Chapter 7 Financing Activities

Under the fair value method of accounting for stock options, firms must value stock options on the date of

grant

The ___________________________ is the date a firm gives a stock option to the employees

grant date

All of the following are primary events that typically lead to changes in book value of shareholders' equity EXCEPT: A. Investments by shareholders, usually net cah received by the company at equity issue date. B. Profitable operating and investing activities, with net income being a large component of this increase C. Debtholders requiring firms to enter into debt covenants D. Distributions to shareholders, usually in the form of periodic cash dividend payments to investors and sometimes in the form of share repurchases.

C

On January 1, 2012, Porter Corporation signed a five-year non-cancelable lease for certain machinery. The terms of the lease called for: 1. price to make annual payments of $60,000 at the end of each year (starting on Dec. 31, 2012) for five years. Porter must return the equipment to the lessor end of this period. 2. The machinery has an estimated useful life of 6 years and no expected salvage value. 3. Porter uses the straight-line method of depreciation for all of its fixed assets. 4. Porter's incremental borrowing rate is 8% 5. The fair value of the asset at January 1, 2012 is $275,000 For the year ended December 31, 2012, Porter should record depreciation expense for the leased equipment equal to: a. $55,000 b. $39,927 c. $47,912 d. $0

C

Under U.S. GAAP, which of the following items would require a lessee to classify a lease of equipment as a capital lease? a. There is not transfer of ownership to the lessee at the end of the lease term. b. The lease does not contain a bargain purchase option c. The lease term is 90% of the estimated economic life of the lease property. d. The present value of the contractual minimum lease payments is 75% of the fair value of the leased property.

C

All of the following are benefits of leasing EXCEPT: a. They have the ability to shift the tax benefits from depreciation and other deductions from a lessee that has little or no taxable income to a lessor that has substantial taxable income. b. They provide flexibility to change capacity as needed without having to purchase or sell assets. c. They have the ability to reduce the risk of technological obsolescence, relative to outright ownership, by maintaining the flexibility to shift to technologically more advanced assets. d. In an operating lease, the lessee recognizes the signing of the lease as the simultaneous acquisition of a long=term asset and the incurring of a long-term liability for lease payments.

D

All of the following are correct regarding operating leases EXCEPT: a. Cash outflow is in the form of rent payments b. The rights to use the property for a specified period of time are conferred to the lessee by the lessor. c. At the end of the lease the lessee returns the property to the lessor. d. Depreciation expense can be recorded on the books by the lessee

D

FASB has set forth all of the following conditions for recognizing transfers of receivables as sales only if the following conditions of surrendering control of the receivables are met EXCEPT: a. The assets transferred have been isolated from the selling firm b. The buying firm obtains the right to pledge or exchange the transferred assets, and no condition both constrains the transferee from taking advantage of its right and provides more than a trivial benefit to the transferor. c. The selling firm does not maintain effective control over the assets transferred through (a) an agreement that both entitles and obligates it to repurchase the assets or (b) the ability to unilaterally case the transferee to return specific assets. d. A creditor of the selling firm can access the receivables in the event of the seller's bankruptcy.

D

Financial reporting requires that firms recognize product financing arrangements as liabilities if which of the following conditions is met? a. The arrangement requires the sponsoring firm to purchase the inventory, substantially identical inventory, or processed goods of which the inventory is a component at specified prices. b. The selling or sponsoring firm physically controls the inventory. c. The payments made to the other entity cover all acquisition, holding, and financing costs d. Both A and C are correct

D

Regarding accounting for troubled debt, which of the following statements is true? a. The treatment for troubled debt is the same under both U.S. GAAP and IFRS b. The settlement of troubled debt results in an economic loss to the debtor because the creditor accepts more than the book value of the debt to settle the debt. c. U.S. GAAP uses a "10 percent rule" to determine whether a gain is recognized by the debtor in a trouble ddebt situation. d. Because IFRS uses the present value approach to determine the magnitude of the settlement for troubled debt, the magnitude of the new book value of the restructured debt will be lower and the gain recognition will be larger under IFRS.

