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Chapter 12, 13.14

Terms in this set (76)

1.
All of the following are key similarities between GAAP and IFRS with respect to accounting for intangible assets except:

(a)for accounting purposes, costs associated with research and development activities are segregated into the two components.
(b)the accounting for intangibles acquired in a business combination.
(c)recovery of impairments on intangibles other than goodwill.
(d)the accounting for impairments of assets held for disposal.
(c)recovery of impairments on intangibles other than goodwill.
Research and development costs are:

(a)expensed under GAAP.
(b)expensed under IFRS.
(c)expensed under both GAAP and IFRS.
(d)None of the above.
(a)expensed under GAAP.
Which of the following statements is correct?

(a)Both IFRS and GAAP permit revaluation of property, plant, and equipment and intangible assets (except for goodwill).
(b)GAAP permits capitalization of development costs.
(c)IFRS requires capitalization of research and development costs once economic viability is met.
(d)IFRS requires capitalization of development costs once economic viability is met.
(d)IFRS requires capitalization of development costs once economic viability is met.
4.
A loss on impairment of an intangible asset under IFRS is the asset's:

(a)carrying amount less the expected future net cash flows.
(b)carrying amount less its recoverable amount.
(c)recoverable amount less the expected future net cash flows.
(d)book value less its fair value.
(b)carrying amount less its recoverable amount.
5.
Recovery of impairment is recognized under IFRS for all the following except:

(a)patent held for sale.
(b)patent held for use.
(c)trademark.
(d)goodwill.
(d)goodwill.
1.
Which of the following is not a characteristic of intangible assets? (LO 1)

(a)They lack physical existence.
(b)They are not financial instruments.
(c)They are long-term in nature.
(d)They are all subject to amortization.
(d)They are all subject to amortization.
All of the options are characteristics except not all intangibles are subject to amortization.
Expensing all R&D costs associated with internally created intangible assets could result in (LO 1)

(a)Overstating assets and overstating expenses.
(b)Overstating assets and understating expenses.
(c)Understating assets and overstating expenses.
(d)Understating assets and understating expenses.
(c)Understating assets and overstating expenses.
Expensing all R&D costs associated with internally created intangible assets could result in understating assets and overstating expenses.
3.
A purchased limited-life intangible asset ________ amortized and is impairment tested using ________. (LO 1)

(a)is; the recoverability test and then the fair value test.
(b)is not; the fair value test only.
(c)is not; the recoverability test and then the fair value test.
(d)is; the fair value only.
(a)is; the recoverability test and then the fair value test.
A purchased limited-life intangible asset is amortized and is impairment tested using the recoverability test and then the fair value test.
4.
Which of the following is a factor to be considered in determining a limited-life intangible asset's useful life? (LO 1)

(a)Any legal provisions that may limit the useful life.
(b)The expected useful life of any related asset.
(c)The effects of obsolescence.
(d)All of the answer choices are correct.
(d)All of the answer choices are correct.
All of the options are factors affecting useful life.
5.
Which of the following is not one of the major categories of intangibles? (LO 2)

(a)Contract-related.
(b)Financing-related.
(c)Artistic-related.
(d)Marketing-related.
(b)Financing-related.
There is no category of financing-related intangibles.
6.
The difference between the price paid to acquire another company and the fair market value of that company's net assets can be referred to as (LO 2)

(a)A master valuation account.
(b)Goodwill.
(c)A gap filler.
(d)All of these answer choices are correct.
(d)All of these answer choices are correct.
Goodwill is the difference between the purchase price and the fair market value of the company's net assets. Since it is measured as a residual amount, it is sometimes called a master valuation account or a gap filler.
7.
On January 1, 2017, Springsteen Corp. acquires a customer list for $400,000. Springsteen estimates that this customer list will generate value for at least 5 years. At the end of 3 years, Springsteen plans to sell the customer list to another company for $62,500. On Springsteen's income statement for the year ended December 31, 2017, how much amortization expense would it report? (LO 2)

(a)$67,500
(b)$133,333
(c)$80,000
(d)$112,500
(d)$112,500
Customer lists should be amortized over their useful life: (⁄400,000 − $62,500) / 3 years = $112,500 annual amortization expense.
8.
Eisenhower Corporation purchased a patent for $1,850,000 on November 30, 2015. It has a remaining legal life of 18 years. Eisenhower estimates that the remaining useful life of the patent is 15 years. What balance will be reported on the December 31, 2017 balance sheet for the patent (if necessary, round your answer to the nearest dollar)? (LO 2)

