Deck 10: Long-Term Liabilities

Question 1

Which of the following is an unsecured promissory note issued by a company with a high credit rating?

A)Commercial paper
B)Convertible bond
C)Notes payable
D)Coupon bond

Answer 1

A

Question 2

All of the following are used to determine the bond premium or the bond discount except for?

A)market rate.
B)yield rate.
C)coupon rate.
D)capital rate.

Answer 2

B

Question 3

If a bond is issued at a discount, the coupon rate is:

A)equal to the effective rate.
B)less than the effective rate.
C)greater than the effective rate.
D)not needed to determine the bond's sale price.

Answer 3

B

Question 4

There is an inverse relationship between the discount rate and the selling price of a bond.

Question 5

Post-employment benefits other than pensions are expensed on an accrual basis.

Question 6

Benefits that are not contingent upon an employee's continued employment are called vested benefits.

Question 7

The distinction between senior and subordinated debt is associated with:

A)general debenture bonds.
B)mortgage bonds.
C)collateral trust bonds.
D)commercial bonds.

Question 8

The two kinds of pension plans that are commonly used by employers are: defined obligation plans and defined contribution plans.

Question 9

Gains and losses from the early retirement of debt are not recognized until the maturity date.

Question 10

A finance lease allows a firm to report more expenses over the life of a lease than an operating lease.

Question 11

The carrying value of a bond issued at a discount decreases over time.

Question 12

An operating lease is similar to a mutually unexecuted contract.

Question 13

If a bond is trading at 103 the:

A)the interest expense is greater than the interest payment
B)the interest expense is less than the interest payment
C)the interest expense is equal to the interest payment
D)the interest expense can not be determined

Question 14

Commercial paper is a source of debt financing.

Question 15

If a bond is trading at 98 the:

A)the interest expense is greater than the interest payment
B)the interest expense is less than the interest payment
C)the interest expense is equal to the interest payment
D)the interest expense can not be determined

Question 16

A lease that runs eight years on an asset with a 12-year useful life may qualify as an operating lease.

Question 17

If a bond is issued at a premium, the coupon rate is:

A)equal to the effective rate.
B)less than the effective rate.
C)greater than the effective rate.
D)not needed to determine the bond's sale price.

Question 18

The proceeds from the sale of a bond are equal to:

A)the face value of the bond.
B)the face value of the bond plus the present value of the interest to be paid.
C)the maturity value of the bond plus the interest to be paid.
D)the present value of the principal and interest to be paid.

Question 19

A bond issue is a form of:

A)equity financing
B)debt financing
C)collateral financing
D)financing similar to an instalment loan

Question 20

Which of the following is backed by shares and bonds of other companies?

A)Collateral trust bond
B)Debenture bond
C)Mortgage bond
D)Convertible bond

Question 21

On January 1, 2011, Bally Co.issued a $500,000, 6%, 8-year bond with interest payable semi-annually at par.The issuance price of the bond and the first period's interest expense are closest to:

Question 22

Albacore Inc.issued a $500,000, 6%, 10-year bond, paying interest semi-annually to yield 8%.The issuance price was closest to:

A)$432,048
B)$432,900
C)$500,000
D)$574,387

Question 23

A bond discount results in a liability on the balance sheet that is:

A)lower than the face value of the bond
B)higher than the face value of the bond
C)equal to the face value of the bond
D)there is no corresponding liability for the discount

Question 24

From the lessor's perspective, a capital lease results in which one of the following?

A)Recognition of a liability on the balance sheet
B)Recognition of the leased asset on the balance sheet
C)Recognition of the sale of the leased asset on the income statement
D)Recognition of amortization expense on the leased asset, on the income statement.

Question 25

If the lessee makes the following entry: $\begin{array} { l } \text {Dr. Amortization expense (SE) }&xx\\ \text { Cr. Accumulated amortization (XA) }&&xx\\\end{array}$

What type of lease do they have?

A)Commercial lease
B)Finance lease
C)Operating lease
D)Sales-type lease

Question 26

If a bond sells at a premium, the amortization of the premium will:

A)have no effect on periodic expense.
B)decrease periodic expense.
C)increase periodic interest expense.
D)make periodic interest expense equal to the periodic interest payment.

