ACC Ch10

Question 1

The present value of the annuity of interest payments plus the present value of the principal.

Answer 1

Bond issue price

Question 2

Bonds that may be redeemed or retired before their specified due date.

Answer 2

Callable bonds

Question 3

A lease that is recorded as an asset by the lessee.

Answer 3

Capital lease

Question 4

The face value of a bond plus the amount of unamortized premium or minus the amount of unamortized discount.

Answer 4

Carrying value

Question 5

Bonds that are not backed by specific collateral.

Answer 5

Debenture bonds

Question 6

The account used to reconcile the difference between the amount recorded as income tax expense and the amount that is payable as income tax.

Answer 6

Deferred tax

Question 7

The excess of the face value of bonds over the issue price.

Answer 7

Discount

Question 8

The process of transferring a portion of the premium or discount to interest expense; this method results in a constant effective interest rate.

Answer 8

Effective interest method of amortization

Question 9

The rate of interest on the bond certificate.

Answer 9

Face rate of interest

Question 10

The principal amount of the bond as stated on the bond certificate.

Answer 10

Face value

Question 11

The difference between the carrying value and the redemption price at the time bonds are redeemed.

Answer 11

Gain or loss on redemption

Question 12

An obligation that will not be satisfied within one year or the current operating cycle.

Answer 12

Long-term liability

Question 13

The rate that investors could obtain by investing in other bonds that are similar to the issuing firm’s bonds.

Answer 13

Market rate of interest

Question 14

A lease that does not meet any of the four criteria and is not recorded as an asset by the lessee.

Answer 14

Operating lease

Question 15

A difference that affects the tax records but not the accounting records, or vice versa.

Answer 15

Permanent difference

Question 16

The excess of the issue price over the face value of the bonds.

Answer 16

Premium

Question 17

Bonds that do not all have the same due date; a portion of the bonds comes due each time period.

Answer 17

Serial bonds

Question 18

A difference that affects both book and tax records but not in the same time period.

Answer 18

Temporary difference

Question 19

Bonds usually pay interesta. either annually or semiannually. b. at the time of issuance. c. only at the due date of the bond. d. monthly.

Answer 19

either annually or semiannually.

Question 20

The excess of the issue price over the face value of the bond is referred to as:a. a discount. b. prepaid interest. c. a premium. d. accrued interest.

Answer 20

a premium.

Question 21

If a long-term liability account increases, how should it be presented?a. as an increase in cash in the Operating Activities category. b. as an increase in cash in the Financing category. c. as a decrease in cash in the Financing category. d. as an increase in cash in the Investing category.

Answer 21

as an increase in cash in the Financing category.

Question 22

Which of the following is likely to appear in the Long-term Liabilities category of the balance sheet?a. Accounts payable b. Bonds payable c. Unearned revenue d. Warranty liability

Answer 22

Bonds payable

Question 23

Deferred income taxes arise because:a. corporations often make errors in their tax estimations. b. companies can use accounting methods that minimize net income for tax purposes and other methods that maximize net income for reporting to shareholders. c. the IRS owes a company a refund from last year. d. large corporations generally have operations in foreign countries whose tax law is quite different from U.S. tax law.

Answer 23

corporations often make errors in their tax estimations.

Question 24

If the market rate of the bond at the time of issuance is greater than the face rate:a. the bonds will be issued at a discount. b. a loss will occur. c. a gain will occur. d. the bonds will be issued at a premium.

Answer 24

the bonds will be issued at a discount.

Question 25

Discount on Bonds Payable should be considered what type of account?a. contra-liability b. deferred revenue c. asset d. current liability

Answer 25

contra-liability

Question 26

On January 1, 2012, Omega Corporation issued a three-year, $1,000 bond with a nominal interest rate of 9%. At the time, the market rate of interest was 9%.If the market rate had been 10% at the time Omega issued the bonds:a. the bonds would have been issued at a discount. b. there would have been 1% accrued interest at the time of issuance. c. the bonds would have been issued at a premium. d. the bonds would have been issued at face value.

