finance income
b. Be recognized in the normal way on the transaction
c. Only be recognized at the end of the lease term
d. Be recognized on a straight line over the lease term
5. In a sales type lease, interest revenue should be
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a. Ignored
b. Recognized over the lease term using interest method
c. Recognized over the lease term using straight, e
d. Recognized in full as revenue at the inception of lease
6. The sales revenue recognized at the commencement of the lease by a
manufacturer or dealer lessor is the
a. Fair value of the asset
b. Present value of the lease payments Fair value of the asset or present value
c. of the lease payments, whichever is lower.
d. Fair value of the asset or present value of the lease payments, whichever is
higher.
7. What is the treatment of unguaranteed residual value in determining the cost of
goods sold under a sales type lease?
a. The unguaranteed residual value is ignored.
b. The unguaranteed residual value is added to the cost of the underlying asset.
c. The unguaranteed residual value is deducted from the cost of the underlying
asset at absolute amount.
d. The unguaranteed residual value is deducted from the cost of the
underlying asset at present value.
8. The excess of the fair value of underlying asset at the inception of the lease over
the carrying amount shall be recognized by the dealer lessor as
a. Unearned income from a sales type lease
b. Unearned income from a direct financing lease
c. Manufacturer profit from a sales type lease
d. Manufacturer profit from a direct financing lease
CHAPTER 13
CURRENT LIABILITIES AND CONTINGENCIES
TRUE-FALSE—Conceptual
Answer
No.
Description
F
1.
Zero-interest-bearing note payable.
F
2.
Dividends in arrears.
T
3.
Examples of unearned revenues.
T
4.
Reporting discount on Notes Payable.
F
5.
Currently maturing long-term debt.
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F
6.
Excluding short-term debt refinanced.
T
7.
Accounting for sales tax collected.
F
8.
Accounting for sick pay.
T
9.
Social security taxes as liabilities.
F
10.
Definition of accumulation rights.
T
11.
Recognizing compensated absences expense.
F
12.
Accruing estimated loss contingency.
T
13.
Disclosing gain contingencies.
F
14.
Sales-type warranty profit.
T
15.
Fair value of asset retirement obligation.
T
16.
Reporting a litigation liability.
F
17.
Expense warranty approach.
F
18.
Acid-test ratio components.
F
19.
Affect on current ratio.
T
20.
Reporting current liabilities.
MULTIPLE CHOICE—Conceptual
Answer
No.
Description
d
21.
Definition of a liability.
d
22.
Nature of current liabilities.
a
23.
Recording of accounts payable.
a
24.
Classification of notes payable.
b
25.
Classification of discounts on notes payable.
d
26.
Identify current liability.
c
27.
Bonds reported as current liability.
d
28.
Identify item which is not a current liability.
c
29.
Dividends reported as current liability.
d
30.
Classification of stock dividends distributable.
c
31.
Identify item which is not a current liability.
d
32.
Identify current liability.
d
33.
Short-term obligations expected to be refinanced.
d
34.
Ability to consummate refinancing of short-term obligations.
d
35.
Determine what is a liability.
a
36.
Classification of sales taxes.
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MULTIPLE CHOICE—Conceptual (cont.)
Answer
No.
Description
d
S
37.
Disclosure for short-term debt refinanced.
b
S
Vested rights vs. accumulated rights.
d
P
39.
Deductions in computing net pay.
d
40.
Employer's payroll tax expense.
d
41.
Accrual of a liability for compensated absences.
c
42.
Accrual of a liability for compensated absences.
d
43.
Accrual of a liability for compensated absences.
d
44.
Disclosure of a gain contingency.
d
45.
Disclosure of contingencies.
b
46.
Accrual of loss contingency.
a
47.
Litigation and loss contingencies.
c
48.
Accrual of a contingent liability.
d
49.
Source of a contingent liability.
b
50.
Asset retirement obligation.
c
51.
Asset retirement obligation.
c
52.
Classification of warranty liability.
c
53.
Liability accrual due to governmental action.
a
54.
Accrual of product warranties.
38.
b
P
Determining loss amount to report.
d
S
Reporting lawsuit loss and liability.
d
S
Accrual method for warranty costs.
c
S
Presentation of current liabilities.
a
P
59.
Current ratio formula.
d
60.
Disclosure of accrued liabilities.
d
61.
Acid-test ratio elements.
d
*62.
55.
56.
57.
58.
Methods of calculating employee bonuses.
P
These questions also appear in the Problem-Solving Survival Guide.
S
These questions also appear in the Study Guide.
*This topic is dealt with in an Appendix to the chapter.
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SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Ite
m
Typ
e
Ite
m
Typ
e
Ite
m
Typ
e
Ite
m
Typ
e
Ite
m
Ty
pe
Ite
m
Typ
e
Ite
m
Ty
pe
Learning Objective 1
1.
TF
21.
MC
25.
MC
29.
MC
63.
MC
102.
MC
2.
TF
22.
MC
26.
MC
30.
MC
64.
MC
111.
E
3.
TF
23.
MC
27.
MC
31.
MC
100.
MC
118.
P
4.
TF
24.
MC
28.
MC
32.
MC
101.
MC
36.
Learning Objective 2
MC
66. MC
69.
MC
103.
MC
37.
MC
67.
MC
70.
MC
119.
P
65.
MC
68.
MC
71.
MC
MC
41.
Learning Objective 3
MC
73. MC
77.
MC
112.
E
113.
E
5.
TF
33.
MC
6.
TF
34.
MC
7.
TF
35.
MC
35.
S
8.
TF
9.
TF
S
MC
42.
MC
74.
MC
78.
MC
10.
TF
P
39.
MC
43.
MC
75.
MC
104.
MC
11.
TF
40.
MC
72.
MC
76.
MC
105.
MC
38.
Learning Objective 4
12.
