Intermediate Accounting Chapter 13, 14 & 15. Current Liabilities and contingencies. Long-term Liabilities. Stockholders' equity.

A bond issued in the name of the owner is a: a) bearer bond b) convertible bond c) income bond d) registered bond

d Registered bonds are issued in the name of the owner

A company can exclude a short-term obligation from current liabilities if it? a) intends to refinance the obligation on a long-term basis b) demonstrates an ability to consummate the refinancing c) pays off the obligation after the balance sheet date and subsequently replaces it with long-term debt before the balance sheet is issued d) intends to refinance the obligation on a long-term basis and demonstrates an ability to consummate the refinancing

d Short-term obligations can be excluded from current liabilities if the company has both the intent and the ability to consummate the refinancing

A stock dividend distributable is classified as a long-term liability because it will not be liquidated using current assets a) true b) false

...

Discount on Notes Payable is an adjunct account to Notes Payable and therefore is added to Notes Payable on the balance sheet

...

Preferred dividends in arrears should be recognized as a liability in the balance sheet a) true b) false

...

Convertible bonds give the issuer the right to retire bonds prior to maturity a) true b) false

B Callable bonds give the issuer the right to retire bonds prior to maturity

Discount on Notes Payable is an adjunct account to Notes Payable and therefore is added to Notes Payable on the balance sheet a) true b) false

False Discount on Notes Payable is a contra account to Notes Payable and therefore is subtracted from Notes Payable on the balance sheet

The face amount of a zero-interest bearing note is equal to its present value. a) true b) false

False Stock dividends distributable is not a liability. They are reported as a component of stockholders equity.

Preferred dividends in arrears should be recognized as a liability in the balance sheet a) true b) false

Preferred dividends in arrears are not an obligation until formal action is taken by the boards of directors authorizing the distribution of earnings (although a disclosure may be involved)

A zero-interest bearing note is recorded at its present value? a) true b) false

True The face amount of a zero-interest bearing note is equal to its present value.

If Bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will a) exceed what it would have been had the effective-interest method of amortization been used b) be less than what it would have been had the effective-interest method of amortization been used c) be the same as what it would have been had the effective-interest method of amortization been used d) be less than the stated (nominal) rate of interest

a If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will exceed what it would have been had the effective-interest method of amortization been used

Preferred stock has no voting rights a) true b) false

a In exchange for other preferred stockholders give up their voting rights

Bonds which do not pay interest unless the issuing company is profitable are called a) income bonds b) term bonds c) debenture bonds d) secured bonds

a Income bonds are bonds which do not pay interest unless the issuing company is profitable

Japanese companies consider bonuses to be a distribution of profits and charge them against retained earnings a) true b) false

a Rather than considering a bonus to be additional wages or operating expenses, as in U.S. GAAP, Japanese companies charge bonuses against retained earnings as a distribution of profits

The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the a) bond indenture b) bond debenture c) registered bond d) bond coupon

a The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the bond indenture

The effective interest method is preferred when amortizing bond premiums and discounts a) true B) false

a The effective interest method is preferred unless the amounts produced under the straight-line method are not materially different

Sales taxes collected from customers are recorded by retailers as: a) liabilities b) revenues c) unearned revenues d) receivables

a They are reported as liabilities because the retailer is acting as the collection agent for the government

On September 14, 2012, Battle Company required 24,000 shares of its $1 par value common stock for $20 per share. Battle uses the cost method to account for treasury stock. The journal entry to record the reacquisition of the stock should debit a) Treasury stock for $480,000 b) Common Stock for $480,000 c) Common stock for $24,000 and Paid-in Capital in Excess of Par for $46,000 d) Treasury stock for $24,000

a Treasury Stock is debited for the cost of the stock: 24,000 X $20 = $456,000

Which of the following is not typically classified as a long-term liability? a) Unearned Revenue b) Bonds Payable c) Lease Payable d) Mortgage Payable

a Unearned Revenue is typically classified as a current liability

The residual interest in a corporation belongs to a) the common stockholders b) the preferred stockholders c) the Board of Directors d) Management

a the residual interest in a corporation belongs to the common stockholders

Common Stock $1 par $14,350,000 Paid in Capital in excess of par - common stock 6,520,000 preferred 8 1/2 % stock, $50 par Paid-in Capital in excess of Par - preferred stock 2,400,000 Retained Earnings 9,543,000 Treasury common Stock (at cost) 695,000 The total stockholders' equity of Rosbottom Corporation is a) $24,805,000 b) $34,348,000 c) $35,043,000 d) 35,738,000

b $14,350,000 + $6,520,000 + $2,230,000 + $2,400,000 + $9,543,000 - $695,000 = $34,348,000.

