accounting 4356 test 3

Salt Corporation issues bonds with a face amount of $10 million and a stated interest rate of 8%.

The market interest rate associated with the bonds is 6%. Bond issue costs are $200,000. The bond issue costs should be recognized as a:

a. deferred charge.

b. period expense.

c. reduction of the bond premium.

d. bond discount.

c

Neuberg Corporation issues bonds with a face amount of $12 million and a stated interest rate of 5%. The bonds sell at face amount. In addition, the company incurs bond issue costs of

$320,000. The journal entry to record the issuance of the bonds includes a debit to:

a. bond discount for $320,000.

b. bond discount for $12,000,000.

c. bond premium for 320,000.

d. bonds payable for $320,000.

a

Gross Company sold $100,000 of long-term bonds in the open market for $108,000. The entry to record the transaction would be:

a. DR Cash 108,000 CR Premium on Bonds Payable 8,000 CR Bonds Payable 100,000

a

Using the effective interest method, amortization of a discount or premium behave in this manner over the life of the outstanding bonds.

a. Increase for premium bond, decrease for discounted bond

b. Increase for premium bond, increase for discounted bond

c. Decrease for premium bond, decrease for discounted bond

d. Decrease for premium bond, increase for discounted bond

d

A probable future sacrifice of an economic benefit arising from a present obligation to transfer assets or provide services to other entities in the future as a result of a past transaction is a/an:

a. asset.

b. liability.

c. equity.

d. expense.

b

Which of the following is a correct statement about preparing a balance sheet?

a. All current liabilities must be due within the current calendar year.

b. Bonds payable are reported in long-term liabilities with the current year portion shown separately in that section of the balance sheet.

c. Some financial instruments possess the characteristics of both debt and equity.

d. A financial instrument's legal form will define how it is classified on the balance sheet.

c

Noncurrent monetary liabilities are initially recorded at their:

a. future value.

b. historical value.

c. present value when incurred.

d. undiscounted amount due.

c

Which of the following would only be found in current liabilities on the balance sheet?

a. Bonds payable.

b. Accrued compensation for services already rendered by employees.

c. Income tax liabilities.

d. Deferred revenue.

b

When the market rate of interest is below the stated rate of interest, a bond sells at:

a. par.

b. a premium.

c. a discount.

d. stated value.

b

Roberts owns 100 shares of $1,000 face amount convertible bonds issued by Bearny Inc. Choose the statement that correctly describes this transaction.

a. Roberts may choose to exchange the bonds for Bearny Inc. common stock, or retain the bonds

until maturity.

b. Roberts must exchange the bonds for Bearny Inc. common stock prior to maturity.

c. Roberts must exchange the bonds for Bearny Inc. common stock at maturity.

d. Bearney Inc. may require that Roberts exchange the bonds for its common stock.

a

Strauss Company sold $100,000 of long-term bonds in the open market for $100,000. The entry to record the transaction would be:

a. DR Cash 100,000CR Bonds Payable 100,000

a

When the effective yield of a bond is the same as the stated rate on the bond, the bond is sold at:

a. a discount.

b. a premium.

c. par.

d. a price above par.

c

Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 8%. These bonds will sell in the market at:

a. par.

b. a discount.

c. a premium.

d. stated value.

b

Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 5%. These bonds will sell in the market at:

a. par.

b. a discount.

c. a premium.

d. stated value.

c

When computing the issue price of a bond that has a stated rate of 8% payable semiannually and a market rate of 10%, the discount rate used would be:

a. 8%.

b. 10%.

c. 4%.

d. 5%.

d

Amortization of discount on bonds payable (bond discount) results in which of the following?

a. A decrease in bond interest expense.

b. An increase in net income.

c. An increase in the carrying value of the bond.

d. An increase in stockholders' equity due to the decrease in bond interest expense

c

Generally accepted accounting principles require that when bonds are sold at a discount, the discount must be allocated to interest expense using the:

a. cash interest method.

b. effective interest method.

c. bond yield method.

d. cumulative interest method.

