INT. II ACCT Test 2 Reading Comprehension

When bonds are sold at a premium and the effective interest method is used, at each interest payment date, the interest expense: Increases. Decreases. Is equal to the change in outstanding balance (book value). Remains constant.

Decreases.

Match 1. Reported as assets 2. Based on term of lease for a finance lease 3. Lessor's rate of return 4. Calculated as effective rate times balance 5. Calculated as lease payments plus residual value Amortization on right-of-use assets Discount rate Interest expense Leasehold improvements Lessor's gross investment

1. Leasehold improvements 2. Amortization on right-of-use assets 3. Discount rate 4. Interest expense 5. Lessor's gross investment

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. Asset and a different amount should be recorded as a liability. Liability and a different amount should be recorded as an asset. Expense.

Asset and a liability.

Recording a sales-type lease with a selling profit is similar to recording: A purchase on account. An exchange of assets. A sale of a fixed asset. A sale of merchandise on account.

A sale of merchandise on account.

In each succeeding payment on an installment note, the: Amount of principal paid increases. Amount of principal paid decreases. Amounts paid for both interest and principal increase proportionately. Amount of interest paid increases.

Amount of principal paid increases.

A sales-type lease is reported in the lessor's balance sheet as: An asset. A liability. Interest revenue. A contra account to lease liability.

An asset.

Any one of the five criteria specified by GAAP regarding accounting for leases. Any one of first five classification criteria and both of the last two additional conditions specified by GAAP regarding accounting for leases. More than one of the five criteria specified by GAAP regarding accounting for leases. All five of the criteria specified by GAAP regarding accounting for leases. Any one of the five criteria specified by GAAP regarding accounting for leases.

Any one of the five criteria specified by GAAP regarding accounting for leases.

The lessee's option to purchase a leased asset at a price that is sufficiently lower than the asset's expected fair value so that the exercise of the option appears reasonably certain sometimes is called a: Bargain purchase option. Lessee buy-out option. Lessor sell-out option. Guaranteed purchase option.

Bargain purchase option.

If the lessor records deferred lease revenue at the beginning of a lease term, the lease must: Be a financing lease. Be a sales-type lease. Contain a bargain renewal option. Be an operating lease.

Be an operating lease.

When the interest payment dates are March 1 and September 1, and notes are issued on July 1, the amount of interest expense to be accrued on December 31 of the year of issue would: Be for ten months. Be for six months. Not be required. Be for four months.

Be for four months.

Advance payments made by the lessee on an operating lease are considered to be: Lease expense. Amortization of the right-of-use asset. Deferred revenue to the lessor. A prepayment of interest expense.

Deferred revenue to the lessor.

Interest expense is the: Stated interest rate times the face amount of the debt. Stated interest rate times the amount of the debt outstanding during the interest period. Effective interest rate times the amount of the debt outstanding during the interest period. Effective interest rate times the face amount of the debt.

Effective interest rate times the amount of the debt outstanding during the interest period.

The interest rate that is printed on the bond certificate is referred to as any of the following except: Nominal rate. Effective rate. Stated rate. Contract rate.

Effective rate.

The rate of interest that actually is incurred on a bond payable is called the: Contract rate. Stated rate. Effective rate. Face rate.

Effective rate.

When bonds and other debt are issued, costs such as legal costs, printing costs, and underwriting fees are referred to as debt issue costs. When debt issue costs are incurred, the: Recorded amount of the debt is increased by the debt issue costs. Decrease in the effective interest rate caused by the debt issue costs is reflected in the interest expense. Increase in the effective interest rate caused by the debt issue costs is reflected in the interest expense. Debt issue costs are recorded separately as an asset.

Increase in the effective interest rate caused by the debt issue costs is reflected in the interest expense.

When bonds are sold at a discount and the effective interest method is used, at each interest payment date, the interest expense: Increases. Remains the same. Is equal to the change in book value. Decreases.

Increases.

An amortization schedule for bonds issued at a premium: Summarizes the amortization of the premium, a contra-asset account with a credit balance. Is reported in the balance sheet. Is a schedule that reflects the changes in the debt over its term to maturity. All of these answer choices are correct.

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

For a bond issue that sells for more than the bond face amount, the effective interest rate is: Less than the rate stated on the face of the bond. More than the rate stated on the face of the bond. The rate printed on the face of the bond. The Wall Street Journal prime rate.

