ACC CH13-15

Presented below is information related to Kaenzig Corporation: Common Stock , $1 par $2,100,000 Paid-in Capital in Excess of Par - Common Stock. 550,000 Preferred 8 ½% Stock, $50 par. 1,700,000 Paid-in Capital in Excess of Par—Preferred Stock. 950,000 Retained Earnings 2,350,000 Treasury Common Stock (at cost) 250,000 The total stockholders' equity of Kaenzig Corporation is $5,300,000. $2,300,000. $7,900,000. $7,400,000.

$7,400,000.

Which of the following is not needed to determine the unamortized discount? A : Bond issue costs. B : Face value of the bond. C : Par value. D : Term in years of the bond.

A Bond issue costs.

JT Enterprises has $800,000 in short-term debt that it both intends to and has the ability to refinance. As a result, JT excludes this debt from the current liabilities section of its financial statements. In doing so, JT should not include which of the following in the note to the financial statements? A : A general description of the financing agreement. B : The terms of any equity security issued or to be issued. C : The amount of interest to be paid over the life of the long-term obligation. D : The terms of the any new obligation incurred or to be incurred.

A The amount of interest to be paid over the life of the long-term obligation.

Net receivables should be included in the numerator when computing the acid-test ratio. A True B False

A True

Paying a current liability with cash will increase a current ratio. A True B False

A True

Payment of debt is also called extinguishment of debt. A : True B : False

A True

Pinnacle Corporation uses the fair value option to record the value of a long-term note payable. If, in 2020, the company reports an unrealized holding gain, this gain should be reported as part of the firm's net income. A : True B : False

A True

Under which of the following circumstances will total stockholders' equity increase? A After neither a stock dividend nor a stock split. B After a stock dividend but not a stock split. C After a stock split but not a stock dividend. D After either a stock dividend or a stock split.

After neither a stock dividend nor a stock split.

Which of the following factors need not be considered in determining whether a liability should be recorded with respect to pending or threatened litigation? The time period in which the cause of action occurred. The probability of an unfavorable outcome. The ability to make a reasonable estimate of the loss. All of the options must be considered.

All of the options must be considered.

Which of the following is included in employer payroll taxes? F.I.C.A. taxes. Federal unemployment taxes. State unemployment taxes. All of these answers are correct.

All of these answers are correct.

An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. Which of the following is not true at the time of reacquisition? A : Any costs of issuing the bonds must be amortized up to the purchase date B : Interest must be accrued from the last interest date to the purchase date C : The premium must be amortized up to the purchase date D : Any gain or loss is amortized over the remaining life of the bonds

Any gain or loss is amortized over the remaining life of the bonds

How does the generally accepted method of accounting for gains or losses from the early extinguishment of debt treat any gain or loss? A : As an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt B : As an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument C : As an adjustment to the cost basis of the asset obtained by the debt issue D : As a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption

As a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption

The Marson Company took advantage of market conditions to refund debt. This was the fourth refunding operation carried out by Marson within the last three years. How should the excess of the carrying amount of the old debt over the amount paid to extinguish it be reported? A : As part of continuing operations B : As deferred credit to be amortized over the life of the new debt C : As loss, net of income taxes D : As gain, net of income taxes

As part of continuing operations

Current liabilities are usually recorded and reported in financial statements at their current value. A True B False

B False

The earned __________ of the company is represented by retained earnings.

Capital

Which of the following is not an example of "off-balance-sheet financing"? Operating leases Capital leases Special purpose entity Non-consolidated subsidiary

Capital Lease

Federal income taxes withheld by the employer on behalf of the employee are recorded as current liabilities. receivables. expenses. unearned revenues.

Current Liabilities

Best-efforts underwriting means that the investment bank guarantees the proceeds of the bond issue will be a certain amount. True False

False

Stock splits increase total stockholders' equity. True False

False

Oliveira Industries issued $500,000 in 10% bonds with a 10-year term. If they pay interest to bondholders on a typical schedule, they could choose to pay interest on A January 1 and July 1. B the last day of each month. C December 31. D March 31, June 30, September 31, and December 31.

January 1 and July 1.

Which of the following country systems of finance have relied more heavily on debt financing, interlocking stock ownership, banker/directors, and worker/shareholder rights? Japan and Germany. Germany and Britain. Britain and Japan. USA and Britain.

Japan and Germany.

Which of the following is not acceptable treatment for the presentation of current liabilities? Listing current liabilities according to amount. Showing currently maturing long-term debt as part of current liabilities. Listing current liabilities in order of maturity. Offsetting current liabilities against assets that are to be applied to their liquidation.

Offsetting current liabilities against assets that are to be applied to their liquidation.

Which of the following is not an example of a current liability? Preferred dividends in arrears. Dividends Payable. Unearned Service Revenue. Salaries Payable.

Preferred dividends in arrears

Which of the following is not true about the discount on short-term notes payable? The Discount on Notes Payable account should be reported as an asset on the balance sheet. The Discount on Notes Payable account is a contra account to the liability, Notes Payable, and has a debit balance. When there is a discount on a note payable, the amount of cash received will be less than the face value of the note. The amortization of Discount on Notes Payable increases interest expense.

The Discount on Notes Payable account should be reported as an asset on the balance sheet.

Preferred stock has no voting rights. True False

True

Accrued liabilities are disclosed in the financial statements by an appropriation of retained earnings. appropriately classifying them as regular liabilities in the balance sheet. showing the amount among the liabilities but not extending it to the liability total. a footnote to the statements.

appropriately classifying them as regular liabilities in the balance sheet.

Before declaring a cash dividend, management must consider the availability of funds. current market price of the stock. effect on paid-in capital. legal capital of the stock.

availability of funds.

The printing costs and legal fees associated with the issuance of bonds should not be reported as an expense until the period the bonds mature or are retired. be reported as a reduction to the issue amount of the bond payable and then amortized to expense over the life of the bond. be accumulated in a deferred charge account and amortized over the life of the bonds. be expensed when incurred.

be reported as a reduction to the issue amount of the bond payable and then amortized to expense over the life of the bond.

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

callable bond.

After a stock split, a company's par value per share will __________ and the number of shares outstanding will __________. A decrease; increase B decrease; remain the same C increase; increase D remain the same; remain the same

decrease; increase

On January 1, 2020, Hanson Incorporated had an initial public offering of 10,000 shares of $10 par value common stock. The shares sold for $15 each. Six months later, Hanson reacquired 1,000 shares of its stock for $12 per share. The acquisition of these treasury shares A decreased total stockholders' equity. B increased total stockholders' equity. C did not change total stockholders' equity. D decreased the number of issued shares.

decreased total stockholders' equity.

On October 31, 2017, Lexington Corp. declared and issued a 12% common stock dividend. Prior to this dividend, Lexington had 302,000 shares of $.001 par value common stock issued and outstanding. The fair value of Lexington's common stock was $16.75 per share on October 31, 2017. As a result of this stock dividend, the company's total stockholders' equity did not change. decreased by $5,058,500. decreased by $5,058,198. increased by $302,000.

did not change.

Marion Company issued a $350,000, zero-interest-bearing, 5-year note in exchange for land with a fair market value of $287,000 from Palma Real Estate. If the present value of the note at an appropriate rate of interest is $287,000, Palma Real Estate should record a A discount on notes receivable. B premium on the sale of land. C premium on notes receivable. D gain on the sale of land.

discount on notes receivable.

Fuller Enterprises reports a credit balance in retained earnings. Because of this, if they have sufficient cash, they may decide to A distribute the assets to the stockholders. B sell common stock above par value. C sell treasury stock at an amount in excess of par value. D distribute the assets to creditors.

distribute the assets to the stockholders.

