Inter Acct 2 CH 13 - 16

13 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

13 Which of the following is a current liability? a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue c. A long-term debt maturing currently, which is to be converted into common stock d. None of these answers are correct.

D

13 Which of the following is the proper way to report some gain contingencies? a. As an accrued amount. b. As deferred revenue. c. As an account receivable with additional disclosure explaining the nature of the contingency. d. As a disclosure only.

D

13 Which of these is not included in an employer's payroll tax expense? a. F.I.C.A. (social security) taxes b. Federal unemployment taxes c. State unemployment taxes d. Federal income taxes

D

14 An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition a. A gain or loss must be recognized for the difference between the net carrying amount of the bonds and the reacquisition price. b. the premium 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 answers are correct.

D

14 Premium on bonds payable is a. a contra account. b. reported as a reduction of the bond liability. c. debited to a deferred charge account and amortized over the life of the bonds. d. an adjunct account.

D

14 The rate of interest actually earned by bondholders is called the a. stated rate. b. coupon rate. c. nominal rate. d. effective rate.

D

14 Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to a. the stated (nominal) rate of interest multiplied by the face value of the bonds. b. the market rate of interest multiplied by the face value of the bonds. c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds. d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.

D

14 Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to a. the stated (nominal) rate of interest multiplied by the face value of the bonds. b. the market rate of interest multiplied by the face value of the bonds. c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds. d.the market rate multiplied by the beginning-of-period carrying amount of the bonds

D

14 If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting a. Bonds Payable. b. Gain on Restructuring of Debt. c. Unrealized Holding Loss. d. Unrealized Holding Gain.

D

15 A primary source of stockholders' equity is a. income retained by the corporation. b. appropriated retained earnings. c. contributions by stockholders. d. both income retained by the corporation and contributions by stockholders.

D

15 Stockholders' equity is generally classified into two major categories: a. contributed capital and appropriated capital. b. appropriated capital and retained earnings. c. retained earnings and unappropriated capital. d. earned capital and contributed capital.

D

16 Antidilutive securities a. should be included in the computation of diluted earnings per share but not basic earnings per share. b. are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share. c. include stock options and warrants whose exercise price is less than the average market price of common stock. d. should be ignored in all earnings per share calculations.

D

16 In computing earnings per share for a simple capital structure, if the preferred stock is cumulative, the amount that should be deducted as an adjustment to the numerator (earnings) is the a. preferred dividends in arrears. b. preferred dividends in arrears times (one minus the income tax rate). c. annual preferred dividend times (one minus the income tax rate). d. annual preferred dividend

D

16 When computing diluted earnings per share, convertible bonds are a. ignored. b. assumed converted whether they are dilutive or antidilutive. c. assumed converted only if they are antidilutive. d. assumed converted only if they are dilutive.

D

13 In August 2021, a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued Barkley Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000. The Barkley's 2020 financial statements should include the following related to the lawsuit: a. recognition of a loss and creation of a liability. b. recognition of a loss only. c. creation of a liability only. d. disclosure in note form only.

D Barkley Co. should disclose in the notes to the financial statements the existence of a possible contingent liability related to the lawsuit. The note should indicate the range of the possible loss. The contingent liability should not be accrued because the loss is not probable.

13 Kroft is involved in a pending court case. Kroft's lawyers believe it is probable that Kroft will be awarded damages of $1,000,000. Which of the following is the proper way to report this situation? a. As an accrued amount. b. As deferred revenue. c. As an account receivable with additional disclosure explaining the nature of the contingency. d. Not record until it is realized or disclosed only if the probability that it will be realized is very high.

D Kroft should not record the gain contingency until it's realized. Usually, gain contingencies are neither accrued nor disclosed. The $1,000,000 gain contingency should be disclosed only if the probability that it will be realized is very high.

13 A loss 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 a liability has been incurred. d. it is probable that a liability has been incurred even though the amount of the loss cannot be reasonably estimated.

c

14 1. If the stated rate = the market rate, the bond will sell at 2. If the stated rate < the market rate, the bond will sell at 3. If the stated rate > the market rate, the bond will sell at

1. par (face value) 2. discount 3. premium

International Financial Reporting Standards (IFRS) the measurement related to a contingency is based on the best estimate of the amount required to settle the obligation. If a range of estimates is predicted, and no amount in the range is more likely than another, the "midpoint" of the range is used to measure the liability. In GAAP, the minimum amount in a range is used.