b

Baker Company issued $200,000 of ten-year bonds to yield 11% when the stated rate of the bonds was 9%. Present value interest factors (PVIF) are:

a. DR Cash176,442, DR Bond discount23,558, CR Bonds payable200,000

a

On January 1, 20X1 when the effective interest rate was 14%, a company issued bonds with a maturity value of $1,000,000. The stated rate of interest is 12%, the bonds pay interest semi-

annually and sold for $893,640. The amount of bond discount amortized on July 1, 20X1 is approximately:

a. $1,000

b. $2,555

c. $2,000

d. $5,110

b

Which of the following statements is correct?

a. Amortization of discount on bonds payable (bond discount) results in an increase in a bond's carrying value.

b. Amortization of discount on bonds payable (bond discount) results in a decrease in bond interest expense.

c. Amortization of premium on bonds payable (bond premium) results in an increase in a bond's carrying value.

d. Amortization of premium on bonds payable (bond premium) results in an increase in bond interest expense.

a

When a bond is sold at a discount the effective interest rate is:

equal to the stated rate.

a. above the stated rate.

b. below the stated rate.

c. equal to the stated rate for a period of time and then above d. the stated rate for a period of time.

a

When a bond is sold at a premium the:

a. effective interest rate is less than the stated rate.

b, effective interest rate is greater than the stated rate.

c. effective interest rate relative to the stated rate is not known.

d. interest expense during the life of the bond exceeds the amount of cash interest payments during the life of the bond.

a

Which of the following represent(s) a bond valuation account?

a. Bond premium

b. Bond discount

c. Bond interest

d. Both bond premium and discount

d

Debentures are bonds that:

a. have no maturity date.

b. do not pay periodic interest.

c. that are unsecured.

d. that can be converted to common stock.

c

The most common types of bonds are unsecured bonds that also are referred to as:

a. debentures.

b. indentures.

c. term bonds.

d. bearer bonds.

a

Secured bonds are __________ by assets held by the bond issuer.

a. promised

b. transferred

c. collateralized

d. insured

c

Dora Company issues a three-year non-interest bearing note in exchange for a piece of equipment. Dora should record the note at:

a. face value.

b. the present value of the face amount.

c. the fair value of the equipment.

d. the equipment's estimated value in use.

b

Consistent with ASC Topic 842, lease contracts are classified in these categories:

a. Financing leases

b. Operating leases

c. Short-term leases

d. All are lease contract categories under ASC Topic 842

d

Consistent with ASC Topic 842 and IFRS 16, leases should be accounted for under the _______ assumption.

a. property rights

b. executory rights

c. unilateral

d. temporary

a

When accounting for a long-term operating lease under ASC 842, which one of the following accounts are charged with the expense on the lessee's income statement?

a. Depreciation Expense

b. Amortization Expense

c. Rent Expense

d. Lease Expense

d

Consistent with ASC Topic 842, at the inception of the lease, lessees must recognize a "right-of- use" asset for which type of lease(s)?

a. Finance leases

b. Finance leases and short-term leases

c. Finance leases and operating leases

d. Finance, short-term, and operating leases

c

Consistent with ASC Topic 842, operating lease expense is equal to

a. the amortization expense recognized for financing leases.

b. the interest expense recognized for financing leases.

c. the lease expense that would have been recognized if classified as a short-term lease.

d. the amortization expense recognized if the asset had been purchased by lessee.

c

Consistent with ASC Topic 842, the amortization of the right-to-use asset fluctuates for a(n)

a. operating lease.

b. financing lease.

c. short-term lease.

d. amortization tends to fluctuate for all types of leases

a

If a corporation signs a ten-year lease for a building and the present value of the lease payments is $250,000, the lease is a finance lease under ASC 842 if the:

a. fair value of the building is $1,000,000.

b. remaining useful life of the building is 20 years.

c. lessor can purchase the building for $5,000 at the end of the lease when the fair value is estimated to be $25,000.

d. building reverts back to the lessor at the end of the lease.

c

GAAP establishes specific criteria for the treatment of leases under ASC 842. If any of the criteria are met, the lessee

a. must treat the lease as an operating lease.

