Int FA 2 Exam 1

In May of 20X1, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 20X1, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The penalties were estimated to be $970,000. After the year-end, but before the 20X1 financial statements were issued, Raymond accepted an EPA settlement offer of $770,000. Raymond should report an accrued liability on its December 31, 20X1, balance sheet of: $ 770,000. $ 900,000. $ 970,000. $1,170,000.

$ 770,000.

Panther Co. had a warranty liability of $310,000 at the beginning of 2011, and $350,000 at end of 2011. Warranty expense is based on 4% of sales, which were $50 million for the year. What were the warranty expenditures for 2011? Note: Expenditures means the actual cash outflow to pay for warranty claims. $0. $1,960,000. $2,000,000. $2,040,000.

$1,960,000. BI-310,000 +Warranty Exp.* Sales 50,000,000*4% -EI=350,000

At the beginning of 20X1, Angel Corporation began offering a 2-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 20X1 were $180 million. Fifteen percent of the units sold were returned in 20X1 and repaired or replaced at a cost of $5.3 million. The amount of warranty liability on Angel's 12/31/20X1 balance sheet is: $1.9 million. $5.3 million. $7.2 million. $27.0 million.

$1.9 Million 180mil*4%=7.2-5.3=1.9

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. What is the carrying value of the bonds as of December 31, 2012?

$11,256,109 Semi annual effective rate = Effective int./ outstanding balance 344632/11487747= 3% Ammoriation payment= cash- (ending outstanding value * %) 400000-(11316611*3%) =60502 Ending value- above 11316611-60502

Use Excel or your time value of money calculator to answer this question. A bond issue has a $100,000 face value, 10 percent stated rate, 10 year maturity, and pays interest semiannually. If the effective interest rate on the bond issue is 8%, what is the selling price of the bond?

$113,590 n=10*2=20 i/y=.08/2= .04 fv=100,000

Branch Company, a building materials supplier, has $18,000,000 of notes payable due April 12, 2012. At December 31, 2011, Branch signed an agreement with First Bank to borrow up to $18,000,000 to refinance the notes on a long-term basis. The agreement specified that borrowings would not exceed 75% of the value of the collateral that Branch provided. At the date of issue of the December 31, 2011, financial statements, the value of Branch's collateral was $20,000,000. On its December 31, 2011, balance sheet, Branch should classify the notes as follows: $15,000,000 long-term and $3,000,000 current liabilities. $4,500,000 short-term and $13,500,000 current liabilities. $18,000,000 of current liabilities. $18,000,000 of long-term liabilities.

$15,000,000 long-term and $3,000,000 current liabilities. N/P=18000000 Refinancing (20000000*.75) =15000000 N/P- refin. =3 mil cl

Gorillas Inc. issued 4% bonds on July 1, 20X1. The bonds mature in 10 years and a face value of $300 million. The bonds pay interest each December 31 and June 30, beginning December 31, 201X. The effective interest rate established by the market was 6%.Assuming that Gorrilas issued the bonds for $255,369,000, what would the company report for the carrying value of the bonds on December 31, 2011?

$257,030,070 Interest Exp 255,369,000*6%*6/12= 7,661,070 - Interest Payable 300,000,000*4%*6/12= 6,000,000 =1,661,070 Issue price for bond=255,369,000 + 1,661,070

On January 1, 2011, an investor paid $291,000 for bonds with a face amount of $300,000. The stated rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2011 (assume annual interest payments and amortization)? $23,280. $29,100. $24,000. $30,000.

$29,100 291000*10%=29100

Auerbach Inc. issued 4% bonds on October 1, 2011. The bonds have a maturity date of September 30, 2021 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2012. The effective interest rate established by the market was 6%.Assuming that Auerbach issued the bonds for $255,369,000, what interest expense would it recognize in its 2011 income statement?

$3,830,535 This is the issue price of $255,369,000 x 6% effective rate x 3 mos./12 mos.

