Chapter 10: Long-Term Liabilities
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
89. The result of using the effective interest method of amortization of discount on bonds is that the
a.
interest expense for each amortization period is constant.
b.
effective interest rate for each amortization period is constant.
c.
amount of interest expense decreases each period.
d.
cash interest payment is greater than the interest expense.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Understanding
90. If bonds were initially issued at a premium, the carrying value of the bonds on the issuer’s books will
a.
decrease as the bonds approach their maturity date.
b.
increase as the bonds approach their maturity date.
c.
remain constant throughout the bonds’ life.
d.
fluctuate throughout the bonds’ life.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Understanding
91. If bonds were initially issued at a discount, the interest expense on the bonds calculated using the effective interest
method will
a.
decrease as the bonds approach their maturity date.
b.
increase as the bonds approach their maturity date.
c.
remain constant throughout the bonds’ life.
d.
fluctuate throughout the bonds’ life.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Understanding
92. Under the effective interest method, the cash paid on each interest payment date will
a.
decrease if bonds are issued at a premium.
b.
increase if bonds are issued at a premium.
c.
remain constant regardless of the issuance price.
d.
increase if bonds are issued at a discount.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Understanding
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
93. On January 1, 2016, Chain, Inc. issued $400,000, 10-year, 10% bonds for $354,200. The bonds pay interest on June
30 and December 31. The market rate is 12%. The interest expense on the bonds at June 30, 2016, is
a.
$20,000
b.
$24,000
c.
$21,252
d.
$17,710
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Analyzing
94. On January 1, 2016, Sharpsburg, Inc. issued $400,000, 10-year, 10% bonds for $354,200. The bonds pay interest on
June 30 and December 31. The market rate is 12%. What is the carrying value of the bonds after the first interest payment
is made on June 30, 2016?
a.
$352,960
b.
$354,200
c.
$355,452
d.
$400,000
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Analyzing
95. On January 1, 2016, Sharpsburg, Inc. issued $400,000, 10-year, 10% bonds for $354,200. The bonds pay interest on
June 30 and December 31. The market rate is 12%. The cash payment on June 30, 2016, is
a.
$20,000.
b.
$21,200.
c.
$24,000.
d.
$17,710.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Analyzing
96. On January 1, 2016, Sharpsburg, Inc. issued $400,000, 10-year, 10% bonds for $354,200. The bonds pay interest on
June 30 and December 31. The market rate is 12%. What is the carrying value of the bonds at the end of the ten years?
a.
$400,000
b.
$480,000
c.
$380,000
d.
$354,200
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
97. On January 2, 2016, Garage Master Construction, Inc. issued $500,000, 10-year bonds for $574,540. The bonds pay
interest on June 30 and December 31. The face rate is 8% and the market rate is 6%. The interest expense on the bonds at
June 30, 2016, is
a.
$2,764.
b.
$17,236.
c.
$20,000.
d.
$22,764.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Analyzing
98. On January 2, 2016, Hi–Tech Master Construction, Inc. issued $500,000, 10-year bonds for $574,540. The bonds pay
interest on June 30 and December 31. The face rate is 8% and the market rate is 6%. The annual cash payment (paid in
semiannual payments) on the bonds is
a.
$40,000.
b.
$30,000.
c.
$20,000.
d.
$15,000.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Analyzing
99. On January 2, 2016, Concrete Master Construction, Inc. issued $500,000, 10-year bonds for $574,540. The bonds pay
interest on June 30 and December 31. The face rate is 8% and the market rate is 6%. What is the carrying value of the
bonds after the first interest payment is made on June 30, 2016?
a.
$574,540
b.
$571,776
c.
$568,920
d.
$500,000
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
100. On January 2, 2016, Lawn Master Construction, Inc. issued $500,000, 10-year bonds for $574,540. The bonds pay
interest on June 30 and December 31. The face rate is 8% and the market rate is 6%. What is the carrying value of the
bonds at the end of ten years before the final maturity payment is made?
a.
$574,540
b.
$525,000
c.
$500,000
d.
$425,460
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Analyzing
101. Which of the following statements regarding amortization is true?
a.
Amortization of the premium causes the premium on bonds payable account to increase.
b.
Amortization of the premium causes the amount of interest expense to increase.
c.
Cash interest payments on bonds equals interest expense on the income statement when there is amortization
of bond premium.
d.
