Intermediate Accounting Volume 2 Seventh Canadian Edition Test Bank

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ExamName___________________________________TRUE/FALSE.Write 'T' if the statement is true and 'F' if the statement is false.1)Conceptually, liabilities constitute a present obligation as a result of a past event andentail an expected future sacrifice of assets or services.1)_______2)Under ASPE, only legal obligations are recognized.2)_______3)A reasonable expectation on the part of a company's stakeholders arising from acompany's past practices or behaviour may constitute a constructive obligation in certaininstances.3)_______4)A contingency may become a provision if the likelihood of the contingent event greatlyincreases.4)_______5)Under IFRS, most financial liabilities are valued at Fair Value.5)_______6)An improvement to a company's credit rating under IFRS will lead to a reduction in thecarrying amount of any financial liabilities and a gain being reported in OCI.6)_______7)Loan guarantees are only recorded if they are likely to be paid.7)_______8)Accrued liabilities made due to routine operating expenses are not normally discounted.8)_______9)For a small population, the best estimate for the amount of a provision that must berecognized is the expected value of the possible outcomes.9)_______10)Under IFRS, provisions are always recorded at their expected value.10)______11)For a large population, the best estimate for the amount of a provision that must berecognized is the most likely outcome with respect to the expected value and cumulativeprobabilities.11)______12)Under ASPE, contingent liabilities which are more likely than not, are accrued at thelowest end of the range.12)______13)Contingent assets may be recorded under ASPE but not under IFRS.13)______14)Executory contracts seldom require a journal entry, while onerous contracts do.14)______15)Discounting is not required when the time value of money is immaterial or if the amountand timing of cash flows is highly uncertain.15)______16)Financial liabilities are initially recognized at fair value and at cost, amortized cost orfair value post-acquisition.16)______17)A company decides to relocate a group from a discontinued business segment to adivision with ongoing operations. The expenses incurred in doing so would qualify as arestructuring charge.17)______18)Under the warranty expense approach, there should be no income statement effects forwarranty

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repairsperformed afterthe yearof sale(assuming thataccruedwarrantyexpenses andexpendituresequaloneanother).18)______19)Under the warranty revenue approach, there should be no income statement effects forwarranty repairs performed after the year of sale (assuming that accrued warrantyexpenses and expenditures equal one another).19)______20)An onerous contract is one where the unavoidable costs of meeting the contract may ormay not exceed the benefits derived from the contract.20)______21)A lawsuit in progress wherein the defendant will probably be found guilty would likelybe accounted for as a provision.21)______22)Warranties provisions may arise from legal or constructive obligations.22)______23)Once a company has formally decided to restructure its operations, a provision must bemade for the restructuring.23)______24)Loyalty points are provided (accrued) for and reversed once the points are redeemed.24)______25)Self-insurance costs for expected losses must never be provided for.25)______26)Current liabilities are usually discounted.26)______27)A decline in value of a company's reporting currency relative to the foreign currency inwhich it has payables will result in a foreign exchange gain on the reporting company'sbooks.27)______28)Adjustments to fair value relating to FVTPL liabilities will always flow throughearnings.28)______29)Loan guarantees must be provided for; the amount of the provision is the probability ofpayout multiplied by the fair value of the loan guarantee.29)______30)A company may reclassify a current financial liability to a long-term one only if there isacontra

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ctualagreement inplace bythereporting date toreplacethefinancing.30)______31)Debt issue costs may be expensed or included in the cost of the debt.31)______32)Normal business risks that are insured must be provided for.32)______33)An administrative fee pertaining to an unsuccessful loan application is to be immediatelyexpensed.33)______34)Capitalization of borrowing costs on qualifying assets will continue even if work on theasset has temporarily ceased.34)______35)Accounts payable should include only obligations directly related to the primary andcontinuing operations of an entity.35)______36)Capitalization of borrowing costs on qualifying assets is mandatory under both IFRS andASPE.36)______37)Under IFRS, a loss contingency must be credited to a liability account only if theoccurrence of the contingent event is probable and if the amount of loss can bereasonably estimated.37)______38)A gain contingency will usually not be recorded in the accounts and reported in thefinancial statements even though its occurrence is probable.38)______39)Under ASPE, disclosure in the footnotes to the financial statements is the only way toproperly report contingent losses.39)______40)Under IFRS, a continuity schedule must be provided for both provisions andcontingencies.40)______MULTIPLE CHOICE.Choose the one alternative that best completes the statement or answers the question.41)A brewing company operating in an Ontario city experiencing water shortages receivedits water bill for December 2013, on December 31, 2013. The bill ($8,000) represents thecost of water used in December to make its product. The company will not publish the2013 financial statements until February 2014. Therefore, the adjusting entry as ofDecember 31, 2013 includes which of the following?41)______A)cr. cash $8,000B)cr. utilities payable $8,000C)cr. utilities expense $8,000D)no adjusting entry needed because the bill will not be paid until January 2014

