Exam 1 prep quiz

We classify a lease as a finance lease if the:

lessee obtains control of the use of the asset.

Of the following, which usually would not be classified as a current liability?

A nine-month note to be paid with the proceeds from the sale of common stock.

Which of the following statements concerning lines of credit is untrue?

A noncommitted line of credit is a formal agreement that usually requires the firm to pay a commitment fee to the bank.

Bonds will sell at:

A premium if the stated rate exceeds the market rate.

After the end of the 2025 fiscal year but before financial statements were issued, Palladin Company learned that an arbitrator had made a $15 million judgment in a litigation case against it. The claim had been made in 2024 for alleged defects of products sold in 2023. Prior to learning of the judgment, Palladin had not accrued any litigation loss, and does not plan to appeal. For the 2025 fiscal year, Palladin should:

Accrue a $15 million liability and explain it in a note to the financial statements.

A discount on bonds should be reported in the balance sheet:

As a reduction of the face amount of the bond.

For a finance lease, an amount equal to the present value of the lease payments should be recorded by the lessee as a(n)

Asset and a liability.

Which of the following would result in a credit to a deferred revenue liability?

Both are correct.

Commercial paper has become an increasingly popular way for companies to raise funds. Which of the following is not true regarding commercial paper?

Commercial paper usually is sold in minimum denominations of $25,000 with maturities of greater than 270 days.

Most corporate bonds are:

Debenture bonds.

The interest rate that is printed on the bond certificate is referred to as any of the following except:

Effective rate.

Leasing has become the number one method of external financing by U.S. companies. Reasons include each of the following except:

Extended use of the asset.

From the perspective of the lessee, leases may be classified as either:

Finance or operating.

When a firm records bond interest expense at the effective rate for bonds issued at a discount its net income in the bond's first year will be:

Higher than if the straight-line method were used.

When a bond issue sells for less than its face value, the market rate of interest is:

Higher than the stated rate of interest.

If bonds are issued between interest dates the entry to record the issuance of the bonds will:

Include a credit to accrued interest payable.

AMC Corporation issued bonds at a discount. The long-term liability reported in AMC's balance sheet will:

Increase each year during the term to maturity.

Which of the following results in an accrued liability?

Interest on a 6 month bank loan due in two months; Yes / Sales taxes collected on recent sales; Yes

An amortization schedule for bonds issued at a premium:

Is a schedule that reflects the changes in the debt over its term to maturity.

When bonds are issued at a discount and interest expense is recorded at the effective interest rate, interest expense in the earlier years of the term to maturity will be:

Less than if the straight-line method were used.

In a ten-year finance lease, the portion of the annual lease payment in the lease's third year that represents interest is:

Less than in the second year.

From the perspective of the lessor, two possible lease classifications are:

Operating or sales-type.

If a finance lease contains a bargain purchase option, the lessee should amortize the leased asset:

Over the economic life of the asset.

The price of a corporate bond is the present value of its face amount at the market or effective rate of interest

Plus the present value of all future interest payments at the market or effective rate of interest.

Since the lease payments under a lease agreement are normally paid at the beginning of each period, the appropriate compound interest table to be used to determine the amount at which the right-of-use asset should be recorded is the:

Present value of an annuity due table.

The appropriate asset value reported in the balance sheet by the lessee for an operating lease is:

Present value of the lease payments.

Bonds usually sell at their:

Present value.

Which of the following loss contingencies generally do not require accrual?

Retailers' extended warranties.

Which of the following would a lessor not record in connection with a lease?

Right-of-use asset.

The interest rate that determines the amount of cash interest paid each interest date is referred to as the

Stated rate.

Which of the following leases would least likely be classified as an operating lease by the lessee?

The agreement permits the lessee to buy the leased asset for one dollar at the end of the lease term.

Under U.S. GAAP, liabilities payable within one year can be excluded from current liabilities only if:

The business has the intent and the ability to refinance the obligation on a long-term basis.

The five criteria provided in GAAP for distinguishing a finance lease from an operating lease do not include which of the following?

The collectibility of the lease payments must be reasonably predictable.

The essential characteristics of a liability do not include:

The existence of a legal obligation.

Which of the following is not a sufficient criterion for a lessee to classify a lease as a finance lease?

The lease term is greater than two-thirds of the economic life of the asset.

In its financial statements, an enterprise should accrue a liability for a loss contingency involving a possible cash payment if certain conditions exist. Each of the following is a condition for accrual except:

The obligation is a legally enforceable claim.

In a bond amortization table for bonds issued at a discount:

The total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid.

In connection with a lease transaction, the lessor would not record:

a liability.

A loss contingency should be accrued when the amount of loss is known and the occurrence of the loss is:

no; no

There is a possibility of a safety hazard for a manufactured product. As yet, no claim has been made for damages, though there is a reasonable possibility that a claim will be made. If a claim is made, it is probable that damages will be paid and the amount of the loss can be reasonably estimated. This possible loss must be:

no; no