A debenture bond issued by a corporation A is unsecured. B matures in installments. C is secured by stocks and bonds of other corporations. D may be converted into other securities of the corporation for a specified time after issuance. the correct Answer is A : is unsecured.

is unsecured.

The current ratio measures profitability. solvency. liquidity. all of these options are correct.

liquidity.

Which of the following dividends does not reduce total stockholders' equity? Stock dividends. All of these answer choices reduce total stockholders' equity. Liquidating dividends. Cash dividends.

Stock dividends.

Note disclosures for long-term debt generally include all of the following except restrictions imposed by the creditor. names of specific creditors. assets pledged as security. call provisions and conversion privileges.

names of specific creditors.

The residual interest in a corporation belongs to the preferred stockholders. management. the board of directors. the common stockholders.

the common stockholders.

Ultra-energy Company offers a cash rebate of $2 on each $9 package of protein powder sold during 2017. Historically, 20% of their customers mail in the rebate form. During 2017, 3,000,000 packages are sold, and 250,000 $2 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the company's 2017 financial statements? $1,200,000; $700,000 $500,000; $1,200,000 $1,200,000; $500,000 $500,000; $700,000

$1,200,000; $700,000

Pontchartrain Company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. The company uses effective-interest amortization. Interest expense reported on the 2017 income statement will total $1,529,115. $1,560,000. $1,600,000. $1,568,498.

$1,568,498.

Terpsichore Inc. has 1,000 shares of 5%, $100 par value, cumulative preferred stock and 200,000 shares of $1 par value common stock outstanding at December 31, 2017, and December 31, 2016. No dividends were paid in 2016. In 2017, $75,000 of dividends are declared and paid. If the preferred stock is nonparticipating, what are the dividends received by the preferred stockholders in 2017? $5,000. $10,000. $42,500. $65,000.

$10,000.

Fancy Fish Company offers a cash rebate of $.25 on each $12 package of fish food sold during 2017. Historically, 10% of their customers mail in the rebate form. During 2017, 5,000,000 packages are sold, and 150,000 $.25 rebates are mailed to customers. What is the rebate expense and liability, respectively, reported in the company's 2017 financial statements? $125,000; $37,500 $125,000; $125,000 $125,000; $87,500 $37,500; $87,500

$125,000; $87,500

Blowing Rock Inc. has 5,000 shares of 5%, $100 par value, cumulative preferred stock and 30,000 shares of $1 par value common stock outstanding at December 31, 2017. There were no dividends declared in 2015. The board of directors declares and pays a $45,000 dividend in 2016 and in 2017. What is the amount of dividends received by the common stockholders in 2017? $0 $15,000 $45,000 $25,000

$15,000

Camden Inc. has 2,000 shares of 5%, $100 par value, cumulative preferred stock and 200,000 shares of $1 par value common stock outstanding at December 31, 2017, and December 31, 2016. No dividends were paid in 2016. In 2017, $85,000 of dividends are declared and paid. If the preferred stock is nonparticipating, what are the dividends received by the preferred stockholders in 2017? $85,000. $10,000. $20,000. $65,000.

$20,000.

On June 30, 2017, Prouty Co. had outstanding 9%, $5,000,000 face amount, 10-year bonds that pay interest semi-annually on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2017 was $200,000. On June 30, 2017, Prouty acquired all of these bonds at 101 and retired them. What amount of gain or loss would Prouty record on this early extinguishment of debt? $250,000 loss $505,000 gain $300,000 loss $200,000 gain

$250,000 loss

Presented below is information related to Polaris Corporation: Common Stock, $1 par $10,350,000 Paid-in Capital in Excess of Par—Common Stock 6,520,000 Paid-in Capital from Treasury Stock 400,000 Retained Earnings 9,543,000 Treasury Common Stock (at cost) 695,000 The total stockholders' equity of Polaris Corporation is $27,508,000. $26,118,000. $25,318,000. $27,108,000.

$26,118,000.

On January 1, 2017, Kimbrough Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Kimbrough uses the effective-interest method of amortizing bond discount. At December 31, 2017, Kimbrough should report unamortized bond discount of $285,500. $258,050. $255,000. $274,500.

$285,500.

McCaffrey Corporation owned 15,000 shares of Harper Corporation's $5 par value common stock. These shares were purchased in 2015 for $326,000. On May 4, 2017, McCaffrey declared a property dividend of one share of Harper for every twenty shares of McCaffrey stock held by a stockholder. On that date, when the market price of Harper was $34 per share, there were 280,000 shares of McCaffrey outstanding. What net reduction in retained earnings would result from this property dividend? $176,000 $150,000 $476,000 $304,220

$304,220

In 2016, General Dynamics Corporation began selling a new line of products that carries a two-year warranty against defects. Based upon past experience with other products, the estimated warranty costs related to dollar sales are as follows: First year of warranty2%Second year of warranty5% Sales and actual warranty expenditures for 2016 and 2017 are presented below: 2016 2017Sales$600,000$800,000Actual warranty expenditures20,00040,000 What is the estimated warranty liability at the end of 2017? $98,000. $58,000. $38,000. $16,000.

$38,000.

Ferrone Company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Ferrone uses effective-interest amortization. What amount of interest expense will Ferrone record for the June 30, 2017 payment? $392,083 $784,164 $400,000 $390,000

$392,083

Durango Inc. had net income for 2017 of $2,120,000 and earnings per share on common stock of $5. Included in the net income was $300,000 of bond interest expense related to its long-term debt. The income tax rate for 2017 was 30%. Dividends on preferred stock were $400,000. The payout ratio on common stock was 25%. What were the dividends for common stock in 2017? $430,000. $530,000. $645,000. $482,500.

$430,000.

Duszynski Company issues 20,000 shares of its $.50 par value common stock having a market value of $25 per share and 6,000 shares of its $25 par value preferred stock having a market value of $50 per share for a lump sum of $750,000. The proceeds allocated to the common stock is $468,750. $705,000. $500,000. $450,000.

$468,750.

Hise Inc., has 4,000 shares of 9%, $100 par value, cumulative preferred stock and 200,000 shares of $1 par value common stock outstanding at December 31, 2017, and December 31, 2016. The board of directors declared and paid a $25,000 dividend in 2016. In 2017, $74,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2017? $47,000 $74,000 $36,000 $11,000

$47,000

On December 31, 2020, SoBou Co. has $5,000,000 of short-term notes payable due on February 14, 2021. On January 10, 2021, SoBou arranged a line of credit with Suntrust Bank, which allows SoBou to borrow up to $3,500,000 at one percent above the prime rate for three years. On February 3, 2021, SoBou borrowed $3,500,000 from Suntrust and used $500,000 additional cash to liquidate $4,000,000 of the short-term notes payable. The amount of the short-term notes payable that should be reported as a current liability on the December 31, 2020 balance sheet which is issued on March 2, 2021 is $4,000,000. $5,000,000. $500,000. $0.

$5,000,000.

Presented below is information related to Schoenthaler Corporation: Common Stock , $5 par $1,100,000 Paid-in Capital in Excess of Par - Common Stock. 400,000 Preferred 5 ½% Stock, $100 par. 1,500,000 Paid-in Capital in Excess of Par—Preferred Stock. 500,000 Retained Earnings. 2,000,000 Paid-in Capital from Treasury Stock. 150,000 The total stockholders' equity of Schoenthaler Corporation is $5,350,000. $5,500,000. $5,650,000. $3,650,000.

$5,650,000.

On June 30, 2017, Baker Co. had outstanding 8%, $6,000,000 face amount, 15-year bonds maturing on June 30, 2027. Interest is payable on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2017 was $210,000. On June 30, 2017, Baker acquired all of these bonds at 94 and retired them. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt? $5,640,000. $5,790,000. $5,940,000. $5,730,000.

$5,790,000.