Answer 26

the bonds would have been issued at a discount.

Question 27

Which of the following circumstances would result in a capital lease to the lessee?a. The lessee can purchase the property for $1 at the end of the lease term. b. The fair market value of the property at the inception of the lease is $18,000; the present value of the minimum lease payments is $15,965. c. The lease term is 70% of the property's economic life. d. The lessee will return the property to the lessor at the end of the lease term.

Answer 27

The lessee can purchase the property for $1 at the end of the lease term.

Question 28

On January 1, 2012, Omega Corporation issued a three-year, $1,000 bond with a nominal interest rate of 9%. At the time, the market rate of interest was 9%.If the market rate had been 8% at the time Omega issued the bonds:a. the bonds would have been issued at a premium. b. the bonds would have been issued at a discount. c. the bonds would have been issued at face value. d. there would have been 1% accrued interest at the time of issuance.

Answer 28

the bonds would have been issued at a premium.

Question 29

When a bond is issued at a premium, the interest expense each year:a. is less than the cash payment for interest. b. cannot be determined without details of the bond issue. c. equals the cash payment for interest. d. is greater than the cash payment for interest.

Answer 29

is less than the cash payment for interest.

Question 30

If bonds are sold at a premium, the carrying value of the bonds will:a. remain the same over the life of the bond. b. decrease over the life of the bond. c. increase over the life of the bond. d. unable to determine from the information provided

Answer 30

decrease over the life of the bond.

Question 31

When serial bonds are issued:a. the bonds all come due on the same date. b. not all of the bonds come due on the same date. c. the interest is paid as a series of monthly payments. d. the lender repays the interest only.

Answer 31

not all of the bonds come due on the same date.

Question 32

Items that are considered permanent differences:a. should be reflected as deferred tax assets on the balance sheet. b. should be reflected as deferred tax liabilities on the balance sheet. c. should not be reflected in the Deferred Tax account. d. are items that have been excluded from both tax and financial statement calculation.

Answer 32

should not be reflected in the Deferred Tax account.

Question 33

If a long-term liability account decreases, how should it be presented on the statement of cash flows?a. as an increase in cash in the Investing Activities category b. as an increase in cash in the Operating Activities category c. as a decrease in cash in the Financing Activities category d. as an increase in cash in the Financing Activities category

Answer 33

as a decrease in cash in the Financing Activities category

Question 34

What does a gain on the redemption of bonds indicate?a. The carrying value of the bond was equal to the redemption price. b. The bondholders were not paid the full face value at time of redemption. c. The carrying value of the bond was larger than the redemption price. d. The carrying value of the bond was less than the redemption price.

Answer 34

The carrying value of the bond was larger than the redemption price.

Question 35

When a company uses the straight-line depreciation method for financial reporting purposes and an accelerated depreciation method for tax purposes, what is the result?a. no deferred taxes. b. a deferred tax asset. c. a deferred tax liability. d. a violation of GAAP.

Answer 35

a deferred tax liability.

Question 36

When bonds are sold, the Bonds Payable account is always credited for:a. the amount of the premium or discount. b. None of these choices are correct. c. the face value of the bonds. d. the cash received

Answer 36

the face value of the bonds.

Question 37

If bonds are retired early, a gain will be recorded if the:a. redemption price > maturity value. b. redemption price carrying value.

Answer 37

redemption price

Question 38

Wong Corporation's balance sheet showed the following amounts: Current Liabilities, $5,000; Bonds Payable, $1,500; Lease Obligations, $2,000, and Deferred Income Taxes, $300. Total stockholders' equity was $6,000. The debt-to-equity ratio is:a. 0.83 b. 0.63 c. 1.47 d. 1.42

Answer 38

1.47

Question 39

Which of the following statements regarding leases is not true?a. Lease agreements are a popular form of financing the purchase of assets because leases do not require a large initial outlay of cash. b. If a lessor classifies a lease as a capital lease, then the lessor records a lease liability on its balance sheet. c. If a lease is classified as an operating lease, the lessee records a lease liability on its balance sheet. d. Accounting recognizes two types of leases--operating and capital leases.