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42)A short-term note payable may include all of the following except:42)______A)A current portion of a long-term liability.B)Unearned revenue.C)Non trade notes payable.D)Trade notes payable.43)Which of the following statements is correct?43)______A)Under IFRS, contingencies may be accrued, but not under ASPE.B)A contingency is more likely to require an accrual than a provision.C)Litigation for which the company will probably be found guilty would normally beaccrued as a provision.D)Under IFRS, content gains should be recognized if they are reasonably certain tooccur.44)A firm sold $100,000 worth of goods during 2014. The firm extends warranty coverageon these goods. Historically, warranty costs have averaged 2% of total sales. During2014, the firm incurred $1,000 to service goods sold in 2013 and $200 to service goodssold in 2014. What is warranty expense for 2014?44)______A)$1,200B)$200C)$3,200D)$2,00045)You are an investor and have just purchased a bond on July 1 which pays interest everyMarch 1 and September 1. When you receive your first interest cheque, you will receiveand have earned how many months interest?ReceivedEarned16626232244456445)______A)Choice 1B)Choice 2C)Choice 3D)Choice 4E)Choice 546)On November 7, 2014 local residents sued Brimley Corporation for excess chemicalemissions that caused some of them to seek medical attention. The total lawsuit is$8,000,000. Brimley Corporation's lawyers believe that the lawsuit will be successfuland that the amount to be paid to the residents will be $4,000,000. On its December 31,2014 financial statements Brimley should:46)______A)Simply disclose the details regarding the lawsuit in a note.B)Accrue a provision loss of $4,000,000 and note disclose.C)Accrue a provision loss of $8,000,000 with no financial statement disclosurenecessary.D)Do nothing as the lawsuit has not yet ended.47)ABC Inc. has 50 pending lawsuits for which it may be found liable. The expected value(sum of the probabilities of the outcomes multiplied by their respective payouts)amounts to $100,000. However, the company's controller believes that the most likelyoutcome will be a payout of $120,000. Which of the following statements pertaining tothe accrual of the provision is correct?47)______A)There is a small population of lawsuits, so a provision of $100,000 must be accrued.B)There is a large population of lawsuits, so a provision of $120,000 must be accrued.

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C)There is a large population of lawsuits, so a provision of $100,000 must be accrued.D)There is a small population of lawsuits, so a provision of $120,000 must be accrued.48)Which one of the following items is not a liability?48)______A)Dividends payable in sharesB)The portion of long-term debt due within one yearC)Advances from customers on contractsD)Accrued estimated warranty costs49)A company has commenced work on a non-cancellable fixed price construction contractin the amount of $6 million. Costs of $4 million have been incurred to date, and it isexpected that $3.2 million in additional costs will have to be incurred to complete thecontract. The company adheres to IFRS. Which of the following statements with respectto the contract are correct?49)______A)There is a constructive obligation to finish the contract.B)The company will have recognized $3 million in profit on the contract to date.C)This is an onerous contract, so the company must accrue a loss of $1.2 million plusany previously recognized profit.D)The company has a constructive obligation to accrue a loss of $1.2 million plus anypreviously recognized profit.50)Constructive obligations may arise from:50)______A)Accrued Liabilities resulting from operations.B)Unearned Revenues.C)Warranty obligations.D)Notes Payable.51)Jake Co.includes three coupons in each bag of dog food it sells. In return for fifteencoupons, customers receive a dog leash. The leashes cost Jones $2.00 each. Jakeestimates that 50% of the coupons will be redeemed. Data for 2014 and 2015 are asfollows:20142015Bags of dog food sold200,000300,000Leashes purchased50,00050,000Coupons redeemed100,00050,000The estimated liability for premiums for Jake Co. as at December 31, 2015 is:51)______A)$80,000.B)$50,000.C)$20,000.D)$160,000.52)Long-term obligations (i.e., debts) that is callable for early payment:52)______A)Must continue to be classified as a long-term liability by the debtor, if a provisionof the debt covenant has been violated.B)Can be reported as current liabilities by the debtor only if callable because aprovision of the debt covenant has been violated.C)Must be reported as current liabilities by the debtor if callable on demand.D)Must continue to be classified as a long-term liability in all situations.53)A company had sales of $1 million. Coupons in the amount of $1 per $10 in sales weregiven to paying customers. History has shown that 50% of all coupons are redeemed.Which of the following statements is correct?53)______A)A provision for $1 million must be recognized.B)A provision for $50,000 must be recognized.