TF
35.
MC
45.
MC
47.
MC
49.
MC
13.
TF
44.
MC
46.
MC
48.
MC
114.
E
MC
107.
MC
120.
P
121.
P
14.
TF
52.
MC
79.
Learning Objective 5
MC
85. MC
91.
15.
TF
53.
MC
80.
MC
86.
MC
92.
MC
108.
MC
16.
TF
54.
MC
81.
MC
87.
MC
93.
MC
109.
MC
17.
TF
P
MC
82.
MC
88.
MC
94.
MC
110.
MC
50.
MC
S
MC
83.
MC
89.
MC
95.
MC
115.
E
51.
MC
S
MC
84.
MC
90.
MC
106.
MC
116.
E
120.
P
55.
56.
57.
Learning Objective 6
18.
TF
19.
TF
62.
Note:
MC
20.
S
58.
97.
TF
MC
MC
P
59.
MC
61.
MC
118.
P
60.
MC
96.
MC
119.
P
98.
Learning Objective *7
MC
99. MC
117.
E
TF = True-False
E = Exercise
MC = Multiple Choice
P = Problem
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TRUE-FALSE—Conceptual
1. A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense being
recognized.
2. Dividends in arrears on cumulative preferred stock should be recorded as a current liability.
3. Magazine subscriptions and airline ticket sales both result in unearned revenues.
4. Discount on Notes Payable is a contra account to Notes Payable on the balance sheet.
5. All long-term debt maturing within the next year must be classified as a current liability on the balance sheet.
6. A short-term obligation can be excluded from current liabilities if the company intends to refinance it on a longterm basis.
7. Many companies do not segregate the sales tax collected and the amount of the sale at the time of the sale.
8. A company must accrue a liability for sick pay that accumulates but does not vest.
9. Companies report the amount of social security taxes withheld from employees as well as the companies’
matching portion as current liabilities until they are remitted.
10. Accumulated rights exist when an employer has an obligation to make payment to an employee even after
terminating his employment.
11. Companies should recognize the expense and related liability for compensated absences in the year earned by
employees.
12. Companies should accrue an estimated loss from a loss contingency if information available prior to the
issuance of financial statements indicates that it is probable that a liability has been incurred.
13. A company discloses gain contingencies in the notes only when a high probability exists for realizing them.
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14. The expected profit from a sales type warranty that covers several years should all be recognized in the period
the warranty is sold.
15. The fair value of an asset retirement obligation is recorded as both an increase to the related asset and a
liability.
16. The cause for litigation must have occurred on or before the date of the financial statements to report a
liability in the financial statements.
17. Under the expense warranty approach, companies charge warranty costs only to the period in which they
comply with the warranty.
18. Prepaid insurance should be included in the numerator when computing the acid-test (quick) ratio.
19. Paying a current liability with cash will always reduce the current ratio.
20. Current liabilities are usually recorded and reported in financial statements at their full maturity value.
True False Answers—Conceptual
Item
Ans.
1.
F
2.
Item
Ans.
Item
Ans.
Item
Ans.
6.
F
11.
T
16.
T
F
7.
T
12.
F
17.
F
3.
T
8.
F
13.
T
18.
F
4.
T
9.
T
14.
F
19.
F
5.
F
10.
F
15.
T
20.
T
MULTIPLE CHOICE—Conceptual
21.
Liabilities are
a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally accepted
accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the future.
D.
22.
Which of the following is a current liability?
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a.
b.
c.
d.
A long-term debt maturing currently, which is to be paid with cash in a sinking fund
A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue
A long-term debt maturing currently, which is to be converted into common stock
None of these
B
23.
Which of the following is true about accounts payable?
1. Accounts payable should not be reported at their present value.
2. When accounts payable are recorded at the net amount, a Purchase Discounts account will be
used.
3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account
will be used.
a.
b.
c.
d.
1
2
3
Both 2 and 3 are true.
A
24.
Among the short-term obligations of Lance Company as of December 31, the balance sheet date, are notes
payable totaling $250,000 with the Madison National Bank. These are 90-day notes, renewable for another
90-day period. These notes should be classified on the balance sheet of Lance Company as
a.
b.
c.
d.
current liabilities.
deferred charges.
long-term liabilities.
intermediate debt.
A
25.
Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the balance sheet.
c. When there is a discount on a note payable, the effective interest rate is higher than the stated
discount rate.
d. All of these are true.
B
26.
Which of the following may be a current liability?
a.
b.
c.
d.
Withheld Income Taxes
Deposits Received from Customers
Deferred Revenue
All of these
D
27.
Which of the following items is a current liability?
a. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in
three months.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
d. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the
refunding issue.
C
28.
Which of the following should not be included in the current liabilities section of the balance sheet?
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a.
b.
c.
d.
Trade notes payable
Short-term zero-interest-bearing notes payable
The discount on short-term notes payable
All of these are included
D
29.
Which of the following is a current liability?
a.
b.
c.
d.
Preferred dividends in arrears
A dividend payable in the form of additional shares of stock
A cash dividend payable to preferred stockholders
All of these
C
30.
Stock dividends distributable should be classified on the
a.
b.
c.
d.
income statement as an expense.
balance sheet as an asset.
balance sheet as a liability.
balance sheet as an item of stockholders' equity.
A
31.
Of the following items, the only one which should not be classified as a current liability is
a.
b.
c.
d.
current maturities of long-term debt.
sales taxes payable.
short-term obligations expected to be refinanced.
unearned revenues.
C
32.
An account which would be classified as a current liability is
a. dividends payable in the company's stock.
b. accounts payable—debit balances.
c. losses expected to be incurred within the next twelve months in excess of the company's
insurance coverage.
d. none of these.
D
33.