Answer 39

If a lease is classified as an operating lease, the lessee records a lease liability on its balance sheet.

Question 40

When an investor views the times interest earned ratio of a company:a. a low value is generally viewed favorably. b. it is a measure of the company's ability to generate cash. c. it is a measure of the company's liquidity. d. a high value is generally viewed favorably.

Answer 40

a high value is generally viewed favorably.

Question 41

When a lease is classified as a capital lease:a. the lease liability should be presented on the balance sheet of the lessor. b. the leased asset liability should be presented on the balance sheet of the lessor. c. title to the leased asset may not pass to the lessee at the end of the lease. d. the lease liability should be presented on the balance sheet of the lessee.

Answer 41

the lease liability should be presented on the balance sheet of the lessee.

Question 42

A bond that is not backed by collateral is called a:a. secured bond. b. term bond. c. sub-prime bond. d. debenture bond.

Answer 42

debenture bond.

Question 43

A ten-year lease obligation appears on the balance sheet of Generic Products Company. How would it most likely be classified on the balance sheet?a. current assetb. long-term liabilityc. long-term assetd. contra-liability

Answer 43

long-term liability

Question 44

Which of the following items should NOT appear in the long-term liability section of the balance sheet?a. accrued income taxesb. deferred income taxesc. bonds payabled. pension obligations

Answer 44

accrued income taxes

Question 45

A convertible bond is one wherea. the issuer can convert from a fixed interest rate to a floating one,b. the issuer can convert it from long-term to short-termc. the issuer can retire the bond before its specified due date.d. the holder can convert the bond into common stock at a future time.

Answer 45

the holder can convert the bond into common stock at a future time.

Question 46

Bonds are a popular source of financing becausea. bond interest expense is deductible for tax purposes, while dividends paid on stock are not.b. financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of stock.c. a company having cash flow problems can postpone payment of interest to bondholders.d. the bondholders can always convert their bonds into stock if they choose.

Answer 46

bond interest expense is deductible for tax purposes, while dividends paid on stock are not.

Question 47

Endeavor Company issued 20-year bonds with a coupon rate of 6% when the market rate of interest was 9%. This means that the bonds were issueda. at a premiumb. at a discountc. at the face valued. with an additional 3 years of interest

Answer 47

at a discount

Question 48

The Premium on Bonds Payable account is shown on the balance sheet asa. a contra assetb. a reduction of an expensec. an addition to a long-term liabilityd. a subtraction from a long-term liability

Answer 48

an addition to a long-term liability

Question 49

If bonds were initially issued a a premium, the carrying value of the bonds on the issuer's books willa. decrease as the bonds approach their maturityb. increase as the bonds approach their maturity datec. remain constant throughout the bonds lifed. fluctuate throughout the bonds life

Answer 49

decrease as the bonds approach their maturity

Question 50

Under the effective interest method, the cash paid on each interest payment date will a. decrease if bonds are issued at a premiumb. increase if bonds are issued at a premiumc. remain constant regardless of the issuance priced. increase if bonds are issued at a discount

Answer 50

remain constant regardless of the issuance price

Question 51

Because of changing market conditions, Friendly Corporation made the decision to redeem $300,000 of its bonds prior to maturity. The bonds had been issued at a discount and the balance in the discount account at the time of redemption was $15,000. The corporations bond certificates indicated that the bonds could be retired early at 103. Friendlys retirement of the bonds would result in a(n)a. loss of $24,000b. gain of $6,000c. decrease in owners equity of $9,000d. increase in assets of $15,000

Answer 51

loss of $24,000

Question 52

Which of the following lease conditions would result in a capital lease to the lessee?a. the lessee will return the property to the the lessor at the end of the lease term.b. the lessee can purchase the property for $1 at the end of the lease term.c. the fair market value of the property at the inception of the lease is $18,000; the present value of the minimum lease payments is $15,977.d. the lease term is 70% of the property's economic life.

Answer 52

the lessee can purchase the property for $1 at the end of the lease term.