When the effective rate of a bond is lower than the stated rate, the bond sells at a discount a) true b) false

b A bond sells at a premium when the stated rate is higher than the effective rate

A corporation must be incorporated in each state that it does business in a) true B) false

b A corporation is only incorporated in a single state, namely the one that granted the corporation's charter

Bonds that are not recorded in the name of the bondholder are called unsecured bonds a) true b) false

b Bonds not recorded in the name of the bondholder are called coupon bonds

A bond that matures in installments is called a: a) term bond b) serial bond c) callable bond d) bearer bond

b Bonds that mature in installments are referred to as serial bonds

Stone, Inc. issued bonds with a maturity amount of $2,000,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that a) the market rate of interest exceeded the stated rate b) the stated rate of interest exceeded the market rate c) the market and stated rates coincided d) no necessary relationship exists between the two rates

b Bonds will sell at a premium when the market rate is lower than the stated rate

A bond for which the issuer has the right to call and retire the bonds prior to maturity is a a) convertible bond b) callable bond c) retirable bond d) debenture bond

b Callable bonds give the issuer the right to call and retire the bonds prior to maturity

Participating preferred stock requires that if a corporation fails to pay a dividend in any year, it must make it up in a later year before paying any dividends to common stockholders a) true b) false

b Cumulative preferred stock requires that if a corporation fails to pay a dividend in any year, it must make it up in a later year before paying any dividiends to common stockholders

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 c) When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate. d) The amortization of Discount on Notes Payable increases interest expense.

b Discount on Notes payable account should not be reported as an asset on the balance sheet.

Employee's bonus expense is considered other expense on the income statement a) true b) false

b Employees' bonus expense is an operating expense on the income statement

Employer payroll taxes include all of the following except: a) Federal unemployment taxes b) Federal income taxes c) FICA taxes d) state unemployment taxes

b Employer payroll taxes include all of the options except federal income taxes

Long-term debts maturing currently should be included as a current liability if they are or will be: a) converted into capital stock b) due on demand c) refinanced with the proceeds of a new debt issue d) retired by use of noncurrent assets

b Long-term debts on demand should be classified as a current liability.

Which of the following type of stock will not increase Additional-Paid-in-Capital when issued? a) Par value stock b) No-par value stock c) Stated value stock d) Preferred stock

b No-par value stock does not increase Additional Paid-in Capital because there is no excess over and above a par or stated value to be recorded

Which of the following is not an example of a current liability? a) Dividends Payable b) Preferred dividends in arrears c) Unearned Revenue d) Sales Tax Payable

b Preferred dividends in arrears are not a liability until declared by the Board of Directors.

Costs of issuing stock such as underwriting cost, accounting and legal fees, and printing costs should be recorded as a deferred charge and charged to expense over a period not greater than 25 years a) true b) false

b Stock issue costs are a cost of financing and should reduce the proceeds received from the sale of the stock

The adjusting entry for bond premium amortization Increases interest expense and decreases the balance in premium on bonds payable. a) true B) false interest expense and decreases the balance in premium on bonds payable

b The adjusting entry for bond premium amortization decreases interest expense and decreases the balance in premium on bonds payable

The effective interest method calculates interest expense by multiplying the carrying value of the bonds by the stated rate of interest a) true B) false

b The effective interest method calculates interest expense by multiplying the carrying value of the bonds by the market rate of interest

On January 1, Franco Inc. issued $10,000,000, 9% bonds at 102. The journal entry to record the issuance of the bonds will include. a) a credit to bonds payable for $10,200,000 b) a credit to Premium on Bonds Payable for $200,000 c) a debit to Cash for $10,000,000 d) a credit to Interest Expense for $200,00

b The entry will credit Bonds Payable for $10,000,000 and Premium on Bonds Payable for $200,000

