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Finance
Q:
The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year. The bonds have an effective yield of 9%. Present value factors are below:
The amount of bond interest expense for Year 2 is
A. $450,000.
B. $464,578.
C. $500,000.
D. $535,422.
Q:
Hooker Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2011. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578. The amount of bond interest expense for 2012 is
A. $16,000.
B. $17,696.
C. $18,458.
D. $19,280.
Q:
Baker Company issued $200,000 of ten-year bonds to yield 11% when the stated rate of the bonds was 9%. Present value factors are:
The entry to record the sale would be
A. Option a
B. Option b
C. Option c
D. Option d
Q:
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.
Q:
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
Q:
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%.
Q:
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.
Q:
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.
Q:
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. Option a
B. Option b
C. Option c
D. Option d
Q:
When the market rate of interest is below the nominal rate, a bond sells at
A. par.
B. a premium.
C. a discount.
D. stated value.
Q:
Non-current monetary liabilities are initially recorded at their
A. future value.
B. historical value.
C. present value when incurred.
D. undiscounted amount due.
Q:
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.
Q:
Under IFRS, debt issue costs are treated as an expense of the period when the debt is issued.
Q:
IFRS allows the fair value option for liabilities only to eliminate or significantly reduce the "mismatch" that arises when different measurement bases are used for related financial instruments.
Q:
Under IFRS, a classified balance sheet may list accounts in the following order: stockholders' equity, long-term liabilities, current liabilities.
Q:
Changes in the fair value of all derivatives other than hedges must be recognized in income when they occur.
Q:
A call option contract requires the holder to buy a specific underlying asset at a set price during a specific time period.
Q:
All derivatives must be carried on the balance sheet at historical cost.
Q:
A lender can effectively convert a fixed-rate debt into a floating-rate debt by using an interest rate swap.
Q:
The value of a futures contract entered into to hedge inventory being held for sale increases as the selling price of the inventory increases.
Q:
An example of a derivative instrument is a forward contract.
Q:
The intent of covenants in debt agreements is to discourage lender fraud.
Q:
A debt-for-debt swap of debts with equal maturity values that occurs when the market rate of interest is higher than the stated rate of the old debt will give rise to a gain on debt extinguishments.
Q:
When interest rates have increased and bonds are retired before maturity, market value is below book value generating an accounting loss.
Q:
Current GAAP has eliminated the opportunity for a company to attempt to generate income statement gains and the resulting favorable financial ratio effects associated with many debt-for-debt and debt-for-equity swaps.
Q:
A year-by-year transfer of wealth from bondholders to stockholders occurs when the market rate of interest increases and the historical cost accounting model is used to account for bonds.
Q:
The gain or loss on the early retirement of a bond is the difference between the amount paid to retire the bond and the bond's carrying value at the date of retirement.
Q:
The retirement of a bond which has a $250,000 maturity value and a $10,000 balance in premium on bonds payable (bond premium) creates a $15,000 gain if the bond is retired at a cost of $245,000.
Q:
The gain or loss on the extinguishment of debt is usually categorized on the income statement as part of continuing operations.
Q:
When a debt is retired on the maturity date, a loss occurs if the market rate of interest increased subsequent to the issue of the bond.
Q:
When a debt is retired on the maturity date, the book value is always equal to the market value.
Q:
When market rates of interest increase, the use of floating-rate debt benefits the issuing company.
Q:
Floating-rate debt protects investors from losses because the market value of this debt remains constant when the market rate of interest changes.
Q:
Net income for a particular time period will be understated if a bond issuer fails to amortize premium on bonds payable (bond premium) during that time period.
Q:
Annual amortization of discount on bonds payable (bond discount) results in an increase in interest expense and the bond's carrying value.
Q:
During the past year a company reported bond interest expense of $29,875 and a cash interest payment of $27,500; therefore the bond's carrying value must have increased by $2,375 during the past year.
Q:
The annual amortization of both discount on bonds payable (bond discount) and premium on bonds payable (bond premium) increases as the bond matures.
Q:
Annual amortization of discount on bonds payable (bond discount) increases as a bond matures.
Q:
As a bond matures, annual amortization of premium on bonds payable (bond premium) increases while annual interest expense decreases.
Q:
When bonds were initially sold at a discount, interest expense increases as the bonds reach maturity.
Q:
A five-year bond with a maturity value of $900,000 and a stated interest rate of 8% initially sold for $879,000; total interest expense during the five-year life of the bond will be $339,000.