:)

13 What condition(s) is/are necessary to recognize an asset retirement obligation? a. Company has an existing legal obligation and can reasonably estimate the amount of the liability. b. Company can reasonably estimate the amount of the liability. c. Company has an existing legal obligation. d. Obligation event has occurred.

A

13 Which of the following is an example of a contingent liability? a. Obligations related to product warranties. b. Possible receipt from a litigation settlement. c. Pending court case with a probable favorable outcome. d. FICA taxes payable

A

13 Which of the following is an example of a contingent liability? a. Obligations related to product warranties. b. Possible receipt from a litigation settlement. c. Pending court case with a probable favorable outcome. d. Tax loss carryforwards.

A

14 If bonds are issued initially at a premium, and the effective-interest method of amortization is used, interest expense in the earlier years will be a. greater than if the straight-line method were used. b. greater than the amount of interest payments. c. the same as if the straight-line method were used. d.less than if the straight-line method were used

A

14 Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from the date of issue. If the bonds were issued at a discount, this indicates that a. the effective yield or market rate of interest exceeded the stated (nominal) rate. b. the nominal rate of interest exceeded the market rate. c. the market and nominal rates coincided. d. no necessary relationship exists between the two rates.

A

15 In January 2020, Finley Corporation, a newly formed company, issued 10,000 shares of its $10 par common stock for $15 per share. On July 1, 2020, Finley Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of these treasury shares a. decreased total stockholders' equity. b. increased total stockholders' equity. c. did not change total stockholders' equity. d. decreased the number of issued shares.

A

16 When convertible debt is retired by the issuer, any material difference between the cash acquisition price and the carrying amount of the debt should be a. reflected currently in income. b. reflected currently in income as a discontinued operations item. c. treated as a prior period adjustment. d. treated as an adjustment of additional paid-in capital.

A

13 A suit for breach of contract seeking damages of $3,000,000 was filed by an author against Henderson Co. on October 4, 2021. Henderson's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $1,000,000 and $2,250,000. No amount within this range is a better estimate of potential damages than any other amount. The Henderson's 2020 financial statements should include the following related to the lawsuit: a. recognition of a loss and creation of a liability. b. recognition of a loss only. c. creation of a liability only. d. disclosure in note form only.

A A charge should accrue the probable award to an estimated loss and a credit to an estimated liability of $1,000,000. Henderson Co. should disclose the following in the notes to the financial statements: the amount of the suit, the nature of the contingency, the reason for the accrual, and the range of the possible loss. The accrual is made because it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The lowest amount of the range of possible losses is used when no amount is a better estimate than any other amount.

15 Porter Corp. purchased its own par value stock on January 1, 2020 for $20,000 and debited the treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction from a. additional paid-in capital to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise, from retained earnings. b. additional paid-in capital without regard as to whether or not there have been previous net "gains" from sales of the same class of stock included therein. c. retained earnings. d. net income.

A Explanation: This is a case where a company sold treasury stock below cost. Thus, the difference should be debited to: 1) Paid-in Capital from Treasury Stock (additional paid-in capital to the extent that previous net "gains" from sales of the same class of stock) until that account is depleted. 2) Any balance is debited to Retained Earnings. Thus, a) is the correct accounting treatment of the $8,000 difference the cost and sales price

13 Which of the following is not a condition allowing a company to exclude a short-term obligation from current liabilities? a. Liability is contractually due to be settled more than a year after the balance sheet date. b. Obligation must be due within one year. c. A contractual right to defer settlement of the liability at least a year after the balance sheet date. d. Subsequently refinance the obligation on a long-term basis.

B

13 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. Discount on Notes Payable is a contra account to Notes Payable.

B

14 Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from the date of issue. If the bonds were issued at a premium, this indicates that a. the effective yield or market rate of interest exceeded the stated (nominal) rate. b. the nominal rate of interest exceeded the market rate. c. the market and nominal rates coincided. d. no necessary relationship exists between the two rates.

B

15 Quirk Corporation issued a 100% stock dividend of its common stock which had a par value of $10 before and after the dividend. At what amount should retained earnings be capitalized for the additional shares issued? a. There should be no capitalization of retained earnings. b. Par value c. Fair value on the declaration date d. Fair value on the payment date

B

13 Sandy Shoes Foot Inc. is involved in litigation regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined that it is possible that they may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is the case, their attorney estimated that the amount of any payment would be $800,000. What is the required journal entry as a result of this litigation? a. Debit Litigation Expense for $800,000 and credit Litigation liability for $800,000. b. No journal entry is required. c. Debit Litigation Expense for $320,000 and credit Litigation Liability for $320,000. d. Debit Litigation Expense for $480,000 and credit Litigation Liability for $480,000.