On January 1, 2016, Morley Electronics issued bonds with a par value of $1,350,000 at 95, due in 10 years. Bond issue costs were $22,000. Bond issue costs and the bond discount were amortized using straight-line methods. On January 1, 2021, Morley called the entire issue at 102. Calculate Morley's loss or gain on redemption. A $71,750 loss B $44,750 gain C $67,500 loss D $89,500 gain

$71,750 loss

On January 1, 2017, Vancleave Corporation had 110,000 shares of its $.001 par value common stock outstanding. On November 27, when the market price of the stock was $8, the corporation declared a 10% stock dividend to be issued to stockholders of record on December 28, 2017. What was the impact of the 10% stock dividend on the balance of the retained earnings account? $77,000 decrease No effect $11,000 decrease $88,000 decrease

$88,000 decrease

Which of the following are primary considerations management must make before declaring a cash dividend? 1. The tax impact on stockholders of the receipt of the dividends 2. The legal permissibility of the dividend 3. The availability of funds to pay the dividend A 2 and 3 only B 1 and 2 only C 3 only D 1, 2, and 3

2 and 3 only

In which order should the following sections generally be placed when preparing the statement of stockholders' equity? 1. Additions 2. Beginning balance 3. Deductions 4. Ending balance A : 1, 3, 2, 4 B : 2, 1, 3, 4 C : 3, 1, 2, 4 D : 2, 3, 1, 4

2, 1, 3, 4

Gulfport Corporation was organized in January 2017 with authorized capital of $.0001 par value common stock. On February 1, 2017, shares were issued at par for cash. On March 1, 2017, the corporation's attorney accepted 5,000 shares of common stock in settlement for legal services with a fair value of $25,250. Additional paid-in capital would increase on 2/1/2017. 3/1/2017 1)Yes. No 2)Yes . Yes 3)No. No 4)No. Yes 2 3 1 4

4

Bowser Clothing sold $350,000 in 10-year bonds at an interest rate of 8 percent. The market rate for similar bonds is 9 percent. Bowser decides to pay interest annually. Assume that the PVF-OA10, 8% = 6.71008, PVF-OA10, 9% = 6.41766, PVF10, 8% = 0.46319, and PVF10, 9% = 0.42241. Based on this, Bowser sold the bonds for ________ of par. A 93.6% B 100% C 102.6% D 95.9%

93.6%

Which of the following is an example of a disclosure of guarantees of indebtedness? A : "We are self-insured for certain insurable risks consisting primarily of employee health insurance programs. We fully insured future risks for long-term disability, but maintained a self-insured position for claims incurred prior to inception of that coverage." B : "During December, a run of gadgets shipped to customers was found to be faulty. The gadgets have been recalled and customer reimbursement in the amount of $1,500,000 has been charged to current operations." C : "During Q1, a U.S. District court awarded an $800,000 judgment against Company X for failure to uphold our agreement. No income related to this judgment has been recorded because Company X has filed an appeal." D : "We have guaranteed debt obligations of $9 million of companies in which substantial stock investments are held. It is not anticipated that any loss will result from these agreements."Which of the following is an example of a disclosure of guarantees of indebtedness? A : "We are self-insured for certain insurable risks consisting primarily of employee health insurance programs. We fully insured future risks for long-term disability, but maintained a self-insured position for claims incurred prior to inception of that coverage." B : "During December, a run of gadgets shipped to customers was found to be faulty. The gadgets have been recalled and customer reimbursement in the amount of $1,500,000 has been charged to current operations." C : "During Q1, a U.S. District court awarded an $800,000 judgment against Company X for failure to uphold our agreement. No income related to this judgment has been recorded because Company X has filed an appeal." D : "We have guaranteed debt obligations of $9 million of companies in which substantial stock investments are held. It is not anticipated that any loss will result from these agreements."

A "We have guaranteed debt obligations of $9 million of companies in which substantial stock investments are held. It is not anticipated that any loss will result from these agreements."

Bravo Industries intends to retire $950,000 in short-term debt using proceeds from the sale of 30,000 shares of common stock. The stock sells for $25 per share. How much of its short-term debt can Bravo exclude from current liabilities if the sale occurs after the balance sheet date but before the balance sheet issue? A $0 B $200,000 C $950,000 D $750,000

A $0

Farrar Cakes disclosed total liabilities of $5,400,000, total assets of $8,000,000, interest expense of $400,000, income taxes of $600,000, and net income of $1,000,000 in their 2020 Annual Report. Based on this, Farrar Cakes' times interest earned ratio is A 5. B 8. C 10. D 2.5.

A 5.

A recently graduated staff auditor is reviewing evidence of the ability and intent to complete a refinancing of a short-term obligation. Which of the following should the auditor reject as being inadequate evidence for reclassification? Select all that apply. A Actual refinancing after the balance sheet date by issuance of a long-term obligation. B Entering into an agreement that gives the company the right to defer settlement for at least one year C A statement by the board of directors that refinancing is inevitable. D Actual refinancing after the balance sheet date by issuance of equity securities.

A Actual refinancing after the balance sheet date by issuance of a long-term obligation. C A statement by the board of directors that refinancing is inevitable. D Actual refinancing after the balance sheet date by issuance of equity securities.

On November 1, 2020, JT Engineering signs a $200,000, 6%, four-month note with Federal Bank. How should JT record and report the value of this note on its December 31, 2020, financial statements? A : At its full maturity value B : At its probable value C : At its fair market value D : At its net value

A At its full maturity value

How are accrued liabilities disclosed in financial statements? A : By appropriately classifying them as regular liabilities in the balance sheet B : By showing the amount among the liabilities but not extending it to the liability total C : By listing them as an appropriation of retained earnings D : By including them in a footnote to the statements

A By appropriately classifying them as regular liabilities in the balance sheet

The numerator of the acid-test ratio consists of: A Cash, short-term investments, and net receivables. B Total current assets. C Cash, inventory and short-term investments. D Cash inventory and net receivables.

A Cash, short-term investments, and net receivables.

The following appeared in the notes of JT Engineering's December 31, 2020, financial statements. JT has guaranteed debt obligations of $5 million of companies in which substantial stock investments are held. Also, under long-term agreements with certain companies in which stock interests are held, JT has agreed to provide minimum revenue for product shipments. It is not anticipated that any loss will result from any of the above-described agreements. This is an example of a disclosure of A Guarantees of indebtedness. B An accrual for loss contingency. C A litigation. D A gain contingency.

A Guarantees of indebtedness

Which of the following is included in the current ratio but not the acid-test ratio? A Inventory B Cash C Short-term investment D Net receivables

A Inventory

Under normal circumstances, are losses related to receivable collections and losses related to warranties accrued? A Losses related to receivable collections and losses related to warranties are both accrued. B Losses related to receivable collections are accrued but losses related to warranties are not. C Losses related to receivable collections are not accrued but losses related to warranties are. D Neither losses related to receivable collections nor losses related to warranties are accrued.

A Losses related to receivable collections and losses related to warranties are both accrued.

An unacceptable treatment for the presentation of current liabilities is: A : Showing current liabilities immediately below current assets to obtain a presentation of working capital. B : Listing current liabilities according to amount. C : Offsetting current liabilities against assets that are to be applied to their liquidation. D : Listing current liabilities in order of maturity.

A Offsetting current liabilities against assets that are to be applied to their liquidation.

RL Enterprises places a $750,000 short-term liability in the long-term liability section of its financial statements. It then includes a note giving a description of a new financing agreement for the liability and describes the terms that would be incurred by the new obligation. Which of the following can you assume based on this information? A : RL has proceeded with refinancing the short-term liability on a long-term basis. B : RL intends to refinance the short-term liability on a long-term basis. C : RL intends to and has demonstrated the ability to refinance the short-term liability on a long-term basis. D : RL has demonstrated the ability to refinance the short-term liability on a long-term basis.