b. must treat the lease as a finance lease.

c. may choose the treatment if two or less criteria are met.

d. may elect to treat the lease as an operating lease if only one criterion is met.

b

GAAP establishes specific criteria for the treatment of leases under ASC 842. Which of the following does not accurately describe the criteria applicable to a lessee?

a. The lease agreement includes a bargain purchase option that the lessee is likely to exercise.

b. The lease term allows the lessee to derive substantially all the remaining benefits associated with the asset.

c. The lease agreement transfers title of the leased asset to the lessee at the end of the lease term.

d. The present value of the minimum lease payments is equal to or greater than 75% of the leased asset's fair value.

d

When a lessee has a finance lease under ASC 842, the amount shown for the asset and the amount shown for the related liability are equal

a. only at the lease inception.

b. throughout the life of the lease.

c. only at the termination of the lease.

d. throughout the life of the lease, but only when there is an unguaranteed residual value.

a

If a lease contains a residual value guarantee, the lessee must:

a. add the guaranteed amount to the present value of the minimum lease payments.

b. add the present value of the guaranteed amount to the present value of the minimum lease payments.

c. include the guaranteed amount in the minimum lease payments only if the lessee intends to keep the asset at the end of the lease.

d. ignore the guaranteed amount if the lessee intends to keep the asset at the end of the lease.

b

All the following statements about residual value guarantees are correct about residual value guarantees, except that they:

a. protect lessors against lessees who abuse leased assets.

b. protect lessees against lessors who abuse leased assets.

c. protects lessors against technological changes.

d. protects lessors against marketplace changes.

b

Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor's implicit lease rate, known to the lessee, is 10%. The lessor and the lessee use ASC 842 guidelines for lease accounting.

To value the lease asset, Pepper should use a discount rate of:

a. 10%.

b. 11%.

c. 12%.

d. prime rate.

a

The Pepper lease is a(n):

a. operating lease because ownership does not automatically transfer to the lessee at the end of the lease term.

b. short-term lease because the lease value is less than the fair value of the asset.

c. operating lease because the asset reverts to Blue at the end of the lease.

d. finance lease because the lease term covers the major part of the economic life of the asset.

d

The entry to record this lease on Pepper's books is (Round intermediate and final answer to the nearest whole dollar amount.)

a. DR Right-to-use asset—finance lease 144,475 CR Finance lease liability 144,475

b. DR Right-to-use asset—finance lease 157,469 CR Finance lease liability 157,469

c. DR Right-to-use asset—finance lease — 157,469 DR Discount on lease obligation 92,531 CR Finance lease liability 250,000

d. DR Right-to-use asset—finance lease 167,469 DR Discount on lease obligation 82,531 CR Finance lease liability 250,000

b

At the end of Year 1, Pepper will make a payment of $30,000. Which one of the following entries will properly record this payment? (Round intermediate and final answer to the

nearest whole dollar amount.)

a. DR Finance lease liability 30,000 CR Cash 30,000

b. DR Finance lease liability 14,253 DR Interest expense 15,747 CR Cash 30,000

c. DR Finance lease liability 9,253 DR Maintenance expense 5,000 DR Interest expense 15,747 CR Cash 30,000

d. DR Finance lease liability 25,000 DR Maintenance expense 5,000 CR Cash 30,000

c

Under ASC 842, over the life of a lease, the amount charged to expense is:

a. greater for an operating lease.

b. greater for a finance lease.

c. the same for a finance or operating lease.

d. less for a finance lease.

c

Under ASC 842, the difference between the expense charged relating to a finance lease and an operating lease is:

a. the amount of total expense, with a finance lease higher than an operating lease.

b. the amount of total expense, with an operating lease higher than a finance lease.

c. the number of years that recognize expense.

d. the timing of the expense recognition.

d

Which one of the following ratios increases with the lessee's capitalization of a lease?