Q:
A rise in the market rate of interest will cause the value of a financial instrument such as a bond to rise.
Q:
Bonds are required by GAAP to be reported on the balance sheet at market value.
Q:
Discount on bonds payable (bond discount) is a liability valuation account.
Q:
A company is considering offering for sale one of two bond issues. The two bond issues are equivalent except that one bond pays semi-annual interest while the other bond pays annual interest.The proceeds from the sale of the bond with annual interest payments will be greater than the proceeds from the sale of the bonds with semi-annual payments.
Q:
When the market rate of interest is above the nominal rate, a bond sells at a premium.
Q:
The precise terms of a bond issue are found in the bond indenture agreement.
Q:
A product warranty provided with the sale of an item of merchandise gives rise to a non-monetary liability.
Q:
A current monetary liability is shown on the financial statements at the undiscounted amount due.
Q:
A liability that is satisfied through the payment of cash is referred to as a denominational liability.
Q:
The price charged for the privilege of delaying payment on a liability is interest.
Q:
Generally accepted accounting principles require capitalization of an expenditure when it results in an increase in the economic benefit of an asset.
Q:
Taxpayers would prefer not to capitalize interest payments for tax purposes.
Q:
An expenditure that increases a long-lived asset's useful life should be capitalized.
Q:
GAAP calls for capitalization of an expenditure on a long-lived asset when the capacity of the asset is decreased.
Q:
Because of interest capitalization, an increase in capital expenditures can temporarily decrease the amount of interest expense shown on the income statement.
Q:
Because equity funds are not really "free," GAAP allows capitalization of an imputed interest charge when equity is used to finance a construction project.
Q:
Avoidable interest is the product of cumulative weighted average expenditures times the interest rate.
Q:
To qualify as avoidable interest, the interest must arise from borrowing that is directly linked to a construction loan.
Q:
Salvage value of material from demolishing a building is considered a reduction in the cost of the building.
Q:
All costs necessary to acquire an asset and make it ready for use are included in the asset account.
Q:
Expenditures included in the cost of a long-lived asset are capitalized.
Q:
GAAP prohibits adjustment for upward revisions in the replacement cost of the asset, but mandates write-downs when asset values are impaired.
Q:
The only long-lived asset measurement method that survives the dual filters of reliability and verifiability is the economic benefit approach.
Q:
Book value reflects the economic worth of an asset.
Q:
A primary concern of auditors and analysts is that numbers on the financial statements be verifiable, which means that the numbers should arise from readily observable facts subject to corroboration.
Q:
Current cost is an example of the economic sacrifice approach for valuing long-lived assets.
Q:
One way to value a piece of manufacturing equipment is to just add up the net future operating cash inflows the equipment is expected to generate over its life.
Q:
Long-lived assets are operating assets that are expected to yield their economic benefits over a period longer than one year.
Q:
Harrison Company owns a manufacturing plant with a fair value of $3,000,000, a recorded cost of $6,200,000, and accumulated depreciation of $2,400,000. Pablo Company owns a warehouse with a fair value of $3,500,000, a recorded cost of $5,500,000, and accumulated depreciation of $2,800,000. Harrison and Pablo exchange assets with Harrison also receiving cash of $500,000 from Pablo. The exchange is considered to have commercial substance.
Required:
Record the exchange on the books of:
1. Harrison.
2. Pablo.
Q:
Roadrunner Co. is building a waste landfill in the desert near Phoenix, AZ. Roadrunner estimates that this landfill will be in operation for 4 years, will cost $175,000,000 to build, and will generate $600 million in revenues during its useful life. Federal law requires that Roadrunner decommission and decontaminate the site at the end of its useful life. A team of engineers has studied the decontamination procedure and has estimated that Roadrunner will have to spend $20,000,000 on the decommissioning process when the landfill is shut down four years from now. Roadrunner's credit-adjusted risk-free rate of interest is 10%; the PV factor for 4 periods at 10% equals 0.683013.
Required: a. In accordance with U.S. GAAP, how should Roadrunner Co. account for the costs associated with the decommissioning process? Prepare the journal entry required and prepare an amortization table for the asset retirement obligation.
b. How are the costs associated with the decommissioning process reflected on the income statement? Explain how this accounting treatment improves the matching process.