A RL intends to and has demonstrated the ability to refinance the short-term liability on a long-term basis.

RL Enterprises financial statements include a $100,000, 8%, nine-month note in its long-term liabilities section. RL plans to retire the liability at maturity using proceeds from the liquidation of an investment property. Which of the following can you assume based on this information? A RL is using an asset classified as long-term to pay off a current liability. B RL is using an asset classified as short-term to pay off a current liability. C RL is using an asset classified as long-term to pay off a long-term liability.

A RL is using an asset classified as long-term to pay off a current liability.

Which of the following describes the calculation used to determine the acid-test ratio? A Sum cash, short-term investments, and net receivables and then divide that amount by current liabilities B Sum cash and short-term investments and then divide that amount by short-term debt C Divide current assets by current liabilities D Divide current assets by short-term debt

A Sum cash, short-term investments, and net receivables and then divide that amount by current liabilities

Which of the following statements about the use of the assurance warranty method in accounting for product warranty costs is true? A The assurance warranty method represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale. B The assurance warranty method is required for federal income tax purposes. C The assurance warranty method is frequently justified on the basis of expediency when warranty costs are immaterial. D The assurance warranty method finds the expense account being charged when the seller performs in compliance with the warranty.

A The assurance warranty method represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.

Blake Enterprises is named as a defendant in a lawsuit after the date of its 2020 financial statements but before the statements are issued. It is highly probable that the outcome of the suit will be unfavorable to Blake and that damages will be $2.5 million. In order for Blake to report a loss and the related liability in its 2020 statements, which of the following must also be true? A The cause for action occurred during the accounting period covered by the financial statements. B Blake Enterprises admits guilt. C The court will decide the case within one year of the statement date. D The damages appear to be material.

A The cause for action occurred during the accounting period covered by the financial statements.

What is the proper name for the ratio of current assets to current liabilities? A The current ratio B The acid-test ratio C The current asset turnover ratio D The current liability turnover ratio

A The current ratio

What is the proper accounting treatment for a loss that is either probable or estimable, but not both? Assume that there is at least a reasonable possibility that a liability may have been incurred. A The footnotes to the financial statements should disclose (1) the nature of the contingency, and (2) an estimate of the possible loss or range of loss or a statement that an estimate cannot be made. B The financial statements should record the loss and the related liability, but at an amount that is significantly conservative. C The financial statements should record the loss and the related liability, but indicate in the footnotes that this loss may not occur because one of the criteria may not be met. D Neither the financial statements nor the footnotes should record the contingency or make mention of it because it lacks the required criteria.

A The footnotes to the financial statements should disclose (1) the nature of the contingency, and (2) an estimate of the possible loss or range of loss or a statement that an estimate cannot be made.

Which of the following is not a characteristic of a project financing arrangement? A The project must be one that neither entity could enter into on its own. B Two or more entities form a new entity to construct an operating plant that will be used by both parties. C The new entity borrows money to finance the project and repays the debt from the proceeds received from the project. D Payment of the debt is guaranteed by the companies that formed the new entity.

A The project must be one that neither entity could enter into on its own.

Borrowing money in such a way that it allows minimal reporting of debt on the balance sheet is called off-balance-sheet financing. A : True B : False

A True

In a variable-rate mortgage, the interest rate changes based on the fluctuating market rate. A : True B : False

A True

Refunding is the process of replacing an existing bond issue with a new one. A : True B : False

A True

A company that enters into off-balance sheet financing A can enhance the quality of its reported financial position and perhaps permit credit to be obtained more readily and at less cost. B wishes to confine all information related to the debt to the income statement and the statement of cash flow. C is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet. D is in violation of generally accepted accounting principles.

A can enhance the quality of its reported financial position and perhaps permit credit to be obtained more readily and at less cost.

Because they usually involve short periods and the difference in their present and maturity value is so small that it is immaterial, ________ are usually recorded and reported at full maturity value on financial statements. A : long-term assets B : current assets C : long-term liabilities D : current liabilities

A current liabilities

Brownlee Enterprises calculates the value of their bond investments based on the fair value option. If the market interest rate declines, the value of Brownlee's bonds is likely to A increase. B decrease. C stay the same. D be the same as the bond's face value.

A increase

A company's current ratio provides information about that company's A : extent of slow-moving inventories. B : profitability. C : liquidity. D : efficient use of assets.

A liquidity

Accrued loss contingencies typically include A obligations related to product warranties. B pending or threatened litigation. C general or unspecified business risk. D risk of property loss due to fire.

A obligations related to product warranties.

A distinguishing characteristic of a mortgage note payable is that it is secured by A : services to be rendered in the future. B : the title to a piece of property. C : finished goods inventory. D : equipment.

A the title to a piece of property.

Bond issue costs, premiums, and discounts associated with bonds that are held to maturity A will be fully amortized as their amortization period is designed to coincide with the life of the bond issue. B are carried forward and written off in the same manner as that used prior to the maturity date. C should be written off directly to a bond retirement account as the bond will be redeemed. D reflect a negotiated interest rate between the issuer of the note and the owner of the property, goods, or services.

A will be fully amortized as their amortization period is designed to coincide with the life of the bond issue.

Anderson Petroleum is involved in a lawsuit over the removal of underground gasoline storage tanks at the former site of one of its filling stations. Anderson's attorneys believe it is probable the outcome of the suit will be unfavorable, but can only estimate the loss within the range of $4 million to $8 million, with the minimum of $4 million being the most probable outcome. How should Anderson record this environmental liability? A As a loss and liability of $4 million. B No recording is required. C As a loss and liability of $8 million. D As a loss and liability of $6 million.

A : As a loss and liability of $4 million.

An unacceptable treatment for the presentation of current liabilities is: A Offsetting current liabilities against assets that are to be applied to their liquidation. B Listing current liabilities in order of maturity. C Listing current liabilities according to amount. D Showing current liabilities immediately below current assets to obtain a presentation of working capital.

A : Offsetting current liabilities against assets that are to be applied to their liquidation.

"In-substance defeasance" is a term used to refer to an arrangement whereby which of the following occurs? A : A company legally extinguishes debt before its due date B : A company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust C : A company gets another company to cover its payments due on long-term debt D : A governmental unit issues debt instruments to corporation

A company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust

Cohle Industries has a taxable payroll of $350,000. The company is subject to a 6.2% FUTA tax rate and a 5.4% state contribution rate. However, due to Cohle's stable employment experience, the company's state rate has been reduced to 2%. How much combined federal and state unemployment tax must Cohle pay? A $9,800 B $16,800 C $21,700 D $28,700

A) 9,800

Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles? Event is unusual in nature and occurrence of event is probable. Amount of loss is reasonably estimable and event occurs infrequently. Event is unusual in nature and event occurs infrequently. Amount of loss is reasonably estimable and occurrence of event is probable.

Amount of loss is reasonably estimable and occurrence of event is probable.

What is meant by the capital of a corporate organization? A Amounts paid-in and earned that represents stockholders' equity in the corporation. B The assets of a business organization that are durable and last a long period of time. C Money borrowed to finance the operations of the organization. D The cash held by the organization at the point in time when the reference to capital is made.

Amounts paid-in and earned that represents stockholders' equity in the corporation.

How should a bond premium be reported on a balance sheet? A As a direct addition to the face amount of the bond. B As a deferred credit. C Along with other premium accounts such as those resulting from stock transactions. D At the present value of the future reduction in bond interest expense due to the premium.

As a direct addition to the face amount of the bond.

How should long-term debt be reported if it will be converted into stock within the next year? A : As a non current liability and accompanied with a note explaining the method to be used in its liquidation. B : In a special section between liabilities and stockholders' equity. C : As a non current liability. D : As a current liability

As a non current liability and accompanied with a note explaining the method to be used in its liquidation.