Which of the following statements is correct?
a. A company may exclude a short-term obligation from current liabilities if the firm intends to
refinance the obligation on a long-term basis.
b. A company may exclude a short-term obligation from current liabilities if the firm can
demonstrate an ability to consummate a refinancing.
c. A company may exclude a short-term obligation from current liabilities if it is paid off after the
balance sheet date and subsequently replaced by long-term debt before the balance sheet is
issued.
d. None of these.
D
34.
The ability to consummate the refinancing of a short-term obligation may be demon- strated by
a. actually refinancing the obligation by issuing a long-term obligation after the date of the balance
sheet but before it is issued.
b. entering into a financing agreement that permits the enterprise to refinance the debt on a longterm basis.
c. actually refinancing the obligation by issuing equity securities after the date of the balance sheet
but before it is issued.
d. all of these.
D
35.
Which of the following statements is false?
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a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance
the obligation on a long-term basis and demonstrates an ability to complete the refinancing.
b. Cash dividends should be recorded as a liability when they are declared by the board of directors.
c. Under the cash basis method, warranty costs are charged to expense as they are paid.
d. FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the
employer will eventually remit the amounts withheld to the appropriate taxing authority.
D
36.
Which of the following is not a correct statement about sales taxes?
a. Sales taxes are an expense of the seller.
b. Many companies record sales taxes in the sales account.
c. If sales taxes are included in the sales account, the first step to find the amount of sales taxes is to divide
sales by 1 plus the sales tax rate.
d. All of these are true.
A
S
37.
If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the
financial statements describing this event should include all of the following information except
a.
b.
c.
d.
a general description of the financing arrangement.
the terms of the new obligation incurred or to be incurred.
the terms of any equity security issued or to be issued.
the number of financing institutions that refused to refinance the debt, if any.
D
S
38.
In accounting for compensated absences, the difference between vested rights and accumulated rights is
a. vested rights are normally for a longer period of employment than are accumulated rights.
b. vested rights are not contingent upon an employee's future service.
c. vested rights are a legal and binding obligation on the company, whereas accumulated rights
expire at the end of the accounting period in which they arose.
d. vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights
do not represent monetary compensation.
B
P
39.
An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax
withholdings and the employee's
a.
b.
c.
d.
portion of FICA taxes, and unemployment taxes.
and employer's portion of FICA taxes, and unemployment taxes.
portion of FICA taxes, unemployment taxes, and any voluntary deductions.
portion of FICA taxes, and any voluntary deductions.
D
40.
Which of these is not included in an employer's payroll tax expense?
a.
b.
c.
d.
F.I.C.A. (social security) taxes
Federal unemployment taxes
State unemployment taxes
Federal income taxes
D
41.
Which of the following is a condition for accruing a liability for the cost of compensation for future absences?
a. The obligation relates to the rights that vest or accumulate.
b. Payment of the compensation is probable.
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c. The obligation is attributable to employee services already performed.
d. All of these are conditions for the accrual.
D
42.
A liability for compensated absences such as vacations, for which it is expected that employees will be paid,
should
a.
b.
c.
d.
be accrued during the period when the compensated time is expected to be used by employees.
be accrued during the period following vesting.
be accrued during the period when earned.
not be accrued unless a written contractual obligation exists.
C
43.The amount of the liability for compensated absences should be based on
1. the current rates of pay in effect when employees earn the right to compensated absences.
2. the future rates of pay expected to be paid when employees use compensated time.
3. the present value of the amount expected to be paid in future periods.
a.
b.
c.
d.
1.
2.
3.
Either 1 or 2 is acceptable.
D
44.
Which of the following is the proper way to report a gain contingency?
a.
b.
c.
d.
As an accrued amount.
As deferred revenue.
As an account receivable with additional disclosure explaining the nature of the contingency.
As a disclosure only.
D
45.
Which of the following contingencies need not be disclosed in the financial statements or the notes thereto?
a.
b.
c.
d.
Probable losses not reasonably estimable
Environmental liabilities that cannot be reasonably estimated
Guarantees of indebtedness of others
All of these must be disclosed.
D
46.
Which of the following sets of conditions would give rise to the accrual of a contingency under current
generally accepted accounting principles?
a.
b.
c.
d.
Amount of loss is reasonably estimable and event occurs infrequently.
Amount of loss is reasonably estimable and occurrence of event is probable.
Event is unusual in nature and occurrence of event is probable.
Event is unusual in nature and event occurs infrequently.
B
47.
Mark Ward is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On
August 10, 2007, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned.
Ward had had a dispute with the Railroad for several years concerning the ownership of a small parcel of
land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the
land to Ward in exchange for a release of his right to reimbursement for the loss he has sustained from the
fire. Ward appears inclined to accept the Railroad's offer. The Railroad's 2007 financial statements should
include the following related to the incident:
a.
b.
c.
d.
recognition of a loss and creation of a liability for the value of the land.
recognition of a loss only.
creation of a liability only.
disclosure in note form only.
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A
48.
A contingency can be accrued when
a. it is certain that funds are available to settle the disputed amount.
b. an asset may have been impaired.
c. the amount of the loss can be reasonably estimated and it is probable that an asset has been
impaired or a liability incurred.
d. it is probable that an asset has been impaired or a liability incurred even though the amount of
the loss cannot be reasonably estimated.
C
49.
A contingent liability
a.
b.
c.
d.
definitely exists as a liability but its amount and due date are indeterminable.
is accrued even though not reasonably estimated.
is not disclosed in the financial statements.
is the result of a loss contingency.
D
50.
To record an asset retirement obligation (ARO), the cost associated with the ARO is
a.
b.
c.
d.
expensed.
included in the carrying amount of the related long-lived asset.
included in a separate account.
none of these.
B
51.