Question 27

A 6% 5-year bond was issued at $918.89.The face value and yield to maturity for the bond are:

Question 28

Sail Fish Inc.issued a $500,000, 8%, 10-year bond, with interest payable semi-annually to yield 6%.The issuance price of the bond was:

A)$432,048
B)$500,000
C)$573,600
D)$574,387

Question 29

If a company made the following entry: $\begin{array} { l } \text {Dr. Asset under lease (A) }&xx\\ \text {\( \mathrm{Cr} \). Lease obligation (L) }&&xx\\\end{array}$

Under IFRS, what type of lease do they have?

A)Capital lease
B)Finance lease
C)Operating lease
D)Sales-type lease

Question 30

Mermaid Inc.sold a $50,000, 8%, 5-year bond for $46,139 to yield 10%.Interest is paid semi-annually.The net carrying value of the bond after the first interest payment will be closest to:

A)$46,446
B)$50,000
C)$46,139
D)$48,446

Question 31

How would the amortization of a bond discount affect each of the following?

Question 32

Firms having significant operating leases must disclose their commitments to pay for these leases in a footnote listing the payments to be made:

A)in total.
B)in total and over the next 3 years.
C)in total and over the next 5 years.
D)over the next 5 years.

Question 33

Unamortized bond premium is reported on the balance sheet as an):

A)contra-liability account.
B)contra-asset account.
C)accumulation account.
D)bond liability.

Question 34

Sunset Inc.decided to repurchase an outstanding bond issue by buying it back in the open market.The face value of the bonds was $1,000,000; they were originally issued at $914,698 and currently had a book value of $976,770 and a market value of $954,202.The gain or loss that Sunset will record on the retirement is closest to:

A)$23,230 gain
B)$22,568 loss
C)$22,568 gain
D)$45,798 loss

Question 35

Restrictions placed on a company in their bond indenture agreement are known as:

A)collateral.
B)bond indenture.
C)bond covenants.
D)agreements.

Question 36

On January 1, 2011 Fintale Ltd issued a $100,000, 6%, 5-year bond for $91,889 to yield 8%.The interest expense and interest payable for the first year are closest to:

Question 37

A call feature on a bond:

A)prevents the interest rate on the bond from fluctuating.
B)determines the earliest date that the bonds may be retired.
C)allows the company to buy back the bonds at a predetermined price.
D)gives the issuer the right to call the investment banker at any time during the bond's life.

Question 38

From the lessee's perspective, a finance lease results in all of the following except:

A)recognition of an asset on the balance sheet.
B)recognition of a liability on the balance sheet.
C)recognition of interest expense on the income statement.
D)recognition of rent expense on the income statement.

Question 39

If a company made the following journal entry: $\begin{array} { l } \text {Dr. Rent expense (SE) }&xx\\ \text {Cr. Cash (A) }&&xx\\\end{array}$

What type of lease do they have?

A)Capital lease
B)Finance lease
C)Operating lease
D)Sales-type lease

Question 40

Shark Co.sold a $10,000, 8%, 5-year bond for $10,853 to yield 6%.Interest is paid semi-annually.The first interest payment entry will record interest payable of:

A)$300.00
B)$434.12
C)$400.00
D)$325.59

Question 41

From the lessee's point of view, a lease qualifies as a finance lease if it contains which one of the following?

A)The lease term is for a major part of the asset's economic life.
B)Title to the lease remains with the lessor
C)The lease does not contain a bargain purchase option
D)The present value of the minimum lease payments is at least 60% of the asset's fair market value

Question 42

The entry made when cash is set aside to pay for future pension benefits is called an):

A)funding entry.
B)adjusting entry.
C)accrual entry.
D)reclassification entry.

Question 43

The following information in thousands) is available from the notes to the financial statements for Moonbeam Ltd.related to their defined benefit pension plan:
The funded status of the plan and the pension expense reported by Moonbeam are:

Question 44

Use the following information to answer questions
Jacquin Co.leased an asset under the following terms: $\begin{array}{ll}\text { Annual lease payments } & \$ 7,500 \\\text { Asset's estimated useful life } & 8 \text { years } \\\text { Bargain purchase option } & \text { none } \\\text { Asset's fair market value } & \$ 65,000 \\\text { Transfer of title at end of lease } & \text { none } \\\text { Lease term } & 4 \text { years } \\\text { Present value of lease payments } & \$ 35,500\end{array}$

-Assume Jacquin's decides to account for the lease as a finance lease.The lessee's entry to record the leased asset and lease acquired would include a:

A)debit to asset under lease for $35,500.
B)debit to asset under lease for $40,000.
C)credit to lease obligation for $7,500.
D)credit to lease payable for $7,500.