An unrealized holding gain or loss is the net change in the fair value of the liability from one period to another, including interest expense recognized but not recorded. A : True B : False

B False

GAAP requires the use of the estimated future rate when calculating compensated absences? A True B False

B False

On a long-term note payable, the stated interest rate and the effective rate are always the same. A : True B : False

B False

Under which of the following circumstances should the currently maturing portion of long-term debt be classified as a current liability? A If the funds used to liquidate it are currently classified as a long-term investment on the balance sheet. B If the classified portion will be liquidated within one year using current assets. C If the debt is to be converted into capital stock. D If the debt is to be refinanced on a long-term basis.

B If the classified portion will be liquidated within one year using current assets.

On November 1, 2020, JT Engineering signs a $150,000, 4 percent, one-year note for which both principal and interest are payable on November 1, 2021. On the December 31, 2020 balance sheet, how should JT classify the note and the related interest? A It should classify the note payable as a non current liability and the accrued interest as a current liability. B It should classify the note payable as a current liability and the accrued interest as a current liability. C It should classify the note payable as a non current liability and the accrued interest as a non current liability. D It should classify the note payable as a current liability and the accrued interest as a non current liability.

B It should classify the note payable as a current liability and the accrued interest as a current liability.

If an enterprise intends to refinance a short-term obligation on a long-term basis, which of the following conditions must it meet in order to exclude that obligation from current liabilities? A The interest rate on the long-term obligation is not above the prime rate. B The enterprise has a contractual right to defer settlement of the liability for at least one year. C The enterprise must demonstrate that a negative effect on working capital will result if it is not reclassified. D The enterprise must be able to demonstrate the ability and intent to complete the refinancing.

B The enterprise has a contractual right to defer settlement of the liability for at least one year.

Which of the following is a nonessential component of a liability? A The transaction or other event creating the obligation must have already occurred. B The obligation must be liquidated using cash, goods, or services that were earned by the entity in the performance of its normal business operation. C The liability must be an unavoidable obligation. D The liability is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services.

B The obligation must be liquidated using cash, goods, or services that were earned by the entity in the performance of its normal business operation.

Which of the following statements about current liabilities is true? A They are liabilities that may be paid out of any asset pool accumulated by the enterprise as long as payment is due within one year. B They are due within one year or one operating cycle, whichever is longer. C They are liabilities that are due and payable on the balance sheet date. D They are void of notes payable, as notes are always long-term.

B They are due within one year or one operating cycle, whichever is longer

How is the payout ratio calculated? A : By dividing dividends per share by earnings per share and dividing cash dividends by net income less preferred dividends. B : By dividing cash dividends by market price per share. C : By dividing dividends per share by earnings per share. D : By dividing cash dividends less preferred dividends by net income less preferred dividends.

By dividing cash dividends less preferred dividends by net income less preferred dividends.

How is the return on common stockholders' equity calculated? A : By dividing net income less preferred dividends by average common stockholders' equity. B : By dividing net income by average common stockholders' equity. C : By dividing net income less preferred dividends by ending common stockholders' equity. D : By dividing net income by ending common stockholders' equity.

By dividing net income less preferred dividends by average common stockholders' equity.

How are commissions, legal fees, and printing fees associated with a bond issue accounted for? A By recording them as a reduction to the issue amount of the bond payable and then amortizing into expense over the life of the bond, through an adjustment to the effective interest rate. B By charging them to an expense account in the year the bonds are actually sold so there is revenue to charge them against on the income statement. C By charging them to an expense account in the year the bonds are originally dated, whether or not they are sold in that year. D By adding them to any discount on bonds or subtracting them from any premium on bonds when the bonds are sold.

By recording them as a reduction to the issue amount of the bond payable and then amortizing into expense over the life of the bond, through an adjustment to the effective interest rate.

Current asset information for Weston Industries is shown below. If Weston's total current liabilities are $100,000, what is Weston's acid-test ratio? A : 2.77 to 1 B : 2.47 to 1 C : 1.37 to 1 D : 0.73 to 1

C 1.37 to 1

On May 15, 2020, RL Enterprises issues a $312,000, six-month, zero-interest-bearing note to Federal Bank. The present value of the note is $300,000. Which of the following must be recorded as part of this transaction? A A debit to cash of $312,000 B A credit to Discount on Notes Payable of $12,000 C A debit to Discount on Notes Payable of $12,000 D A credit to Notes Payable of $300,000

C A debit to Discount on Notes Payable of $12,000

How is a contingency defined by the accounting profession? A As an existing condition, situation, or set of circumstances involving uncertainty as to a possible loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. B As an uncertain event that must have a reasonable chance of occurrence and the amount must be reasonably determinable by the company. C As an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. D As an event that will result in the requirement to record a liability if it can be shown that an asset is in danger of being lost to the enterprise and the company has no ability to avoid the loss.

C As an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.

Why are current liabilities usually recorded and reported at their full maturity value on financial statements? A : Current liabilities involve small amounts of debt, making their maturity values exactly identical to their present value. B : Current liabilities are offset against the assets that will be used to liquidate them and must be listed at the cost of that liquidation. C : Current liabilities involve short periods and the difference in their present and maturity value is so small that it is immaterial. D : Current liabilities are eligible for various tax breaks and the tax breaks are larger if they are recorded at maturity value

C Current liabilities involve short periods and the difference in their present and maturity value is so small that it is immaterial.

What is the difference between vested rights and accumulated rights when accounting for compensated absences? A Vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose. B Vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation. C Vested rights are not contingent upon an employee's future service while accumulated rights are. D Vested rights are normally for a longer period of employment than are accumulated rights.

C Vested rights are not contingent upon an employee's future service while accumulated rights are.

Weston Industries has a potential contingent liability that is considered reasonably possible. The company must now prepare a footnote to its financial statements describing the contingent liability. Which of the following does not need to be included in this footnote? A Guarantees to repurchase receivables that have been sold or assigned. B Guarantees of indebtedness of others C The terms of the new obligation incurred or to be incurred D Obligations of commercial banks under "stand-by letters of credit"

C) The terms of the new obligation incurred or to be incurred

Which of the following statements is false? Unemployment taxes are paid by the employer. When rights are vested, an employer has an obligation to make payment to an employee. The liability for compensated absences should be recognized in the year earned. Compensated absences are usually reported as a long-term liability.

Compensated absences are usually reported as a long-term liability.

Which of the following statements related to dividends is incorrect? Before declaring a dividend, management must consider availability of funds to pay the dividend. Dividends must be declared by the Board of Directors. Distributions to owners must be in compliance with the state laws. Dividends must be paid in the period declared.

Dividends must be paid in the period declared.

Bellingham Inc. sold bonds with a face value of $100,000,000 and a stated interest rate of 8% for $92,278,000, to yield 10%. If the company uses the effective interest method of amortization, interest expense for the first six months would be $4,000,000. True False

False

Bonds that are not recorded in the name of the bondholder are called unsecured bonds. True False

False

Dividing net income by the outstanding shares will give the rate of return on common stock equity. A : True B : False

False

Federal law requires that corporations restrict their legal capital from distribution to stockholders. A : True B : False

False

If a company elects the fair value option for its long-term liabilities, a decrease in the fair value of a bond payable will result in an unrealized holding loss. True False

False

State and federal unemployment taxes are imposed on both employers and employees. True False

False

The effective interest method calculates bond interest expense by multiplying the carrying value of the bonds at the beginning of the period by the stated rate of interest. True False

False

The loss recorded by the creditor in a troubled debt restructuring is based on the expected future cash flows discounted at the current effective interest rate. True False

False

The par value of a stock has a direct relationship to its fair value. A : True B : False

False

Treasury stock is classified on the balance sheet as an asset. True False

False

Treasury stock sold for less than its cost decreases net income. True False

False

When assets such as buildings and equipment are transferred in a troubled debt restructuring, the creditor should record a gain or loss for the difference between the fair value and the debtor's book value. True False

False

When the effective rate of a bond is lower than the stated rate, the bond sells at a discount. True False

False

Boomchickapop Company elects the fair value option for a long-term note payable. In 2017, the company reported an unrealized holding gains which was reported as a component of Other Comprehensive Income. True False

Faulse

In accounting for short-term debt expected to be refinanced to long-term debt: GAAP uses the authorization date to determine classification of short-term debt to be refinanced. IFRS uses the financial statement date to determine classification of short-term debt to be refinanced. IFRS uses the authorization date to determine classification of short-term debt to be refinanced. GAAP uses the date of issue, but only for secured debt, to determine classification of short-term debt to be refinanced.