(a)$1,850,000.
(b)$1,583,678.
(c)$1,593,056.
(d)$1,485,606.
(c)$1,593,056.
Total amortization expense charged between November 30, 2012 and December 31, 2017:$1,850,000/180months×25months=$256,944. The balance in the Patent account would be: $1,850,000-$256,944=$1,593,056.
9.
Kern Corporation began operating as a business in 2017. During January 2017, the company paid $300,000 in design costs to develop its trademark and $250,000 in legal and registration fees to secure the trademark. During October 2017, the company successfully defended its trademark, paying an additional $150,000 in legal fees during the process. At what amount should Kern Corporation report its trademark on its December 31, 2017 balance sheet? (LO 2)

(a)$150,000.
(b)$400,000
(c)$550,000
(d)$150,000
(d)$150,000
When a company develops a trademark, it capitalizes the costs related to securing it including legal fees, registration fees, design costs, and successful defense costs. In the case, $300,000 + $250,000 + $150,000 = $700,000.
10.
Zak Company and Clark Company were combined in a purchase transaction. Zak Company was able to acquire Clark at a bargain price. The fair market value of Clark's net assets exceed the price paid by Zak to acquire the company. Proper accounting treatment by Zak is to report the excess of fair value over purchase price as (LO 3)

(a)A gain.
(b)A loss.
(c)A liability.
(d)Paid-in capital.
(a)A gain.
Proper accounting treatment by Zak is to report the amount as a gain.
11.
Capitalizing goodwill only when it is purchased in an arm's-length transaction, and not capitalizing any goodwill generated internally, is an example of (LO 3)

(a)Accrual accounting winning out over cash-basis accounting.
(b)GAAP winning out over IFRS.
(c)Faithful representation winning out over relevance.
(d)Financial accounting winning out over managerial accounting.
(c)Faithful representation winning out over relevance.
Capitalizing goodwill only when it is purchased in an arm's-length transaction, and not capitalizing any goodwill generated internally, is an example of faithful representation winning out over relevance.
12.
Truffle Inc. acquired a patent on January 1, 2014 for $7,800,000. It was expected to have a 10 year life and no residual value. Truffle uses straight-line amortization for its patents. On December 31, 2017, the expected future cash flows from the patent are $518,000 per year for the next six years. The present value of these cash flows, discounted at Truffle's market interest rate, is $2,120,000. What amount, if any, of impairment loss will be reported on Truffle's 2017 income statement? (LO 4)

(a)$1,340,000.
(b)$2,120,000.
(c)$2,560,000.
(d)$4,680,000.
(c)$2,560,000.
Amortization charged to date is $7,800,000/10years×4years=$3,120,000 so the carrying value of the patent at December 31, 2017 is: $4,680,000($7,800,000-$3,120,000). The impairment loss is the difference between the carrying value and the discounted expected future net cash flows: $4,680,000-$2,120,000=$2,560,000.
13.
Kust Company acquired a patent on a manufacturing process on January 1, 2012 for $5,100,000. It was expected to have a 12 year life and no residual value. Kust uses straight-line amortization for patents. On December 31, 2013, the expected future cash flows from the patent are $387,500 per year for the next ten years. The present value of these cash flows, discounted at Kust's market interest rate, is $3,050,000. At what amount should the patent be carried on the December 31, 2013 balance sheet? (LO 4)

(a)$5,100,000.
(b)$4,250,000.
(c)$3,875,000.
(d)$3,050,000.
(d)$3,050,000.
The book value of the patent at December 31, 2013 is $4,250,000 (cost of $5,100,000 less 2 years amortization at $425,000 per year). Since the sum of the undiscounted cash flows of $3,875,000 is less than the carrying value, the company must measure and recognize an impairment loss. The patent should be carried on the balance sheet at the present value of $387,500 expected annual cash lows for the next 10 years, $3,050,000.
14.
Felhofer Inc. purchased McKinley Marine on June 1, 2012 for $25,000,000 and recorded goodwill of $3,100,000 in connection with the purchase. At December 31, 2015, the McKinley Marine Division had a fair value of $25,400,000. The net identifiable assets of McKinley (including goodwill) had a fair value of $24,900,000 at that time. What amount of loss on impairment of goodwill should Felhofer record in 2015? (LO 4)