a. Current ratio

b. Return on equity

c. Inventory turnover

d. financial leverage

d

On January 1, 20X1, Lessee Corporation entered into a ten-year lease agreement. The lease terms required annual year-end payments of $160,000. The lease agreement does not contain

either a bargain purchase option or a transfer of title. The fair value of the equipment at the inception of the lease was $1,100,000; estimated life of the leased assets was fourteen years. Lessee Corporation's incremental borrowing rate was 10%; the implicit rate of interest, known to the lessee, was 12%. Applicable time value of money values are as follows:

Lessee Corporation should classify this lease agreement as a(n):

a. Operating lease

b. Financing lease

c. Short-term lease

d. Sales-type lease

b

Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray's incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipment's production, Ray warrants equipment for eight full years anyway.

On Ford's books, this lease is treated as a/an:

a. operating lease.

b. short-term lease.

c. finance lease.

d. sales-type capital lease.

c

Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray's incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipment's production, Ray warrants equipment for eight full years anyway. Ford uses which one of the following interest rates to record this lease?

a. Use 9.0% because it is the lessee's incremental borrowing rate.

b. Use 10.0% because it is the implicit lease rate of return to the lessor.

c. Use 8.5% because it is the lesser of the implicit rate and Ray's incremental borrowing rate.

d. Use 9.0% because it is the lesser of the implicit rate and Ford's incremental borrowing rate.

b

Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 20X1 under the following terms:

1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each

year.

2. The payments were calculated based on the fair value (which is also the book value for

Equity) of the tractor.

3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term.

4. The tractor has a six-year economic life.

5. Morey has an excellent credit rating.

6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer.

For Morey, this lease is treated as a(n)

a. operating lease.

b. short-term lease.

c. finance lease.

d. sales-type capital lease.

c

Which of the following is not a qualifier for a lease to be considered a finance lease under ASC 842?

a. The lease grants an option to purchase that is reasonably certain to occur.

b. The lease transfers ownership at the end of the lease.

c. The asset is not a specialized asset and will have alternative use to the lessor.

d. The lease term is for the major part of the remaining economic life of the asset.

c

Under ASC 842 for lease accounting, which statement below is not accurate with respect to financial reporting?

a. Finance leases show separate amounts for amortization and interest expense.

b. Lease expense is shown in the operating section of the statement of cash flows.

c. Operating leases show total lease expenses as a single line item.

d. Lease expense is shown in the financing section of the statement of cash flows.

d

Which of the following is correct with respect to ASU 842 for lease accounting?

a. It retained the distinction between operating and finance leases for lessees.

b. It is mandatory for fiscal years beginning after December 15, 2020 and may not be adopted early.

c. It requires the lessee to record a prepaid asset and a lease liability.

d. It allows the lessee to decide what borrowing rate to use to value the lease obligation.

a

Samson Inc. leases equipment from Gerhard for a six-year period. The lease contract includes a purchase option, the conditions of which make it likely that Samson will exercise the option. The equipment's estimated useful life is eight years. Samson should amortize the associated right-to- use asset over

a. 8 years.

b. 6 years.

c. 7 years.

d. either 6 or 8 years.

a

Margot leases equipment with an estimated useful life of five years, for a term of four years. Margot should classify this lease as a (n)

a. operating lease.

b. finance lease.

c. short-term lease.

d. purchase.

b

Flimm Company leases an asset over its estimated useful life of six years. At the inception of the lease, the present value of the lease payments is $240,000. The market value of the leased asset is $258,000.

Flimm's journal entry to recognize the inception of the lease includes a debit to

a. Equipment for $258,000

b. Equipment for $240,000

c. Right-to-use assets for $258,000

d. Right-to-use asset for $240,000

d

Flimm Company leases an asset over its estimated useful life of six years. At the inception of the lease, the present value of the lease payments is $240,000. The market value of the leased asset is $258,000.

Flimm's journal entry to recognize the inception of the lease includes a credit to

a. Lease liability for $258,000.

b. Lease liability for $240,000.

c. Accrued lease payable for 43,000.

d. Accrued lease payable for 40,000.

b

Flimm Company leases an asset over its estimated useful life of six years. At the inception of the lease, the present value of the lease payments is $240,000. The market value of the leased asset is $258,000.