IFRS uses the financial statement date to determine classification of short-term debt to be refinanced.

What is the term used for bonds that pay no interest unless the issuing company is profitable? A Income bonds B Debenture bonds C Revenue bonds D Collateral trust bonds

Income bonds

O'Brien Industries paid above par value to acquire treasury stock. They held the treasury stock for three months and then sold it again for a price higher than the acquisition price. If O'Brien uses the cost method to account for treasury stock transactions, what effect would the resale of the treasury stock have on additional paid-in capital, retained earnings, and total stockholders' equity? A It would increase both additional paid-in capital and total stockholders' equity and have no effect on retained earnings. B It would decrease both additional paid-in capital and total stockholders' equity and have no effect on retained earnings. C It would increase additional paid-in capital, total stockholders' equity, and retained earnings. D It would have no effect on additional paid-in capital, total stockholders' equity, and retained earnings.

It would increase both additional paid-in capital and total stockholders' equity and have no effect on retained earnings.

Which of the following demonstrates the share system of corporate stocks? A Jeffrey can sell his shares of stock in Gilbert Enterprises to anyone he wants without the knowledge or permission of Gilbert Enterprises. B Jeffrey can sell his shares of stock in Gilbert Enterprises to anyone he wants as long as he notifies Gilbert Enterprises before the sale. C Jeffrey can only sell his shares of stock in Gilbert Enterprises to other Gilbert Enterprises shareholders. D Jeffrey can only sell his shares of stock in Gilbert Enterprises back to Gilbert Enterprises.

Jeffrey can sell his shares of stock in Gilbert Enterprises to anyone he wants without the knowledge or permission of Gilbert Enterprises.

On June 30, 2020, Dean & Associates paid a cash dividend to stockholders that was declared on June 10, 2020. On which date will the company make a journal entry crediting cash? A June 30, 2020 only B Both June 10 and June 30, 2020 C June 10, 2020 only D Cash will not be credited on either June 10 or June 30, 2020

June 30, 2020 only

JT Engineering plans to retire a short-term bond payable using a bond sinking fund. This fund is classified as a long-term asset. Based on this information, JT should report the bond payable in the ____________ liabilities section of its financial statements.

Long Term

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

May decrease but not increase retained earnings.

Which of the following statements about mortgage notes payable is not true? A : Mortgage notes payable are payable in full at maturity or in installments. B : A mortgage note payable is a promissory note secured by a document that pledges title to property as security for the loan. C : Mortgage notes payable are always reported as a long-term liability. D : Mortgage notes payable are the most common form of long-term notes payable.

Mortgage notes payable are always reported as a long-term liability.

Which one of the following statements relating to mortgage notes payable is not correct? Mortgage notes payable are payable in full at maturity or in installments. Mortgage notes payable are always reported as a long-term liability. Mortgage notes payable are the most common form of long-term notes payable. A mortgage note payable is a promissory note secured by a document that pledges title to property as security for the loan.

Mortgage notes payable are always reported as a long-term liability.

Which of the following is not generally included in the note disclosures for long-term debt? A Names of specific creditors. B Call provisions and conversion privileges. C Restrictions imposed by the creditor. D Assets pledged as security.

Names of specific creditors.

Which of the following type of stock will not increase Additional Paid-in Capital when issued? No-par value stock. Preferred stock. Par value stock. No-par with a stated value stock.

No-par value stock.

Which of the following include only examples of off-balance-sheet financing? A : Non-consolidated subsidiary, operating lease, and non-interest bearing note. B : Non-interest bearing note and operating lease. C : Special purpose entity and non-interest bearing note. D : Non-consolidated subsidiary, operating leases. and special purpose entity.

Non-consolidated subsidiary, operating leases. and special purpose entity.

Which of the following is not an example of off-balance-sheet financing? Operating lease Non-interest bearing note Non-consolidated subsidiary Special purpose entity

Non-interest bearing note

Jackson Corporation issued a 100% stock dividend of its common stock, which had a par value of $.01, and a market value of $123 before the dividend and $62 after the dividend. At what amount should retained earnings be capitalized for the additional shares issued? There should be no capitalization of retained earnings. Par value. Market value on the declaration date. Market value on the payment date.

Par value.

Which of the following parties will always sacrifice inherent rights in return for special preferences? A Preferred stock B Common stock C Both preferred and common stock D Bondholders

Preferred stock

How should a company record a property dividend? A Record the dividend by debiting retained earnings for an amount equal to the fair value of the property to be distributed. B Record the dividend by crediting retained earnings for an amount equal to the fair value of the property to be distributed. C Record the dividend by debiting retained earnings for an amount equal to the book value of the property to be distributed. D Record the dividend at the carrying value of the property distributed and inform stockholders as to the fair value of the property so they may individually recognize a gain or loss.

Record the dividend by debiting retained earnings for an amount equal to the fair value of the property to be distributed.

Which of the following features of preferred stock makes the security more like debt than an equity instrument? Voting Participating Redeemable Noncumulative

Redeemable

Employer payroll taxes include all of the following except state income taxes. federal unemployment taxes. state unemployment taxes. FICA taxes.

State income Taxes

Which of the following statements is false? Stock dividends declared but not yet distributed are a reported as a liability until the stock is issued. 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. Unearned revenues represent advance payments for goods or services from customers. Cash dividends should be recorded as a liability when they are declared by the board of directors.

Stock dividends declared but not yet distributed are a reported as a liability until the stock is issued.

Why does a stock dividend require a formal journal entry in the financial accounting records when a stock split does not? A Stock dividends represent a transfer from retained earnings to capital stock. B Stock dividends are payable on the date they are declared. C Stock dividends increase the relative book value of an individual's stock holdings. D Stock splits increase the relative book value of an individual's stock holdings.

Stock dividends represent a transfer from retained earnings to capital stock.

When considering discounts or premiums applied to a bond issue, which of the following statements is correct? A The interest expense to the seller of bonds issued at a premium will be less than the total interest payments. B The terms "discount" and "premium" are the same as loss and gain, respectively, to both buyer and seller. C The difference between the effective rate of interest and the market rate of interest is the reason discounts and premiums arise. D When bonds are issued at a discount, the seller has an advantage in that interest payments are based upon an amount less than face value.

The interest expense to the seller of bonds issued at a premium will be less than the total interest payments.

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

To share proportionately in all management decisions.

On September 14, 2017, Gayot Company reacquired 12,000 shares of its $1 par value common stock for $40 per share. Gayot uses the cost method to account for treasury stock. The journal entry to record the reacquisition of the stock should debit Treasury Stock for $480,000. Common Stock for $480,000. Treasury Stock for $24,000. Common Stock for $24,000 and Paid-in Capital in Excess of Par for $456,000.

Treasury Stock for $480,000.

Which of the following statements accurately describes treasury shares? A : Treasury shares are shares of a corporation's stock that are being held as an investment by the corporation itself. B : Treasury shares are shares of a corporation's stock that have been issued but are not currently outstanding. C : Treasury shares are shares of a corporation's stock that have been issued and are currently outstanding. D : Treasury shares are shares of a corporation's stock that are being held as an investment by the corporation's treasurer.

