Deck 11: Long-Term Liabilities

Question 1

If bonds are issued initially at a discount and the straight-line method of amortization is used for the discount,interest expense in the earlier years will be

A)Greater than if the compound interest method were used
B)The same as if the compound interest method were used
C)Less than if the compound interest method were used
D)Less than the amount of the interest payments

Answer 1

A

Question 2

The current accounting treatment for convertible debt is to treat it as straight debt.This treatment can be defended on what basis?

A)Convertible debt is a complex financial instrument.
B)Convertible debt comprises two financial instruments - a debt instrument and the option to convert.
C)The debt instrument and the option to convert are not separable.
D)The option to convert is equity.

Answer 2

C

Question 3

An estimated loss from a loss contingency should be accrued when

A)It is probable at the date of the financial statements that a loss has been incurred and the amount of the loss can be reasonably estimated
B)The loss has been incurred by the date of the financial statements and the amount of the loss may be material
C)It is probable at the date of the financial statements that a loss has been incurred and the amount of the loss may be material
D)It is probable that a loss will be incurred in a future period and the amount of the loss can be reasonably estimated

Answer 3

A

Question 4

When the issuer of bonds exercises the call provision to retire the bonds,the excess of the cash paid over the carrying amount of the bonds should be recognized separately as a an)

A)Extraordinary loss
B)Extraordinary gain
C)Loss from continuing operations
D)Loss from discontinued operations

Question 5

"Trading on the equity" financial leverage)is likely to be a good financial strategy for stockholders of companies having

A)Cyclical high and low amounts of reported earnings
B)Steady amounts of reported earnings
C)Volatile fluctuation in reported earnings over short periods of time
D)Steadily declining amounts of reported earnings

Question 6

When it is necessary to impute an interest rate in connection with a note payable,the rate should be

A)Two-thirds of the prime rate effective at the time the obligation is incurred
B)The same as that used in the GNP Implicit Price Deflator
C)At least equal to the rate at which the debtor can obtain financing of a similar nature from other sources at the date of the transaction
D)As near zero as can be justified

Question 7

In the situation described in problem 10,if Lee records the asset and note at $11,800,the overall effect will be

A)A correct acquisition cost and correct interest expense
B)A correct acquisition cost and understated interest expense
C)An understated acquisition cost and understated interest expense
D)An overstated acquisition cost and understated interest expense

Question 8

How should the value of warrants attached to a debt security be account for?

A)No value assigned
B)A separate portion of paid-in capital
C)An appropriation of retained earnings
D)A liability

Question 9

For a trouble debt restructuring involving only modification of terms,it is appropriate for a debtor to recognize a gain when the carrying amount of the debt

A)Exceeds the total future cash payments specified by the new terms
B)Is less than the total future cash payments specified by the new terms
C)Exceeds the present value specified by the new terms
D)Is less than the present value specified by the new terms

Question 10

Taft Company sells Lee Company a machine,the usual cash price of which is $10,000,in exchange for an $11,800 non-interest-bearing note due three years from date.If Taft initially records the note at $10,000,the overall effect will be

A)A correct sales price and correct interest revenue
B)A correct sales price and understated interest revenue
C)An understated sales price and understated interest revenue
D)An overstated interest price and understated interest revenue

Question 11

A threat of expropriation of assets that is reasonably possible,and for which the amount of loss can be reasonably estimated,is an example of a an)

A)Loss contingency that should be disclosed,but not accrued
B)Loss contingency that should be accrued and disclosed
C)Appropriation of retained earnings against which losses should be charged
D)General business risk which should not be accrued and need not be disclosed

Question 12

Theoretically,a bond payable should be reported at the present value of the interest discounted at

A)Stated interest rate for both principal and interest
B)Effective interest rate for both principal and interest
C)Stated interest rate for principal and effective interest rate for interest
D)Effective interest rate for principal and stated interest rate for interest

Question 13

A loss from early extinguishment of debt,if material,should be reported as a component of income

A)After cumulative effect of accounting changes and after discontinued operations of a segment of a business
B)After cumulative effect of accounting changes and before discontinued operations of a segment of a business
C)Income from continuing operations
D)Before cumulative effect of accounting changes and before discontinued operation s of a segment of a business

Question 14

Unamortized debt discount should be reported on the balance sheet of the issuer as

A)A direct deduction from the face amount of the debt
B)A direct deduction from the present value of the debt
C)A deferred charge
D)Part of the issue costs

Question 15

The interest rate used to calculate the cash interest payments by the issuer of bonds is

A)The market rate of interest
B)The effective interest rate
C)The stated interest rate
D)Equal to the actual interest expense rate

Question 16

Trading on the equity leverage)refers to the

A)Amount of working capital
B)Amount of capital provided by owners
C)Use of borrowed money to increase the return to owners
D)Number of times interest is earned

Question 17

Cole Manufacturing Corporation issued bonds with a maturity amount of $200,000 and a maturity 10 years from date of issue.If the bonds were issued at a premium,this indicates that