A company is legally obligated for the costs associated with the retirement of a long-lived asset
a.
b.
c.
d.
only when it hires another party to perform the retirement activities.
only if it performs the activities with its own workforce and equipment.
whether it hires another party to perform the retirement activities or performs the activities itself.
when it is probable the asset will be retired.
C
52.
Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a
relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against
defects for three years that has resulted in material but rather stable warranty repair and replacement costs.
Any liability for the warranty
a.
b.
c.
d.
should be reported as long-term.
should be reported as current.
should be reported as part current and part long-term.
need not be disclosed.
C
53.
Lopez Corporation, a manufacturer of household paints, is preparing annual financial statements at
December 31, 2007. Because of a recently proven health hazard in one of its paints, the government has
clearly indicated its intention of having Lopez recall all cans of this paint sold in the last six months. The
management of Lopez estimates that this recall would cost $800,000. What accounting recognition, if any,
should be accorded this situation?
a.
b.
c.
d.
No recognition
Note disclosure only
Operating expense of $800,000 and liability of $800,000
Appropriation of retained earnings of $800,000
C
54.
Information available prior to the issuance of the financial statements indicates that it is probable that, at the
date of the financial statements, a liability has been incurred for obligations related to product warranties. The
amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss
contingency should be
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a.
b.
c.
d.
accrued.
disclosed but not accrued.
neither accrued nor disclosed.
classified as an appropriation of retained earnings.
A
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P
55.
Mayberry Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a
range of outcomes. No single amount within the range is a better estimate than any other amount. The
amount of loss accrual should be
a.
b.
c.
d.
zero.
the minimum of the range.
the mean of the range.
the maximum of the range.
D
S
56.
Marx Company becomes aware of a lawsuit after the date of the financial statements, but before they are
issued. A loss and related liability should be reported in the financial statements if the amount can be
reasonably estimated, an unfavorable outcome is highly probable, and
a.
b.
c.
d.
the Marx Company admits guilt.
the court will decide the case within one year.
the damages appear to be material.
the cause for action occurred during the accounting period covered by the financial statements.
D
S
57.
Use of the accrual method in accounting for product warranty costs
a. is required for federal income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are immaterial.
c. finds the expense account being charged when the seller performs in compliance with the
warranty.
d. represents accepted practice and should be used whenever the warranty is an integral and
inseparable part of the sale.
D
S
58.
Which of the following is not acceptable treatment for the presentation of current liabilities?
a.
b.
c.
d.
Listing current liabilities in order of maturity
Listing current liabilities according to amount
Offsetting current liabilities against assets that are to be applied to their liquidation
Showing current liabilities immediately below current assets to obtain a presentation of working
capital
C
P
59.
The ratio of current assets to current liabilities is called the
a.
b.
c.
d.
current ratio.
acid-test ratio.
current asset turnover ratio.
current liability turnover ratio.
A
60.
Accrued liabilities are disclosed in financial statements by
a.
b.
c.
d.
a footnote to the statements.
showing the amount among the liabilities but not extending it to the liability total.
an appropriation of retained earnings.
appropriately classifying them as regular liabilities in the balance sheet.
D
61.
The numerator of the acid-test ratio consists of
a.
b.
c.
d.
total current assets.
cash and marketable securities.
cash and net receivables.
cash, marketable securities, and net receivables.
D
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*62.
Which of the following is not a permissible method of calculating a bonus to an employee?
a. The bonus is based on income before deductions for the bonus and income taxes.
b. The bonus is based on income after deduction of the bonus but before deduction of income
taxes.
c. The bonus is based on income after deductions for the bonus and income taxes.
d. All of these are permissible.
D
Multiple Choice Answers—Conceptual
Item
Ans.
21.
22.
23.
24.
25.
26.
d
d
a
a
b
d
Item
27.
28.
29.
30.
31.
32.
Ans.
c
d
c
d
c
d
Item
33.
34.
35.
36.
37.
38.
Ans.
d
d
d
a
d
b
Item
39.
40.
41.
42.
43.
44.
Ans.
d
d
d
c
d
d
Item
45.
46.
47.
48.
49.
50.
Ans.
d
b
a
c
d
b
Item
Ans.
Item
Ans.
c
c
c
a
b
d
57.
58.
59.
60.
61.
*62.
d
c
a
d
d
d
51.
52.
53.
54.
55.
56.
Solutions to those Multiple Choice questions for which the answer is “none of these.”
22.
A long-term debt maturing currently to be paid with current assets is a current liability.
32.
Accounts Payable, Wages Payable, etc., would be examples of current liabilities.
33.
The company must both intend to refinance the obligation on a long-term basis and demonstrate the ability
to consummate the refinancing to exclude a short-term obligation from current liabilities.
CHAPTER 10—DEBT FINANCING
MULTIPLE CHOICE
1. For a liability to exist,
a. a past transaction or event must have occurred.
b. the exact amount must be known.
c. the identity of the party owed must be known.
d. an obligation to pay cash in the future must exist.
ANS:
A
OBJ:
LO 1
2. The most conceptually appropriate method of valuing a liability under the historical cost basis is to
a. discount the amount of expected cash outlfows that are necessary to liquidate the
liability using the market rate of interest at the date the liability was initially incurred.
b. discount the amount of expected cash outlfows that are necessary to liquidate the
liability using the market rate of interest at the date financial statements are prepared
subsequent to issuance.
c. record as a liability the amount of cash or cash-equivalent value that the company would
be required to pay to eliminate the liability in the ordinary course of business on the date
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of the financial statements.
d. record as a liability the amount of cash or cash-equivalent proceeds actually received
when a liability was incurred.
ANS:
A
OBJ:
LO 1
3. Which of the following represents a liability?
a. The obligation to pay for goods that a company expects to order from suppliers next year.
b. The obligation to provide goods that customers have ordered and paid for during the
current year.
c. The obligation to pay interest on a five-year note payable that was issued the last day of
the current year.
d. The obligation to distribute share of a company's own common stock next year as a result
of a stock dividend declared near the end of the current year.