Treasury stock sold for less than its cost decreases net income a) true b) false

b The excess of cost of treasury stock over proceeds is debited to Paid-in Capital from Treasury Stock to the extent that the account has a sufficient balance, and reduced Retained Earnings if the balance is insufficient

Treasury stock is classified on the balance sheet as an asset a) true b) false

b Treasury stock sold for less than its cost decreases net income

Bonds with a face value of $100,000, and stated interest rate of 8%, were sold for $92,278 to yield 10%. Using the effective interest method of amortization, interest a) true B) false

b Using the effective interest method of amortization, interest expense for the first six months would be $4,614 (10% X .5 X $92,278).

If a bond sold at 98 1/2, the market rate was: a) equal to the stated rate b) less than the stated rate c) greater than the stated rate d) equal to the coupon rate

b When a bond is sold at 98 1/2, it sold at a discount (98.5 % of face value), which occurs when the market rate is greater than the stated rate.

If a company intends to refinance a short-term liability on a long-term basis, the liability must be reported as current unless the company has compensated the refinancing agreement by the balance sheet date. a) true b) false

b if a company has both intent and ability to refinance as long-term liability, the debt is classified as long-term

State and federal unemployment taxes are imposed on both employers and employees. a) true b) false

b unemployment taxes are imposed solely on the employer

Lockhart Company issues 10,000 shares of its $1 par value common stock having a market value of $50 per share and 3,000 shares of its $15 par value preferred stock having a market value of $100 per share for a lump sum of $750,000. The proceeds allocated to the common stock is a) $450,000 b) $468,000 c) $500,000 d) $705,000

b (500,000/800,000) X $750,000 = $468,000

A liability for compensated absences is: a) accrued under all conditions b) disclosed in a note only c) accrued only if specific conditions are met d) never accrued but may be disclosed if desired

c A liability for compensated absences should be accrued if specific conditions are met

Which one of the following is not a right of common stockholders? a) To share proportionately in profits and losses b) To share proportionately in corporate assets upon liquidation c) To share proportionately in all management decisions d) To share proportionately in any new issues of stock of the same class

c All of the options are rights of common stockholders except to share in all management decisions

Short-term obligations expected to be refinanced are not classified as current liabilities because a) they will be paid by the balance sheet date b) the obligations will be satisfied before the financial statements are issued c) their satisfaction will not require the use of assets classified as current as of the balance sheet date d) none of these

c Because these obligations will not require the use of working capital during the next year (or operating cycle), they are not classified as current liabilities

All of the following statements related to bonds are correct except bonds: a) arise from a contract known as a bond debenture b) represent a promise to pay a sum of money plus periodic interest c) usually pay interest annually d) typically have a $1,000 face value

c Bond interest payments are usually made semiannually

Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as a) an increase in current liabilities b) an increase in stockholders' equity c) footnote d) an increase in current liabilities for the current portion and long-term liabilities for the long-term portion

c Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as a footnote

Which of the following statements is false? a) Vested rights exist when an employer has an obligation to make payment to an employee b) Unemployment taxes are paid by the employer c) Profit-Sharing Bonus Payable is usually recognized as a long-term liability d) The liability for compensated absences should be recognized in the year

c Profit-Sharing Bonus Payable is usually recognized as a current liability

Most corporations make quarterly tax payments based on: a) actual taxable income for the quarter b) estimated taxable income for the quarter c) estimated total annual tax liability d) actual annual tax liability

c Quarterly tax payments should be made based on estimated total annual tax liability

Which of the following country systems of finance have relied more heavily on debt financing, interlocking stock ownership, banker/directors, and workers/shareholder rights? a) Germany and Britain b) USA and Britain c) Japan and Germany d) Britain and Japan

c The German and Japanese systems have relied more on debt financing, interlocking stock ownership, banker/directors, and worker/shareholder rights than the U.S. and British systems

In every corporation the one class of stock that represents the basic ownership interest is called a) preferred stock b) cumulative stock c) common stock d) owners' stock

c The basic ownership of a corporation is represented by common stock

When a zero-interest-bearing note is issued, the borrower receives the: a) face value of the note b) maturity value of the note c) present value of the note d) none of these

c The borrower receives the present value of the note because the interest has already been deducted