(a)$0.
(b)$500,000.
(c)$600,000.
(d)$2,600,000.
(a)$0.
The fair value of McKinley is greater than its carrying amount so no impairment has occurred.
15.
The impairment rule for goodwill involves how many steps? (LO 4)

(a)1
(b)2
(c)3
(d)4
(b)2
There are two steps: first, compare the fair value of the company to its carrying value including goodwill; and second, compare the implied fair value of the goodwill to its carrying value.
16.
Which of the following principles best describes the current method of accounting for research and development costs? (LO 5)

(a)Associating cause and effect.
(b)Systematic and rational allocation.
(c)Income tax minimization.
(d)Immediate recognition as an expense.
(d)Immediate recognition as an expense.
Research and development costs should be immediately recognized as an expense.
17.
Which of the following is considered a research activity? (LO 5)

(a)Construction of a prototype.
(b)Operation of a pilot plant.
(c)Critical investigation aimed at discovery of new knowledge.
(d)All of these answer choices are correct.
(c)Critical investigation aimed at discovery of new knowledge.
Critical investigation aimed at discovery of new knowledge is considered a research activity.
18.
Which of the following costs should be excluded from research and development expense? (LO 5)

(a)Modification of the design of a product.
(b)Acquisition of R&D equipment for use on a current project only.
(c)Cost of marketing research for a new product.
(d)Engineering activity required to advance the design of a product to the manufacturing stage.
(c)Cost of marketing research for a new product.
The cost of marketing research for a new product should be excluded from research and development expenses.
19.
The presentation of intangible assets in the financial statements (LO 5)

(a)Includes reporting R&D costs as an expense in the income statement.
(b)Involves crediting amortization directly to the intangible asset account.
(c)Includes the disclosure of the amortization expense for the next 5 years.
(d)All of these answer choices are correct.
(d)All of these answer choices are correct.
The presentation of intangibles in the financial statement includes reporting R&D expense in the income statement, crediting amortization directly to the intangible asset account, and disclosing amortization expense for the next 5 years.
20.
Which of the following research and development costs may be capitalized? (LO 5)

(a)Contract services.
(b)Personnel.
(c)Indirect costs.
(d)Research and development equipment to be used on current and future projects.

(d)Research and development equipment to be used on current and future projects.
R&D equipment to be used on current and future projects is to be capitalized and depreciated over its useful life.
...
1.
The presentation of current and non-current liabilities in the statement of financial position (balance sheet):

(a)is shown only on GAAP financial statements.
(b)is shown on both a GAAP and an IFRS statement of financial position.
(c)is always shown with current liabilities reported first in an IFRS statement of financial position.
(d)includes contingent liabilities under IFRS.
(b)is shown on both a GAAP and an IFRS statement of financial position.
2.
In accounting for short-term debt expected to be refinanced to long-term debt:

(a)GAAP uses the authorization date to determine classification of short-term debt to be refinanced.
(b)IFRS uses the authorization date to determine classification of short-term debt to be refinanced.
(c)IFRS uses the financial statement date to determine classification of short-term debt to be refinanced.
(d)GAAP uses the date of issue, but only for secured debt, to determine classification of short-term debt to be refinanced.
(c)IFRS uses the financial statement date to determine classification of short-term debt to be refinanced.
3.
Under IFRS, a provision is the same as:

(a)a contingent liability.
(b)an estimated liability.
(c)a contingent gain.
(d)None of the above.
(b)an estimated liability.
4.
A typical provision is:

(a)bonds payable.
(b)cash.
(c)a warranty liability.
(d)accounts payable.
(c)a warranty liability.
5.
In determining the amount of a provision, a company using IFRS should generally measure:

(a)using the midpoint of the range between the lowest possible loss and the highest possible loss.
(b)using the minimum amount of the loss in the range.
(c)using the best estimate of the amount of the loss expected to occur.
(d)using the maximum amount of the loss in the range.
(c)using the best estimate of the amount of the loss expected to occur.
1.
Which of the following statements is false? (LO 1)

(a)A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing.
(b)Cash dividends should be recorded as a liability when they are declared by the board of directors.
(c)Unearned revenues represent advance payments for goods or services from customers.
(d)Stock dividends declared but not yet distributed are a reported as a liability until the stock is issued.
(d)Stock dividends declared but not yet distributed are a reported as a liability until the stock is issued.
Common stock dividends distributable is reported as a component of stockholders' equity, not as a liability.
2.
Lyric Company issued a 90-day zero-interest-bearing note with a face amount of $3,000. The present value of the note is $2,855. The journal entry to record the issuance of the note will include (LO 1)

