Intermediate II Final Exam
When a zero-interest-bearing note is given in return for property, the present value of the note is measured by the fair value of the property or by an amount that reasonably approximates the market value of the note.
(T)
GAAP requires that a liability always be accrued for the cost of compensation for future absences of full-time employees.
(F) A liability for the cost of compensation for future absences is required if the four following conditions are met: (a) the employee's services have already been rendered, (b) the obligation relates to rights that vest or accumulate, (c) payment is probable, and (d) the amount can be reasonably estimated.
A stock dividend distributable is classified as a long-term liability because it will not be liquidated using current assets.
(F) A stock dividend distributable is liquidated using capital stock rather than assets. Thus, a stock dividend distributable should be classified in an entity's equity section.
An assurance-type warranty is usually recorded in a unearned warranty Revenue account.
(F) An assurance-type warranty should be expensed in the period the goods are provided or services performed. A service-type warranty is usually recorded in a Unearned Warranty Revenue Account.
An imputed interest rate used to determine the present value of a debt instrument may change during the life of the debt if a change occurs in the prevailing interest rate.
(F) An imputed interest rate is determined at the time a debt instrument is issued. Any subsequent changes in prevailing interest rates are ignored.
Any excess of the net carrying amount over the reacquisition price is a loss from extinguishment.
(F) Any excess of the net carrying amount over the reacquisition price is a gain from extinguishment.
When bonds are issued by a corporation, the AICPA requires that the issue be placed with an independent underwriter.
(F) Companies issuing bonds may choose to place privately a bond issue by selling bonds directly to a large institution, financial or otherwise, without the aid of an underwriter. The AICPA has no rules about initial bond placements.
The term "loss contingency," as used in accounting, refers to situations that result in a liability after the passage of a specified period of time.
(F) Contingencies result in liabilities if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The mere passage of time is not a criteria in determining whether a loss contingency should be recorded as a liability.
Discount on Notes Payable is an adjunct account to Notes Payable and therefore is added to Notes Payable on the balance sheet.
(F) Discount on Notes Payable is a contra account to Notes Payable and therefore is subtracted from Notes Payable on the balance sheet.
If bonds are sold at a premium, the effective rate of interest is greater than the stated rate of interest.
(F) If bonds sell for more than face value, they are said to have sold at a premium. Thus, the effective rate of interest is less than the stated rate of interest.
The only requirement for an obligation to be classified as a current liability is that it be liquidated within the operating cycle or one year, whichever is longer.
(F) In addition to the "operating cycle or one year, whichever is longer" criterion, one other criterion is necessary for an obligation to be classified as current. Current liabilities are obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets or the creation of other current liabilities.
Generally, long-term debt, in whatever form, is issued subject to various covenants or restrictions for the protection of corporate stockholders
(F) Long-term debt is subject to various covenants or restrictions. However, these covenants and restrictions are for the protection of the lenders and the borrowers.
Notes payable are only classified as short-term.
(F) Notes payable may be classified as short-term or long-term, depending upon the payment due date
Off-balance-sheet financing is an attempt to borrow monies in such a way that the obligations are recorded in the retained earnings statement.
(F) Off-balance-sheet financing is an attempt to borrow monies in such a way that the obligations are not recorded.
Preferred dividends in arrears should be recognized as a liability in the balance sheet.
(F) Preferred dividends in arrears are not an obligation until formal action is taken by the board of directors authorizing the distribution of earnings (although a disclosure may be involved).
In a project financing arrangement, a single company sets up a second company for the purpose of financing a specific project that has a maximum life of five years
(F) Project financing arrangements arise when (a) two or more entities form another entity to construct an operating plant that will be used by all parties; (b) the new entity borrows funds to construct the project and repays the debt from the proceeds received from the project; and (c) payment of the debt is guaranteed by the entities that formed the new company.
Revenue bonds are bonds whose interest rate is a function of the revenue earned by the company issuing the bonds
(F) Revenue bonds are bonds whose interest is paid from specified revenue sources. Such bonds are usually issued by airports, school districts, counties, tollroad authorities, and other governmental bodies
When there is an absence of insurance, a firm should estimate the amount of possible future losses and record a liability at the date of the financial statements.