Q:
Nadir Company purchased a milling machine on January 3, 2003 for $55,000. The machine was being depreciated on the straight-line method over an estimated useful life of 10 years, with $5,000 salvage value. At the beginning of 2011, the company paid $15,000 to overhaul the machine. As a result of this expenditure, the company estimated that the remaining useful life of the machine was now 8 years with no salvage value.
Required: What should be the depreciation expense recorded for this machine in 2011 and what is the asset's December 31, 2011 book value?
Q:
Mackerel Company purchased equipment on January 2, 2010 for $100,000. The equipment had an estimated eight-year service life and $5,000 salvage value. Mackerel's policy for "eight-year assets" is to use double-declining balance depreciation for the first five years of the asset's life and then switch to the straight-line depreciation method.
Required: In its December 31, 2012 balance sheet, what amount should Mackerel report as net book value for this equipment?
Q:
In January 2011, Rock Company purchased a copper mine for $8,500,000, with removable ore estimated at 2,400,000 tons. After it has extracted all the ore, Rock will be required by law to restore the land to its original condition at an estimated cost of $500,000. Rock believes it will be able to then sell the property for $200,000. During 2008, Rock incurred $750,000 of development costs to prepare the mine for production, and it removed and sold 80,000 tons of ore.
Required: a. What amount should Rock capitalize as the cost of the mine?
b. What amount should Rock report as depletion expense in its 2011 income statement?
Q:
Rick Company uses straight-line depreciation for its property, plant, and equipment whichstated at costconsisted of the following:
Rick's depreciation expense for 2012 and 2011 was $115,000 and $110,000 respectively.
Required: What amount was debited to accumulated depreciation during 2012 because of property, plant, and equipment retirements?
Q:
Four years ago Alpha Products, Inc. acquired a computer-controlled milling machine to use in its medical device manufacturing operations at a cost of $5,000,000. The firm expected the machine to have an eight-year useful life and zero salvage value. The company has been using straight-line depreciation for the asset. Due to the rapid rate of technological change in the industry, at the end of Year 5, Alpha estimates that the machine is capable of generating (undiscounted) future cash flows of $1,500,000. Based on the quoted market prices of similar assets, Alpha estimates the machine to have a fair value of $1,200,000.
Required: a. What is the book value of the machine at the end of Year 5?
b. Should Alpha recognize an impairment of this asset? Why or why not? If yes, what is the amount of the impairment loss that should be recognized?
c. At the end of Year 5, at what amount should the machine appear in Alpha's balance sheet?
d. What would your answer to requirement (b.) have been if Alpha's estimate of the machine's (undiscounted) future cash flows was $2,000,000?
Q:
On January 2, 2008 Lamp, Inc. purchased a patent for a new consumer product for $120,000. At the time of purchase, the patent was valid for 14 years; however, the patent's useful life was estimated to be only 10 years due to the competitive nature of the product. On December 31, 2011 the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product.
Required: a. Record any loss on impairment that Lamp should record in 2011 related to this patent.
b. What should the total charge against income be in 2011 on this patent?
Q:
Jade, Inc. develops and markets computer software. During 2011, one of Jade's engineers began developing a new and very innovative software product. On April 1, 2012, a team of Jade's engineers determined that the software product was technologically feasible. Jade engineers continued to ready the software for general release and in January 2013 the first product sales were made. Total costs incurred were as follows:
Required: a. How should Jade account for the costs incurred during 2011 and what is the rationale for your answer?
b. How should Jade account for the costs incurred during 2012? If your answer differs from your answer in requirement 1, explain why.
Q:
King Company began constructing a building for its own use in January 2011. During 2011, King incurred interest of $60,000 on specific construction debt and $12,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during 2011 as $50,000.
Required: a. What amount of interest should King capitalize?
b. Prepare the journal entry to record payment of the interest.
Q:
Brick Company started construction on a new office building on January 1, 2011, and moved into the finished building on July 1, 2012. Of the building's $3,000,000 total cost, $2,000,000 was incurred in 2011 evenly throughout the year. The remaining $1,000,000 was paid in installments of $500,000 each on February 1, 2012 and June 30, 2012. Brick's incremental borrowing rate was 12% throughout the construction period and the total amount of interest incurred by Brick during 2011 and 2012 was $200,000 and $210,000 respectively.
Required: a. What amount of capitalized interest should Brick report as part of its building account at December 31, 2011?
b. What amount of capitalized interest should Brick report as part of its building account at December 31, 2012?