Additional paid-in-capital is not affected by the issuance of: a) stated value stock b) par value stock c) no-par stock d) preferred stock

c The issuance of no-par stock has no effect on additional paid-in-capital

When bonds sell between interest payment dates, the purchaser will pay the seller: a) the price of the bonds only b) the price of the bonds less the accrued interest c) the price of the bonds plus the accrued interest d) none of the above

c The purchaser pays the price of the bonds plus the accrued interest because at the next interest payment date the buyer will receive interest for the entire interest period

The interest rate actually earned by bondholders is called the: a) stated rate b) coupon rate c) effective rate d) nominal rate

c The rate earned by bondholders is called the effective rate or market rate

The residual interest in a corporation belongs to the a) management b) creditors c) common stockholders d) preferred stockholders

c The residual interest in a corporation belongs to the common stockholders

Total stockholders' equity represents a) a claim to specific assets contributed by the owners b) the maximum amount that can be borrowed by the enterprise c) a claim against a portion of the total assets of an enterprise

c Total stockholders' equity represents a claim against a portion of the total assets of an enterprise

Which of the following is true regarding treasury stock transactions by a corporation a) May increase but not decrease retained earnings b) May increase net income if the cost method is used c) May decrease but not increase retained earnings d) May decrease but not increase net income

c Treasury stock transaction may decrease but not increase retained earnings

Which of the following best describes a possible result of treasury stock transactions by a corporation a) may increase but not decrease retained earnings b) may increase net income if the cost method is used c) May decrease but not increase retained earnings d) May decrease but not increase net income

c Treasury stock transactions by a corporation may decrease but not increase retained earnings

Under the cost method, when treasury stock is sold for more than its cost, the excess is credited to: a) Gain on Sale of Treasury Stock b) Paid-in Capital in Excess of Par c) Paid-in capital from treasury stock d) Retained Earnings

c Under the cost method, the excess goes to Paid-in Capital from Treasury Stock

Current liabilities are defined as obligations whose liquidation is reasonably expected to: a) be paid within a year b) require use of current assets c) require use of current assets or creation of other current liabilities d) require the distribution of cash

c require use of current assets or creation of other current liabilities

The printing costs and legal fees associated with the issuance of bonds should a) be expensed when incurred b) be reported as a deduction from the face amount of bonds payable c) be accumulated in a deferred charge account and amortized over the life of the bonds d) not be reported as an expense until the period the bonds mature or are retired

c the printing costs and legal fees associated with the issuance of bonds should be accumulated in a deferred charge account and amortized over the life of the bonds

A debenture bond is a(an): a) callable bond b) Secured bond c) term bond d) unsecured bond

d A debenture bond is unsecured

On December 31, 2011, Bollinger Co. has $3,000,000 of short-term notes payable due on February 14, 2010. On January 10, 2010, Bollinger arranged a line of credit with Compass Bank which allows Bollinger to borrow up to $1,500,000 at one percent above the prime rate for three years. On February 3, 2012, Bollinger borrowed $1,800,000 from Compass Bank and used $800,000 additional cash to liquidate $2,600,000 of short-term notes payable. The amount of the short-term notes payable that should be reported as a current liability on the December 31, 2011 balance sheet which is issued on March 2, 2012 is a) $0 b) $400,000 c) $800,000 d) $1,200,000

d Correct! The correct amount is ($3,000,000 - $1,800,000)$1,200,000

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 Federal income taxes are not included in an employer's payroll tax expense

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 Liabilities are obligations arising from past transactions and payable in assets or services in the future.

Characteristics of the corporate form of organization include all of the following except a) capital stock or share system b) formality of profit distribution c) variety of ownership interests d) unlimited liability of stockholders

d Limited liability - not unlimited liability - is a characteristic of the corporate form

Which of the following statements is false? 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 boards of directors. c) Unearned revenues represent advance payments for good or services from customers. d) Stock Dividends are a reported as a liability until paid.

d Stock dividends are not a liability.