(a)a credit to Notes Payable for $2,855.
(b)a debit to Interest Expense for $145.
(c)a debit to Cash for $2,855.
(d)None of these answers are correct.
(c)a debit to Cash for $2,855.
The borrower receives the present value of the note because the interest has already been deducted so the Cash account is debited for that amount.
3.
Liabilities are (LO 1)

(a)accounts having credit balances after closing entries are made.
(b)deferred credits that are recognized and measured in conformity with generally accepted accounting principles.
(c)obligations to transfer ownership shares to other entities in the future.
(d)obligations arising from past transactions and payable in assets or services in the future.
(d)obligations arising from past transactions and payable in assets or services in the future.
Liabilities are obligations arising from past transactions and payable in assets or services in the future.
4.
Which of the following is not an example of a current liability? (LO 1)

(a)Dividends Payable.
(b)Preferred dividends in arrears.
(c)Unearned Service Revenue.
(d)Salaries Payable.
(b)Preferred dividends in arrears.
Preferred dividends in arrears are not a liability until declared by the Board of Directors.
5.
Short-term obligations expected to be refinanced are not classified as current liabilities because (LO 2)

(a)they will be paid by the balance sheet date.
(b)the obligations will be satisfied before the financial statements are issued.
(c)their satisfaction will not require the use of assets classified as current as of the balance sheet date.
(d)None of these answers are correct.
(c)their satisfaction will not require the use of assets classified as current as of the balance sheet date.
Because these obligations will not require the use of working capital during the next year (or operating cycle), they are not classified as current liabilities.
6.
On December 31, 2016, SoBou Co. has $5,000,000 of short-term notes payable due on February 14, 2017. On January 10, 2017, SoBou arranged a line of credit with Suntrust Bank which allows SoBou to borrow up to $3,500,000 at one percent above the prime rate for three years. On February 3, 2017,SoBou borrowed $3,500,000 from Suntrust and used $500,000 additional cash to liquidate $4,000,000 of the short-term notes payable. The amount of the short-term notes payable that should be reported as a current liability on the December 31, 2016 balance sheet which is issued on March 2, 2017 is (LO 2)

(a)$0.
(b)$500,000.
(c)$1,000,000.
(d)$1,500,000.
(d)$1,500,000.
The correct amount is ($5,000,000 − $4,000,000) + $500,000 = $1,500,000.
7.
Which of the following statements is false? (LO 1)

(a)When rights are vested, an employer has an obligation to make payment to an employee.
(b)Unemployment taxes are paid by the employer.
(c)Profit-Sharing Bonus Payable is usually reported as a long-term liability.
(d)The liability for compensated absences should be recognized in the year earned.
(c)Profit-Sharing Bonus Payable is usually reported as a long-term liability.
Profit-Sharing Bonus Payable is usually reported as a current liability.
8.
Federal income taxes withheld by the employer on behalf of the employee are recorded as (LO 1)

(a)current liabilities.
(b)expenses.
(c)unearned revenues.
(d)receivables.
(a)current liabilities.
The taxes are reported as liabilities because the employer is acting as the collection agent for the government.
9.
Employer payroll taxes include all of the following except (LO 1)

(a)federal unemployment taxes.
(b)state income taxes.
(c)FICA taxes.
(d)state unemployment taxes.
(b)state income taxes.
Employer payroll taxes include all of the options except state income taxes.
10.
A large anticipated insurance recovery is reported as (LO 3)

(a)an accrued amount.
(b)deferred revenue.
(c)an account receivable with additional disclosure explaining the nature of the contingency.
(d)a disclosure only.
(d)a disclosure only.
An anticipated insurance recovery is a gain contingency and thus is as a disclosure only.
11.
Black Water Inc. is being sued by former employees as a result of negligence on the company's part. Black Water's lawyers state that it is probable that the company will lose the suit and be found liable for a judgment costing the company anywhere from $100,000,000 to $200,000,000. However, the lawyer states that the most probable cost is $125,000,000. As a result of the above facts, Black Water should accrue (LO 3)

