Intermediate Accounting 2 Multiple Choice

What is $425 to be received at the end of the year worth on January 1, assuming 6% interest compounded quarterly (rounded to the nearest dollar)?

$400.

Why are most current liabilities reported at face or maturity value rather than their present value, as prescribed by GAAP?

The difference between maturity and present value is not material because such a short amount of time is involved.

Collette Company invests in bonds that will be held to maturity. The bonds have a face value of $100,000, and Collette pays a premium of $1,000. The entry to record the acquisition of the bonds includes a debit to Investment in Held-to-Maturity Securities for:

$101,000.

Jan Company sells 5-year bonds with a face value of $100,000 for $97,000. Interest is paid semiannually on October 1 and April 1. Using the straight-line method of amortization and a contract rate of 10%, for how much will Interest Payable be credited in the adjusting entry on December 31?

$2,500

Jan Company sells 5-year bonds with a face value of $100,000 for $97,000. Interest is paid semiannually. Using the straight-line method, how much will the discount be amortized with each interest payment?

$300

Jan Company sells 5-year bonds with a face value of $100,000 for $97,000. Interest is paid semiannually. Using the effective-interest method at 12%, how much interest expense will be recorded with the first payment?

$5,820

The formula for compound interest is:

(Principal + Accumulated Interest) x Rate x Time.

If 500 stock warrants, each assigned a value of $3, are later exercised at the $25 per share exercise price, and the stock has a par value of $10, the company would record

- a debit to cash for $12,500 - a debit to common stock warrants for $1500 - a credit to additional paid-in capital on common stock for $9000

Accounting standards require interest to be imputed on notes payable when:

- a note is non-interest bearing. - no interest rate is stated. - the stated interest rate is unrealistically low.

Payments received in advance on service contracts:

- cannot be recorded as revenues until the contracted services are performed. - are called unearned revenues. - are called deferred revenues.

The time value of money provides compensation for:

- delayed consumptions. - expected inflation. - risk.

When a corporation invests borrowed money in assets that generate profits greater than the after-tax cost of the debt, it:

- increases the return on equity for common shareholders. - creates financial leverage. - has a mix of debt and equity in its capital structure.

A company recognizes an expense and accrues a liability for an employees' future vacation pay when which of following conditions are met?

- the company's obligation is based on the employee's services already rendered. - the company's obligation relates to rights that vest. - the company's obligation relates to rights that accumulate.

How should a loss contingency that is reasonably possible and for which the amount can be reasonably estimated be reported?

Accrued - no Disclosed - yes

Which of the following is most likely an equitable and constructive liability?

Bonuses Payable.

"The probable future sacrifices of economic benefits arising from present obligations of a company to transfer assets or provide services in the future as a result of past transactions or events" describes which of the following?

Liabilities.

Discount on notes payable is shown on the balance sheet as:

a contra liability.

When a company issues bonds at a discount, it records:

a debit to cash.

If the effective rate of interest is greater than the contract rate, the bonds will sell at:

a discount.

When a company exercises its call provision on bonds:

a loss occurs because the call price is generally set above the issue price.

A premium account is:

an adjunct account added to bonds payable on the balance sheet.

On the maturity date of bonds:

any premium or discount on bonds payable is fully amortized.

A minority active investment with significant influence occurs when the investor owns:

between 20% and 50% of the voting common stock of the investee.

A stock warrant gives:

bondholders the option to purchase a specific number of common shares at a predetermined price for a period of time.

Osprey Company owns 25% of the outstanding stock of Dove Company, exercising significant influence. Dove pays a $40,000 dividend. Osprey's journal entry to record receipt of the dividend will include a:

credit to Investment in Stock: Dove Company for $10,000.

Falcon Company purchased 10% bonds with a face value of $200,000 at par plus accrued interest on April 1, Year 1. Interest on these bonds is payable June 30 and December 31. Falcon intends to hold the bonds until maturity in Year 3. The entry to record the acquisition of the bonds includes a:

debit to Interest Income for $5,000.

Osprey Company purchases 5,000 shares (25%) of Dove Company's outstanding common stock, paying $125,000 for the shares when Dove's book value is $390,000 and fair value is $520,000. The entry to record the purchase will include a

debit to Investment in Stock: Dove Company for $125,000.

The process of converting a future cash flow to a present value is called:

discounting.

Most companies report current liabilities as the:

first classification of the Liabilities and Shareholders' Equity section of the balance sheet.

Undeclared dividends in arrears on preferred stock is reported:

in the notes to the financial statements.

The effective rate of interest on bonds:

is the market rate of interest when the bonds are actually sold.

A corporation may choose to use debt financing because:

it has an income tax advantage.

Baxter Company purchases used equipment from Grant Company, issuing a non-interest-bearing, $10,000, 5-year note in exchange. Baxter uses an incremental borrowing rate of 12%. The present value of $10,000 to be repaid at the end of five years at 12% is $5,674.27. Baxter Company will record this exchange with:

none of these choices. (a debit to Cash for $5,674.27. a debit to Equipment for $10,000. a credit to Discount on Notes Payable for $4,325.73.)

Current liabilities are obligations that must be met within:

one year or the normal operating cycle, whichever is longer.

Zero coupon bonds:

pay all interest at a maturity.

The selling price of the bond is determined by summing the:

present value of the principal and interest payments discounted at the effective interest rate.

Any change in the fair value of trading securities is:

reported in the income statement as a part of net income.

With a non-interest-bearing note:

the discount deducted from the proceeds represents the interest expense.

The amortization of note discounts is included in:

the operating activities section of the statement of cash flows.

The payment of cash for note interest is included in:

the operating activities section of the statement of cash flows.

Companies may list current liabilities on the balance sheet in the order of:

their preference of any of these choices.

All equity securities and investments in debt securities that are intended to be sold in the near term are classified as:

trading securities.