Amortization of premium continues over the life of the bond until the balance in the account is reduced to
zero.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Understanding
102. Amortization of bond discount results in a(n)
a.
decrease of the bonds payable account.
b.
decrease of stockholders’ equity.
c.
increase of stockholders’ equity.
d.
decrease in the cash account.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Understanding
103. Amortization of bond premium results in a(n)
a.
decrease of the carrying value of bonds.
b.
no change in stockholders’ equity.
c.
increase in interest expense.
d.
decrease in the cash account.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Understanding
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
104. Neville Company issued $100,000 of 6%, 10 year bonds when the market rate of interest was 5%. The proceeds from
this bond issue were $107,732. Using the effective interest method of amortization, which of the following statements is
true? Assume interest is paid annually.
a.
Interest payments to bondholders each period will be $6,464.
b.
Interest payments to bondholders each period will be $5,000.
c.
Amortization of the premium for the first interest period will be $1,226.
d.
Amortization of the premium for the first interest period will be $613.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Analyzing
105. Because of changing market conditions, Friendly Corporation made the decision to redeem $300,000 of its bonds
prior to maturity. The bonds had been issued at a discount and the balance in the discount account at the time of
redemption was $15,000. The corporation’s bond certificates indicated that the bonds could be retired early at 103.
Friendly’s retirement of the bonds would result in a(n)
a.
loss of $24,000.
b.
gain of $6,000.
c.
decrease in owners’ equity of $9,000.
d.
increase in assets of $15,000.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-06 – LO:10-06
KEYWORDS:
Bloom’s: Analyzing
106. Which of the following statements is true with regard to early retirement of bonds?
a.
If the carrying value of the bonds is higher than the redemption price, the issuing firm must record a loss.
b.
Firms always find it advantageous to retire bonds issued at lower rates with bonds issued at higher rates.
c.
It is always advantageous to carry out early retirement for bonds issued at a premium but not for bonds issued
at a discount.
d.
Any gain or loss resulting from early retirement of bonds would appear on the income statement of the issuing
company.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-06 – LO:10-06
KEYWORDS:
Bloom’s: Understanding
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-06 – LO:10-06
KEYWORDS:
Bloom’s: Understanding
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.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 – LO: 10-07
KEYWORDS:
Bloom’s: Analyzing
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 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.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 – LO: 10-07
KEYWORDS:
Bloom’s: Understanding
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.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 – LO: 10-07
KEYWORDS:
Bloom’s: Applying
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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 8 years. It is estimated that the useful life of the machine is 9 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 8
years.
d.
The machine would be recorded as an asset, at the present value of the annual cash payments, $6,000 for 9
years.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 – LO: 10-07
KEYWORDS:
Bloom’s: Analyzing
112. Which of the following accounts would not appear on the balance sheet of a lessee company recording a capital
lease?
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
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 – LO: 10-07
KEYWORDS:
Bloom’s: Understanding
113. Happy Corporation leased a building from Sensor Company. The 10-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.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 – LO: 10-07
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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 requires more accounting judgment than U.S. GAAP in the determination of whether a lease is classified
as an operating lease or a capital lease.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 – LO: 10-07
KEYWORDS:
Bloom’s: Understanding
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 will
a.
stay the same
b.
decrease
c.
increase
d.
cannot be determined from this information.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-08 – LO: 10-08
KEYWORDS:
Bloom’s: Analyzing
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
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-08 – LO: 10-08
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
ANSWER:
d
RATIONALE:
$5,000 (Current Liabilities) + $1,500 (Bonds Payable) + $2,000 (Lease Obligations) + $300
(Deferred Income Taxes)/$6,000 (Total Stockholders’ Equity)
$8,800/$6,000 = 1.47
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-08 – LO: 10-08
KEYWORDS:
Bloom’s: Analyzing
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.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-08 – LO: 10-08
KEYWORDS:
Bloom’s: Analyzing
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
ANSWER:
d
RATIONALE:
$20,000 (Current Liabilities) + $60,000 (Bonds Payable) + $12,000 (Lease Obligations) +
$2,000 (Deferred Income Taxes / $42,000 (Total Stockholders’ Equity) = $94,000/$42,000 =
2.238 or 2.24
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-08 – LO: 10-08
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-09 – LO: 10-09
KEYWORDS:
Bloom’s: Analyzing
121. On January 1, 2016, the long-term liability section of Quick Silver Co. balance sheet showed a balance of $800,000
in the bonds payable account. On December 31, 2016, the balance in that same account was $765,000. This change would
appear on the statement of cash flows as
a.
an outflow of cash of $35,000 in the financing activities category.
b.
an inflow of cash of $35,000 in the financing activities category.
c.
an outflow of cash of $35,000 in the investing activities category.
d.
an inflow of cash of $35,000 in the investing activities category.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-09 – LO: 10-09
KEYWORDS:
Bloom’s: Analyzing
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.