(a)a loss contingency of $100,000,000 and disclose an additional contingency of up to $100,000,000.
(b)a loss contingency of $125,000,000 and disclose an additional contingency of up to $75,000,000.
(c)a loss contingency of $125,000,000 but not disclose any additional contingency.
(d)no loss contingency but disclose a contingency of $100,000,000 to $200,000,000.
(b)a loss contingency of $125,000,000 and disclose an additional contingency of up to $75,000,000.
Because a loss of $125,000,000 is more likely than any other amount in the range, Black Water should accrue $125,000,000 and disclose the potential additional loss of $75,000,000.
12.
A loss related to general or unspecified business risks is (LO 3)

(a)always accrued.
(b)not accrued.
(c)sometimes accrued.
(d)usually accrued.
(b)not accrued.
A loss related to general or unspecified business risks is not accrued.
13.
Ultra-Energy Company offers a cash rebate of $2 on each $9 package of protein powder sold during 2014. Historically, 20% of customers mail in the rebate form. During 2017, 3,000,000 packages are sold, and 250,000 $2 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the company's 2017 financial statements? (LO 3)

(a)$500,000; $700,000
(b)$1,200,000; $700,000
(c)$1,200,000; $500,000
(d)$500,000; $1,200,000
(b)$1,200,000; $700,000
The expense is (3,000,000 packages × 20% × $2/ package) = $1,200,000. Since 250,000 $2 rebates were mailed in during 2014, the liability balance is ($1,200,000 − $500,000) $700,000.
14.
Fancy Fish Company offers a cash rebate of $.25 on each $12 package of fish food sold during 2017. Historically, 10% of customers mail in the rebate form. During 2014, 5,000,000 packages are sold, and 150,000 $.25 rebates are mailed to customers. What is the rebate expense and liability, respectively, reported in the company's 2017 financial statements? (LO 3)

(a)$125,000; $37,500
(b)$37,500; $87,500
(c)$125,000; $125,000
(d)$125,000; $87,500
(d)$125,000; $87,500
The expense is 5,000,000 packages × 10% × $0.25 per package or $125,000. Since 150,000 $0.25 rebates were mailed in during 2014, the liability balance is ($125,000 − $37,500) $87,500.
15.
In 2013, General Dynamics Corporation began selling a new line of products that carries a two-year warranty against defects. Based upon past experience with other products, the estimated warranty costs related to dollar sales are as follows:

First year of warranty 2%
Second year of warranty 5%

Sales and actual warranty
expenditures for 2016 and 2017 are presented below:

2016 2017
Sales $600,000 $800,000
Actual warranty expenditures 20,000 40,000

What is the estimated warranty liability at the end of 2017? (LO 3)

(a)$38,000.
(b)$58,000.
(c)$98,000.
(d)$16,000.
(a)$38,000.
{[$600,000 × (2% + 5%)] + [$800,000 × (2% + 5%)]} − ($20,000 + $40,000) = $38,000.
16.
Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles? (LO 3)

(a)Amount of loss is reasonably estimable and event occurs infrequently.
(b)Amount of loss is reasonably estimable and occurrence of event is probable.
(c)Event is unusual in nature and occurrence of event is probable.
(d)Event is unusual in nature and event occurs infrequently.
(c)Event is unusual in nature and occurrence of event is probable.
Loss contingencies are accrued with the amount of the loss is reasonably estimable and the occurrence of the event is probable.
17.
Accrued liabilities are disclosed in the financial statements by (LO 4)

(a)a footnote to the statements.
(b)showing the amount among the liabilities but not extending it to the liability total.
(c)an appropriation of retained earnings.
(d)appropriately classifying them as regular liabilities in the balance sheet.
(d)appropriately classifying them as regular liabilities in the balance sheet.
Accrued liabilities are disclosed in the financial statements by appropriately classifying them as regular liabilities in the balance sheet.
18.
The current ratio measures (LO 4)

(a)Profitability.
(b)Solvency.
(c)Liquidity.
(d)All of these options are correct.
(c)Liquidity.
The current ratio is a measure of a firm's ability to meet its currently maturing debt.
19.
Which of the following is not acceptable treatment for the presentation of current liabilities? (LO 4)

(a)Listing current liabilities in order of maturity.
(b)Listing current liabilities according to amount.
(c)Offsetting current liabilities against assets that are to be applied to their liquidation.
(d)Showing currently maturing long-term debt as part of current liabilities.
(c)Offsetting current liabilities against assets that are to be applied to their liquidation.
Offsetting current liabilities against assets that are to be applied to their liquidation is not proper presentation of current liabilities.
20.
In accounting for short-term debt expected to be refinanced to long-term debt: (LO 5)