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C)A provision for $100,000 must be recognized.D)No provision is necessary.54)By law, a fleet of aircraft must be subject to a major overhaul every 5 years as part of itsscheduled maintenance program. Which of the following statements is correct?54)______A)The cost of the overhaul should be deferred and amortized.B)The estimated cost of the overhaul should be disclosed as part of a continuityschedule in the notes to the financial statements.C)An accrual should be made in each of the 5 years preceding the overhaul.D)The costs of the overhaul should be expensed as incurred.55)Which of the following statements is correct?55)______A)There is no guidance for self-insurance under IFRS.B)Contingent assets are only recorded when it is virtually certain that the benefitsrelating to the contingent assets will be received.C)For companies that are self-insured, a provision must be established for eventstaking place prior to the reporting period if known.D)Contingent assets are only recorded when it is reasonably certain that the benefitsrelating to the contingent assets will be received.56)Information obtained prior to the issuance of the current period's financial statements ofKG Company indicates that it is probable that, at the date of the financial statements, aliability will be incurred for obligations related to product warranties on products soldduring the current period. During the past three years, product warranty costs have beenapproximately 1 1/2 percent of annual sales revenue. An estimated loss contingencyshould be:56)______A)Disclosed in the financial statements but not accrued.B)Accrued in the accounts and reported in the financial statements.C)Neither accrued nor disclosed in the financial statements.D)Recognized as an appropriation of retained earnings.57)Contingent liabilities will or will not become actual liabilities depending on:57)______A)The outcome of a future eventB)The present condition suggesting a liabilityC)Whether they are probable and estimableD)The degree of uncertainty58)Under IFRS, which of the following will only require only a note disclosure as acontingency?58)______A)Remote chance of loss from a lawsuit in processB)Probable claim for an income tax refundC)Cash discounts given for early payment by customers; almost always takenD)Loss from an investment in equity securities that is certain59)Which of the following contingencies should be accrued in the accounts and reported inthe financial statements?59)______A)An accommodation endorsement involving a remote loss.B)The estimated expenses of a one-year product warranty.C)It is probable that the company will receive $50,000 in settlement of a lawsuit.D)The company is forcefully contesting a personal injury suit and a loss is possibleand reasonably estimable.