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-09 – LO: 10-09
KEYWORDS:
Bloom’s: Applying
123. On January 1, 2016, 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, 2016, the balance in that same account was $20,000. This change would
appear on the statement of cash flows as
a.
an outflow of cash of $15,000 in the financing activities category.
b.
an inflow of cash of $15,000 in the financing activities category.
c.
an outflow of cash of $15,000 in the investing activities category.
d.
an inflow of cash of $15,000 in the investing activities category.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-09 – LO: 10-09
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-10 – LO: 10-10
KEYWORDS:
Bloom’s: Understanding
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.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-10 – LO: 10-10
KEYWORDS:
Bloom’s: Understanding
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.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-10 – LO: 10-10
KEYWORDS:
Bloom’s: Applying
127. [APPENDIX] Wave Corporation is determining its income tax liability. It has one machine that cost $30,000 with a
4-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.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-10 – LO: 10-10
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-10 – LO: 10-10
KEYWORDS:
Bloom’s: Analyzing
129. [APPENDIX] For 2016, 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
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-10 – LO: 10-10
KEYWORDS:
Bloom’s: Analyzing
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.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-10 – LO: 10-10
KEYWORDS:
Bloom’s: Applying
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 not necessary to record them.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-10 – LO: 10-10
KEYWORDS:
Bloom’s: Understanding
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
132. [APPENDIX] Deferred income taxes is a balance sheet item for Iowa Products Company. How would it most likely
be classified on the balance sheet?
a.
Owners’ equity
b.
Long-term liability
c.
Expense
d.
Contra liability
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-10 – LO: 10-10
KEYWORDS:
Bloom’s: Applying
133. [APPENDIX] A decrease in deferred taxes (liability) would appear on the statement of cash flows, prepared using
the indirect method as a(n)
a.
addition to net income in the operating activities category.
b.
deduction to net income in the operating activities category.
c.
inflow of cash in the financing activities category.
d.
outflow of cash in the financing activities category.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-10 – LO: 10-10
KEYWORDS:
Bloom’s: Remembering
134. [APPENDIX] O’hara Company uses the straight-line depreciation for financial reporting purposes and an accelerated
depreciation method for tax purposes. As a result, O’hara will record:
a.
a deferred tax asset.
b.
a deferred tax liability.
c.
a permanent difference.
d.
tax-exempt depreciation.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-10 – LO: 10-10
KEYWORDS:
Bloom’s: Applying
135. All of the following are considered to be long-term liabilities for Parsons Company except:
a.
Bonds issued this year (due in 10 years).
b.
The third year payments 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.
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-01 – LO: 10-01
KEYWORDS:
Bloom’s: Applying
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-01 – LO: 10-01
KEYWORDS:
Bloom’s: Understanding
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.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-08 – LO: 10-08
KEYWORDS:
Bloom’s: Analyzing
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.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-08 – LO: 10-08
KEYWORDS:
Bloom’s: Analyzing
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.
Increase in deferred tax.
b.
Depreciation expense on leased assets.
c.
Interest expense.
d.
An increase in long-term liabilities.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-09 – LO: 10-09
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
140. 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
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 – LO: 10-02
KEYWORDS:
Bloom’s: Remembering
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 as the bond approaches maturity?
a.
decrease
b.
increase
c.
remain constant
d.
not enough information given to decide
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 – LO: 10-02
KEYWORDS:
Bloom’s: Remembering
142. 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 as the bond approaches maturity?
a.
decrease
b.
increase
c.
remain constant
d.
not enough information given to decide
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 – LO: 10-02
KEYWORDS:
Bloom’s: Remembering
143. 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
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 – LO: 10-02
KEYWORDS:
Bloom’s: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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 as the bond approaches maturity?
a.
decrease
b.
increase
c.
remain constant
d.
not enough information given to decide
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 – LO: 10-02
KEYWORDS:
Bloom’s: Remembering
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 as the bond approaches maturity?
a.
decrease
b.
increase
c.
remain constant
d.
not enough information given to decide
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 – LO: 10-02
KEYWORDS:
Bloom’s: Remembering
146. Amortized premium 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 as the bond approaches maturity?
a.
decrease
b.
increase
c.
remain constant
d.
not enough information given to decide
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 – LO: 10-02
KEYWORDS:
Bloom’s: Remembering
147. Carrying value 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 as the bond approaches maturity?
a.
decrease
b.
increase
c.
remain constant
d.
not enough information given to decide
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 – LO: 10-02
KEYWORDS:
Bloom’s: Remembering
Chapter 10: Long-Term Liabilities
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Completion
148. All liabilities that are not classified as current liabilities are classified as ___________________.
ANSWER:
long-term
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-01 – LO: 10-01
KEYWORDS:
Bloom’s: Remembering
149. The denomination or principal amount of the bond is usually referred to as the _________________________.
ANSWER:
face value
par value
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 – LO: 10-02
KEYWORDS:
Bloom’s: Remembering
150. ____________________ bonds may be retired by the issuing company before their specified due date.