Auerbach Inc. issued 4% bonds on October 1, 20X1. The bonds mature in 10 years and have a face value of $30 million. The bonds pay interest each March 31 and September 30, beginning March 31, 20X2. The effective interest rate established by the market was 6%.Assuming that Auerbach issued the bonds for $22,561,000, what interest expense would it recognize in its income statement for the year ended December 31, 20X1? Group of answer choices$0$338,415$676,830$451,220$200,000

$338,415 22,561,000*6%*3/12

Funzy Cereal includes one coupon in each package of Wheatos that it sells and offers a toy car in exchange for $1.00 and 3 coupons. The cars cost Funzy $1.50 each. Experience indicates that 30% of the coupons eventually will be redeemed. During the last month of 20X1, the first month of the offer, Funzy sold 12 million boxes of Wheatos and 2.4 million of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 20X1, income statement? $400,000. $600,000. $800,000. $1,200,000.

$600,000 12 mil*30%=3.6mil/3=1.2mil 1.5-1=.5 .5*1.2mil

Universal Travel Inc. borrowed $500,000 on November 1, 20X1, and signed a 12-month note bearing interest at 9%. Interest is payable in full at maturity on October 31, 20X2. In connection with this note, Universal Travel Inc. should report interest payable at December 31, 20X1, in the amount of: $7,500. $30,000. $ 5,000. $25,000.

$7,500 500000*.09*2/12

On February 1, 2010, Pat Weaver Inc. (PWI) issued 10%, $1,000,000 bonds for $1,116,000. PWI retired all of these bonds on January 1, 2011, at 102. Unamortized bond premium on that date was $92,800. How much gain or loss should be recognized on this bond retirement?

$72,800 gain Carrying value of bonds = 1000000+92800 = 1092800 Retirement value = 1000000*1.02 = 1020000 Gain on retirement = 1092800-1020000 = 72800

B Corp. has an employee benefit plan for compensated absences that gives employees 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 20X1, B's unadjusted balance of liability for compensated absences was $42,000. B estimated that there were 420 vacation days and 150 sick days available at December 31, 20X1. B's employees earn an average of $200 per day. In its December 31, 20X1, balance sheet, what amount of liability for compensated absences is B required to report? $ 60,000. $ 84,000. $ 90,000. $114,000.

$84,000 420*200=84000

Oklahoma Oil Corp. paid interest of $785,000 during 20X1, and the interest payable account increased by $105,000. What was interest expense for the year? $890,000. $660,000. $555,000. $785,000.

$890,000 interest payable account INCREASE= + together to find int. exp 785000+105000

Auerbach Inc. issued 6% bonds on October 1, 2011. The bonds have a maturity date of September 30, 2021 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2012. The effective interest rate established by the market was 4%.How much cash interest does Auerbach pay on March 31, 2012?

$9 million Face value* stated rate 300mil/(6%/2)

Auerbach Inc. issued 4% bonds on October 1, 2011. The bonds have a maturity date of September 30, 2021 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2012. The effective interest rate established by the market was 6%.How much cash interest does Auerbach pay on March 31, 2012?

6 mil 300mil*4%*6/12

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. What is the effective annual rate of interest on the bonds? 1 Cash $400,000 Effective Interest $344,632 Decrease in Balance $55,368 Outstanding Balance $11,432,379

6% (344,632/11487747) *2

Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2011. LPC's accountant has projected the following amortization schedule from issuance until maturity: What is the effective ANNUAL interest rate on the bonds?

6% Take outstanding balce-207020 and divide by interest exp. =7000*2 (In this case int, exp, is semiannual so multiple by 2)

Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2011. LPC's accountant has projected the following amortization schedule from issuance until maturity: What is the annual stated interest rate on the bonds?

7% Annual cash interest paid-14000 and divide by the maturity value of 200,000

On June 30, 2011, Blair Industries had outstanding $80 million of 8%, convertible bonds that mature on June 30, 2012. Interest is payable each year on June 30 and December 31. The bonds are convertible into 6 million shares of $10 par common stock. At June 30, 2011, the unamortized balance in the discount on bonds payable account was $4 million. On June 30, 2011, half the bonds were converted when Blair's common stock had a market price of $30 per share. When recording the conversion, Blair should credit paid-in capital-excess of par:

8 million Bonds payble (80mil*1/2) =40 Paid In Capital = plug figure Discount (4 mil*1/2) =2 Common stock (6mol*1/2*10) 30

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. What is the stated annual rate of interest on the bonds?