(F) The absence of insurance does not mean that a liability has been incurred at the date of the financial statements.
When a company offers premiums to its customers in return for coupons, the cost of the premiums should be charged to expense when the premiums are distributed to customers.
(F) The cost of premiums should be charged to expense during the period in which the sale that gave rise to the premium is made.
Current liabilities are generally measured by the present value of the future outlay of cash required to liquidate them.
(F) Theoretically, current liabilities should be measured by the present value of the future outlay of cash required to liquidate them. But, in practice, current liabilities are usually recorded in accounting records and reported in financial statements at their full maturity value.
One factor to consider in determining whether a liability should be recorded with respect to threatened litigation is the effect such a liability will have on a reported financial condition.
(F) Threatened litigation is a loss contingency that should be recorded as a liability if it is probable that a liability has been incurred and the amount of the loss is reasonably estimated.
Under the effective interest method semiannual interest expense is computed by multiplying the effective interest rate times a constant carrying value of the bonds.
(F) Under the effective interest method, the interest expense for each interest period is computed by multiplying the effective interest rate times the carrying amount of the bonds at the start of the period. The carrying amount of the bonds either increases (for bonds issued at a discount) or decreases (for bonds issued at a premium) each period by the amount of the amortized discount or premium.
Vested rights exist when an employer has an obligation to make payment to an employee but not if the employee is terminated.
(F) Vested rights exist when an employer has an obligation to make payment to an employee even if his or her employment is terminated.
When bonds are issued between interest dates, the purchaser pays for interest accrued since the date the bonds were originally issued.
(F) When bonds are issued between interest dates, the purchaser pays for interest accrued from the last interest payment date to the date of the purchase. Thus, the maximum amount of accrued interest a purchaser can be required to pay is 6 months (assuming semiannual interest).
A current liability results when a company collects sales taxes from customers.
(T)
A short-term obligation expected to be refinanced may be excluded from current liabilities if (a) the liability is contractually due to be settled more than one year (or operating cycle, if longer) after the balance sheet date or (b) the company has a contractual right to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date.
(T)
Because current liabilities tend to be liquidated within a short period of time, present value techniques are not normally applied.
(T)
Bond discount should be reported in the balance sheet as a direct deduction from the face amount of the bond.
(T)
Bonds issued by a corporation represent a means of borrowing funds from the general public or institutional investors on a long-term basis.
(T)
Commodity-backed bonds are redeemable in measures of a commodity such as barrels of oil, tons of coal, or ounces of a rare metal.
(T)
Disclosure is required of future payments for sinking fund requirements and maturity amounts of long-term debt during each of the next 5 years
(T)
If a company at the balance sheet date has a liability that will be settled on a long-term basis, this means that the company will not require the use of working capital during the ensuing fiscal year (or operating cycle, if longer).
(T)
If a loss contingency is likely to occur and its amount can be reasonably estimated, it should be recorded in the accounts.
(T)
If sick pay benefits accumulate but do not vest, accrual is permitted but not required.
(T)
Long-term debt is ordinarily used by an enterprise as a more or less permanent means of financing to increase the earnings available to stockholders
(T)
Long-term debt that matures within one year should be reported as a current liability, unless retirement is to be accomplished with other than current assets.
(T)
Mortgage "points" raise the effective interest rate above the rate specified in the note.
(T)
The amortization of a bond discount increases the amount of bond interest expense recorded each period.
(T)
The amount of unremitted employee and employer social security tax on gross wages paid should be reported by the employer as a current liability.
(T)
The currently maturing portion of a serial bond should not be classified as a current liability if it will be paid out of a long-term asset such as a sinking fund.
(T)
The fact that a company has the right to refinance at any time permits the company to classify the liability as non-current.
(T)
The number of outstanding premium offers that will be presented for redemption must be estimated in order to reflect the existing current liability and to match costs with revenues.
(T)
The stated rate of interest on bonds is the rate set by the party issuing the bonds.
(T)
The times interest earned ratio indicates the company's ability to meet interest payments as they come due
(T)
To report a loss and a liability in the financial statements, the cause for litigation must have occurred on or before the date of the financial statements.