ANS:
B
OBJ:
LO 1
4. A short-term note payable with no stated rate of interest should be
a. recorded at maturity value.
b. recorded at the face amount.
c. discounted to its present value.
d. reported separately from other short-term notes payable.
ANS:
C
OBJ:
LO 2
5. At December 31, 2005, Jenkins Sales & Service has a $100,000, 120-day note payable outstanding. The company has
followed the policy of replacing the note rather than repaying it over the last three years. The company's treasurer
says that this policy is expected to continue indefinitely, and the arrangement is acceptable to the bank to which the
note was issued. The proper classification of the note on the December 31, 2005, balance sheet is
a. dependent on the intention of management.
b. dependent on the actual ability to refinance.
c. current liability, unless specific refinancing criteria are met.
d. noncurrent liability.
ANS:
C
OBJ:
LO 2
6. Which of the following does not meet the FASB's definition of a liability?
a. The signing of a three-year employment contract at a fixed annual salary
b. An obligation to provide goods or services in the future
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c. A note payable with no specified maturity date
d. An obligation that is estimated in amount
ANS:
A
OBJ:
LO 1
7. Bruemmer Co. has a $20,000, two-year note payable to Second City Bank that matures June 30, 2005. Bruemmer's
management intends to refinance the note for an additional three years and is negotiating a financing agreement
with Second City. In order to exclude this note from current liabilities on its December 31, 2004, balance sheet,
Bruemmer Co. must
a. pay off the note and complete the refinancing before the 2004 financial statements are
issued.
b. demonstrate an ability to refinance the obligation before the 2004 financial statements
are issued.
c. complete the refinancing before the balance sheet date.
d. complete the refinancing before the note's maturity date.
ANS:
B
OBJ:
LO 2
8. In theory (disregarding any other marketplace variables), the proceeds from the sale of a bond will be equal to
a. the face amount of the bond.
b. the present value of the bond maturity value plus the present value of the interest
payments to be made during the life of the bond.
c. the face amount of the bond plus the present value of the interest payments made
during the life of the bond.
d. the sum of the face amount of the bond and the periodic interest payments.
ANS:
B
OBJ:
LO 4
9. Kenwood Co. neglected to amortize the premium on outstanding ten-year bonds payable. What is the effect of the
failure to record premium amortization on interest expense and bond carrying value, respectively?
a. Understate; understate
b. Understate; overstate
c. Overstate; overstate
d. Overstate; understate
ANS:
C
OBJ:
LO 4
10. Unamortized debt premium should be reported on the balance sheet of the issuer as a
a. direct addition to the face amount of the debt.
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b. direct addition to the present value of the debt.
c. deferred credit.
d. deduction from the issue costs.
ANS:
A
OBJ:
LO 4
11. Which one of the following is true when the effective-interest method of amortizing bond discount is used?
a. Interest expense as a percentage of the bonds' book value varies from period to period.
b. Interest expense remains constant for each period.
c. Interest expense increases each period.
d. The interest rate decreases each period.
ANS:
C
OBJ:
LO 4
12. Scott Inc. neglected to amortize the discount on outstanding ten-year bonds payable. What is the effect of the failure
to record discount amortization on interest expense and bond carrying value, respectively?
a. Understate; understate
b. Understate; overstate
c. Overstate; overstate
d. Overstate; understate
ANS:
A
OBJ:
LO 4
13. Bond discount should be presented in the financial statements of the issuer as a(n)
a. contra liability.
b. adjunct liability.
c. deferred charge.
d. contra asset.
ANS:
A
OBJ:
LO 4
14. Any gains or losses from the early extinguishment of debt should be
a. recognized in income of the period of extinguishment.
b. treated as an increase or decrease in Paid-In Capital.
c. allocated between a portion that is an increase (decrease) in Paid-In Capital and a portion
that is recognized in current income.
d. amortized over the remaining original life of the extinguished debt.
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ANS:
A
OBJ:
LO 4
15. When bonds are retired prior to maturity with proceeds from a new bond issue, gain or loss from the early
extinguishment of debt, if material, should be
a. amortized over the remaining original life of the retired bond issue.
b. amortized over the life of the new bond issue.
c. recognized as an extraordinary item in the period of extinguishment.
d. recognized in income from continuing operations in the period of extinguishment.
ANS:
D
OBJ:
LO 4
16. When bonds are redeemed by the issuer prior to their maturity date, any material gain or loss on the redemption, if
material, is
a. amortized over the period remaining to maturity and reported as an extraordinary item in
the income statement.
b. amortized over the period remaining to maturity and reported as part of income from
continuing operations in the income statement.
c. reported in the income statement as an extraordinary item in the period of redemption.
d. reported in the income statement as part of income from continuing operations in the
period of redemption.
ANS:
D
OBJ:
LO 4
17. A variable interest entity (VIE) is required to be consolidated by an entity holding the largest voting interest in the VIE
if the equity interest provided by third parties is
a. less than 3% of the total assets of the VIE.
b. less than 5% of the total assets of the VIE.
c. less than 10% of the total assets of the VIE.
d. less than 20% of the total assets of the VIE.
ANS:
C
OBJ:
LO 4
18. The market price of a bond issued at a discount is the present value of its principal amount at the market (effective)
rate of interest
a. plus the present value of all future interest payments at the market (effective) rate of
interest.
b. plus the present value of all future interest payments at the rate of interest stated on the
bond.
c. minus the present value of all future interest payments at the market (effective) rate of
interest.
d. minus the present value of all future interest payments at the rate of interest stated on
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the bond.
ANS:
A
OBJ:
LO 4
19. When the interest payment dates of a bond are May 1 and November 1, and the bond is issued on June 1, the
amount of interest expense at December 31 of the year of issuance would be for
a. two months.
b. six months.
c. seven months.
d. eight months.