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60)KR Corporation was involved in a lawsuit with the Government alleging inadequate airpollution control facilities at its Glowworm plant site during 2013. At December 31,2016, it appeared probable the Government would settle for approximately $150,000.This event should be recorded (i.e., recognized) in 2016 as a(n):60)______A)Unusual gain.B)Unusual loss.C)Disclosure of contingency loss only in a note.D)Prior period adjustment.E)Loss on the lawsuit (operating expense).61)On January 1, 2014, DWW borrowed $400,000 cash and signed a one-year, 12 percentinterest-bearing note payable. Assuming a 40 percent average income tax rate for DWWCorporation, the net effective interest rate on this note was:61)______A)6.0 percent.B)4.8 percent.C)12.0 percent.D)7.2 percent.62)XYZ borrowed $60,000 for one year and signed an 18 percent, interest-bearing notepayable. Assuming XYZ has an income tax rate of 45 percent, the net effective rate was:62)______A)18 percent.B)9.9 percent.C)8.1 percent.D)11.7 percent.63)On September 1, 2012, Company B signed a $7,392, two-year non-interest-bearing notepayable in full on August 31, 2014. Company B received $6,000 cash. What was theyield or effective rate of interest?63)______A)23 percentB)11 percentC)14 percentD)18 percent64)VCR Company owed a $73,311 debt due on January 1, 2012. An agreement was reachedto pay it off in three equal annual payments of $30,000 each, starting on December 31,2012. The interest rate was 11 percent. The balance in the liability account of VCRCompany on January 1, 2014 is (round annual payment to nearest $1):64)______A)$90,000B)$73,311C)$51,875D)$27,02665)XY Company owed a $45,489 due on January 1, 2015. An agreement was reached topay it off in five equal annual payments, starting on December 31, 2015. The interestrate was 10 percent. The total amount of interest paid under the terms of the agreementwas (round annual payment to nearest $1):65)______A)$25,000B)$6,000C)$14,511D)$22,74566)A firm sells products covered by a three-year warranty. From the past experience of theother firms in the industry, the firm expects to incur warranty costs equal to 1% of sales.Firm sales were $40,000 and $50,000 in 2013 and 2014 respectively. In 2014, the firmspent $200 to repair goods sold in 2013, and $300 to repair goods sold in 2014. The firmreceived no warranty servicing demands from customers in 2013, the firm's first year ofoperations. What is the balance in the warranty liability account on January 1, 2014?66)______A)$500B)$300C)$400D)$067)On January 1, 2014, JG purchased a machine and gave a $30,000 three-year, 8% note.The market or "going" interest rate was 12%. The annual interest payments are to be paidon each December 31. On January 1, 2014, JG should record the net liability amountdetermined as follows:67)______A)Use its face amount, $30,000 plus the $7,200 interest.B)Use its face amount, $30,000 minus $7,200 interest.

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C)Compute the present value of its face amount and the three $2,400 interest amountsby using a discount rate of 12%.D)Compute the present value of its face amount and the three $2,400 interest amountsby using a discount rate of 8%.68)Ryan Company borrow $45,000 US when the exchange rate for US $1.00 is Cdn. $1.46.When the debt was repaid the exchange rate changes to US $1.00 = Cdn. $1.38. RyanCompany records the amount on the date of exchange as:68)______A)A foreign exchange gain of $3,600.B)A foreign exchange gain of $62,100.C)A foreign exchange loss of $62,100.D)A foreign exchange loss of $3,600.ESSAY.Write your answer in the space provided or on a separate sheet of paper.69)A company has been sued for damages as a result of illness caused to local residents due to theemission of highly toxic chemicals from its plant. The company's legal firm advises that it isprobable that the company will lose the suit and that it probably will result in a judgment of $2million to $10 million in damages. However, the legal firm believes that the most probable amountof the loss will be $6 million, and that the suit will be terminated about three years hence. Thecompany has no other lawsuits pending.(a) Should the company disclose this event in the year thesuit was filed? (check one) ________ No; ________ Note only; ________ A loss in the incomestatement.(b) If a loss should be reported, give the journal entry required:70)On January 1, 2012, a company purchased a machine that had a list price of $23,500. The purchaseterms agreed upon were: cash down payment $12,000 plus a 15% note payable of $9,132 (itspresent value). The note is payable in three equal annual instalments (interest plus principal) oneach December 31. Round to the nearest dollar.Required:(a) Give the entry to record the acquisitionof the machine.(b) Give the adjusting entry required on September 30, 2013, for interest assumingthis is the end of the accounting period.71)On January 1, 2000, a corporation purchased a machine (10 year estimated useful life; no residualvalue; straight-line method) by paying cash $1,500 and signing a note payable with a face amount of$4,500, 8% interest payable each December 31. The maturity date is December 31, 2002. The goingmarket rate of interest was 10%. Give all required entry (entries) at each of the followingdates:January 1, 2000:December 31, 2000:72)On September 1, 2020, a company purchased a machine and paid for it by signing a two-yearnoninterest-bearing note, face $4,000. The note is payable August 31, 2022. The going rate ofinterest was 18% per year. The accounting period ends December 31.(a) Compute the cost of themachine.(b) Give all appropriate entries throughout the term of the note.Use the net method.73)On September 1, 2020, a company signed a $6,540, one-year, non-interest-bearing note payable andreceived $6,000 cash.(a) What was the imputed rate of interest? ________%.(b) Give the entryrequired at September 1, 2020, to record the receipt of the cash (record on net basis).(c) Give theadjusting entry required at the end of the accounting year, December 31, 2020.(d) Give the entryrequired on the due date, August 31, 2021, assuming no reversing entries were made.74)Quality 9000 International Inc., which began operations in 1996, sells 20,000 units of its producteach year under the following warranty: defective units will be fixed free of charge during thecalendar year of purchase and the next two calendar years. (This means it is best to buy from thiscompany early in the year.) Only 1% of units sold have required warranty service in the past. Theaverage cost has been $200 per unit for servicing. Units require service only once and the likelihoodof a unit requiring service is the same during each year in the warranty period. What is the balance

