Final Exam

Question 1

Which type of lease does a lessor not record interest revenue?

Answer 1

Operating lease

Question 2

Capitalized amount for a Finance/Sales type lease =

Answer 2

Annual payments x PV Annuity Due

Question 3

Gross Profit =

Answer 3

Sales Price - COGS

Question 4

Direct Financing Lease

Answer 4

when lessor relinquishes control of asset to lessee, but a third party is involved in the residual value guarantee.

Question 5

Sale Leaseback

Answer 5

Company sells an asset to another entity, and then leases that asset from the new owner.

Question 6

In a Sales-Type lease, the gross profit will be the same whether __________.

Answer 6

the residual value is guaranteed or ungauranteed

Question 7

If Expected RV > Guaranteed RV ;

Answer 7

Lessee should NOT include guaranteed RV in the lease liability computation

Question 8

If Expected RV < Guaranteed RV :

Answer 8

the difference should be included in the lease liability computation

Question 9

In a Sales-Type lease, initial direct costs are ________.

Answer 9

expensed in the year of incurrence

Question 10

In an Operating lease, initial direct costs are ________.

Answer 10

amortized as expenses over life of the lease term

Question 11

What is the short-term lease exception?

Answer 11

If under 12 months, the LESSEE lease payments may be expensed as incurred.

Question 12

The new standard for lease accounting will affect a company’s _______.

Answer 12

profitability and solvency

Question 13

Both Operating and Financing leases use ______ assets.

Answer 13

right-of-use

Question 14

A lease executory cost example would be ______.

Answer 14

property taxes, property insurance

Question 15

What is the Cumulative Effect?

Answer 15

Difference in PY’s net income OR retained earnings between the new accounting method and prior method.

Question 16

What is Depreciation Charge?

Answer 16

Book Value / Remaining Service Life

Question 17

What is a change in accounting principle?

Answer 17

from one GAAP to another GAAP (avg cost to FIFO)

Question 18

Accounting errors are treated as ______.

Answer 18

prior period adjustments

Question 19

Does a change in depreciation method have a cumulative effect?

Answer 19

No; because it is prospective not retrospective.

Question 20

How to retrospectively report cumulative effect change in accounting principle:

Answer 20

On Retained Earnings Statement as adjustment to beginning balance of earliest year presented.

Question 21

What makes the retrospective approach impractical?

Answer 21

1. Cannot determine effects of retrospective application
2. Requires assumptions on management’s intent in prior period
3. Requires significant estimates that cannot be objectively verified

Question 22

When the retrospective approach is impractical, what approach should be used instead?

Answer 22

Prospective approach

Question 23

A change in accounting estimate is accounted for in what periods?

Answer 23

Current and future

Question 24

If it is impossible to determine if a change is a change in principle or estimate, consider the change a ________.

Answer 24

Estimate; as prospective approach is more conservative

Question 25

Why do companies prefer certain accounting methods?

Answer 25

Bonus payments, political costs, smooth earnings, capital structure

Question 26

Inventory errors are ______ errors.

Answer 26

counterbalancing

Question 27

On the Statement of Cash Flows, after all reconciling items, each line for a BS account should ______.

Answer 27

foot across

Question 28

Bad debt expense is a ______ charge.

Answer 28

non-cash

Question 29

On the statement of Cash Flows, items should be reported _____, not netted against each other.

Answer 29

gross

Question 30

Statement of Cash Flows has two sections:

Answer 30

Balance sheet effects and cash effects

Question 31

Nonconvertible debenture bonds usually have ____ interest rates than convertible debenture bonds.

Answer 31

higher

Question 32

_________ should be classified as equity because the issuer has no obligation to pay divs or repurchase stock.

Answer 32

Nonredeemable common shares

Question 33

Convertible bonds are classified as _______, and convertible preferred stock is classified as _______.

Answer 33

liabilities, equity

Question 34

if the exercise price of the option/warrant is ______ than the market price, dilution occurs.

Answer 34

lower

Question 35

Basic EPS =

Answer 35

(Net Income - Preferred Dividends) / Weighted Avg Common Shares Outstanding

Question 36

Diluted EPS =

Answer 36

Basic EPS - Impact of convertibles - impact of options, warrants, and other dilutive securities

Question 37

Projected Benefit Obligation

Answer 37

PV of vested AND nonvested benefits accrued to date, based on employees' future salary levels.

Question 38

Settlement Rate

Answer 38

Interest rate -> interest expense accrues each year on the projected benefit obligation.

Question 39

Which would be least likely to change stockholders' equity; Sale of Treasury Stock above cost, expiration of stock rights, or sale of common stock below par.

Answer 39

Expiration of stock rights

Question 40

Treasury stock is a _________ account.

Answer 40

contra-equity

Question 41

The difference between the Projected Benefit Obligation and the FV of Plan Assets is the _________.

Answer 41

pension asset / liability

Question 42

Bargain Purchase Option

Answer 42

Lesse to purchase leased property for price substantially lower than expected future fair value.

Question 43

When are leases capitalized by the Lessor?

Answer 43

When the penalty for nonperformance is substantial, and its unlikely to avoid severe penalty for failure.

Question 44

The implicit interest rate is used to calculate the ___________ to determine if lease is Finance or Operating.

Answer 44

PV of lease payments

Question 45

Executory Cost vs Initial Direct Costs

Answer 45

Executory costs are normal expenses associated owning asset (taxes, insurance), while initial direct costs are exclusive to the acquisition of the lease (fees, commissions).

Question 46

What is a Captive Leasing company and what are their advantages?

Answer 46

Ford, Boeing, etc; product knowledge, lease flexibility, POS

Question 47

Lessee - advantages of leasing

Answer 47

Fixed rate financing, protection against obsolescence, less costly, flexibility

Question 48

Lessor - advantages of leasing

Answer 48

Profitable interest margins, stimulate sales, tax benefits

Question 49

What leases are exempt from Capitalization?

Answer 49

Leases with term of 12 months or less

Question 50

Lease liability or Capitalized Amount formula

Answer 50

PV of lease payments less PV of guaranteed residual value

Question 51

Direct Effect of a change in accounting principle

Answer 51

retrospectively applied, inventory adjustment from different method, asset impairment

Question 52

_____ effects do not change prior period amounts.

Answer 52

Indirect

Question 53

Principal-agent relationship uses gross or net revenue recognition?

Answer 53

net