ANS:
C
OBJ:
LO 4
20. For a bond issue that sells for more than its par value, the market rate of interest is
a. dependent on the rate stated on the bond.
b. equal to the rate stated on the bond.
c. less than the rate stated on the bond.
d. higher than the rate stated on the bond.
ANS:
C
OBJ:
LO 4
21. How would the carrying value of a bond payable be affected by amortization of each of the following?
Discount
Premium
a.
No effect
No effect
b.
Increase
No effect
c.
Increase
Decrease
d.
Decrease
Increase
ANS:
C
OBJ:
LO 4
22. For the issuer of ten-year bonds, the amount of amortization using the effective-interest method would increase
each year if the bonds were sold at a
Discount
Premium
a.
No
No
b.
Yes
Yes
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c.
No
Yes
d.
Yes
No
ANS:
B
OBJ:
LO 4
23. Outstanding bonds payable are converted into common stock. Under either the book value or market value method,
the same amount would be debited to
Bonds
Payable
Premium on
Bonds Payable
a.
No
No
b.
No
Yes
c.
Yes
No
d.
Yes
Yes
ANS:
D
OBJ:
LO 4
OBJ:
LO 4
24. Debentures are
a. unsecured bonds.
b. secured bonds.
c. ordinary bonds.
d. serial bonds.
ANS:
A
25. Callable bonds
a. can be redeemed by the issuer at some time at a pre-specified price.
b. can be converted to stock.
c. mature in a series of payments.
d. None of the above.
ANS:
A
OBJ:
LO 4
26. The issuance price of a bond does not depend on the
a. face value of the bond.
b. riskiness of the bond.
c. method used to amortize the bond discount or premium.
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d. effective interest rate.
ANS:
C
OBJ:
LO 4
27. The effective interest rate on bonds is higher than the stated rate when bonds sell
a. at face value.
b. above face value.
c. below face value.
d. at maturity value.
ANS:
C
OBJ:
LO 4
28. Bonds usually sell at a discount when
a. investors are willing to invest in the bonds at the stated interest rate.
b. investors are willing to invest in the bonds at rates that are lower than the stated interest
rate.
c. investors are willing to invest in the bonds only at rates that are higher than the stated
interest rate.
d. a capital gain is expected.
ANS:
C
OBJ:
LO 4
29. Bonds usually sell at a premium
a. when the market rate of interest is greater than the stated rate of interest on the bonds.
b. when the stated rate of interest on the bonds is greater than the market rate of interest.
c. when the price of the bonds is greater than their maturity value.
d. in none of the above cases.
ANS:
B
OBJ:
LO 4
30. The effective interest rate on bonds is lower than the stated rate when bonds sell
a. at maturity value.
b. above face value.
c. below face value.
d. at face value.
ANS:
B
OBJ:
LO 4
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31. To compute the price to pay for a bond, you use
a. only the present value of $1 concept.
b. only the present value of an annuity of $1 concept.
c. both a and b.
d. neither a nor b.
ANS:
C
OBJ:
LO 4
32. Which of the following is true of a premium on bonds payable?
a. It is a contra-stockholders' equity account.
b. It is an account that appears only on the books of the investor.
c. It increases when amortization entries are made until it reaches its maturity value.
d. It decreases when amortization entries are made until its balance reaches zero at the
maturity date.
ANS:
D
OBJ:
LO 4
33. The net amount of a bond liability that appears on the balance sheet is the
a. call price of the bond plus bond discount or minus bond premium.
b. face value of the bond plus related premium or minus related discount.
c. face value of the bond plus related discount or minus related premium.
d. maturity value of the bond plus related discount or minus related premium.
ANS:
B
OBJ:
LO 4
34. When interest expense is calculated using the effective-interest amortization method, interest expense (assuming
that interest is paid annually) always equals the
a. actual amount of interest paid.
b. book value of the bonds multiplied by the stated interest rate.
c. book value of the bonds multiplied by the effective interest rate.
d. maturity value of the bonds multiplied by the effective interest rate.
ANS:
C
OBJ:
LO 4
35. When a company issues bonds, how are unamortized bond discounts and premiums classified on the balance sheet?
a. Bond discounts are classified as assets, and bond premiums are classified as contra-asset
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accounts.
b. Bond discounts are classified as expenses, and bond premiums are classified as revenues.
c. Bond premiums are classified as additions to, and bond discounts are classified as
deductions from, the face value of bonds.
d. None of the above.
ANS:
C
OBJ:
LO 4
36. The effective-interest method of amortizing bond premiums
a. is too complicated for practical use.
b. recognizes the time value of money.
c. is another name for the straight-line method.
d. is needed to determine the amount of cash to be paid to bondholders at each interest
date.
ANS:
B
OBJ:
LO 4
37. The net amount required to retire a bond before maturity (assuming no call premium and constant interest rates) is
the
a. issuance price of the bond plus any unamortized discount or minus any unamortized
premium.
b. face value of the bond plus any unamortized premium or minus any unamortized
discount.
c. face value of the bond plus any unamortized discount or minus any unamortized
premium.
d. maturity value of the bond plus any unamortized discount or minus any unamortized
premium.
ANS:
B
OBJ:
LO 4
38. RCM Corporation, a calendar-year firm, is authorized to issue $200,000 of 10 percent, 20-year bonds dated January 1,
2005, with interest payable on January 1 and July 1 of each year. The entry to account for the discount amortization
and accrual of interest on December 31, 2005, would include a
a. debit to Discount on Bonds Payable.
b. credit to Cash.
c. credit to Interest Payable.
d. debit to Bonds Payable.