D

______________ means that a company will buy back those receivables that are NOT collected by the company they are factored to

With recourse

Under the fair value method of accounting for stock options, firms must value stock options on the: a. grant date b. intrinsic date c. measurement date d. fair value date

a

Which is the first date when employees can exercise their stock options? a. vesting date b. grant date c. exercise date d. liquidating date

a

Which kind of dividend typically pays dividends with investments in other corporations' stock? a. property dividend b. stock dividend c. liquidating dividend d. scrip dividend

a

Which of the following is the date on which a company determines the owners of the stock that will receive a dividend? a. date of record b. measurement date c. date of declaration d. date of payment

a

Please view question 26 on the study guide for Chapter 7 for more information. Using the information provided by Santa Corporation, calculate the present value of the operating leases. a. $2,155,843 b. $2,024,945 c. $1,482,390 d. $2,854,452

a Use study guide for detailed answer

Derivatives are financial instruments that derive their value from changes in any of the following underlying securities EXCEPT: a. Stock prices b. Percentage discount on accounts receivable c. Interest rates d. Commodity prices

b

In some countries the account Reserve for Contingencies may be most comparable to which of the following accounts for a company reporting under U.S. GAAP? a. Contingency Expense b. Retained Earnings Appropriated for Contingencies c. Unearned Contingency Fees d. Contingency Losses

b

On January 1, 2012, Porter Corporation signed a five-year non-cancelable lease for certain machinery. The terms of the lease called for: 1. price to make annual payments of $60,000 at the end of each year (starting on Dec. 31, 2012) for five years. Porter must return the equipment to the lessor end of this period. 2. The machinery has an estimated useful life of 6 years and no expected salvage value. 3. Porter uses the straight-line method of depreciation for all of its fixed assets. 4. Porter's incremental borrowing rate is 8% 5. The fair value of the asset at January 1, 2012 is $275,000 At January 1, 2012 Porter should record an asset and liability with respect to the equipment lease equal to: a. $258,726 b. $239,562 c. $275,000 d. $0

b

On January 1, 2012, Porter Corporation signed a five-year non-cancelable lease for certain machinery. The terms of the lease called for: 1. price to make annual payments of $60,000 at the end of each year (starting on Dec. 31, 2012) for five years. Porter must return the equipment to the lessor end of this period. 2. The machinery has an estimated useful life of 6 years and no expected salvage value. 3. Porter uses the straight-line method of depreciation for all of its fixed assets. 4. Porter's incremental borrowing rate is 8% 5. The fair value of the asset at January 1, 2012 is $275,000 What accounting method should Porter use to account for the equipment lease? a. Operating Lease method b. Capital Lease method c. Equipment Lease method d. Lessee Accounting method

b

Please view question 26 on the study guide for Chapter 7 for more information. Assuming that Santa Corporation was require to capitalize its operating lease, how would the company's fixed asset ratio change under this assumption? a. increase b. decrease c. no effect d. unable to determine

b

Under current U.S. GAAP, unrealized gains and losses from four balance sheet items are reported in accumulated other comprehensive income or loss. Which of the following is NOT one of the balance sheet items? a. Derivatives held as cash flow hedges b. Deferred tax assets related to net operating loss carryforwards c. Minimum pension obligations d. Investment securities classified as available for sale

b

Which is the date when a firm gives a stock option to employees? a. vesting date b. grant date c. exercise date d. market date

b

Which kind of dividend typically pays dividends with additional shares of the corporation's stock? a. property dividend b. stock dividend c. liquidating dividend d. scrip dividend

b

Which of the following is NOT one of the three criteria for recognition of a liability? a. The obligation involves a probable future sacrifice of resources at a specified or determinable date b. The firm is required to make a cash payment for the goods or services. c. The firm has little or no discretion to avoid the transfer. d. The transaction or event giving rise to the liability has already occurred.

b

Which of the following is the typical tradeoff when issuing preferred stock? a. the tradeoff between different accounting for an initial issuance of preferred stock as compared to a common stock issuance. b. the tradeoff between maintaining corporate control and creating a class of shareholders with preference in all asset distributions c. The tradeoff of giving common shareholders priority over preferred shareholders in corporate liquidations. d. The tradeoff of a convertibility feature of common shares into preferred shares.

b

Please view question 26 on the study guide for Chapter 7 for more information. Using the information provided by Santa Corporation, estimate the average life of the operating leases. a. 8.66 years b. 13.66 years c. 10 years d. Not able to determine

b $2,471,600/$285,452 = 8.66 years + 5 disclosed years = 13.66 years

Please view question 26 on the study guide for Chapter 7 for more information. Using the information provided by Santa Corporation, calculate the company's 2012 fixed asset ratio a. 3.0 b. 3.65 c. 3.23 d. 5.21

b Use the study guide for detailed information

According to U.S. GAAP, which of the following provides the most reliable measure for fair value measurement? a. Observable market data serving as inputs into estimates into present value-based measurements such as foreign exchange rates. b. Quoted market prices of identical assets or liabilities in inactive markets c. Observable quoted market prices in active markets for identical assets or liabilities d. Unobservable inputs used by the reporting entity when modeling how the market would determine the fair value of the asset or liability in question