ANSWER:
Callable
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 – LO: 10-03
KEYWORDS:
Bloom’s: Remembering
151. The _____________________ rate of interest is the rate that bondholders could obtain by investing in other bonds
that are similar to the issuing firm’s bonds.
ANSWER:
market
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 – LO: 10-03
KEYWORDS:
Bloom’s: Remembering
152. The bond issue price equals the _________________________ of the cash flows that the bond will produce.
ANSWER:
present value
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 – LO: 10-03
KEYWORDS:
Bloom’s: Remembering
153. Bonds were issued at a(n) _____________________ when the issue price exceeds the face value.
ANSWER:
premium
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-04 – LO: 10-04
KEYWORDS:
Bloom’s: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
154. Discount on Bonds Payable is shown on the balance sheet as a(n) ____________________________.
ANSWER:
contra liability
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-04 – LO: 10-04
KEYWORDS:
Bloom’s: Remembering
155. If the market rate of interest is greater than the face rate, then the bonds are issued at a(n)
________________________.
ANSWER:
discount
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-04 – LO: 10-04
KEYWORDS:
Bloom’s: Remembering
156. ______________________ is the process of transferring an amount from the bond discount or premium to interest
expense each time period to adjust interest expense.
ANSWER:
Amortization
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Remembering
157. ______________________ is either the bond’s face value minus any unamortized discount or plus any unamortized
premium.
ANSWER:
Carrying value
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Remembering
158. The effective interest method amortizes premium or discount in a manner that produces a(n)
______________________ rate of interest from period to period.
ANSWER:
constant
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Remembering
159. Under the effective interest method of amortization, the interest expense for each period is the carrying value times
the ______________________.
ANSWER:
effective rate
market rate
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
160. When a bond is retired early and the redemption price is greater than the bond’s carrying value, there will be a(n)
______________________ on redemption.
ANSWER:
loss
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-06 – LO:10-06
KEYWORDS:
Bloom’s: Remembering
161. A(n) ______________________ lease is recorded on the lessee’s balance sheet as an asset and related liability.
ANSWER:
capital
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 – LO: 10-07
KEYWORDS:
Bloom’s: Remembering
162. Although operating leases are not recorded on the balance sheet by the lessee, they are disclosed in the
____________________________________.
ANSWER:
notes to the financial statements
financial statements
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 – LO: 10-07
KEYWORDS:
Bloom’s: Remembering
163. For a capital lease, the lessee must record both an asset and a liability. The amount of the asset is subsequently
reduced by the process of __________________________.
ANSWER:
depreciation
amortization
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 – LO: 10-07
KEYWORDS:
Bloom’s: Remembering
164. In calculating deferred income taxes, ___________________________________ occur when an item is included in
the tax calculation and is never included for financial accounting purposes, or vice versa.
ANSWER:
permanent differences
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-09 – LO: 10-09
KEYWORDS:
Bloom’s: Remembering
165. An alternate term for a timing difference is a _________________________.
ANSWER:
temporary difference
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-09 – LO: 10-09
KEYWORDS:
Bloom’s: Remembering
Chapter 10: Long-Term Liabilities
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Matching
Match the following bond and long-term liability related terms to the appropriate definition.
a.
Long-term liability
b.
Face value
c.
Debenture bonds
d.
Serial bonds
e.
Callable bonds
f.
Face rate of interest
g.
Market rate of interest
h.
Bond issue price
i.
Premium
j.
Discount
k.
Effective interest method of amortization
l.
Carrying value
m.
Gain or loss on redemption
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 – LO: 10-02
FACC.PONO.13.10-03 – LO: 10-03
FACC.PONO.13.10-04 – LO: 10-04
FACC.PONO.13.10-05 – LO: 10-05
FACC.PONO.13.10-06 – LO:10-06
KEYWORDS:
Bloom’s: Remembering
166. The principal amount of the bond as stated on the bond certificate.
ANSWER:
b
167. Bonds that are backed by the general creditworthiness of the issuer and are not backed by specific collateral.
ANSWER:
c
168. An obligation that will not be satisfied within one year.
ANSWER:
a
169. The excess of the issue price over the face value of bonds. It occurs when the face rate on the bonds exceeds the
market rate.
ANSWER:
i
170. Bonds that do not all have the same due date. A portion of the bonds comes due each time period.
ANSWER:
d
171. The excess of the face value of bonds over the issue price. It occurs when the market rate on the bonds exceeds the
face rate.
ANSWER:
j
172. Bonds that may be redeemed or retired before their specified due date.
ANSWER:
e