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in thewarranty liability account at December 31, 1999?75)A firm sells a remarkable product, which serves many household purposes. The firm is confidentabout its product and is so anxious to sell a large number of units that it grants a 3-year warranty.The warranty agreement specifies that any malfunction or other problem will be fixed at no cost tothe customer, unless the customer has abused the product. Based on experience with otherhousehold products it has sold in the past, 3% of total units sold will require service over thewarranty period at an average cost of $200 per unit. The following information relates to the firsttwo years of the product's life:Year 1Year 2Unit sales$20,000$5,000Actual warranty costs incurred35,00080,000What is the balance of the warranty liability account at January 1, Year 3? Assume that thecompany did not revise its estimate of future warranty claims frequency.76)At December 31, 2015, ABC Company has the following three separate lawsuits pending against it:Suit A-Plaintiffs seek damages of $40,000; Suit B-Plaintiff seeks damages of $200,000; and SuitC-Plaintiff seeks damages of $20,000.ABC management and legal counsel have made theassessments indicated below. For each suit, taking into account the assessment, you are to (a) givethe accrual entry if it is required (if not, state why) and (b) indicate whether a disclosure note isrequired and explain the reason.CASE A-Remote that ABC will lose the suit.(a) Accrual entry:(b)Disclosure note: ________ Yes________No. Explanation:CASE B-Reasonably possible thatABC will lose; reasonable estimate of damages $4,000.(a) Accrual entry:(b) Disclosure note:________ Yes ________ No. Explanation:CASE C-Probable that ABC will lose; reasonableestimate of damages $10,000.(a) Accrual entry:(b) Disclosure note: ________ Yes ________ No.Explanation:77)BRIEFLY explain how the treatment of contingencies differs under IFRS and ASPE.78)On September 1, 2014, XYZ borrowed $100,000 on a 9%, two-year, note payable. Simple interest ispayable on August 31, 2015 and 2016. XYZ's reporting year ends December 31 and the companydoes not use reversing entries for interest. The required entry on August 31, 2015, is:

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1)FALSE2)FALSE3)FALSE4)FALSE5)FALSE6)FALSE7)FALSE8)FALSE9)FALSE10)FALSE11)FALSE12)FALSE13)FALSE14)FALSE15)FALSE16)FALSE17)FALSE18)FALSE19)FALSE20)FALSE21)FALSE22)FALSE23)FALSE24)FALSE25)FALSE26)FALSE27)FALSE28)FALSE29)FALSE30)FALSE31)FALSE32)FALSE33)FALSE34)FALSE35)FALSE36)FALSE37)FALSE38)FALSE39)FALSE40)FALSE41)B42)B43)C44)D45)B46)B47)B48)A49)C50)C51)A

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52)C53)B54)A55)B56)B57)A58)A59)B60)E61)D62)B63)B64)D65)C66)C67)C68)A69)(a) a loss in the income statement.(b)Loss-pollution (lawsuit pending)6,000,000Estimated liability pollution lawsuit6,000,00070)(a)Machine21,132Cash12,000Note payable9,132(b)Interest expense731Interest payable (975 × 9/12)73171)January 1, 2000:Machine ($1,500 + $4,276)5,776Cash (given)1,500Note payable (net)*4,276*principal $4,500 x (PV1, 10%, 3)(.75131)3,381*interest $360 x (PVA, 10%, 3)(2.48685)8954,276December 31, 2000:Depreciation expense ($,5776 / 10 years)578Accumulated depreciation578Interest expense ($4,276 x .10)428Cash ($4,500 x .08)360Note payable ($428—360)6872)(a) $4,000 x (PV1, 18%, 2) (.71818) = $2,873(b) September 1, 2000Machine2,873Note payable2,873December 31, 2020