(T)
Two reasons often cited for off-balance sheet financing are: (a) keeping debt off the balance sheet enhances the quality of the balance sheet and permits credit to be obtained more easily and (b) loan covenants often impose a limitation on the amount of debt a company may have.
(T)
When a company issues a zero-interest-bearing note, the difference between the face amount of the note and the cash proceeds is most appropriately recorded as a discount on notes payable.
(T)
A contingency is defined by the accounting profession as: A. 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. B. 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. C. 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. D. an uncertain event that must have a reasonable chance of occurrence and the amount must be reasonably determinable by the company.
A
A debt instrument with no ready market is exchanged for property whose fair market value is currently indeterminable. When such a transaction takes place: 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.
A
An enterprise is required to exclude a short-term obligation from current liabilities if it intends to refinance the obligation on a long-term basis and: A. the enterprise can demonstrate the ability to consummate the refinancing. B. the obligation is not a part of normal operations. C. it can demonstrate that a negative effect on working capital will result if it is not reclassified. D. the interest rate on the long-term obligation is not above the prime rate
A
Bonds that are secured by stocks and bonds of other corporations are called: A. collateral trust bonds. B. registered bonds. C. serial bonds. D. treasury bonds
A
If bonds are issued initially at a premium and the effective interest method of amortization is used, interest expense in the earlier years will be: A. greater than if the straight-line method were used. B. greater than the amount of the interest payments. C. the same as if the straight-line method were used. D. less than if the straight line method were used.
A
The interest rate actually earned by a bondholder who buys the bond at a discount, as compared to the stated rate on the bond is: Higher/Lower A. Yes No B. Yes Yes C. No Yes D. No No
A
When a zero-interest-bearing note is given for property, goods, or services, the present value of the note is best 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. the prime interest rate unless that rate is not applicable to the entities involved in the transaction. C. the interest rate on similar notes being offered in the market place for similar property, goods, or services. D. a negotiated interest rate between the issuer of the note and the owner of the property, goods, or services.
A
A liability has three essential characteristics; which of the following is not one of them? A. It 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 their normal business operation. C. The liability must be an unavoidable obligation. D. The transaction or other event creating the obligation must have already occurred.
B
In accounting for compensated absences, the difference between vested rights and accumulated rights is: A. vested rights are normally for a longer period of employment than are accumulated rights. B. vested rights are not contingent upon an employee's future service. C. 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. D. vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation.
B
Nietzsche Corn Flakes Company offers its customers a silver cereal spoon if they send in 5 boxtops from Nietzsche Corn Flakes boxes and $1.00. The Company estimates that 75% of the boxtops will be redeemed. In 2020 the Company sold 450,000 boxes of Corn Flakes and customers redeemed 220,000 boxtops receiving 44,000 spoons. If the spoons cost Nietzsche Company $2.50 each, how much liability for outstanding premiums should be recorded at the end of 2020? A. $23,500 B. $35,250 C. $58,750 D. $82,250
B
On October 1, 2020 Sinatra Corporation issued 5%, 10-year bonds with a par value of $300,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. The entry to record the issuance of the bonds would include: A. a credit of $7,500 to Accrued Interest Payable. B. a credit of $12,000 to Premium on Bonds Payable. C. a credit of $288,000 to Bonds Payable. D. a debit of $12,000 to Discount on Bonds Payable.
B
The Diana Co. issues a $208,000 6-month, zero-interest-bearing note to the Tang National Bank. The present value of the note is $200,000. The entry to record this transaction by Diana Co. would include: A. a credit to Notes Payable of $200,000. B. a debit to Discount on Notes Payable of $8,000. C. a credit to Discount on Notes Payable of $8,000. D. a debit to cash of $208,000.
B
Which of the following is not a characteristic of a project financing arrangement? A. Two or more entities form a new entity to construct an operating plant that will be used by all parties. B. The project must be one that neither entity could enter into on its own. 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.
B
Which of the following would not constitute the refinancing of a short-term obligation? A. Actual refinancing after the balance sheet date by issuance of a long-term obligation. B. A statement by the board of directors that refinancing is inevitable. C. Entering into a contractual agreement that clearly permits refinancing on a long-term basis with terms that are readily determinable. D. Actual refinancing after the balance sheet date by issuance of equity securities.