8% (400,000/10,000,000)*2=8%

The unamortized balance of discount on bonds payable is reported in the balance sheet as: A prepaid expense. An expense account. A current liability. A contra-liability.

A contra-liability

When cash is received from customers in the form of a refundable deposit, the cash account is increased with a corresponding increase in: A current liability. Revenue. Shareholders' equity. Paid-in capital

A current liability.

When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes: A debit to a revenue and a credit to a liability account. A debit to a revenue and a credit to an asset account. A debit to an asset and a credit to a revenue account. A debit to a liability and a credit to a revenue account.

A debit to a liability and a credit to a revenue account.

Z Co. filed suit against W, Inc. in 20X1 seeking damages for patent infringement. At December 31, 20X1, legal counsel for Z believed that it was probable that Z would be successful against W for an estimated amount in the range of $30 million to $60 million, with each amount in that range considered equally likely. Z was awarded $40 million in April 20X2, which was after Z's 20X1 financial statements had been issued. Z should report this award in its 20X1 financial statements as A receivable and unearned revenue of $40 million. A receivable and revenue of $40 million. A disclosure of a gain contingency of $40 million. A disclosure of a gain contingency of an undetermined amount in the range of $30 million to $60 million.

A disclosure of a gain contingency of an undetermined amount in the range of $30 million to $60 million.

Pierce Company issued 11% bonds, dated January 1, with a face amount of $800,000 on January 1, 2011. The bonds sold for $739,816 and mature in 2030 (20 years). For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Pierce determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2011, the fair value of the bonds was $730,000. Pierce's earnings for the year will include: A gain from change in the fair value of debt of $10,617. A loss from change in the fair value of debt of $10,617. A gain from change in the fair value of debt of $10,204. A loss from change in the fair value of debt of $10,204.

A gain from the change in fair value of debt 10,617 06/11 Int. Exp. (6%*739816) = 44389 Discount on B/P (Plug figure) =389 Cash (5.5% *800000) = 44000 12/11 Int exp. (6%*739816+389) = 44412 Discount on b/p (plug figure) 412 Cash=44000 Bonds Payable (739816+389+412)-730000= 10617 Gain on change in fv of bonds =10617

The unamortized balance in the premium on bonds payable account is reported in the balance sheet as: Unearned Revenue Prepaid Asset Stockholders' Equity Adjunct (addition) to Bonds Payable

Adjunct (addition) to Bonds Payable

Which of the following is generally not a current liability? Accounts payable. Bonds payable. Accrued interest payable. Sales tax payable.

Bonds payable

All of the following but one represent collections for third parties. Which one of the following is not a collection for a third party? Sales tax payable. Customer deposits. Employee insurance deductions. Social security taxes deductions.

Customer deposits.

How would the carrying value of bonds payable be affected by the amortization of each of the following? Premium: Increase, Decrease or No Effect Discount: Increase, Decrease or No Effect

Decrease premium and increase discount

When bonds are sold at a premium and the effective interest method is used, at each interest payment date, the interest expense: Remains constant. Is equal to the change in book value. Increases. Decreases.

Decreases

Orange Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's asset in that country. If expropriation is reasonably possible, a loss contingency should be Disclosed but not accrued as a liability. Disclosed and accrued as a liability Accrued as liability but not disclosed. Neither accrued as a liability nor disclosed.

Disclosed but not accrued as a liability.

When a gain contingency is probable and the amount of gain can be reasonably estimated, the gain should be: Reported in the income statement and disclosed. Offset against shareholders' equity. Disclosed, but not recognized in the income statement. Neither recognized in the income statement nor disclosed.

Disclosed, but not recognized in the income statement.

The interest rate that is printed on the bond certificate is not referred to as the: Stated rate. Contract rate. Nominal rate. Effective rate.

Effective rate.