Flimm uses the straight-line method to allocate lease-related assets to accounting periods during

which benefits are derived from the leased assets. To allocate the costs of the related asset, Flinn should debit

a. amortization expense for $43,000

b. amortization expense for $40,000

c. depreciation expense for $43,000

d. depreciation expense for $40,000

b

Flimm Company leases an asset over its estimated useful life of six years. At the inception of the lease, the present value of the lease payments is $240,000. The market value of the leased asset is $258,000. Assuming that the lease contract includes a highly favorable option for Flinn to purchase the

leased equipment at the end of the lease term, Flinn should allocate the cost of the related asset by debiting

a. amortization expense for $43,000

b. amortization expense for $40,000

c. depreciation expense for $43,000

d. depreciation expense for $40,000

b

Flimm Company leases an asset over its estimated useful life of six years. At the inception of the lease, the present value of the lease payments is $240,000. The market value of the leased asset is $258,000. The "property rights approach" is evident under ASB Topic 842 and IFRS No. 16 because both

standards require that the

a. lessee recognize an asset and a liability for leases exceeding one year.

b. leased property is transferred to the lessee at the end of the lease term.

c. lessor must transfer the leased property at the inception of the lease.

d. lessee must guarantee a residual value of the leased property.

a

The allocation of income tax expense across periods when book and tax income differ is called:

a. interperiod tax allocation.

b. intraperiod tax allocation.

c. current income tax allocation.

d. constructive receipt allocation.

a

The two broad categories of differences that result from determining the pre-tax book income and the taxable income are:

a. temporary differences and originating differences.

b. temporary differences and reversing differences.

c. temporary differences and permanent differences.

d. permanent differences and deferred differences.

c

Temporary differences that will cause taxable income in future periods to be higher than pre-tax book income in future periods give rise to:

a. deferred tax assets.

b. deferred tax liabilities.

c. permanent differences.

d. tax refund receivable.

b

Temporary differences that will cause taxable income in future periods to be lower than pre-tax book income in future periods give rise to:

a. deferred tax assets.

b. deferred tax liabilities.

c. permanent differences.

d. expense.

a

Which one of the following is a permanent difference between book and taxable income?

a. Interest received on municipal bonds

b. Installment sales

c. Bad debts expense

d. Warranty expense

a

A temporary difference that causes book income to be greater than or less than taxable income when it is initially recorded is a/an:

a. reversing temporary difference.

b. originating temporary difference.

c. permanent difference.

d. minor difference.

b

Which of the following would not create a temporary difference?

a. A revenue included in the determination of book income this year but not included in taxable income until next year.

b. An expense included in the determination of taxable income this year but not included in book income until next year.

c. A revenue included in the determination of book income this year but never included in taxable income.

d. A revenue item that causes book income to be more (less) than taxable income when it is initially

recorded.

c

Which of the following items does not create a temporary difference?

a. The accrual of pension and OPEB expenses

b. Installment sales

c. Revenues received in advance

d. The payment of life insurance premiums on company executives

d

A temporary difference created this year causes book income to be greater than taxable income; in future years, book income will be less than taxable income. The temporary difference in the future years' incomes is referred to as:

a. reversing temporary difference.

b. originating temporary difference.

c. permanent difference.

d. minor difference.

a

Which of the following transactions would not create a temporary difference?

a. The cash payment to acquire a three-year insurance policy.

b. The accrual of warranty expense.

c. The accrual of bad debt expense.

d. The cash collection of interest earned on a municipal bond.

d

Which of the following statements is not correct?

a. Temporary differences causing taxable income in future periods to be higher than book income in future periods create deferred tax liabilities.

b. Temporary differences causing taxable income in future periods to be lower than book income in future periods create deferred tax assets.

c. A permanent difference results when a revenue enters into the determination of book income in one period but affects taxable income in a different period.

d. A temporary difference causing book income to be less than taxable income when initially recorded is described as an originating difference.