(a)GAAP uses the authorization date to determine classification of short-term debt to be refinanced.
(b)IFRS uses the financial statement date to determine classification of short-term debt to be refinanced.
(c)IFRS uses the authorization date to determine classification of short-term debt to be refinanced.
(d)GAAP uses the date of issue, but only for secured debt, to determine classification of short-term debt to be refinanced.
(b)IFRS uses the financial statement date to determine classification of short-term debt to be refinanced.
Under IFRS, short-term obligations expected to be refinanced can be classified as noncurrent if the refinancing is completed by the financial statement date. GAAP uses the date the financial statements are issued.
2.
At December 31, 2017 (the end of the fiscal year), Webstar Corporation owes $2,000,000 on a note payable due January 31, 2018. (a) If Webstar refinances the obligation by issuing a long-term note on January 20, 2018 and using the proceeds to pay off the note due January 31, how much of the $2,000,000 should be reported as a current liability at December 31, 2017? (b) If Webstar pays off the note on January 31, 2018, and then borrows $3,000,000 on a long-term basis on February 15, how much of the $2,000,000 should be reported as a current liability at December 31, 2017?
(a)Since both criteria are met (intent and ability), none of the $2,000,000 would be reported as a current liability. The entire amount would be reported as a long-term liability.
(b)Because repayment of the note payable required the use of existing 12/31/17 current assets, the entire $2,000,000 liability must be reported as current. (This assumes Webstar had not entered into a long-term agreement prior to issuance.)
1.
Under IFRS, bond issuance costs, including the printing costs and legal fees associated with the issuance, should be:

(a)expensed in the period when the debt is issued.
(b)recorded as a reduction in the carrying value of bonds payable.
(c)accumulated in a deferred charge account and amortized over the life of the bonds.
(d)reported as an expense in the period the bonds mature or are redeemed.
(b)recorded as a reduction in the carrying value of bonds payable.
2.
Which of the following is stated correctly?

(a)Current liabilities follow non-current liabilities on the statement of financial position under GAAP but non-current liabilities follow current liabilities under IFRS.
(b)IFRS does not treat debt modifications as extinguishments of debt.
(c)Bond issuance costs are recorded as a reduction of the carrying value of the debt under GAAP but are recorded as an asset and amortized to expense over the term of the debt under IFRS.
(d)Under GAAP, bonds payable is recorded at the face amount and any premium or discount is recorded in a separate account. Under IFRS, bonds payable is recorded at the carrying value so no separate premium or discount accounts are used.
(d)Under GAAP, bonds payable is recorded at the face amount and any premium or discount is recorded in a separate account. Under IFRS, bonds payable is recorded at the carrying value so no separate premium or discount accounts are used.
3.
All of the following are differences between IFRS and GAAP in accounting for liabilities except:

(a)When a bond is issued at a discount, GAAP records the discount in a separate contra liability account. IFRS records the bond net of the discount.
(b)Under IFRS, bond issuance costs reduce the carrying value of the debt. Under GAAP, these costs are recorded as an asset and amortized to expense over the terms of the bond.
(c)GAAP, but not IFRS, uses the term "troubled-debt restructurings."
(d)GAAP, but not IFRS, uses the term "provisions" for contingent liabilities which are accrued.
(d)GAAP, but not IFRS, uses the term "provisions" for contingent liabilities which are accrued.
4.
On January 1, Patterson Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report bonds payable of:

(a)$4,725,500.
(b)$4,714,500.
(c)$258,050.
(d)$4,745,000.
(b)$4,714,500.
5.
On January 1, Martinez Inc. issued $3,000,000, 11% bonds for $3,195,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest method of amortizing bond premium. At the end of the first year, Martinez should report bonds payable of:

(a)$3,185,130.
(b)$3,184,500.
(c)$3,173,550.
(d)$3,165,000.
(b)$3,184,500.
1.
The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the (LO 1)

(a)bond indenture.
(b)bond debenture.
(c)registered bond.
(d)bond coupon.
(a)bond indenture.
The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the bond indenture.
2.
A bond for which the issuer has the right to call and retire the bonds prior to maturity is a (LO 1)

(a)convertible bond.
(b)callable bond.
(c)retirable bond.
(d)debenture bond.
(b)callable bond.
Callable bonds give the issuer the right to call and retire the bonds prior to maturity.
3.
A bond that matures in installments is called a: (LO 1)

