978-1337276337 Test Bank Chapter 10 Part 3

Chapter 10

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107. A gain on bond redemption

a. is considered unusual and infrequent.

b. should be treated as part of operating income.

c. decreases a company’s income.

d. is always included when predicting a company’s future income.

108. Shuttle Master Airlines has leased an aircraft from Streamline Aircraft Company. The annual payments are

$1,000,000, and the life of the lease is 18 years. It is estimated that the useful life of the aircraft is 20 years. How would

Shuttle Master Airlines record the acquisition of the aircraft? The effective rate of interest is 9%.

a. The company would not record the aircraft as an asset but would record rent expense of $1,000,000 per year for 18

years.

b. The company would not record the aircraft as an asset but would record rent expense of $900,000 per year for 20

years.

c. The aircraft would be recorded as an asset with a cost of $8,756,000.

d. The aircraft would be recorded as an asset with a cost of $9,129,000.

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109. Which of the following statements regarding leases is false?

a. Lease agreements are a popular form of financing the purchase of assets because leases do not require a large

initial outlay of cash.

b. Accounting recognizes two types of leases—operating leases and capital leases.

c. If a lessor classifies a lease as a capital lease, then the lessee records a lease liability on its balance sheet.

d. If a lease is classified as an operating lease, the lessee records a lease liability on its balance sheet.

110. Which of the following lease conditions would result in a capital lease to the lessee?

a. The lessee will return the property to the lessor at the end of the lease term.

b. The lessee can purchase the property for $1 at the end of the lease term.

c. The fair market value of the property at the inception of the lease is $18,000; the present value of the minimum

lease payments is $15,977.

d. The lease term is 70% of the property’s economic life.

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111. Surplus Mining Company has leased a machine from Craft Machinery Company. The annual payments are $6,000,

and the life of the lease is eight years. It is estimated that the useful life of the machine is nine years. How would Surplus

Mining record the acquisition of the machine?

a. The machine would be recorded as an asset with a cost of $48,000.

b. The company would not record the machine as an asset but would record rent expense of $6,000 per year.

c. The machine would be recorded as an asset, at the present value of the annual cash payments, $6,000 for eight

years.

d. The machine would be recorded as an asset, at the present value of the annual cash payments, $6,000 for nine

years.

112. Which of the following accounts would not appear on the balance sheet of a lessee company recording a capital lease

after the first year of its ten-year life?

a. Accumulated depreciation on the leased asset

b. Lease obligation in the Current Liability section

c. Lease obligation in the Long-Term Liability section

d. Rent expense on the income statement

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113. Happy Corporation leased a building from Sensor Company. The ten-year lease is recorded as a capital lease. The

annual payments are $10,000, and the recorded cost of the asset is $67,100. The straight-line method is used to calculate

depreciation. Which of the following statements is true?

a. Depreciation expense of $6,710 will be recorded each year.

b. Depreciation expense of $10,000 will be recorded each year.

c. No depreciation expense will be recorded by Happy Corporation.

d. No interest expense will be recorded by Happy Corporation.

114. All of the following statements are true except

a. the criteria to determine whether a lease contract should be considered a capital lease are applied in a more rigid

way under U.S. GAAP than IFRS.

b. the criteria to determine whether a lease contract should be considered a capital lease are applied in a more rigid

way under IFRS than U.S. GAAP.

c. the lease criteria under IFRS are to be used as guidelines rather than rules.

d. IFRS require more accounting judgment than U.S. GAAP in the determination of whether a lease is classified as

an operating lease or a capital lease.

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115. The current balance sheet of Blawnox Inc. reports total assets of $20 million, total liabilities of $2 million, and

owners’ equity of $18 million. Blawnox Inc. is considering several financing possibilities in order to expand operations. If

Blawnox Inc.’s owner invests an additional $2 million to finance the expansion, the debt-to-equity ratio

a. will stay the same.

b. will decrease.

c. will increase.

d. cannot be determined from this information.

116. The current balance sheet of Blawnox Inc. reports total assets of $20 million, total liabilities of $2 million, and

owners’ equity of $18 million. Blawnox Inc. is considering several financing possibilities in order to expand

operations. What is the additional amount that Blawnox Inc. can borrow and not exceed a debt–to-equity ratio of 0.3?

a. $5.4 million

b. $3.4 million

c. $5.5 million

d. $4.0 million

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117. Line Corporation’s balance sheet showed the following amounts for their liability and stockholders’ equity accounts:

Current Liabilities, $5,000; Bonds Payable, $1,500; Lease Obligations, $2,000; and Deferred Income Taxes, $300. Total

stockholders’ equity was $6,000. The debt-to-equity ratio is

a. 0.63.

b. 0.83.

c. 1.42.

d. 1.47.