c

When income tax expense equals current income tax payable to the government plus (minus) the increase (decrease) in deferred tax liabilities, income tax expense is properly matched for the:

a. current period.

b. previous period.

c. future period.

d. tax return.

a

Beginning in 2017 for calendar-year public firms, all deferred tax assets and liabilities are classified as:

a. current assets and liabilities.

b. noncurrent assets and liabilities.

c. income tax expense.

d. none of these choices are correct.

b

During its first year of operations a company recorded accrued expenses totaling $250,000 for book purposes. For tax purposes, $100,000 of the expenses are deductible during the first year of operations and $150,000 are deductible during the second year of operations. The income tax

rate for both years is 21%. The balance sheet at the end of the first year of operations will report a deferred tax:

a. asset of $31,500.

b. liability of $31,500.

c. liability of $21,000.

d. asset of $100,00.

a

During its first year of operations a company recorded accrued expenses totaling $375,000 for book purposes. For tax purposes, $175,000 of the expenses are deductible during the first year of operations and $200,000 are deductible during the second year of operations. The enacted income tax rate was 21% during the first year of operations and 25% during the second year of operations. The balance sheet at the end of the first year of operations will report a deferred tax:

a. asset of $42,000.

b. liability of $42,000.

c. liability of $50,000.

d. asset of $50,000.

d

A corporation that incurs a pre-tax operating loss must:

a. carryback the loss for tax purposes.

b. carryforward the loss for tax purposes.

c. choose to both carryback and carryforward the loss or to only carryback the loss.

d. choose to both carryback and carryforward the loss or to only carryforward the loss.

b

A corporation that incurs a net operating loss may carry the loss forward for

a. 10 years.

b. 12 years.

c. 20 years.

d. an unlimited number of years.

d

Which of the following is not a proper description with respect to the financial accounting and reporting of income taxes?

a. A permanent difference does not create a deferred tax asset or liability.

b. An originating temporary difference will eventually create a reversing temporary difference.

c. A net operating loss carryforward does not have any impact on income tax expense for the year the loss occurs.

d. Income tax expense changes during the year that future tax rate increases are enacted.

c

A company instituted an IRS-approved plan to fund a percentage of each employee's salary to a plan that would pay benefits to the employee after termination of services. This plan is a:

a. defined benefit pension plan.

b. defined contribution pension plan.

c. government sponsored pension plan.

d. postretirement benefit plan.

b

A company instituted an IRS-approved plan to contribute monies to a plan that would pay each employee a percentage of his or her highest year of salary for each year of service upon termination of services. This plan is a:

a. defined benefit pension plan.

b. defined contribution pension plan.

c. government sponsored pension plan.

d. postretirement benefit plan.

a

Which of the following statements does not properly describe a defined benefit pension plan?

a. Many assumptions are made in the determination of pension expense.

b. The employee bears little risk with respect to estimating the amount of the annual contributions to the plan.

c. The employer bears little risk with respect to estimating the amount of the annual contributions to the plan.

d. A pension plan asset is not recorded on the employer's balance sheet.

c

Which of the following is not a factor in the determination of pension expense when the employer sponsors a defined benefit pension plan?

a. The amount of retirement benefits that will vest.

b. The rate of return on the pension fund investment.

c. The rate that salaries will increase until retirement.

d. The amount of funding during a particular period.

d

Which of the following statements is not correct about defined contribution plans?

a. No explicit promise is made about the size of the periodic benefits the employee will receive during retirement.

b. The promise is the amount of contributions the employer will make periodically.

c. The size of payments depends on success of investments.

d. The employer controls the investment choices on the employees' behalf.

d

Which of the following statements is correct with respect to a defined contribution plan?

a. The payments made by the employer to fund a defined contribution pension plan create a pension fund asset on the balance sheet of the employer.

b. The employer receives a tax deduction for amounts contributed to the pension plan trust, and subsequent investment returns do not generate tax for the employer.

c. The anticipated life span of the employees after retirement must be taken into consideration in determination of pension expense for a defined contribution pension plan.