B This is a loss contingency problem. Recognition of Loss Contingencies: depends on 1) the likelihood that the future event or events will confirm the incurrence of a liability and 2) the availability of reasonable estimate of the amount of loss. Likelihood of loss is only possible, not probable. Thus, Sandy will not recognize contingent loss and liability on the book (No journal entry). Proper accounting treatment would be to disclose it in its footnotes.

13 Of the following items, the only one which should not be classified as a current liability is a. current maturities of long-term debt. b. sales taxes payable. c. short-term obligations expected to be refinanced on a long-term basis. d. unearned revenues.

C

14 1. Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to a. multiply $5,000 by the table value for 10 periods and 10% from the present value of an ordinary annuity table. b. multiply $5,000 by the table value for 20 periods and 5% from the present value of an ordinary annuity table. c. multiply $5,000 by the table value for 20 periods and 4% from the present value of an ordinary annuity table. d. None of these answers is correct.

C

14 Bond interest paid is equal to the a. carrying value of the bonds multiplied by the effective-interest rate. b. carrying value of the bonds multiplied by the stated interest rate. c. face amount of the bonds multiplied by the stated interest rate. d. face amount of the bonds multiplied by the effective-interest rate.

C

14 If a company chooses the fair value option, an increase in the fair value of the liability is recorded by crediting a. Bonds Payable. b. Gain on Restructuring of Debt. c. Unrealized Holding Loss. d. Unrealized Holding Gain.

C

15 Total stockholders' equity represents a. a claim to specific assets contributed by the owners. b. the maximum amount that can be borrowed by a company. c. a claim against a portion of the total assets of a company. d. only the amount of earnings that have been retained in the business.

C

15 What effect does the issuance of a 2-for-1 stock split have on each of the following? Par Value per Share - Retained Earnings a. No effect - No effect b. Increase - No effect c. Decrease - No effect d. Decrease - Decrease

C

15 Which of the following statements about property dividends is not true? a. A property dividend is usually in the form of securities of other companies. b. A property dividend is also called a dividend in kind. c. The accounting for a property dividend should be based on the carrying value (book value) of the nonmonetary assets transferred. d. Property dividends may be merchandise or real estate.

C

16 Compensation expense resulting from a compensatory stock option plan is generally a. recognized in the period of exercise. b. recognized in the period of the grant. c. allocated to the periods benefited by the employee's required service. d. allocated over the periods of the employee's service life to retirement.

C

16 Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is a. the ease with which convertible debt is sold even if the company has a poor credit rating. b. the fact that equity capital has issue costs that convertible debt does not. c. that many corporations can obtain debt financing at lower rates. d. that convertible bonds will always sell at a premium.

C

16 What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively? a. Decrease and no effect b. Increase and no effect c. Decrease and increase d.Increase and decrease

C

13 Overton Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2020. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Overton recall all cans of this paint sold in the last six months. The management of Overton estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation? a. No recognition b. Note disclosure only c. Operating expense of $800,000 and liability of $800,000 d. Appropriation of retained earnings of $800,000

C Explanation: This is a loss contingency problem. Recognition of Loss Contingencies: depends on 1) the likelihood that the future event or events will confirm the incurrence of a liability and 2) the availability of reasonable estimate of the amount of loss. The statement, "the government has clearly indicated its intention of having Overton recall all cans...," indicates that the likelihood is "probable" and Overton has an estimate of the call. Thus, the proper accounting treatment would be to recognize contingent loss and liability on the book

13 A suit for breach of contract seeking damages of $3,000,000 was filed by an author against Henderson Co. on October 4, 2021. Henderson's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $1,000,000 and $2,250,000. No amount within this range is a better estimate of potential damages than any other amount. What accounting recognition, if any, should be accorded to this situation? a. Loss of $1,625,000 and liability of $1,625,000 b. Note disclosure only c. Loss of $1,000,000 and liability of $1,000,000 d. No recognition.

C Previous explanation. In addition, under IFRS, if a range of estimates is predicted and no amount in the range is more likely than any other amount in the range, the "midpoint" of the range is used to measure the liability. In GAAP, the minimum amount in a range is used.