ACCT 3120 Exam 2

The unamortized balance of discount on bonds payable is reported in the balance sheet as: A prepaid expense. An expense account. A current liability. A contra-liability.

A contra-liability.

Pyramid Properties entered a lease that contains a bargain purchase option. When calculating the amount to capitalize as a right-of-use asset at the beginning of the lease term, the payment called for by the bargain purchase option should be: Subtracted at its exercise price. Subtracted at its present value. Added at its present value. Excluded from the calculation.

Added at its present value.

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.

GAAP requires that some lease agreements be accounted for as purchases of assets. The theoretical justification for this treatment is that a lease of this type: Complies with the concept of form over substance. Reflects the relationship of cause and effect. Satisfies the concept of historical cost. Conveys most of the benefits of property ownership.

Conveys most of the benefits of property ownership.

If the lessor records deferred rent 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.

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

Effective rate.

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

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

When a bond issue sells for less than its face value, the market rate of interest is: Dependent on the stated rate of interest. Equal to the stated rate of interest. Higher than the stated rate of interest. Less than the stated rate of interest.

Higher than the stated rate of interest.

AMC Corporation issued bonds at a discount. The long-term liability reported in AMC's balance sheet will: Increase each year during the term to maturity. Decrease each year during the term to maturity. Remain the same each year during the term to maturity. Increase or decrease each year depending upon the market rate of interest.

Increase each year during the term to maturity.

BVA Corporation exchanged a $96,000, noninterest-bearing, 3-year note for land with a fair value of $60,000. The $36,000 difference represents: A loss on the purchase of land. A premium on notes payable. Interest expense to be recorded over three years. None of the above.

Interest expense to be recorded over three years.

On January 1, 2018, Walter Scott Co. leased non-specialized machinery under a 6-year lease. The machinery has a 9-year economic life. The present value of the monthly lease payments is determined to be 80% of the machinery's fair value. The lease contract includes neither a transfer of title to Scott nor a bargain purchase option. What amount should Scott report in its 2018 income statement? Amortization expense equal to one-ninth of the equipment's fair value. Amortization expense equal to one-sixth of the machinery's fair value. Lease expense equal to the 2018 lease payments. Lease expense equal to the 2018 lease payments minus interest.

Lease expense equal to the 2018 lease payments.

Which of the following would a lessee not record in connection with a lease? Lease revenue. Amortization expense. Interest expense. Right-of-use asset.

Lease revenue.

When bonds are issued at a discount and interest expense is recorded at the effective interest rate, interest expense in the earlier years of the term to maturity will be: Less than the cash interest payments made. Less than if the straight-line method were used. Greater that if the straight-line method were used. The same as if the straight-line method were used.

Less than if the straight-line method were used.

When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is: More than the effective interest. Less than the effective interest. Equal to the effective interest. More than if the bonds had been sold at a premium.

Less than the effective interest.

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

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

Crystal Corporation makes $2,000 payments every month for leasing office equipment. Crystal recorded a lease payment as follows: Lease payable. 1,200 Interest expense 800 Cash 2,000 Amortization expense 1,200 Right-of-use asset 1,200 Crystal must have a(n): Operating lease. Leveraged lease. Finance lease. Sales-type lease without selling profit.

Operating lease.

If a finance lease contains a bargain purchase option, the lessee should amortize the leased asset: Over the term of the lease. Without reference to the economic life of the asset. Over the economic life of the asset. Without reference to the term of the lease.

Over the economic life of the asset.

The price of a corporate bond is the present value of its face amount at the market or effective rate of interest: Plus the present value of all future interest payments at the market or effective rate of interest. Plus the present value of all future interest payments at the stated rate of interest. Reduced by the present value of all future interest payments at the market or effective rate of interest. Reduced by the present value of all future interest payments at the stated rate of interest.

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

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

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.

Straight-line amortization of bond discount or premium: 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.

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

When a finance lease is first recorded at the beginning of the lease, the lessee typically debits: Right-of-use asset. Rent expense. Lease expense. Lease receivable.

Right-of-use asset.

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. Sold for the $500,000 face amount less $10,000 of accrued interest. Sold at a premium because the stated rate of interest was higher than the yield rate. Sold at a discount because the effective interest rate was lower than the face rate.

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

If the lessor retains title to leased property under the terms of the lease: The amount to be recovered through periodic lease payments is reduced by the present value of any residual amount. The amount to be recovered through periodic lease payments is increased by the present value of the residual amount. The amount to be recovered will be the same as if there were no residual value. The lessor will record a greater amount of depreciation due to the residual value.

The amount to be recovered through periodic lease payments is reduced by the present value of any residual amount.

The five criteria provided in GAAP for distinguishing a finance lease from an operating lease do not include: The agreement specifies that ownership transfers at the end of the lease term. The collectibility of the lease payments must be reasonably predictable. The agreement grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. The noncancelable lease term is for the major part of the remaining economic life of the leased asset.

The collectibility of the lease payments must be reasonably predictable.

For a right-of-use asset under a lease that qualifies as a finance lease because the lease contains a purchase option and the option is reasonably certain to be exercised, the amortization period used by the lessee must be: The same period that was used by the lessor. The economic life of the asset at the time the lease agreement took effect. The term of the lease. The term of the lease or the economic life of the asset, whichever is shorter.

The economic life of the asset at the time the lease agreement took effect.

Interest expense is: The effective interest rate times the amount of the debt outstanding during the interest period. The stated interest rate times the amount of the debt outstanding during the interest period. The effective interest rate times the face amount of the debt. The stated interest rate times the face amount of the debt.

The effective interest rate times the amount of the debt outstanding during the interest period.

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.

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 increase in the effective interest rate caused by the debt issue costs is reflected in the interest expense. The decrease in the effective interest rate caused by the debt issue costs is reflected in the interest expense. The debt issue costs are recorded separately as an asset. The recorded amount of the debt is increased by the debt issue costs.

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

Which of the following statements characterizes an operating lease? The lessee reports cash outflows as financing activities. The lessor records depreciation and lease revenue. The lessor transfers title at the end of the lease term. The lessee has an option to purchase the leased assets and is reasonably sure to exercise the option.

The lessor records depreciation and lease revenue.

When a note is issued in exchange for a machine, and interest on the note is not stated: The machine should be depreciated over the term to maturity of the note. The note should be recorded at its present value, discounted at an appropriate market rate of interest, if fair values of the note and machine are unavailable. The note and machine are recorded at the face amount of the note or the fair value of the machine, whichever is more clearly determinable. The note is recorded at its face amount unless the fair market value of the machine is readily available.

The note should be recorded at its present value, discounted at an appropriate market rate of interest, if fair values of the note and machine are unavailable.

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

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

When a lease qualifies as a finance lease, what amount is recorded as the cost of the right-of-use asset? The present value of the lease payments, exclusive of nonlease components. The present value of the lease payments plus nonlease components. The sum of the gross lease payments. The present value of the lease payments plus the present value of nonlease components.

The present value of the lease payments, exclusive of nonlease components.

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

The present value of the note payments discounted at the market rate.

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

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

In a bond amortization table for bonds issued at a discount: The effective interest expense is less with each successive interest payment. The total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid. The outstanding balance (book value) of the bonds declines eventually to face value. The reduction in the discount is less with each successive interest payment.

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

The beginning of a six-year finance lease is December 31, 2018. The agreement specifies equal annual lease payments on December 31 of each year. For the lessee, the first payment on December 31, 2018, includes: Interest Reduction of the Expense. Lease Liability a. No Yes b. Yes No c. Yes Yes d. No No

a. No Yes