All of the following are typically classified as current liabilities except: a) current maturities of long-term debt b) returnable deposits c) unearned revenues d) stock dividends distributable

d Stock dividends distributable is not a liability

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) retained earnings and contributed capital

d Stockholders' equity is generally classified into retained earnings and contributed capital

Bertram Corporation was organized in January 2012 with authorized capital of $1 par value common stock. On February 1, 2012, shares were issued at par for cash. On March 1, 2012, the corporation's attorney accepted 5,000 shares of common stock in settlement for legal services with a fair value of $45,000. Additional paid-in-capital would increase on February 1, 2012 March 1, 2012 a) yes no b) yes yes c) no no d) no yes

d The first issuance of stock is sold at par so no additional paid-in-capital is recorded. The attorney accepted the stock at (45,000/9,000 shares) = $5, a value greater than par so additional paid-in-capital is recorded

The selling price of a bond is the sum of the present values of the principal and the periodic interest payments. The present values are determined by using the: a) stated rate b) nominal rate c) coupon rate d) market rate

d The market rate is used to determine the selling price of a bond

Stock issued I noncash transactions should be recorded at the: a) Fair Market value of the stock issued b) Fair Market value of the property received c) Par value of the stock issued d) Fair Market value of the stock issued or fair market value of the property received, whichever is more readily determinable

d The transaction should be recorded at the fair market value of the stock issued or the fair market value of the property received, whichever is more readily determined

Bond issue costs are recorded as a(an) a) expense b) asset c) reduction in Bonds Payable d) deferred charge

d Under GAAP debt issue costs are treated as a deferred charge and amortized over the life of the bond

All of the following are features of preferred stock except: a) callable at the corporation's option b) convertible into common stock c) preference as to dividends d) voting

d all of the options are features of preferred stock except that preferred stock is always nonvoting

Both discount on bonds payable and premium on bonds payable are a) adjunct accounts b) contra accounts c) nominal accounts d) valuation accounts

d both discount on bonds payable and premium on bonds payable are liability valuation accounts

When retailers collect sales taxes from customers, the taxes collected are recorded as: a) sales b) sales taxes payable c) unearned sales taxes revenue d) sales or sales taxes payable

d sales taxes collected by retailers can be recorded as either sales or sales taxes payable

The interest rate written in the terms of the bond indenture is known as the a) effective rate b) market rate c) yield rate d) coupon rate, nominal rate, or stated rate

d the interest rate written in terms of the bond indenture is known as the coupon rate, nominal rate, or stated rate

A stock dividend distributable is classified as a long-term liability because it will not be liquidated using current assets a) true b) false

false A stock dividend distributable is liquidated using capital stock rather than assets. Thus, a stock dividend distributable should be classified in an entity's equity section

The only requirement for an obligation to be classified as a current liability is that it be liquidated within the operating cycle or one year, whichever is longer a) true b) false

false In addition to the Operating cycle or one year, whichever is longer criterion, one other criterion is necessary for an obligation to be classified as current. Current liabilities are obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets or the creation of other current liabilities

Notes payable are only classified as short-term a) true b) false

false Notes payable may be classified as short-term or long-term, depending upon the payment due date

A short-term obligation expected to be refinanced may be excluded from current liabilities if (a) a company intends to refinance the obligation on a long-term basis, and (b) the company demonstrates an ability to consummate the refinancing a) true b) false

true

If a short-term obligation is excluded from current liabilities because of refinancing, a footnote to the financial statements should be included disclosing the particulars of the refinancing arrangements a) true b) false

true

If sick pay benefits accumulate but do not vest, accrual is permitted but not required a) true b) false

true

The currently maturing portion of a serial bond should not be classified as a current liability if it will be paid out of a long-term asset such as a sinking fund a) true b) false

true

When a company issues a zero-interest bearing note, the difference between the face amount of the note and the cash proceeds is most appropriately recorded as a discount on notes payable

true

When a company issues a zero-interest bearing note, the difference between the face amount of the note and the cash proceeds is most appropriately recorded as a discount on notes payable a) true b) false

true

When refinancing on a long-term basis is expected to be accomplished through the issuance of equity securities, it is not appropriate to include the short-term obligation in owners' equity a) true b) false

true