d. The return on the pension fund impacts the employer's periodic pension expense for defined

contribution pension plans.

b

Which of the following is not an example of a defined contribution plan?

a. money purchase plan.

b. profit-sharing plan.

c. cash balance plan.

d. 401(k) plan.

c

Defined contribution plans are preferred by companies for all except which of the following reasons?

a. Defined contribution plans carry less risk for the employee.

b. Defined contribution plans cost less to manage.

c. Defined contribution plans improve job mobility for the employee.

d. Defined contribution plans may not be at risk if the employer declares bankruptcy.

a

The components of pension expense are:

a. service cost, plus interest cost, plus net amortization.

b. service cost, plus interest cost, plus return on plan assets, plus net amortization.

c. service cost, plus interest cost, minus expected return on plan assets, plus (or minus) net amortization.

d. service cost, plus interest cost, minus return on plan assets, minus net amortization.

c

The service cost of a defined benefit pension plan is the:

a. annual fee charged by the plan administrator.

b. change in the pension liability caused by plan amendments.

c. change in the pension liability caused by one additional year of employee service.

d. the retirement benefit earned by the employees for services provided to date

c

The service cost component of a defined benefit pension plan is computed as the:

a. present value of the change in the accrued pension liability.

b. actual value of the change in the accrued pension liability.

c. present value of the change in pension liability from additional employee service.

d. undiscounted change in pension liability from additional employee service.

c

Which of the following does not cause an increase in the pension expense for a defined benefit plan?

a. Service cost

b. Expected return on pension plan assets

c. Recognized prior service cost amortization

d. Interest cost

b

Which of the following is not a correct statement with respect to the interest cost component of pension expense?

a. The same interest rate is used to compute service cost, interest cost, and return on plan assets.

b. The interest cost component of a defined benefit pension plan is the portion of expense due to the passage of time.

c. The interest cost component of pension expense in year two is determined by multiplying the projected benefit obligation at the beginning of year two by the discount rate.

d. The interest cost increases the PBO and also increases the pension expense.

a

The interest cost component of a defined benefit pension plan is computed as the:

a. ending accrued pension liability times the discount rate.

b. beginning accrued pension liability times the discount rate.

c. beginning projected benefit obligation times the discount rate.

d. beginning accumulated pension liability times the discount rate.

c

The return on plan assets component of pension expense for a defined benefit pension plan is:

a. the reduction in pension expense created by expected earnings of the plan.

b. the reduction in pension expense created by actual earnings of the plan.

c. the change in the plan asset value resulting from the actual return on plan assets.

d. not a factor in the determination of pension expense.

a

Current accounting standards require that the discount rate used for pension plans be:

a. current market rate for the year.

b. the average market rate since the beginning of the plan.

c. the rates at which the pension benefits could effectively be settled.

d. estimated future average market rates.

c

When employers retroactively amend pension plans to increase benefits to participants, which one of the following is created?

a. Prior service cost

b. Cumulative obligation gain or loss

c. Transition asset

d. Transition liability

a

For income tax purposes, pension plan sponsors deduct the amount of the:

a. pension expense.

b. service cost.

c. plan contribution.

d. service cost plus net amortization and deferral.

c

The net pension liability that must be shown on the balance sheet of the plan sponsor is the:

a. accumulated benefit obligation.

b. projected benefit obligation.

c. excess of the accumulated benefit obligation over the plan assets at fair value.

d. excess of the projected benefit obligation over the fair value of plan assets.

d

The present value of the expected pension benefits that will ultimately be paid is the:

a. accumulated benefit obligation.

b. projected benefit obligation.

c. minimum balance sheet liability.

d. accrued pension liability.

b

This type of pension plan requires that employer contributions are made to a legal trust that is separate from the employer.

a. Defined benefit plan

b. Defined contribution plan

c. Cash balance plan

d. All pensions plans require a separate legal trust

d

Who bears the risk associated with underperforming investments of a defined benefit pension plan?

a. Employees

b. Employers

c. Employees and Employers share the risk

d. The Pension Plan Trustee

b