B
Bonds with par value of $500,000 carrying a stated interest rate of 6% payable semiannually on March 1 and September 1 were issued on July 1. The proceeds from the issue amounted to $510,000. The best explanation for the excess received over par value is: A. the bonds were sold at a premium. B. the bonds were sold at a higher effective interest rate. C. the bonds were issued at par plus accrued interest D. no explanation is possible without knowing the maturity date of the bond issue
C
Current liabilities are: A. liabilities that are due and payable on the balance sheet date. B. liabilities that may be paid out of any asset pool accumulated by the enterprise as long as payment is due within one year. C. due within one year or one operating cycle, whichever is longer. D. void of notes payable, as notes are always long-term.
C
Ewell Corporation's 2020 Annual Report 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. What is Ewell's times interest earned ratio? A. 10 B. 8 C. 5 D. 2.5
C
If a corporation issues a debenture bond, it means the bond: A. is secured by stocks and bonds of other corporations. B. matures in installments. C. is unsecured. D. may be converted into other securities of the corporation for a specified time after issuance.
C
If a loss is either probable or estimable, but not both, and if there is at least a reasonable possibility that a liability may have been incurred, the proper accounting treatment would be reflected by which of the following? A. Record the loss and the related liability, but at an amount that is significantly conservative. B. Record the loss and the related liability, but indicate in a footnote to the financial statements that this loss may not occur because one of the criteria may not be met. C. Disclose in the footnotes to the financial statements (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. D. Do not record the contingency or make mention of it in the financial statements because it lacks meeting the required criteria.
C
If bonds are outstanding to maturity any premium or discount as well as any bond issue costs: A. should be written off directly to a bond retirement account as the bond will be redeemed. B. are carried forward and written off in the same manner as that used prior to the maturity date. C. will be fully amortized as their amortization period is designed to coincide with the life of the bond issue. D. should be used to calculate the gain or loss resulting from the maturity of the bonds.
C
In accounting for compensated absences, a company following GAAP would account for the liability using the: Cash Basis Accrual Basis A. Yes Yes B. Yes No C. No Yes D. No No
C
On October 1, 2019, a company borrowed cash and signed a one-year, interest-bearing note on which both the principal and interest are payable on October 1, 2020. How will the note payable and the related interest be classified in the December 31, 2019, balance sheet? Note Payable Accrued Interest A. Current liability Noncurrent liability B. Noncurrent liability Current liability C. Current liability Current liability D. Noncurrent liability Noncurrent liability
C
On October 1, 2020 Sinatra Corporation issued 5%, 10-year bonds with a par value of $300,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis.T he Interest Expense related to bonds reported on 2020 income statement of Sinatra Corporation would be: A. $4,050. B. $6,900. C. $3,450. D. $3,750.
C
Strassberg Co. purchases a truck from Forward Auto for $65,000 on January 2, 2020. Forward estimated the assurance-type warranty costs on the truck to be $800 (Forward will pay for repairs for the first 50,000 miles or two years, whichever comes first). Strassberg Co. also purchases a $1,000 servicetype warranty for an additional 50,000 miles or two years. Forward incurs warranty costs related to the assurance-type warranty of $300 in 2020 and $500 in 2021. Forward records revenue on the service-type warranty on a straight-line basis. What is the amount of warranty liability and unearned warranty revenue that should be shown on the balance sheet of Forward at December 31, 2020? Warranty Liability/Unearned Warranty Revenue A. $500 $ 500 B. $400 $1,000 C. $500 $1,000 D. $400 $ 500
C
When a business enterprise enters into what is referred to as off-balancesheet financing, the company: A. is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet. B. wishes to confine all information related to the debt to the income statement and the statement of cash flows. C. can enhance the quality of its balance sheet and perhaps permit credit to be obtained more readily and at less cost. D. is in violation of generally accepted accounting principles.
C
When debt is extinguished before its maturity date through a refunding transaction, any difference between the reacquisition price of outstanding debt and its net carrying amount per books should be: A. amortized over the remaining original life of the extinguished issue. B. amortized over the life of the new issue. C. recognized currently in income as a loss or gain. D. treated as a prior period adjustment.