Footnote disclosure is required for material potential losses when the loss is at least reasonably possible: Only if the amount is known. Only if the amount is known or reasonably estimable. Unless the amount is not reasonably estimable. Even if the amount is not reasonably estimable.

Even if the amount is not reasonably estimable.i

Periodic interest expense is the stated interest rate times the amount of debt outstanding during the period. True False

False

On December 31, 20X1, L, Inc. had a $1,500,000 note payable outstanding, due July 31, 20X2. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23, 20X2. In February 20X2, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 20X2. On March 13, 20X2, L issued its 20X1 financial statements. What amount of the note payable should L include in the long-term liabilities section of its December 31, 20X1, balance sheet? $0 $1,000,000 $1,500,000

GAAP states that the amount excluded from current liabilities through refinancing cannot exceed the amount actually refinanced. Therefore, L should consider the $1,000,000 paid by the refinancing to be a long-term liability and the $500,000 a current liability in the December 31, 2011 balance sheet. The refinancing was completed before the issuance of the financial statements and meets both criteria (intent financial ability) for the classification of the $1,000,000 as a long-term liability.

AMC issues a note in exchange for a machine with no stated interest rate. In accounting for the transaction: The machine should be depreciated over the note's term to maturity. If fair values of the note and machine are unavailable, the note should be recorded at its present value, discounted at the market rate of interest. Both the note and machine are recorded at the face amount of the note or the fair value of the machine, whichever is more clearly determinable. The note is recorded at its face amount unless the fair value of the machine is readily available.

If fair values of the note and machine are unavailable, the note should be recorded at its present value, discounted at the market rate of interest.

When bonds are sold at a discount and the effective interest method is used, at each interest payment date, the interest expense: Increases. Decreases. Remains the same. Is equal to the change in book value.

Increases

On January 1, 2011, Tiny Tim Industries had outstanding $1,000,000 of 12% bonds with a carrying amount of $966,130. The indenture specified a call price of $981,000. The bonds were issued previously at a price to yield 14%. Tiny Tim called the bonds (retired them) on July 1, 2011. What is the amount of the loss on early extinguishment? Group of answer choices$0.$6,932.$7,241.$7,629.

Int. Exp. (14%/2) * 966,130 = 67,629 Discount (Plug Figure) Cash ((12%/2)*1,000,000)=60,000 B/P 1,000,000 Loss of early extinguishment (Plug FIgure) Discount on B/P (1000000-(966,130+7629) =26241 Cash (call price) (981,000

Crawford Inc. has bonds outstanding during a year in which the market rate of interest has risen. Crawford elected the fair value option for the bonds upon issuance. What will the company report for the bonds in its income statement for the year? Interest expense and a gain. Interest expense and a loss. A gain and no interest expense. A loss and no interest expense.

Interest expense and a gain.

When an equipment dealer receives a long-term note in exchange for equipment, the present value of the future cash flows received on the notes: Is treated as a current liability at the exchange date. Is recorded as interest revenue at the exchange date. Is recorded as interest receivable at the exchange date. Is credited to sales revenue at the exchange date.

Is credited to sales revenue at the exchange date.

When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is: More than the effective interest. Less than the effective interest. Equal to the effective interest. More than if the bonds had been sold at a premium.

Less than the effective interest.

current liabilities are normally recorded at their:

Maturity amount

A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is 9%. These bonds will sell at a price that is: Equal to $500,000. More than $500,000 .Less than $500,000. The answer cannot be determined from the information provided.

More than $500,000

For a bond issue that sells for less than the bond face amount, the effective interest rate is: The rate printed on the face of the bond. The Wall Street Journal prime rate. More than the rate stated on the face of the bond. Less than the rate stated on the face of the bond.

More than the rate stated on the face of the bond.

Which of the following generally is associated with accounts payable? Interest Expense Yes/No Reported at Present Value Yes/No

No, No

Bonds usually sell at their: Maturity value. Face value. Present value. Statistical expected value.

Present value

A company should accrue a loss contingency only if the likelihood that a liability has been incurred is: Rare and the amount of the loss is known. At least reasonably possible and the amount of the loss is known. At least reasonably possible and the amount of the loss can be reasonably estimated. Probable and the amount of the loss can be reasonably estimated.