Less than the rate stated on the face of the bond.

Zero-coupon bonds: Result in zero interest expense for the issuer. Are reported as shareholders' equity by the issuer. Result in zero interest revenue for the investor. Offer a return in the form of a deep discount off the face value.

Offer a return in the form of a deep discount off the face value.

From the perspective of the lessor, two possible lease classifications are: Financing or sales-type. Operating or financing. Sales-type or indirect financing. Operating or sales-type.

Operating or sales-type.

Bonds usually sell at their: Present value. Maturity value. Statistical expected value. Face value.

Present value

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 ordinary annuity table Present value of $1 table. Present value of an annuity due table. Future value of an annuity due table.

Present value of an annuity due table.

Straight-line amortization of bond discount or premium: Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method. Can be used for amortization of discount or premium in all cases and circumstances. Provides the same amount of interest expense each period as does the effective interest method. Is appropriate for deep discount bonds.

Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method.

The method used to pay interest depends on whether the bonds are: Registered or coupon. Callable or redeemable. Mortgaged or unmortgaged. Indentured or debentured.

Registered or coupon.

When bonds are sold at a discount and the straight-line interest method is used, at each interest payment date, the interest expense: Decreases. Remains the same. Is equal to the change in outstanding balance (book value). Increases.

Remains the same.

When the total expenses over the life of an operating lease are compared to the total expenses over the life of a finance lease, one will find that: The expenses of a finance lease are greater than the expenses of the operating lease. The expenses of the finance lease and operating lease are equal. The expenses of an operating lease are greater than the expenses of a finance lease. No meaningful comparison can be made.

The expenses of the finance lease and operating lease are equal.

The debt to equity ratio indicates: Profitability without regard to how resources are financed. The margin of safety provided to creditors. The extent of "trading on the equity" or financial leverage. The effectiveness of employing resources provided by owners.

The extent of "trading on the equity" or financial leverage.

Bonds were issued at a discount. In the bond amortization schedule, the: Reduction in the discount is less with each successive interest payment. Outstanding balance (book value) of the bonds declines eventually to face value. Interest expense is less with each successive interest payment. Total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid.

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

We classify a lease as a finance lease if the: present value of lease payments is less than the asset's book value. present value of lease payments is less than the asset's fair value. lessee obtains control of the use of the asset. usual risks and rewards are retained by the lessor.

lessee obtains control of the use of the asset.

In an operating lease, the: lessee records an asset and a liability for the present value of lease payments. lessor records a receivable for the present value of lease payments. lessee records an asset and a liability for the total of the lease payments. lessor records interest revenue.

lessee records an asset and a liability for the present value of lease payments.

In a ten-year finance lease agreement, the portion of the periodic lease payment that represents interest in the third year is: the same as in the fourth year. the same as in the first year. less than in the fourth year. more than in the fourth year.

more than in the fourth year.

When a finance lease is first recorded at the beginning of the lease, the entry made by the lessee typically includes a debit to: right-of-use asset. rent expense. lease expense. lease receivable.

right-of-use asset.

One of the five criteria for a finance lease specifies that the present value of the lease payments be equal to or greater than: substantially all of the cost of the asset. the major part of the fair value of the asset. substantially all of the fair value of the asset. the major part of the cost of the asset.

substantially all of the fair value of the asset.

One of the five criteria for a finance lease specifies that the lease term be equal to or greater than: the major part of the remaining economic life of the leased property. the entire amount of the remaining economic life of the leased property. a meaningful part of the remaining economic life of the leased property. a non-insignificant part of the remaining economic life of the leased property.

the major part of the remaining economic life of the leased property.

To evaluate the risk and quality of an individual bond issue, savvy investors rely heavily on: Bond interest payments. Newspaper articles. The company's audit report. Bond ratings provided by financial investment services such as Moody's.

Bond ratings provided by financial investment services such as Moody's.

For the lessee to account for a lease as a finance lease, the lease must meet: All five of the criteria specified by GAAP regarding accounting for leases. Any one of the six criteria specified by GAAP regarding accounting for leases. Any two of the criteria specified by GAAP regarding accounting for leases. Any one of the five criteria specified by GAAP regarding accounting for leases.

Any one of the five criteria specified by GAAP regarding accounting for leases.