ANS:
C
OBJ:
LO 4
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39. Accrued interest on bonds that are sold between interest dates
a. is ignored by both the seller and the buyer.
b. increases the amount a buyer must pay to acquire the bonds.
c. is recorded as a loss on the sale of the bonds.
d. decreases the amount a buyer must pay to acquire the bonds.
ANS:
40.
B
OBJ:
LO 4
When bonds are sold between interest dates, any accrued interest is credited to
a. Interest Payable.
b. Interest Revenue.
c. Interest Receivable.
d. Bonds Payable.
ANS:
A
OBJ:
LO 4
41. Which of the following is true of accrued interest on bonds that are sold between interest dates?
a. It is computed at the effective market rate.
b. It will be paid to the seller when the bonds mature.
c. It is extra income to the buyer.
d. None of the above.
ANS:
D
OBJ:
LO 4
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CHAPTER 15—LEASES
MULTIPLE CHOICE
1. Generally accepted accounting principles require that certain lease agreements be accounted for as purchases. The
theoretical basis for this treatment is that a lease of this type
a. effectively conveys all of the benefits and risks incident to the ownership of property.
b. is an example of form over substance.
c. provides the use of the leased asset to the lessee for a limited period of time.
d. must be recorded in accordance with the concept of cause and effect.
ANS:
A
OBJ:
LO 2
2. Which of the following statements characterizes an operating lease?
a. The lessee records depreciation and interest.
b. The lessee records the lease obligation related to the leased asset.
c. The lessor transfers title of the leased property to the lessee for the duration of the lease
term.
d. The lessor records depreciation and lease revenue.
ANS:
D
OBJ:
LO 2
3. One of the four general criteria for a capital lease is that the present value at the beginning of the lease term of the
minimum lease payments equals or exceeds
a. the property's fair market value.
b. 90 percent of the property's fair market value.
c. 75 percent of the property's fair market value.
d. 50 percent of the property's fair market value.
ANS:
B
OBJ:
LO 4
4. In a lease that is recorded as an operating lease by the lessee, the equal monthly rental payments should be
a. allocated between interest expense and depreciation expense.
b. allocated between a reduction in the liability for leased assets and interest expense.
c. recorded as a reduction in the liability for leased assets.
d. recorded as rental expense.
ANS:
D
OBJ:
LO 5
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5. The present value of the minimum lease payments should be used by the lessee in the determination of a(n)
Capital
Operating
Lease Liability
Lease Liability
a.
Yes
No
b.
Yes
Yes
c.
No
Yes
d.
No
No
ANS:
A
OBJ:
LO 4
6. One of the four general criteria for a capital lease specifies that the lease term be equal to or greater than
a. the estimated economic life of the property.
b. 90 percent of the estimated economic life of the property.
c. 75 percent of the estimated economic life of the property.
d. 50 percent of the estimated economic life of the property.
ANS:
C
OBJ:
LO 4
7. For a capital lease, the amount recorded initially by the lessee as a liability should
a. exceed the present value at the beginning of the lease term of minimum lease payments
during the lease term.
b. exceed the total of the minimum lease payments during the lease term.
c. not exceed the fair value of the leased property at the inception of the lease.
d. equal the total of the minimum lease payments during the lease term.
ANS:
C
OBJ:
LO 5
8. Johnson Institute leased a new machine having an expected useful life of 12 years. The noncancelable lease term is
10 years, and Johnson may exercise a purchase option at the end of the noncancelable term. The machine should be
capitalized by Johnson and depreciated over
a. 9 years.
b. 12 years.
c. 10 years.
d. 10 or 12 years at Johnson's option.
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ANS:
C
OBJ:
LO 5
9. The lessee's balance sheet liability for a capital lease would be periodically reduced by the
a. minimum lease payment.
b. minimum lease payment plus the amortization of the related asset.
c. minimum lease payment less the amortization of the related asset.
d. minimum lease payment less the portion of the minimum lease payment allocable to
interest.
ANS:
D
OBJ:
LO 5
10. What are the three types of period costs that a lessee experiences with capital leases?
a. Interest expense, amortization expense, executory costs
b. Amortization expense, executory costs, lease expense
c. Executory costs, interest expense, lease expense
d. Lease expense, executory costs, initial costs
ANS:
A
OBJ:
LO 5
11. An eight-year capital lease specifies equal minimum annual lease payments. Part of this payment represents interest
and part represents a reduction in the net lease liability. The portion of the minimum lease payment in the fourth
year applicable to the reduction of the net lease liability should be
a. the same as in the third year.
b. less than in the third year.
c. less than in the fifth year.
d. more than in the fifth year.
ANS:
C
OBJ:
LO 5
12. Which of the following statements concerning guaranteed residual values is appropriate for the lessee?
a. The asset and related liability should be increased by the amount of the residual value.
b. The asset and related liability should be decreased by the amount of the residual value.
c. The asset and related liability should be decreased by the present value of the residual
value.
d. The asset and related liability should be increased by the present value of the residual
value.
ANS:
D
OBJ:
LO 5
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13. Johntech Inc. leased a new machine having an expected useful life of 30 years from Carbide Co. Terms of the
noncancelable 25-year lease were that Johntech would gain title to the property upon payment of a sum equal to the
fair market value of the machine at the termination of the lease. Johntech accounted for the lease as a capital lease
and recorded an asset and a liability in the financial records. The asset recorded under this lease should properly be
amortized over
a. 5 years (the period of actual ownership).
b. 22.5 years (75 percent of the 30-year asset life).
c. 25 years (the term of the lease).
d. 30 years (the total asset life).
ANS:
C
OBJ:
LO 5
14. Which one of the following items is not part of the minimum lease payments from the standpoint of the lessee?
a. The minimum rental payments called for by the lease
b. Any guarantee the lessee is required to make at the end of the lease term regarding any
deficiency from a specified minimum
c. Any estimated residual value at the end of the lease term
d. Any payment the lessee must make at the end of the lease term to purchase the leased
property under a bargain purchase option
ANS:
C
OBJ:
LO 5
15. A lease contains a bargain purchase option. In determining the lessee's capitalizable cost at the beginning of the
lease term, the payment called for by the bargain purchase option would be
a. subtracted at its present value.
b. added at its exercise value.
c. added at its present value.
d. subtracted at its exercise price.