Question 45

Which of the following statements concerning pensions is correct?

A)Defined benefit plans offer a retiree more security than defined contribution plans.
B)The accounting for a defined contribution plan is more complex than for a defined benefit plan.
C)Pension funding must always equal the pension expense.
D)The employee will forfeit vested pension contributions if he\she is terminated.

Question 46

Use the following information to answer questions
Jacquin Co.leased an asset under the following terms: $\begin{array}{ll}\text { Annual lease payments } & \$ 7,500 \\\text { Asset's estimated useful life } & 8 \text { years } \\\text { Bargain purchase option } & \text { none } \\\text { Asset's fair market value } & \$ 65,000 \\\text { Transfer of title at end of lease } & \text { none } \\\text { Lease term } & 4 \text { years } \\\text { Present value of lease payments } & \$ 35,500\end{array}$

-The lease should be classified by Jacquin Co.as an):

A)operating lease.
B)commercial lease.
C)leveraged lease.
D)finance lease.

Question 47

Which of the following statements about defined benefit pension plans is true?

A)The expense is equal to the contribution amounts in a period.
B)The contributions to the fund are equal to the benefits paid in a period.
C)The expense is equal to the present value of the future benefit obligations incurred that period.
D)The amount of benefits the employee will receive depends on the performance of the pension plan.

Question 48

Health care benefits and life insurance benefits have historically:

A)not been included in the financial statements of corporations in Canada.
B)been accrued each year in the financial statements.
C)been recorded on a pay-as-you-go basis.
D)only been disclosed in the financial statements in Canada.

Question 49

The required disclosure for a defined contribution plan includes which of the following?

A)Contributions for the past five years
B)The number of employees enrolled in the plan
C)Contributions for the current period
D)Any unfunded pension liability

Question 50

A pension plan that pays employees benefits upon retirement based on their length of service and salary is called a:

A)defined contribution plan.
B)defined service plan
C)defined benefit plan.
D)defined performance plan.

Question 51

Which of the following is a reason a lessee would enter into an operating lease instead of buying an asset?

A)The risk of loss from obsolescence is reduced.
B)The company's ability to borrow increases due to larger assets.
C)The company can claim capital cost allowance.
D)The company benefits from the appreciation in value of the asset.

Question 52

Fieldway Turf Inc.has leased an excavator for a 5-year period.The excavator has an estimated useful life of 15 years and a current market value of $125,000.At the end of the lease Fieldway can buy the asset for its market value at that time.How should Fieldway account for the lease? As an)

A)finance lease because the market value of the asset is known.
B)finance lease because they will own the asset at the end of the lease.
C)operating lease because they might not purchase the asset at the end of the lease.
D)operating lease because the lease is only for one-third of the estimated useful life.

Question 53

If the assets in the pension fund exceed the present value of future pension obligations, the pension fund is described as:

A)fully funded.
B)underfunded.
C)partially funded
D)overfunded.

Question 54

An operating lease will be reflected on the balance sheet of the lessee as:

A)a current liability.
B)a long-term liability.
C)a long-term liability and a fixed asset.
D)nothing; it is not reflected on the balance sheet.

Question 55

From the lessee's point of view, which type of lease means that its debt to equity ratio will not be affected?

A)Operating lease
B)Sales-type lease
C)Leveraged lease
D)Finance lease

Question 56

Which of the following is not a criterion for classifying a lease as a finance lease, from the lessee's point of view?

A)The lease payments are more frequent than annually
B)Title to the lease passes to the lessee at the end of the lease
C)The lease term is for a major portion of the asset's economic life.
D)Present value of the minimum lease payments is equal to substantially all of the FV of the asset.

Question 57

A pension plan that pays employees benefits upon retirement based on how well the investments in the pension plan perform is called a:

A)defined contribution plan.
B)defined performance plan.
C)defined benefit plan.
D)defined investment plan.

Question 58

If the lessee treats the lease as an operating lease, then the lessor:

A)records a liability.
B)records a sale.
C)treats the lease as a finance lease.
D)retains the asset on its books.

Question 59

AFC Corporation leased a piece of machinery and correctly classified and recorded it as a finance lease.At the date of signing, January 1, 2011, the asset and lease obligation were recorded for $42,000.The first lease payment of $8,200 was due December 31, 2011 and the interest rate they used in their calculations was 7%.The lease term was 10 years.Which of the following best describes what would be reported on AFC's income statement for the year ending December 31, 2011?