(a)term bond.
(b)serial bond.
(c)callable bond.
(d)bearer bond.
(b)serial bond.
Bonds that mature in installments are referred to as serial bonds.
4.
Eckert Company issues $10,000,000, 6%, 5-year bonds dated July 1, 2017 on July 1, 2017. The bonds pay interest semiannually on December 31 and June 30. The bonds are issued to yield 5%. What are the proceeds from the bond issue? (LO 1)


2.5% 3.0% 5.0% 6.0%
Present value of a
single sum for 5
periods 0.88385 0.86261 0.78353 0.74726
Present value of a
single sum for
10 periods 0.78120 0.74409 0.61391 0.55839
Present value of an
annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an
annuity for 10 periods 8.75206 8.53020 7.72173 7.36009
(a)$10,000,000
(b)$10,432,988
(c)$10,437,618
(d)$10,434,616
(c)$10,437,618
($10,000,000 × 0.78120) + ($300,000 × 8.75206) = $10,437,618
5.
The printing costs and legal fees associated with the issuance of bonds should (LO 1)

(a)be expensed when incurred.
(b)be reported as a deduction from the face amount of bonds payable.
(c)be accumulated in a deferred charge account and not affect effective interest amortization.
(d)not be reported as an expense until the period the bonds mature or are retired.
(c)be accumulated in a deferred charge account and not affect effective interest amortization.
The printing costs and legal fees associated with the issuance of bonds should be recorded as part of the carrying value of the bonds amortized over the life of the bonds.
6.
The selling price of a bond is the sum of the present values of the principal and the periodic interest payments. The present values are determined by discounting using the (LO 1)

(a)stated rate.
(b)nominal rate.
(c)coupon rate.
(d)market rate.
(d)market rate.
The market rate is used to discount the cash flows in determining the selling price (proceeds) of a bond.
7.
On January 1, Gasperson Inc. issued $100,000,000, 7% bonds at 102. The journal entry to record the issuance of the bonds will include (LO 1)

(a)a credit to Bonds Payable for $102,000,000.
(b)a credit to Premium on Bonds Payable for $2,000,000.
(c)a debit to Cash for $100,000,000.
(d)a credit to Interest Expense for $2,000,000.
(d)a credit to Interest Expense for $2,000,000.
The entry will credit Bonds Payable for $100,000,000 and Premium on Bonds Payable for $2,000,000.
8.
If a bond sold at 97, the market rate was: (LO 1)

(a)equal to the stated rate.
(b)less than the stated rate.
(c)greater than the stated rate.
(d)equal to the coupon rate.
(c)greater than the stated rate.
If a bond was sold at 97, it sold at a discount (97% of face value), which occurs when the market rate is greater than the stated rate.
9.
When a bond sells at a premium, interest expense will be: (LO 1)

(a)equal to the bond interest payment.
(b)greater than the bond interest payment.
(c)less than the bond interest payment.
(d)None of these answer choices are correct.
(c)less than the bond interest payment.
Selling a bond at a premium results in interest expense being less than the interest payment because of the amortized premium.
10.
Under the effective interest method, interest expense: (LO 1)

(a)always increases each period the bonds are outstanding.
(b)always decreases each period the bonds are outstanding.
(c)is the same annual amount as straight-line interest expense.
(d)is the same total amount as straight-line interest expense over the term of the bonds.
(d)is the same total amount as straight-line interest expense over the term of the bonds.
Interest expense is the same total amount over the term of the bonds in both the effective interest and straight-line methods.
11.
If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will (LO 1)

(a)exceed what it would have been had the effective-interest method of amortization been used.
(b)be less than what it would have been had the effective-interest method of amortization been used.
(c)be the same as what it would have been had the effective-interest method of amortization been used.
(d)be less than the stated (nominal) rate of interest.
(a)exceed what it would have been had the effective-interest method of amortization been used.
If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will exceed what it would have been had the effective-interest method of amortization been used.
12.
Ferrone Company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Ferrone uses effective-interest amortization. What amount of interest expense will Ferrone record for the June 30 payment? (LO 1)

(a)$390,000
(b)$392,083
(c)$400,000
(d)$784,164
(b)$392,083
Interest expense for the first six months is ($9,802,072 × 0.04) =$392,083.
13.
Pontchartrain Company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. The company uses effective-interest amortization. Interest expense reported on the 2017 income statement will total (LO 1)