Probable and the amount of the loss can be reasonably estimated.

Gain contingencies usually are recognized in a company's income statement when: Realized. The amount can be reasonably estimated. The gain is reasonably possible and the amount can be reasonable estimated. The gain is probable and the amount can be reasonably estimated.

Realized

Interest expense is: The effective interest rate times the amount of the debt outstanding during the interest period. The stated interest rate times the amount of the debt outstanding during the interest period. The effective interest rate times the face amount of the debt. The stated interest rate times the face amount of the debt.

The effective interest rate times the amount of the debt outstanding during the interest period.

Short-term obligations can be reported as long-term liabilities if: The firm has a long-term line of credit. The firm has tentative plans to issue long-term bonds. The firm intends to and has the ability to refinance as long-term. The firm has the ability to refinance on a long-term basis.

The firm intends to and has the ability to refinance as long-term.

When bonds are retired prior to their maturity date: GAAP has been violated. The issuing company probably will report an ordinary gain or loss. The issuing company probably will report an extraordinary gain or loss. The issuing company will report a non-operating gain or loss.

The issuing company probably will report an ordinary gain or loss.

When a long-term note is given in exchange for equipment, the amount considered as paid for the machine is: The invoice price. The wholesale price. The present value of cash outflows discounted at the stated rate. The present value of the note payments discounted at the market rate.

The present value of the note payments discounted at the market rate.

A company should accrue a liability for a loss contingency if it is probable that assets have been impaired and the amount of potential loss can be reasonably estimated. True False

True

Amortization of discount on bonds payable results in interest expense that is more than the actual cash outflow. True False

True

An implicit or imputed rate of interest must be used when long term notes are issued at a stated rate of interest that is materially different than the market rate of interest. \

True

Bonds will sell for a discount when the market rate of interest exceeds their stated rate. True False

True

Companies are not required to, but have the option to, value some or all of their financial assets and liabilities at fair value.

True

Discount on bonds payable is a contra liability account. True False

True

For a loss contingency to be accrued in period 20X1, the underlying event that caused the loss contingency must have been occurred before the end of the 20X1 accounting period. True False

True

If a company chooses the option to report its bonds at fair value, then it reports changes in fair value in its income statement.

True

The carrying value of zero-coupon bonds increases by the periodic amount of interest recognized each period. Group of answer choicesTrueFalse

True

At times, businesses require advance payments from customers that will be applied to the purchase price when goods are delivered, or services provided. These customer advances represent: Unearned revenue when the advance payment is received. A component of shareholders' equity. Long-term assets until the product or service is provided. Revenue upon receipt of the advance payment.

Unearned revenue when the advance payment is received.

The cost of customer premium offers should be charged to expense: When the related product is sold. When the premium offer expires. Over the life cycle of the product to which the premium relates. When the premiums are claimed.

When the related product is sold.

Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2011. LPC's accountant has projected the following amortization schedule from issuance until maturity: LPC issued the bonds: Beg Outstanding balance=207020 Ending Outstanding balance=200000 At par. At a premium. At a discount. Cannot be determined from the given information.

at a premium

Long-term debt that is callable by the creditor in the upcoming year should be classified as a current liability only if management expects the debt to be called. True False

false

The cost of promotional offers should be recorded as expenses in the accounting period when the offers are redeemed by customers. True False

false

When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is: Less than the effective interest. Equal to the effective interest. Greater than the effective interest. More than if the bonds had been sold at a discount.

greater than the effective interest

A long-term liability should be reported as a current liability in a classified balance sheet if the long-term debt is callable by the creditor. is secured by adequate collateral. will be refinanced with stock. will be refinanced with debt.

is callable by the creditor.

Zero-coupon bonds offer a return in the form of a deep discount off the face value. result in zero interest expense for the issuer. result in zero interest revenue for the investor. are reported as shareholders' equity by the issuer

offer a return in the form of a deep discount off the face value.

The accounting concept that requires recognition of a liability for customer premium offers is Periodicity. Conservatism. Historical cost. The matching principle.

the matching principle