Deck 10: Long-Term Liabilities

Question 1

Companies must always accrue interest between the last loan payment date and the company's reporting date.

Answer 1

False

Question 2

Companies are NOT required to disclose the details of their long-term loans in the notes to the financial statements.

Answer 2

True

Question 3

The operating lease classification is considered the "default" classification.

Answer 3

False

Question 4

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

Question 5

Restrictions placed on a company by the lender are also known as covenants.

Question 6

Under a finance lease the liability is recorded as "obligation under finance lease".

Question 7

Non-financial covenants may include a requirement to have an annual audit.

Question 8

Off-balance sheet financing occurs only for finance leases.

Question 9

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

Question 10

Debentures can be either senior or subordinated.

Question 11

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

Question 12

All bond covenants are recorded in an agreement called a debenture agreement.

Question 13

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

Question 14

At the end of a finance lease the lessee will NEVER have the option to purchase the asset at less than the fair market value.

Question 15

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

Question 16

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

Question 17

An investment banker is usually hired to assist a company in issuing debt securities.

Question 18

A public offering is open to all investors including institutions.

Question 19

Bank loan covenants only pertain to financial data such as ratios.

Question 20

The interest rate paid on the bond is known as the effective rate.

Question 21

A defined benefit plan is similar to a defined contribution plan in that only employers contribute to the plan.

Question 22

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 23

How would the Depreciation of a bond discount affect each of the following? Bond's Net Bond's
Carrying Value Interest Expense

A) increase decrease
B) increase increase
C) decrease increase
D) decrease decrease

Question 24

Temporary differences between accounting and taxable income will eventually offset.

Question 25

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 26

An actuary is only necessary when there is a dispute between contributions made and benefits expected to be received for a defined benefit plan.

Question 27

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 28

A temporary difference is a difference between tax and accounting income that will not reverse in a future period.

Question 29

Hybrid pension plans are also known as target benefit plans.

Question 30

A bond issue is a form of

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

Question 31

Pension funds are described as underfunded if the value of the pensions fund assets is less than the present value of the future pension obligations.

Question 32

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.

Question 33

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

Question 34

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.

Question 35

The calculation of future taxes is based on the temporary differences between book income and tax income.

Question 36

Deferred income taxes represent amounts due to Canada Revenue Agency.

Question 37

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 38

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

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

Question 39

A deferred tax asset can be recognized when lower income taxes will expected in the future.

Question 40

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 41

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 42

Use the following information to answer question
Canin Cranes Co. leased an asset under the following terms:
The lease should be classified by Canin Cranes Co. as a(n)

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

Question 43

If a company made the following entry what type of lease do they have?

A) capital lease
B) finance lease
C) operating lease
D) sales-type lease

Question 44

DRM Corporation leased a piece of machinery and correctly classified and recorded it as a finance lease. At the date of signing, January 1, 2017, the asset and lease obligation were recorded for $42,000. The first lease payment of $8,200 was due December 31, 2017 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 Statement of Income for the year ending December 31, 2017?

A) $8,200 Lease Expense
B) $8,200 Lease Expense, $4,200 Depreciation Expense
C) $2,940 Interest Expense, $1,260 Depreciation Expense
D) $2,940 Interest Expense, $4,200 Depreciation Expense

Question 45

If the lessee makes the following entry what type of lease do they have?

A) commercial lease
B) finance lease
C) operating lease
D) sales-type lease

Question 46

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 47

An operating lease will be reflected on the Statement of Financial Position of the lessee as

A) a current liability.
B) a non-current liability.
C) a non-current liability and a fixed asset.
D) nothing; it is not reflected on the Statement of Financial Position.

Question 48

If a bond sells at a premium, the depreciation 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 49

If a company made the following journal entry what type of lease do they have?

A) capital lease
B) finance lease
C) operating lease
D) sales-type lease

Question 50

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 51

Tough Tracks 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 Tough Tracks can buy the asset for its market value at that time. How should Tough Tracks account for the lease?

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

Question 52

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 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

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 55

The entry made when cash is set aside to pay for future pension benefits is called a(n)

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

Question 56

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 57

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 58

Use the following information to answer question
Canin Cranes Co. leased an asset under the following terms:
Assume Canin Cranes 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 obligation under finance lease for $7,500.
D) credit to lease payable for $7,500.

Question 59

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

A) recognition of an asset on the Statement of Financial Position.
B) recognition of a liability on the Statement of Financial Position.
C) recognition of interest expense on the Statement of Income.
D) recognition of rent expense on the Statement of Income.

Question 60

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 represents all of the asset's fair market value.

Question 61

Wahi Limited reported the following items on their Statement of Financial Position: The debt to equity ratio for Wahi is closest to

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

Question 62

The debt to equity ratio and interest coverage ratio for Lopez Corporation for the last two years are as follows: Which of the following conclusions could be made about Lopez Corporation?

A) The company is less able to pay its interest costs in 2017.
B) The company is better able to pay its interest costs in 2017.
C) The company has more debt outstanding in 2017.
D) The company is less risky in 2017.

Question 63

How should a contingent liability that has a likely chance of occurring and can be reasonably estimated be disclosed?

Question 64

The journal entry to record income taxes owing is

A) Dr. Income Taxes Receivable, Cr. Income Tax Revenue.
B) Dr. Income Tax Expense, Cr. CRA Payable.
C) Dr. Income Tax Expense, Cr. Deferred Tax Liability.
D) Dr. Income Tax Payable, Cr. Cash.

Question 65

When the occurrence of a liability is dependent on the outcome of some future event, the liability is referred to as a(n)

A) contingent liability.
B) commitment.
C) accrued liability.
D) accounts payable.

Question 66

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 67

How should a contingent liability that has an unlikely chance of occurring and is insignificant in size be disclosed?

Question 68

Which of the following contingent losses would require footnote disclosure only?

A) a likely loss with an amount that can be reasonably estimated
B) a likely loss of a known amount
C) an unlikely loss
D) a likely loss with an amount that cannot be reasonably estimated

Question 69

In which of the following situations would a contingent loss be recognized?

Question 70

How should a contingent liability that has a likely chance of occurring but the amount of the loss cannot be reasonably estimated be disclosed?

Question 71

All of the following transactions lead to temporary timing differences EXCEPT

A) the use of straight-line depreciation 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 72

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 73

Which of the following would best describe a contingent liability?

A) An obligation to transfer services instead of cash to settle a liability
B) an obligation where the costs will be covered by insurance
C) an obligation with a high degree of uncertainty about the amount or timing of the payment
D) an obligation with a low degree of uncertainty about the amount or timing of the payment

Question 74

A deferred income tax asset is created when the difference will result in

A) higher income taxes in the future.
B) no income taxes in the future.
C) lower income taxes in the future.
D) none of the above.

Question 75

The following information is from the financial statements of Duff Inc.: The interest coverage ratio for Duff would be closest to

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

Question 76

The interest coverage 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