ANS:
C
OBJ:
LO 5
16. Which of the following statements characterizes a sales-type lease?
a. The lessor recognizes only interest revenue over the life of the asset.
b. The lessor recognizes only interest revenue over the lease term.
c. The lessor recognizes a dealer's profit at lease inception and interest revenue over the
lease term.
d. The lessor recognizes a dealer's profit at lease inception and interest revenue over the
asset life.
ANS:
C
OBJ:
LO 6
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17.
Initial direct costs incurred by a lessor in consummating a sales-type lease are
a. charged to unearned income in the first period of the lease term.
b. charged to cost of sales in the first period of the lease term.
c. deferred and allocated over the lease term in proportion to the recognition of rent
revenue.
d. deferred and allocated over the lease term on a straight-line basis.
ANS:
B
OBJ:
LO 6
18. Equal monthly rental payments for a particular lease should be charged to Rental Expense by the lessee for which of
the following?
Capital Lease
Operating Lease
a.
Yes
No
b.
Yes
Yes
c.
No
No
d.
No
Yes
ANS:
D
OBJ:
LO 5
19. Lease Y does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated
economic life of the leased property. Lease Z does not transfer ownership of the property to the lessee by the end of
the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How
should the lessee classify these leases?
Lease Y
Lease Z
a. Capital lease
Operating lease
b. Capital lease
Capital lease
c. Operating lease
Capital lease
d. Operating lease
Operating lease
ANS:
B
OBJ:
LO 4
20. Which of the following statements characterizes lessor accounting for residual values?
a. Guaranteed residual values are included in the gross investment amount, but
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unguaranteed residual values are excluded from the gross investment.
b. Unguaranteed residual values are included in the gross investment amount, but
guaranteed residual values are excluded from the gross investment.
c. Guaranteed residual values and unguaranteed residual values are excluded from the
gross investment.
d. Guaranteed residual values and unguaranteed residual values are included in the gross
investment.
ANS:
D
OBJ:
LO 6
21. Draper Corp. leased a new building and land from Baylor Leasing Inc. for 25 years. At the inception of the lease the
building and land have fair market values of $200,000 and $25,000, respectively. The building has an expected
economic life of 30 years. Which of the following statements is correct regarding Draper's treatment of the lease?
a. Draper should treat the lease as a capital lease even though there is no bargain purchase
option and no automatic transfer of ownership at the termination of the lease.
b. Draper should treat the lease as a capital lease only if there is either a bargain purchase
option or an automatic transfer of ownership at the termination of the lease.
c. Draper should treat the lease as a capital lease provided that the land and building are
recorded in separate asset accounts and accounted for separately.
d. Draper should treat the lease as a capital lease only if Baylor treats the transaction as a
leveraged lease.
ANS:
A
OBJ:
LO 4
22. Which of the following would be considered an executory cost?
a. Minimum lease payments.
b. Interest expense incurred.
c. Bargain purchase option.
d. Maintenance costs.
ANS:
D
OBJ:
LO 3
23. If the residual value of a leased asset is greater than the amount guaranteed by the lessee
a. the lessee pays the lessor for the difference.
b. the lessee recognizes a gain at the end of the lease term.
c. the lessee has no obligation related to the residual value.
d. the lessee pays the lessor for the difference.
ANS:
C
OBJ:
LO 3
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24. Which of the following is true regarding the lease term?
a. The lease term does not include all periods covered by bargain renewal options.
b. The lease term includes all periods for which failure to renew imposes a penalty
sufficiently high that the lessee probably will renew.
c. The lease term may extend beyond the date a bargain purchase option becomes
exercisable.
d. The lease term does not include all periods representing renewals or extensions of the
lease at the lessor's option.
ANS:
B
OBJ:
LO 3
25. From the standpoint of the lessee, the minimum lease payment includes all of the following except
a. the guaranteed residual value.
b. the lessee's obligation to pay executory costs.
c. the bargain purchase option.
d. any payment that the lessee must make upon failure to extend or renew the lease.
ANS:
B
OBJ:
LO 3
26. Which of the following is (are) not correct regarding disclosure requirements lessees?
I. For capital leases, future minimum lease payments in the aggregate and for each of
the succeeding five years must be disclosed.
II. For operating leases with initial or remaining lease terms in excess of one year, future
minimum rental payments in the aggregate and for each of the five succeeding fiscal
years must be disclosed.
III. For capital leases, future minimum lease payments for each of the succeeding five
years must be disclosed.
IV. For operating leases with initial or remaining lease terms in excess of one year, future
minimum lease payments for each of the five succeeding fiscal years must be
disclosed.
a
.
I only.
b
.
II only.
c
.
Both I and II.
d
.
Both III and IV.
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ANS:
D
OBJ:
LO 7
27. Which of the following is not a required disclosure for lessors?
a. Total of minimum sublease rentals to be received in the future under noncancelable
subleases.
b. Unearned interest revenue
c. Unguaranteed residual values accruing to the benefit of the lessor.
d. A general description of the lessor's leasing arrangements.
ANS:
A
OBJ:
LO 7
28. In order for a lease to be considered a finance (or capital) lease, international accounting standards require that a
lease agreement
a. transfers substantially all risks and rewards incident to ownership of an asset to the
lessee.
b. contains a provision requiring transfer of title to the lessee by the end of the lease term.
c. provides that the term of the lease contract be longer than one year.
d. provides for a bargain purchase option.
ANS:
A
OBJ:
LO 8
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