118. One way analysts measure the ability of a company to meet its obligations is to calculate the times interest earned

ratio for any outstanding debt the company may have. For Tempo Solutions Corporation, $10,000 of bonds paying 6.5%

annually is outstanding. Income before interest and taxes is $7,000. How would Tempo Solutions Corporation calculate

the times interest earned ratio?

a. Income before interest and taxes divided by the interest expense

b. Income before interest and taxes divided by carrying value of the bonds outstanding

c. Income before interest and taxes divided by the face rate on bonds

d. Face amount of bonds divided by income before interest and taxes

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119. Tampa Corporation’s balance sheet showed the following amounts for their liabilities and stockholders’ equity

accounts: Current Liabilities, $20,000; Bonds Payable, $60,000; Lease Obligations, $12,000; and Deferred Income Taxes,

$2,000. Total stockholders’ equity was $42,000. The debt-to-equity ratio is

a. 0.45.

b. 0.58.

c. 1.76.

d. 2.24.

120. A decreasing long-term liability account is presented on the statement of cash flows as

a. a decrease in cash in the Financing Activities category.

b. a decrease in cash in the Investing Activities category.

c. an increase in cash in the Operating Activities category.

d. an increase in cash in the Financing Activities category.

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121. On January 1, 2017, the Long-Term Liability section of Quick Silver Co.’s balance sheet showed a balance of

$800,000 in the Bonds Payable account. On December 31, 2017, the balance in that same account was $765,000. This

change would appear on the statement of cash flows as an

a. outflow of cash of $35,000 in the Financing Activities category.

b. inflow of cash of $35,000 in the Financing Activities category.

c. outflow of cash of $35,000 in the Investing Activities category.

d. inflow of cash of $35,000 in the Investing Activities category.

122. An example of a cash flow related to a liability that would not appear in the Financing Activities category of the

statement of cash flows is

a. mortgage payable.

b. bonds payable.

c. deferred income taxes.

d. a lease obligation.

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123. On January 1, 2017, the Long-Term Liability section of Eden Company’s balance sheet showed a balance of $35,000

in the Bonds Payable account. On December 31, 2017, the balance in that same account was $20,000. This change would

appear on the statement of cash flows as an

a. outflow of cash of $15,000 in the Financing Activities category.

b. inflow of cash of $15,000 in the Financing Activities category.

c. outflow of cash of $15,000 in the Investing Activities category.

d. inflow of cash of $15,000 in the Investing Activities category.

124. [APPENDIX] The deferred income taxes for a corporation represent

a. the dollar amount of deductions that a corporation may claim for the year.

b. an additional assessment made by the IRS for underpaid taxes.

c. the estimated amount of next year’s taxes.

d. the dollar amount that arises due to the difference between accounting for financial statements and accounting for

tax purposes.

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125. [APPENDIX] Deferred income taxes arise because

a. corporations often make errors in their tax estimations.

b. companies can use accounting methods that minimize net income for tax purposes and other methods that

maximize net income for reporting to shareholders.

c. the IRS owes a company a refund from last year.

d. large corporations generally have operations in foreign countries whose tax law is quite different from U.S. tax

law.

126. [APPENDIX] One example of a temporary difference between financial and tax reporting results from

a. rent expense.

b. tax-exempt interest from municipal bonds.

c. life insurance proceeds resulting from the death of an executive.

d. depreciation of long-term assets.

127. [APPENDIX] Wave Corporation is determining its income tax liability. It has one machine that cost $30,000 with a

four-year life and no salvage value. Wave is using an accelerated depreciation method for tax purposes. For accounting

purposes, Wave has decided to use the straight-line method. Which of the following statements is true?

a. There will be a temporary difference between accounting income and income for tax purposes.

b. There will be a permanent difference between accounting income and income for tax purposes.

c. Wave’s accounting income and income for tax purposes will be equal.

d. Accounting income will be lower than income for tax purposes, especially in the early years of the asset’s life.

128. [APPENDIX] Stockton Corporation has made an accounting entry to record deferred taxes as a liability resulting

from temporary differences between accounting income and taxable income. Which of the following statements is true?

a. Deferred tax will be decreased.

b. Stockholders’ equity will be increased.

c. Stockholders’ equity will be decreased.

d. Assets will be decreased.