(a)$1,529,115
(b)$1,560,000
(c)$1,568,498
(d)$1,600,000
(c)$1,568,498
Interest expense for the first 6 month period is ($19,604,145 × 0.04) =$784,166. The new carrying value for the bonds is [$19,604,145 + ($784,166 − $780,000)] = $19,608,311. Interest expense for the second six months is ($19,608,311 × 0.04) = $784,332. Total interest expense for 2017 is ($784,166 + $784,332) = $1,568,498.
14.
On January 1, 2017, Kimbrough Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Kimbrough uses the effective-interest method of amortizing bond discount. At December 31, 2017, Kimbrough should report unamortized bond discount of (LO 1)

(a)$274,500.
(b)$285,500.
(c)$258,050.
(d)$255,000.
(b)$285,500.
The discount on bonds payable is recorded at ($5,000,000 − $4,695,000) = $305,000 at issuance. The amortization of discount in 2017 is [$450,000 − ($4,695,000 × 0.10)] =$19,500 leaving a balance of $305,000 − $19,500 = $285,500.
15.
On June 30, 2017, Baker Co. had outstanding 8%, $6,000,000 face amount, 15-year bonds maturing on June 30, 2024. Interest is payable on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2017 were $210,000 and $60,000, respectively. On June 30, 2017, Baker acquired all of these bonds at 94 and retired them. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt? (LO 2)

(a)$5,940,000.
(b)$5,790,000.
(c)$5,730,000.
(d)$5,640,000.
(c)$5,730,000.
The bonds' net carrying amount used to calculate the gain or loss on extinguishment is ($6,000,000 − $210,000 − $60,000) = $5,730,000.
16.
On June 30, 2017, Prouty Co. had outstanding 9%, $5,000,000 face amount, 10-year bonds that pay interest semi-annually on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2017 were $200,000 and $50,000, respectively. On June 30, 2017, Prouty acquired all of these bonds at 101 and retired them. What amount of gain or loss would Prouty record on this early extinguishment of debt? (LO 2)

(a)$505,000 gain.
(b)$300,000 loss.
(c)$200,000 gain.
(d)$250,000 loss.
(b)$300,000 loss.
The bonds' net carrying amount is ($5,000,000 − $200,000 − $50,000) = $4,750,000. The loss on extinguishment is ($5,000,000 × 1.01) − $4,750,000 = $300,000.
17.
On January 1, 2017, Trinity Company loaned $901,560 to Litton Industries in exchange for a 3 year, zero-interest-bearing note with a face amount, $1,200,000. The prevailing rate of interest for a loan of this type is 10%. The adjusting journal entry made by Litton at December 31, 2017 with regard to the note will include (LO 3)

(a)a credit to Discount on Notes Payable for $90,156.
(b)a debit to Interest Expense for $120,000.
(c)a credit to Interest Payable for $60,000.
(d)a debit to Interest Expense for $29,850.
(a)a credit to Discount on Notes Payable for $90,156.
The adjusting entry made at December 31, 2017 debits Interest Expense and credits Discount on Notes Payable for ($901,560 × 0.10) = $90,156.
18.
All of the following statements are true regarding IFRS treatment of reporting and recognition of long term liabilities except: (LO 7)

(a)IFRS allows use of straight-line amortization of discounts and premiums.
(b)liabilities are classified as current and non-current.
(c)the use of effective interest amortization.
(d)bond issue costs are netted against the carrying amount of the bonds
(a)IFRS allows use of straight-line amortization of discounts and premiums.
IFRS requires use of effective interest amortization. Under GAAP, companies are permitted to use the straight-line method of amortization for bond discount or premium, provided that the amount recorded is not materially different than that resulting from effective-interest amortization.
19.
Which of the following is not an example of "off-balance-sheet financing"? (LO 5)

(a)Non-consolidated subsidiary.
(b)Special purpose entity.
(c)Operating leases.
(d)Capital leases.
(d)Capital leases.
Capital leases are not an example of "off-balance-sheet financing."
20.
Note disclosures for long-term debt generally include all of the following except (LO 5)

(a)assets pledged as security.
(b)call provisions and conversion privileges.
(c)restrictions imposed by the creditor.
(d)names of specific creditors.
(d)names of specific creditors.
Note disclosures for long-term debt generally do not include the names of specific creditors.
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