Intermediate Accounting II- Exam I

The most common type of liability is:

One to be paid in cash and for which the amount and timing are known

Which of the following is the BEST definition of a current liability?

An obligation expected to be satisfied with current assets or by the creation of other current liabilities

Which of the following is NOT a liability?

An unused line of credit

Current liabilities normally are recorded at their:

Maturity amount

The rate of interest printed on the face of a note payable is called the:

Stated rate

Jane's Donuc Co. borrowed $200,000 on January 1, 2011, and signed a two-year note bearing interest at 12%. Interest is payable in full at maturity on January 1, 2013. In connection with this note, Jane should report interest expense at December 31, 2011, in the amount of:

$24,000

When a deposit on returnable containers is forfeited, the firm holding the deposit will experience:

An increase in revenue

Interst expense is:

The effective interest rate times the amount of the debt outstanding during the interest period

Bonds usually sell at their:

Present value

Straight-line amortization of bond discount or premium:

Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method

LPC issued the bonds:

At a premium

What is the annual stated interest rate on the bonds?

7%

What is the effective interest rate on the bonds?

6%

On January 1, 2011, Solo Inc. issued 1,000 of its 8% bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2021. Solo paid $50,000 in bond issue costs. Solo uses straight-line amortization. The amount of interest expense for the year is:

$82,000

Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each matures in 10 years. Bond X pays 8% interest while bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct?

Bond Y sells for more than bond X

The unamortized balance of discount on bonds payable is reported in the balance sheet as:

A contra-liability

When bonds are retired prior to their maturity date:

The issuing company probably will report an ordinary gain or loss

GAAP requires that some lease agreements be accounted for as purchases. The theoretical justification for this treatment is that a lease of this type:

Conveys most of the risks and benefits of property ownership

From the perspective of the lessee, leases may be classified as either:

Capital or operating

From the perspective of the lessOr, leases may be classifieD aS either:

Operating, direct financing, or sales-type

On February 1,2011, Pearson Corporation became the lessee of equipment under a five-year, noncancelable lease. The estimated economic life of the equipment is 8 years. The fair value of the equipment was $600,000. The lease does not meet the definition of a capital lease in terms of a bargain purchase option, transfer of title, or the lease term. However, Pearson must classify this as a capital lease if the present value of the minimum lease payments is at least

$540,000

Which of the following statements characterizes an operating lease?

The lessor records depreciation and lease revenue

The lessee's option to purchase a leased asset at a price that is sufficiently lower than the asset's expected fair value so that the exercise of the option appears reasonably assured is called a:

Bargain purchase option

Recording a sales-type lease is similar to recording:

A sale of merchandise on account

Since the lease payments under a lease agreement are normally paid at the beginning of each period, the appropriate compound interest table to be used to determine the amount at which the leased asset should be recorded is the:

Present value of an annuity due table

On January 1, 2011, Wellburn corporation leased an asset from Tabitha Company. The asset originally cost Tabitha $300,000. The lease agreement is an operating lease that calls for four annual payments beginning on January 1,2011, in the amount of $36,000. The other three remaining payments will be made on January 1 of each subsequent year. Which of the following journal entries should Tabitha record on January 1, 2011?

Cash 36,000

Unearned rent revenue 36,000

Option B

Leasehold improvements usually are classified in a balance sheet as:

Property, plant and equipment

What is the effective annual interest rate?

12%

What would the lessee record as annual depreciation on the asset using the straight-line method?

$6,328

Classifying liabilities as either current or long-term helps creditors assess:

The relative risk of a firm's liabilities

All else equal, a large increase in unearned revenue in the current period would be expected to produce what effect on revenue in a future period?

Large increase, because unearned revenue becomes revenue when revenue is earned

When an equipment dealer receives a long-term note in exchange for equipment, the present value of the future cash flows received on the notes:

Is credited to sales revenue at the exchange date

Technoid would account for this as:

A sales-type lease

Lone Star Company would account for this as:

A capital lease

Secured loan

Requires collateral

Short-term note

Most common temporary financing arrangement

Probable

Confirming event is likely to occur

Advances from customers

Liabilities when received

Warranty Liability

A loss contingency accrued in the period of related sales

Accrued liabilities

Expenses incurred but not yet paid

Discount on notes payable

Contra liability

Callable

Due on demand

Sales tax payable

A third party liability

Interest payable

Accrues with passage of time