c

On January 1, 2012, Porter Corporation signed a five-year non-cancelable lease for certain machinery. The terms of the lease called for: 1. price to make annual payments of $60,000 at the end of each year (starting on Dec. 31, 2012) for five years. Porter must return the equipment to the lessor end of this period. 2. The machinery has an estimated useful life of 6 years and no expected salvage value. 3. Porter uses the straight-line method of depreciation for all of its fixed assets. 4. Porter's incremental borrowing rate is 8% 5. The fair value of the asset at January 1, 2012 is $275,000 Under which of the following conditions does the equipment lease qualify for capital lease accounting? a. The lease contains a bargain purchase option. b. The lease term is equal to or greater than 75% of the asset's economic life. c. A, and B are correct answers. d. The lease transfers ownership to the lessee at the end of the lease term.

c

Where in the financial statements are changes in the fair value of cash flow hedges reported: a. On the Balance Sheet as part of retained earnings b. On the Income Statement as other gains/losses c. As other comprehensive income and accumulated in other comprehensive income on the Balance Sheet. d. On the Statement of Stockholder's Equity

c

Which is the date when employees elect to exchange the option and cash for shares of common stock? a. vesting date b. grant date c. exercise date d. market date

c

Which kind of dividend is a return of the original investment by shareholders? a. cash dividend b. stock dividend c. liquidating dividend d. scrip dividend

c

Which of the following best describes the accounting treatment for derivative instruments NOT held for purposes of hedging? a. Record as an asset or liability and recognize changes in fair value in other comprehensive income. b. Do NOT record as an asset or liability; record income from the transaction at maturity and recognize in earnings. c. Record as an asset or liability; recognize changes in fair value currently in earnings. d. Record as an asset or liability if off-balance sheet risk is material.

c

Which of the following is NOT a distinguishing characteristic of a derivative instrument? a. Derivative instruments have terms that require or permit net settlement b. Derivative instruments have a low initial net investment. c. Derivative instruments are highly effective throughout their term d. Derivative instruments have one or more underlyings and notional amounts

c

Which of the following is NOT one of the GAAP classifications for derivatives? a. Speculative investment b. Fair value hedge c. Asset-liability hedge d. Cash flow hedge

c

Which of the following is NOT true concerning the recognition of unrealized gains and losses on foreign currency translation during the consolidation process? a. Firms do not recognize these gains/losses in current income. b. Firms recognize these gains/losses in the statement of other comprehensive income c. Firms increase/reduce their investment accounts by the translation gains/losses d. Unrealized gains and losses increase/decrease other accumulated comprehensive income in shareholders' equity.

c

Which of the following is the date on which a company incurs a legal liability to distribute the dividend to owners of the stock? a. date of record b. commitment date c. date of declaration d. date of payment

c

Under IFRS, cash payments for purchase of treasury stock: a. operating cash outflow b. investing cash outflow c. financing cash outflow d. Both A and C are correct

c. financing cash outflow

Derivative instruments acquired to hedge exposure to variability in expected future cash are ____________________ hedges

cash flow

Which kind of dividend has an interest-bearing promise to pay dividends? a. property dividend b. stock dividend c. liquidating dividend d. scrip dividend

d

Which of the following does not represent an acceptable method of transferring receivables to increase cash flow? a. With recourse b. Without recourse c. Factoring d. Tax deferred Method

d

Which of the following is the date on which the dividend distribution occurs? a. date of record b. commitment date c. date of declaration d. date of payment

d

Convertible preferred stock has both the attributes of ______________ and __________________________

equity, debt

Derivative instruments acquired to hedge exposure to changes in the fair value of an asset or liability are _________________________ hedges

fair value

The acceptable method of accounting for stock options is the _______________________________ method

fair value

Gains and losses on cash flow hedges affect earnings ____________________ than those on fair value hedges.

later

One criterion that must be satisfied for a firm to recognize an obligation is that the transaction or event giving rise to the obligation has already _______________________

occurred

A(n) _______________________ lease arrangement is one in which the lessee enjoys the use of the property for a set period of time

operating

Under an operating lease agreement the lessee recognizes _______________________________ each period that the leased asset is used.

rent expense

When firms use derivatives effectively to manage risks, the net gain or loss each period should be relatively ________________________

small

A derivative has one or more _____________________________, which are a specified interest rate, commodity price, foreign exchange rate, or other variable

underlyings

The first date at which employees can exercise their stock options is termed the _______________________________

vesting date