A $500,000 bond issue sold at 98. Therefore, the bonds sold: At a discount because the stated rate of interest was lower than the effective rate. At a discount because the effective interest rate was lower than the face rate. At a premium because the stated rate of interest was higher than the yield rate. For the $500,000 face amount less $10,000 of accrued interest.

At a discount because the stated rate of interest was lower than the effective rate.

The unamortized balance of discount on bonds payable is reported in the balance sheet as a(n): Prepaid expense. Contra-liability. Expense account. Current liability.

Contra-liability.

Most corporate bonds are: Mortgage bonds. Secured bonds. Collateral bonds. Debenture bonds.

Debenture bonds.

Bonds payable should be reported as a long-term liability in the balance sheet of the issuing corporation at the: Current bond market price. Face amount less any unamortized premium or plus any unamortized discount. Face amount price less any unamortized discount or plus any unamortized premium. Face amount less accrued interest since the last interest payment date.

Face amount price less any unamortized discount or plus any unamortized premium.

From the perspective of the lessee, leases may be classified as either: Sales-type without selling profit or sales-type with selling profit. Finance or sales-type without selling profit. Finance or operating. Sales-type or operating.

Finance or operating.

At a discount because the stated rate of interest was lower than the effective rate. Less than $500,000. The answer cannot be determined from the information provided. More than $500,000. Equal to $500,000.

More than $500,000.

Ordinarily, the proceeds from the sale of a bond issue will be equal to the: Face amount of the bond plus the present value of the stream of interest payments. Face amount of the bond. Present value of the face amount plus the present value of the stream of interest payments. Total of the face amount plus all interest payments.

Present value of the face amount plus the present value of the stream of interest payments.

The appropriate asset value reported in the balance sheet by the lessee for an operating lease is: Present value of the lease payments. Sum of the lease payments. The lessor's book value of the asset at the beginning of the lease. Zero, unless a prepayment or accrual is involved.

Present value of the lease payments.

The lessee normally measures the lease liability to be recorded as the: Future value of the lease payments. Sum of the cash payments over the term of the lease. Present value of the lease payments. Book value of the leased asset.

Present value of the lease payments.

When a long-term note is given in exchange for equipment, the amount considered as paid for the machine is the: Present value of the note payments discounted at the market rate. Invoice price. Present value of cash outflows discounted at the stated rate. Wholesale price.

Present value of the note payments discounted at the market rate.

The rate of return on assets indicates: The effectiveness of employing resources provided by owners. Profitability without regard to how resources are financed. The margin of safety provided to creditors. The extent of "trading on the equity" or financial leverage.

Profitability without regard to how resources are financed.

When bonds are sold at their face amount (no discount, no premium) and the effective interest method is used, at each interest payment date, the interest expense: Increases. Is equal to the change in outstanding balance (book value). Decreases. Remains the same.

Remains the same.

A noncancelable lease contains an option to purchase a leased asset at a price that is sufficiently lower than the asset's expected fair value so that the exercise of the option appears reasonably certain. The fair value of the asset exceeds the lessor's cost of the asset. Therefore, the lease will be accounted for by the lessor as a(n): Sales-type lease. Financing lease. Operating lease. Guaranteed lease.

Sales-type lease.

The interest rate that determines the amount of cash interest paid each interest date is referred to as the: Market rate. Effective rate. Cash rate. Stated rate.

Stated rate.

Distinguishing between operating and finance leases is due in large part to the accounting concept of: Conservatism. Materiality. Substance over form. Historical cost.

Substance over form.

If the lessee and lessor use different interest rates to account for a finance/sales-type lease, then: The lessee is unaware of the lessor's implicit rate. Total expenses for the lessee will equal the lessor's total revenues. GAAP has been violated by at least one party. The lessee will report more net income for the year.

The lessee is unaware of the lessor's implicit rate.

The times interest earned ratio indicates: The extent of "trading on the equity" or financial leverage. Profitability without regard to how resources are financed. The margin of safety provided to creditors. The effectiveness of employing resources provided by owners.

The margin of safety provided to creditors.

In connection with a lease transaction, the lessor would not record: an asset. depreciation. interest revenue. a liability.

a liability.

In a finance lease, the amortization of the right-of-use asset in the third year is: the same as in the fourth year. zero. less than in the fourth year. more than in the fourth year.

the same as in the fourth year.