Treasury shares are shares of a corporation's stock that have been issued but are not currently outstanding.

Dividing cash dividends paid to common stockholders by net income available to common stockholders gives the payout ratio. A : True B : False

True

Gain contingencies are not recorded. True False

True

Gains and losses on early extinguishment of debt are reported as other gains and losses on the income statement. True False

True

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 consummated the refinancing agreement by the balance sheet date. True False

True

If a firm opts to sell its treasury stock below cost, this sale will not cause a decrease in the firm's net income. A : True B : False

True

No-par stock is carried in the accounts at issue price, and without reporting any additional paid-in capital. A : True B : False

True

Redeemable preferred stock should be classified as a liability on the balance sheet. True False

True

Regardless of the number of states a corporation operates in, it can only be incorporated in one state. A : True B : False

True

The acid-test ratio excludes inventory from the calculation. True False

True

The entry to record the collection of sales tax by a retailer may include credits to both Sales Revenue and Sales Tax Payable. True False

True

Trading on the equity describes the practice of using borrowed funds in the hopes of obtaining a higher rate of return on the money used. A : True B : False

True

Treasury stock is a corporation's own stock, reacquired after having been issued and paid for. A : True B : False

True

When a firm uses the cost method to account for treasury stock, it debits the Treasury Stock account for the stock's reacquisition cost and reports this account as a deduction from the total paid-in capital and retained earnings on its balance sheet. A : True B : False

True

On January 1, 2017, Trinity Company loaned $901,560 to Litton Industries in exchange for a 3 year, zero-interest-bearing note with a face amount, $1,200,000. The prevailing rate of interest for a loan of this type is 10%. The adjusting journal entry made by Litton at December 31, 2017 with regard to the note will include a debit to Interest Expense for $29,850. a credit to Interest Payable for $60,000. a credit to Discount on Notes Payable for $90,156. a debit to Interest Expense for $120,000.

a credit to Discount on Notes Payable for $90,156.

On January 1, Gasperson Inc. issued $100,000,000, 7% bonds at 102. The journal entry to record the issuance of the bonds will include a credit to Interest Expense for $2,000,000. a credit to Bonds Payable for $102,000,000. a debit to Cash for $100,000,000. a credit to Premium on Bonds Payable for $2,000,000.

a credit to Premium on Bonds Payable for $2,000,000.

Lyric Company issued a 90-day zero-interest-bearing note with a face amount of $3,000. The present value of the note is $2,855. The journal entry to record the issuance of the note will include a credit to Notes Payable for $2,855. a debit to Interest Expense for $145. a debit to Cash for $2,855. none of these answers are correct.

a debit to Cash for $2,855.

At the date of declaration of a large common stock dividend, the entry should include a credit to Cash. a debit to Retained Earnings. a credit to Common Stock Dividend Payable. a credit to Paid-in Capital in Excess of Par.

a debit to Retained Earnings.

A large anticipated insurance recovery is reported as deferred revenue. an account receivable with additional disclosure explaining the nature of the contingency. a disclosure only. an accrued amount.

a disclosure only.

Cumulative preferred dividends in arrears should be shown in a corporation's financial statements as an increase in current liabilities for the current portion and long-term liabilities for the long-term portion. a footnote. an increase in stockholders' equity. an increase in current liabilities.

a footnote.

Black Water Inc. is being sued by former employees as a result of negligence on the company's part. Black Water's lawyers state that it is probable that the company will lose the suit and be found liable for a judgment costing the company anywhere from $100,000,000 to $200,000,000. However, the lawyer states that the most probable cost is $125,000,000. As a result of the above facts, Black Water should accrue no loss contingency but disclose a contingency of $100,000,000 to $200,000,000. a loss contingency of $125,000,000 but not disclose any additional contingency. a loss contingency of $125,000,000 and disclose an additional contingency of up to $75,000,000. a loss contingency of $100,000,000 and disclose an additional contingency of up to $100,000,000.

a loss contingency of $125,000,000 and disclose an additional contingency of up to $75,000,000.

All of the following statements are true regarding preferred stock except: a company often issues preferred stock instead of debt, because of a high debt-to-equity ratio. the dividend preference for preferred stock is expressed as a percentage of the par value. a preference as to dividends assures the payment of dividends. companies usually issue preferred stock with a par value.

a preference as to dividends assures the payment of dividends.

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

accrued only if specific conditions are met.

Which of the following are dividend distributions generally based on? Select all that apply. A : accumulated profits B : stockholders' equity C : capital items D : fair value of shares E : par value of stock F : stockholder preference

accumulated profits capital items

Gain contingencies include all of the following except possible receipts of donations and gifts. pending court cases where the probable outcome is favorable. tax loss carryforwards. all of the options are gain contingencies.

all of the options are gain contingencies.

When a note is exchanged for property in a bargained transaction, the stated interest rate is presumed to be fair unless: the stated interest rate is unreasonable. no interest rate is stated. the stated face amount of the note is materially different from the current cash sales price for similar items. all of these answer choices are correct.

all of these answer choices are correct.

Because shareholders are residual owners, they A bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership. B have the rights to specific assets of the business. C are entitled to a dividend every year in which the business earns a profit. D can negotiate individual contracts on behalf of the enterprise.

bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership.

The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the registered bond. bond debenture. bond indenture. bond coupon.

bond indenture.

When a business enterprise enters into what is referred to as off-balance-sheet financing, the company is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet and income statement. can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost. wishes to confine all information related to the debt to the income statement and the statement of cash flow. is in violation of generally accepted accounting principles.

can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost.

Values associated with preferred stock and common stock issued and outstanding and common stock dividends distributable should be found in the A : retained earnings section of the balance sheet. B : retained earnings section of the statement of stockholders' equity. C : dividends section of the income statement. D : capital stock section of the balance sheet.

capital stock section of the balance sheet.

The capital stock section of the balance sheet should include which of the following? (select all that apply) A : common stock dividends distributable B : excess over par—preferred C : common stock D : excess over stated value—common E : retained earnings F : Preferred Stock

common stock dividends distributable common stock preferred stock

In every corporation the one class of stock that represents the basic ownership interest is called preferred stock. owners' stock. cumulative stock. common stock.

common stock.

The interest rate written in the terms of the bond indenture is known as the effective rate. yield rate. coupon rate, nominal rate, or stated rate. market rate.

coupon rate, nominal rate, or stated rate.

The type of preferred stock that would generate a dividend in arrears is: convertible preferred stock. callable preferred stock. participating preferred stock. cumulative preferred stock.

cumulative preferred stock.

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. be less than what it would have been had the effective-interest method of amortization been used. be the same as what it would have been had the effective-interest method of amortization been used. be less than the stated (nominal) rate of interest.

exceed what it would have been had the effective-interest method of amortization been used.

When an individual pays a debt, this is also referred to as _____________ of debt.

extinguishment

Hinds Enterprises issued bonds at a premium. They traditionally use the effective interest method of amortization. Therefore, you would expect the earlier years of the bonds to have an interest expense that is 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.

greater than if the straight-line method were used.

If a bond sold at 97, the market rate was: greater than the stated rate. equal to the stated rate. less than the stated rate. equal to the coupon rate.

greater than the stated rate.

Bonds which do not pay interest unless the issuing company is profitable are called secured bonds. term bonds. debenture bonds. income bonds.

income bonds.

The presentation of current and noncurrent liabilities in the statement of financial position: is shown only on GAAP financial statements. is always shown with current liabilities reported first in an IFRS statement of financial position. is shown on both a GAAP and an IFRS statement of financial position. includes contingent liabilities under IFRS.

is shown on both a GAAP and an IFRS statement of financial position.

