Intermediate Acct. II Exam 1 Concept Questions

Why is the liability section of the balance sheet of primary importance to bankers?

it assists in understanding the entity's liquidity

Which of the following is not considered a part of the definition of a liability? a. It is an unavoidable obligation. b. The transaction or other event creating the liability has already occurred. c. It is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services. d. Its liquidation is reasonably expected to require the use of existing resources classified as current assets or create other current liabilities.

d. Its liquidation is reasonably expected to require the use of existing resources classified as current assets or create other current liabilities.

When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless a. no interest rate is stated. b. the stated interest rate is unreasonable. c. the stated face amount of the note is materially different from the current cash sales price for similar items or from the current fair value of the note. d. any of these answers are correct.

d. any of these answers are correct.

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

d. effective rate.

Which of the following must be disclosed relative to long-term debt maturities & sinking fund requirements? a. present value of scheduled interest payments on long-term debt during each of the next five years b. scheduled interest payments on long-term debt during each of the next five years c. the present value of future payments for sinking fund and long-term debt maturities d. future payments for sinking fund requirements and long-term debt maturities during each of the next five years

d. future payments for sinking fund requirements and long-term debt maturities during each of the next five years

When the effective-interest method is used to amortize bond premium or discount, the periodic amortization amount will a. increase only if the bonds were issued at a discount. b. decrease only if the bonds were issued at a premium. c. increase only if the bonds were issued at a premium. d. increase if the bonds were issued at either a discount or a premium.

d. increase if the bonds were issued at either a discount or a premium.

Which of the following features of preferred stock makes it more like debt rather than equity? a. noncumulative b. voting c. participating d. redeemable

d. redeemable

Stockholder's equity is generally classified into two major categories which are

earned capital & contributed capital

Bonds that pay no interest unless the issuing company is profitable are called

income bonds

Total stockholder's equity represents

claims against a portion of the total assets of a company

When is a contingent liability recorded?

When the future events are probable to occur and the amount can be reasonably estimated.

Direct costs incurred to sell stock such as underwriting costs should be accounted for as

a reduction of additional paid in capital

Which of the following is a characteristic of an assurance-type warranty, but not a service-type warranty? a. Warranty liability. b. Warranty expense. c. Unearned warranty d. Warranty Revenue

a. Warranty liability.

Which of the following is NOT a legal restriction related to profit distributions by a corporation? a. amount distributed in a year can't exceed net income b. dividends must be paid in agreement w/ capital stock contracts c. amount distributed must comply with state law d. profit distributions must be approved by directors

a. amount distributed can't exceed net income

If bonds are issued 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 the interest payments. c the same as if the straight-line method were used. d. less than if the straight-line method were used.

a. greater than if the straight-line method were used.

Which of the following accounts would be classified as a current liability? a. notes payable due within one three-year operating cycle b. accounts payable with debit balances' c. losses expected to be incurred within the next twelve months in excess of the company's insurance coverage d. expected recovery from a lawsuit where likelihood of success is probable

a. notes payable due within one three-year operating cycle

Which of the following is a characteristic of an assurance-type warranty, but not a service-type warranty? a. warranty liability b. warranty revenue c. warranty expense d. unearned warranty revenue

a. warranty liability

Which of the following transactions does not give rise to unearned revenue? a. Delta Airlines sells airline tickets for use in the next month. b. Appalachian Rentals collects security deposits from the students to whom it rents. c. Haircut 101 sells gift cards for services. d. Caldwell University sells season football tickets to alumni.

b. Appalachian Rentals collects security deposits from the students to whom it rents.

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

b. as a disclosure only

The term used for bonds for which the principal is unsecured is a. mortgage bonds. b. debenture bonds. c. indenture bonds. d. callable bonds.

b. debenture bonds.

Which of the following is not included in an employer's payroll tax expense? a. FICA taxes b. federal income taxes c. federal unemployment taxes d. state unemployment taxes

b. federal income taxes

Which type of dividends do not reduce stockholders' equity? a. cash dividends b. stock dividends c. property dividends d. liquidating dividends

b. stock dividends

Martinez Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be a. zero. b. the minimum of the range. c. the mean of the range. d. the maximum of the range.

b. the minimum of the range.

The covenants and other terms of the agreement between the issuer of the bonds and the lender are outlined in the

bond indenture

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

c. common stockholders.

Common stock shares issued will exceed common stock shares outstanding as a result of the a. declaration of a stock split. b. declaration of a stock dividend. c. purchase of treasury stock. d. payment in full of subscribed stock.

c. purchase of treasury stock.

The replacement of an existing bond issuance with a new one is called a. like-kind exchange. b. reissue. c. refunding. d. troubled-debt restructuring.

c. refunding.

"Gains" on sales of treasury stock (using the cost method) should be credited to

paid-in capital from treasury stock

An employee's net pay is determined by gross earnings minus amounts for income tax withholdings and the employee's

portion of FICA taxes and any union dues

When a zero interest bearing note is issued at an amount less than face value

the company records the difference between face amount & cash received (PV) as a discount & amortizes the amount to interest expense over the life of the note

If a company holds a debt until maturity, how should the extinguishment of debt be recorded

the company will not have to compute any gain or loss

The purpose of the times interest earned ratio is to indicate

the company's ability to meet interest payments as they come due

The total interest recorded on a zero-interest-bearing note is equal to

the difference between the maturity value and the cash proceeds received

When treasury stock is purchased for more than the par value of the stock & the cost method is used to account for treasury stock, what account should be debited?

treasury stock for the purchase price