A)The yield effective or market)rate of interest exceeded the nominal coupon)rate
B)The nominal rate of interest exceeded the yield rate
C)The yield and nominal rates coincided
D)No necessary relationship exists between the two rates

Question 18

Gain contingencies are usually recognized in the income statement when

A)Realized
B)Occurrence is reasonably possible and the amount can be reasonably estimated
C)Occurrence is probable and the amount can be reasonably estimated
D)The amount can be reasonably estimated

Question 19

Ace Corporation has a debt to total assets ratio of 65%.This tells the user of Ace's financial statements

A)Ace is getting a 35% return on its assets
B)There is a risk Ace cannot pay its debts as they come due
C)65% of the assets are financed by the stockholders
D)Ace should issue more debt to reduce its risk

Question 20

An example of an item that is not a liability is

A)Dividends payable in stock
B)Advances from customers on contracts
C)Accrued estimated warranty costs
D)The portion of long-term debt due within one year

Question 21

ABC Company has a note payable that is due six months after its year end.Under which of the following conditions will ABC be able to classify the note as a long term debt.

A)ABC cannot classify the note as long term because it is due within the current operating cycle or one year,whichever is longer.
B)ABC can classify the note as long term because it is due next year.
C)ABC can classify the note as long term because management intends to refinance it with long term debt and has an agreement to do so with a qualified creditor.
D)ABC can classify the note as long term because it is a 10 year note and management intends to pay the maturity value at the end of the 10 year period.

Question 22

List the three methods of accounting for bonds refunding.Under current GAAP,how are bond refundings recorded?

Question 23

Discuss the definition and the proper accounting for mandatorily redeemable preferred stock.

Question 24

Discuss the difference between the straight-line and the effective interest methods of bond premium or discount amortizations.

Question 25

List and discuss five factors that may be employed to determine if a particular financial instrument is a debt or equity security.

Question 26

Discuss the four basic reasons why a corporation may wish to issue debt rather than equity securities

Question 27

An unearned revenue is an example of aan)

A)Deferred credit.
B)Accrued liability.
C)Customer billing that takes place before a job is finished.
D)Accounts receivable.

Question 28

What is a zero coupon bond? Discuss accounting for zero-coupon bonds.

Question 29

A zero coupon bond is different from a typical bond issue because

A)The investor can clip the coupons and get paid for the periodic interest on the bond while a typical bond does not have coupons.
B)It is reported in the balance sheet net of the discount on the bond.
C)The zero coupon bond's deep discount is reported as an asset and a typical bond that is issued at a discount is reported net of the discount.
D)It does not pay any periodic interest while the typical bond does.

Question 30

XYZ Company's yearend is December 31,20x1 and its financial statements are issued in the following March.On January 24,20x2.A 10 year note payable came due and was paid by issuing XYZ common stock to the creditor.In its December 31,20x1 balance sheet,XYZ should

A)Report the note as a current liability because it was due on January 24,20x2 - only 24 days after the year end.
B)Report the note as a long-term liability because it was not paid off with a current asset or replaced by another current liability.
C)Report the note as a long-term liability because it was extinguished paid off)on January 24,20x2 - 24 days after the year end.
D)Report the note as a long-term liability because it was a 10 year note.

Question 31

According to IAS No.39,when are financial liabilities recognized?

Question 32

Under a troubled debt restructuring that results in a modification of terms the debtor will report interest expense when

A)The debtor reports a gain on restructuring.
B)The future cash flows under the restructuring agreement are less than the company's obligation at the date the restructuring takes place.
C)Always because the troubled debtor has a new agreement that obligates the company to make payments in the future.
D)The debtor reports no gain on restructuring.

Question 33

The physical capital maintenance concept of income would require that a company's bonds payable be

A)Reported in the balance sheet at their amortized issue price and that changes in their market values be reported in earnings.
B)Reported in the balance sheet at their amortized issue price and that changes in their market values not be reported in earnings.
C)Reported in the balance sheet at their fair market values and that changes in their market values be reported in earnings.
D)Reported in the balance sheet at their fair market values and that changes in their market values be reported in other comprehensive income.

Question 34

Explain how the selling price of a bond is determined.

Question 35

In general,derivative instruments are

A)Not reported in a company's balance sheet because their impact on the company is not yet known..
B)Reported in the balance sheet at fair value and changes in their fair value are reported in earnings.
C)Reported in the balance sheet at historical cost and changes in their fair value are reported in earnings.
D)Reported in the balance sheet at fair value and changes in their fair value are reported in other comprehensive income.

Question 36

Current accounting treatment for gain contingencies is different from the accounting treatment for loss contingencies.Which accounting concept is this differential concept consistent with?

A)Conservatism
B)Materiality
C)Full disclosure
D)Revenue recognition

Question 37

A deferred credit meets the definition of a liability because

A)It is a probable future sacrifice of assets as the result of a past transaction or event.
B)It is a present obligation to transfer assets to another entity.
C)It is an accrual representing an obligation to pay money in the future.
D)It is a present obligation to provide services to another entity.

Question 38

How are compound financial instruments accounted for under IAS No.32?