Under the effective interest method, interest expense: is the same total amount as straight-line interest expense over the term of the bonds. always increases each period the bonds are outstanding. is the same annual amount as straight-line interest expense in the earlier years. always decreases each period the bonds are outstanding.

is the same total amount as straight-line interest expense over the term of the bonds.

On August 31, Jackson Enterprises issued bonds with a par value of $750,000 and a stated interest rate of 8%. Interest is payable semiannually on June 30 and December 31. If the proceeds from the issue amounted to $760,000, the bonds were most likely A issued at par plus accrued interest. B sold at a higher effective interest rate. C sold at a premium. D sold at a discount.

issued at par plus accrued interest.

When a bond sells at a premium, interest expense will be: less than the bond interest payment. none of these answer choices are correct. greater than the bond interest payment. equal to the bond interest payment.

less than the bond interest payment.

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 discounting using the coupon rate. market rate. nominal rate. stated rate.

market rate.

A note payable that is secured by the title to a piece of property is referred to as a ______ note payable.

mortgage

The rate of return on common stock equity is computed by dividing: net income by ending common stockholders' equity. net income by average common stockholders' equity. net income less preferred dividends by average common stockholders' equity. net income less preferred dividends by ending common stockholders' equity.

net income less preferred dividends by average common stockholders' equity.

The numerator in the times interest earned ratio is: net income. net income plus interest expense. net income plus income tax expense. net income plus interest expense and income tax expense.

net income plus interest expense and income tax expense.

Additional paid-in capital is not affected by the issuance of: no-par stock. preferred stock. no par with a stated value stock. par value stock.

no-par stock.

Gain contingencies are recorded when: it is probable that a benefit will be received. the amount of the gain can be reasonably estimated. it is probable that a benefit will be received, and the amount of the gain can be reasonably estimated. none of these answers is correct.

none of these answers is correct.

A loss related to general or unspecified business risks is always accrued. not accrued. usually accrued. sometimes accrued.

not accrued.

Liabilities are accounts having credit balances as a result of closing entries. obligations arising from past transactions and payable in assets or services in the future. obligations to transfer ownership shares to other entities in the future. deferred credits that are recognized and measured in conformity with generally accepted accounting principles.

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

Cash dividends are paid on the basis of the number of shares authorized. issued. outstanding less the number of treasury shares. outstanding.

outstanding.

The return on common stockholders' equity is often used to measure a company's A : liquidity. B : solvency. C : net worth. D : profitability.

profitability.

The value of a single owner's investment in a corporation depends on the corporation's A profitability. B goodwill. C payout ratio. D par value.

profitability.

When a corporation opts to ______ a large number of shares of its own stock on the open market, the price of that stock generally remains steady or may even increase.

purchase

The difference between the reacquisition price and the net carrying amount on the books should be __________ when debt is extinguished before its maturity date through a refunding transaction. A recognized currently in income as a loss or gain B amortized over the life of the new issue C amortized over the remaining original life of the extinguished issue D treated as a prior period adjustment

recognized currently in income as a loss or gain

Because they fear the securities market will negatively view such action, many companies are reluctant to A : increase dividend payouts. B : begin paying out dividends. C : reduce or eliminate dividend payouts. D : offer preferred dividends.

reduce or eliminate dividend payouts.

A bond issued in the name of the owner is a: bearer bond. registered bond. income bond. convertible bond.

registered bond.

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

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

If investors want to determine if a company is profitable for its owners, which ratio should they calculate? A return on common stockholders' equity B payout ratio C equity trading ratio D book value per share

return on common stockholders' equity

A bond that matures in installments is called a: term bond. serial bond. bearer bond. callable bond.

serial bond.

The acid-test ratio relates total current liabilities to cash receivables, and inventory. and short-term investments. and receivables. short-term investments, and receivables.

short-term investments, and receivables.

A 10% stock dividend would be considered a ________ stock dividend. A : large B : small C : regular D : typical

small

The stated interest rate is presumed to be fair when a note is exchanged for property in a bargaining transaction when A : the stated interest rate is unreasonable. B : the stated face amount of the note is materially different from the current cash sales price for similar items. C : the fair value of the property equals the face value of the note. D : no interest rate is stated.

the fair value of the property equals the face value of the note.

The present value of a zero-interest-bearing note given for property, goods, or services should be measured by A the fair value of the property, goods, or services or by an amount that reasonably approximates the fair value of the note. B using the prime interest rate to discount the note. C the book value of the property on the seller's books the interest rate on similar notes being offered in the market place for similar property, goods, or services. D using a negotiated interest rate between the issuer of the note and the owner of the property, goods, or services to discount the note.

the fair value of the property, goods, or services or by an amount that reasonably approximates the fair value of the note.

A company can classify short-term debt expected to be refinanced as noncurrent only if one of the following criteria is met as of the balance sheet date: the liability is contractually due to be settled more than one year (or operating cycle, if longer) after the balance sheet date. the obligations will be satisfied before the financial statements are issued. their satisfaction will not require the use of assets classified as current as of the balance sheet date. none of these answers are correct.

the liability is contractually due to be settled more than one year (or operating cycle, if longer) after the balance sheet date.

Legal capital for a corporation is defined as A the par value of all capital stock issued. B the amount of capital the state of incorporation allows the company to accumulate over its existence. C the amount of capital the federal government allows a corporation to generate. D the total capital raised by a corporation within the limits set by the Securities and Exchange Commission.

the par value of all capital stock issued.

When property with an indeterminable fair market value is exchanged for a debt instrument with no ready market, A the present value of the debt instrument must be approximated using an imputed interest rate. B it should not be recorded on the books of either party until the fair market value of the property becomes evident. C the board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction. D the directors of both entities involved in the transaction should negotiate a value to be assigned to the property.

the present value of the debt instrument must be approximated using an imputed interest rate

A debt instrument with no ready market is exchanged for property whose fair market value is currently indeterminable. When such a transaction takes place it should not be recorded on the books of either party until the fair market value of the property becomes evident. the board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction. the present value of the debt instrument must be approximated using an imputed interest rate. the directors of both entities involved in the transaction should negotiate a value to be assigned to the property.

the present value of the debt instrument must be approximated using an imputed interest rate.

If a company exchanges a debt instrument with no ready market for property with an indeterminable fair value, A : the board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction. B : the present value of the debt instrument must be approximated using an imputed interest rate. C : the directors of both entities involved in the transaction should negotiate a value to be assigned to the property. D : it should not be recorded on the books of either party until the fair value of the property becomes evident.

the present value of the debt instrument must be approximated using an imputed interest rate.

Stonehenge, Inc. issued bonds with a maturity amount of $5,000,000 and a maturity eight years from date of issue. If the bonds were issued at a premium, this indicates that the market and stated rates coincided. the stated rate of interest exceeded the market rate. the market rate of interest exceeded the stated rate. no necessary relationship exists between the two rates.

the stated rate of interest exceeded the market rate.

When journalizing the sale of common stock, a debit to cash that is greater than the credit to the common stock account means that A the stated value of the common stock is less than the per share price investors were willing to pay. B a gain on the sale of stock is a part of the transaction. C the common stock was sold at a discount. D the common stock is worth more than its current market value.

the stated value of the common stock is less than the per share price investors were willing to pay.

Morrison Enterprises decided to issue preferred stock rather than common stock in order to obtain a higher rate of return on common stockholders' equity. Morrison is trying to A : trade on the equity. B : invoke their preemptive right. C : participate in off-balance-sheet financing. D : avoid a contingent liability.

trade on the equity.

Characteristics of the corporate form of organization include all of the following except: capital stock or share system. variety of ownership interests. facility for attracting and accumulating large amounts of capital. unlimited liability of stockholders.

unlimited liability of stockholders.