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129. [APPENDIX] For 2017, Wasabi Company has accounting revenues of $6,000. However, because of temporary

differences between tax and accounting, $1,000 of this is not subject to tax. If expenses are $3,000 for both tax and

accounting, and the tax rate is 40%, what is the amount of tax payable to the IRS?

a. $400

b. $800

c. $1,200

d. $1,600

130. [APPENDIX] When a company has a credit balance in its Deferred Tax account, this amount would appear as a(n)

a. contra asset on the balance sheet.

b. stockholders’ equity account on the balance sheet.

c. expense account on the income statement.

d. liability account on the balance sheet.

131. [APPENDIX] The attitude of the Financial Accounting Standards Board toward deferred tax liabilities is that they

are

a. an amount that results in a future obligation and meets the definition of a liability.

b. a bookkeeping item that is used merely to maintain equality of the accounting equation.

c. not true liabilities because the balance increases every year.

d. not payable in the immediate future so it is not necessary to record them.

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a. bonds issued this year (due in ten years).

b. the payment due in three years for a three-year lease signed this year.

c. the current year portion of deferred taxes.

d. the principal of a note payable signed this year but due in five years.

136. Which of the following statements is false with respect to bonds?

a. Firms issue bonds in very large single issues.

b. Bonds must be held until maturity by the initial investor.

c. The denomination of the bond is usually referred to as the face value.

d. Bonds that are not backed by specific collateral of the issuing company are known as debenture bonds.

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137. Connor Martin Corporation’s balance sheet showed the following amounts: Current Liabilities, $10,000; Bonds

Payable, $3,000; Lease Obligations, $4,000; and Notes Payable, $600. Total stockholders’ equity was $12,000. The debt-

to-equity ratio is

a. 0.83.

b. 1.47.

c. 1.42.

d. 0.63.

138. Frank Crawford Corporation’s balance sheet showed the following amounts: Current Liabilities, $15,000; Bonds

Payable, $8,000; Lease Obligations, $9,000; and Notes Payable, $5,600. Total stockholders’ equity was $17,000. The

debt-to-equity ratio is

a. 0.88.

b. 1.18.

c. 0.71.

d. 2.21.

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139. When using the indirect method for preparing the statement of cash flows, all of the following will appear in the

Operating Activities section except

a. an increase in deferred tax.

b. depreciation expense on leased assets.

c. interest expense.

d. an increase in long-term liabilities.

140. The cash interest payment is computed annually when a bond is issued for other than its face value. For a bond

issued at a discount, how will this component change as the bond approaches maturity?

a. Decrease

b. Increase

c. Remain constant

d. Not enough information given to decide

141. Interest expense is computed annually when a bond is issued for other than its face value. For a bond issued at a

discount, how will this component change under the effective interest method as the bond approaches maturity?

a. Decrease

b. Increase

c. Remain constant

d. Not enough information given to decide

142. An amortized discount is computed annually when a bond is issued for other than its face value. For a bond issued at

a discount, how will this component change under the effective interest method as the bond approaches maturity?

a. Decrease

b. Increase

c. Remain constant

d. Not enough information given to decide

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143. The carrying value is computed annually when a bond is issued for other than its face value. For a bond issued at a

discount, how will this component change as the bond approaches maturity?

a. Decrease

b. Increase

c. Remain constant

d. Not enough information given to decide

144. Cash interest is computed annually when a bond is issued for other than its face value. For a bond issued at a

premium, how will this component change under the effective interest method as the bond approaches maturity?

a. Decrease

b. Increase

c. Remain constant

d. Not enough information given to decide

145. Interest expense is computed annually when a bond is issued for other than its face value. For a bond issued at a

premium, how will this component change under the effective interest method as the bond approaches maturity?

a. Decrease

b. Increase

c. Remain constant

d. Not enough information given to decide

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152. The bond issue price equals the __________ of the cash flows that the bond will produce.

153. Bonds were issued at a(n) __________ when the issue price exceeds the face value.

154. Discount on Bonds Payable is shown on the balance sheet as a(n) __________.

155. If the market rate of interest is greater than the face rate, then the bonds are issued at a(n) __________.

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156. __________ is the process of transferring an amount from the bond discount or premium to interest expense each

time period to adjust interest expense.

157. __________ is either the bond’s face value minus any unamortized discount or plus any unamortized premium.

158. The effective interest method amortizes premium or discount in a manner that produces a(n) __________ rate of

interest from period to period.

159. Under the effective interest method of amortization, the interest expense for each period is the carrying value times

the __________.