C
Which of the following is not acceptable treatment for the presentation of current liabilities? A. Listing current liabilities in order of maturity. B. Listing current liabilities according to amount. C. Offsetting current liabilities against assets that are to be applied to their liquidation. D. Showing current liabilities immediately below current assets to obtain a presentation of working capital.
C
Which of the following loss contingencies is normally accrued? A. Pending or threatened litigation. B. General or unspecified business risk. C. Obligations related to product warranties. D. Risk of property loss due to fire
C
A bond premium should be reported in the balance sheet: A. at the present value of the future reduction in bond interest expense due to the premium. B. as a deferred credit. C. along with other premium accounts such as those resulting from stock transactions. D. as a direct addition to the face amount of the bond
D
Bonds that pay no interest unless the issuing company is profitable are called: A. collateral trust bonds. B. debenture bonds. C. revenue bonds. D. income bonds.
D
During 2019 Wannstedt Co. introduced a new line of machines that carry a three-year warranty against manufacturer's defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 4% in the year after sale, and 6% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: Sales/Actual Warranty Expenditures 2019 $200,000 $ 3,000 2020 500,000 15,000 2021 700,000 45,000 $1,400,000 $63,000 What amount should Wannstedt report as a liability for this assurance type warranty at December 31, 2021? A. $0 B. $5,000 C. $68,000 D. $105,000
D
Hendrix Corporation exchanged land with a fair market value of $150,000 for Gaye Company's $226,000, zero-interest-bearing, 4-year note. If the $150,000 amount represents the present value of the note at an appropriate rate of interest, Hendrix Corporation should record the difference ($76,000) as: A. gain on the sale of land. B. premium on the sale of land. C. premium on notes receivable. D. discount on notes receivable.
D
King Cole Corporation markets a 10-year bond issue dated January 1, 2020. The bonds pay 9% interest semi-annually on January 1 and July 1. If these bonds are sold on September 1, 2020 how many months accrued interest must be paid by the purchaser and over how many months would any premium on the bonds be amortized? Months of Accrued Interest/ Amortization Period A. 8 120 months B. 8 112 months C. 2 120 months D. 2 112 months
D
Long-term debt that matures within one year and is to be converted into stock should be: A. reported as a current liability. B. reported in a special section between liabilities and stockholders' equity. C. reported as noncurrent. D. reported as noncurrent and accompanied with a note explaining the method to be used in its liquidation.
D
Marx Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, and unfavorable outcome is highly probable, and: A. the Marx Company admits guilt. B. the court will decide the case within one year. C. the damages appear to be material. D. the cause for action occurred during the accounting period covered by the financial statements.
D
The currently maturing portion of long-term debt should be classified as a current liability if: A. the debt is to be converted into capital stock. B. the debt is to be refinanced on a long-term basis. C. the funds used to liquidate it are currently classified as a long-term investment on the balance sheet. D. the portion so classified will be liquidated within one year using current assets
D
Which of the following statements correctly depicts the nature of discounts or premiums as applied to a bond issue? A. 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. 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. The net cash outflow (ignoring bond issue costs) to the seller of bonds issued at a premium will be less than the maturity value of the bonds plus total interest payments.
D
Williams Co., which has a taxable payroll of $300,000, is subject to the FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the company's state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Williams Co.? A. $35,100 B. $24,600 C. $12,000 D. $ 8,400
D
Wilson Company is involved in a litigation suit concerning the clean-up of old underground oil storage tanks on property it sold to a housing development company five years ago. The attorneys for Wilson Company cannot give a best estimate for the probable liability; however, the attorneys state that the liability to Wilson Company will probably fall within a range of $2 million to $10 million. According to the SEC, what should Wilson Company record with regards to this environmental liability? A. No entry is required. B. A loss and liability of $10 million. C. A loss and liability of $6 million. D. A loss and liability of $2 million.
D
With respect to the following loss contingencies, would a loss normally be accrued or not accrued? Loss Related to Receivable Collections / Loss Related to Product Warranties A. Accrued Not Accrued B. Not Accrued Accrued C. Not Accrued Not Accrued D. Accrued Accrued
D