A)$8,200 lease expense
B)$8,200 lease expense, $4,200 amortization expense
C)$2,940 interest expense, $1,260 amortization expense
D)$2,940 interest expense, $4,200 amortization expense

Question 60

Vested benefits in a pension plan:

A)belong to an employee even if they leave the firm.
B)are paid to an employee if they leave the firm.
C)revert to the company if an employee leaves the firm.
D)are paid to an employee in the year of vesting.

Question 61

A future tax asset indicates that the company:

A)expects to pay higher taxes in the future.
B)paid their taxes for the current year in advance.
C)expects a benefit in the form of lower taxes in the future.
D)had some expenses that were deductible for taxes but are prepaid for accounting purposes.

Question 62

Under the liability method for calculating future taxes, the future tax liability is based on:

A)current tax rates.
B)known future tax rates.
C)average historical tax rates.
D)effective tax rates.

Question 63

A debt to equity ratio of 50% indicates that:

A)Half of the company's assets are financed through equity
B)50% of the company's interest expense comes from long-term debt financing
C)The company is close to bankruptcy
D)The company spends 50% of its operating earnings on interest.

Question 64

Halibut Limited reported the following items on their balance sheet: $$\begin{array} { l r } \text { Prepaid Expenses } & \$ 85,000 \\\text { Current liabilities } & 135,000 \\\text { Long-term note payable } & 250,000 \\\text { Bonds payable } & 95,000 \\\text { Share capital } & 125,000 \\\text { Retained earnings } & 157,500\end{array}$$
The debt to equity ratio for Halibut is closest to:

A)2.0
B)1.7
C)1.22
D)0.88

Question 65

Under the liability method for calculating future taxes, income tax expense is calculated using:

A)tax return income × tax rate.
B)book income × tax rate.
C)taxes payable + changes in future tax assets and liabilities.
D)book income x tax rate + changes in future tax assets and liabilities.

Question 66

Seagrams Corporation recorded a warranty expense for accounting purposes of $2,000 but only incurred $600 in actual warranty costs this year.If their tax rate is 40%, the difference in the expense and the costs incurred will create a:

A)$1,400 future tax asset.
B)$560 future tax asset.
C)$1,400 future tax liability.
D)$560 future tax liability.

Question 67

The debt to equity ratio and times-interest-earned ratio for Conway Corporation for the last two years are as follows: $$\begin{array} { l r r } & 2011 & 2010 \\\text { Debt to equity } & .34 & .35 \\\text { Times-interest-earned } & 4.2 \times & 5.5 \times \end{array}$$
Which of the following conclusions could be made about Conway Corporation?

A)The company is less able to pay its interest costs in 2011.
B)The company is better able to pay its interest costs in 2011.
C)The company has more debt outstanding in 2011.
D)The company is less risky in 2011.

Question 68

Concerns over off-balance-sheet financing and risk gave rise to all of the following except:

A)finance leases.
B)financial statement disclosure of commitments.
C)detailed financial statement disclosure of terms of long-term debt.
D)current and long-term classifications for assets on the balance sheet.

Question 69

All of the following transactions lead to temporary timing differences except:

A)the use of straight-line amortization of accounting purposes.
B)the use of estimated warranty costs for calculating warranty expense.
C)the recognition of dividend income for dividends received from another Canadian company.
D)all of the above lead to temporary timing differences.

Question 70

The times-interest-earned ratio is calculated as:

A)Net income - taxes - interest) ÷ interest
B)Net income + taxes - interest) ÷ interest
C)Net income + interest) ÷ interest
D)Net income + taxes + interest) ÷ interest

Question 71

What is the effect of classifying a lease as an operating lease, as opposed to as a finance lease, on the debt to equity ratio and times-interest-earned ratio?

Question 72

The following information is from the financial statements of Hayden Inc.: $\begin{array}{lr}\text { Net income } & \$ 450,000 \\\text { Income tax expense } & 250,000 \\\text { Interest expense } & 150,000 \\\text { Long-term debt } & 1,875,000\end{array}$
The times-interest-earned ratio for Hayden would be closest to:

A)3 times
B)4.7 times
C)5.7 times
D)8 times

Question 73

The biggest concern for analysts regarding liabilities is the possibility of:

A)interest payments not being recorded.
B)unrecorded liabilities.
C)unrecorded assets.
D)changes in the market rate of interest.