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Interest expense ($2,873 x .18 x 4/12)172Note payable172December31,2021Interest expense548*Note payable548August 31, 2022Note payable ($2,873 + $172 + $548)3,593Interest expense ($4,000-$3,593)407Cash4,000*$2,873 x .18 = $517 x 8/12 =345Or ($2,873 + $172) x .18548($2,873 + $517) x .18 = $610 x 4/1220373)(a) $6,540-$6,000 = $540$6,000 = 9%(b) September 1, 2020Cash6,000Note payable6,000(c) December 31, 2020:Interest expense ($540 x 4/12)180Note payable180(d) August 31, 2021:Note payable6,000Interest expense ($540 x 8/12)Interest payable360180Cash6,54074)As of Dec. 31/99, the warranty for 1996, 1997 units is expired;Dec. 31/99 liability =For 1998 sales:1/3(20,000)($200)(.01)= $13,333For 1999 sales:2/3(20,000)($200)(.01)=26,667Total liability at Dec. 31/1999$40,00075)January 1, 20x3 warranty liability balance =(20,000 + 25,000).03($200)-$35,000-$80,000 = $155,00076)CASE A(a) None permitted for remote loss contingencies(b) No (permissible but not required)CASE B(a)None(b) Yes (required for reasonably possible loss contingencies)CASE C(a) Estimated loss-Damages fromlawsuit20,000Estimated liability-Damages fromlawsuit20,000(b) Yes or no (Disclosure often required in addition to the journal entry) for full disclosure.77)Contingencies may or may not be accrued under ASPE but are never accrued under IFRS. Both IFRS andASPE require the disclosure of contingencies.78)Please see the following table:Interest Expense6,000Interest Payable3,000Cash9,000

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ExamName___________________________________TRUE/FALSE.Write 'T' if the statement is true and 'F' if the statement is false.1)The carrying value of a bond from the issuing corporation's standpoint will always movecloser to its face value, regardless of whether the bond is issued at a premium or adiscount.1)_______2)Under the effective interest method, interest expense is calculated by multiplying themarket interest rate by the carrying value of the bonds.2)_______3)Assume that a company issues bonds at a discount. Under the effective interest method,the company will record progressively less interest expense with the passage of time.3)_______4)Transaction costs are deducted from the carrying value of long-term financial liabilities.4)_______5)When the market rate exceeds the stated or nominal rate, a bond's carrying value will beless than its fair value.5)_______6)In-substance defeasance leads to the de-recognition of a company's long-term debt.6)_______7)The stated rate of interest is the interest rate used to determine the amount of cashinterest that will be paid on the principal.7)_______8)The capitalization of borrowing costs is mandatory under both IFRS & ASPE.8)_______9)A company enters into a forward exchange contract to hedge its US dollar payable whichis due in 90 days. The company committed to purchase sufficient US currency to settleits liability at a rate of $1 US=$1.20 CAD US. The company's year-end falls 30 daysbefore the settlement date. On that date, the forward rate for 30-day settlement contractswas 1 US=$1.22 CAD US. As a result of these facts the company will record a gain onits current year financial statements.9)_______10)A short-term payable may be the current portion of a long-term liability, which ariseswhen the next payment on such a debt will be made out of current assets.10)______11)Interest may be recognized on a note even though the note does not explicitly state aninterest rate.11)______12)The principal amount of a debt is the cash or cash equivalent amount borrowed.12)______13)Use of the effective interest method for amortizing bond premiums and discounts ismandatory under IFRS but not under ASPE.13)______14)Borrowing costs can only be capitalized on non-financial assets.14)______15)The cost of any equity financing is included when calculating the cost of generalizedborrowings.15)______16)Bonds are said to be redeemable when they can be prematurely retired at the discretionof the issuing company and retractable when they can be prematurely retired at theinvestor's discretion.16)______

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17)When the maturity date of a bond issue is within one year or the operating cycle(whichever is longer) of the current balance sheet date, the bond liability should bereclassified as a current liability (assuming the payment will be made out of currentassets).17)______18)Callable bonds are callable at the option of the investor.18)______19)A $1,000, 6%, 10-year bond purchased as a long-term investment at an effective rate at7%, will pay the investor $70 cash interest each year.19)______20)The amortization of a bind discount or premium over the life of a bond will be the sameunder both the straight line and effective interest methods.20)______21)In-substance defeasance means that a debtor irrevocably places cash or other monetaryassets in a trust fund to pay interest on an outstanding debt. In such situations, the debt isalways recorded as paid when the trust fund is set up (i.e. removed from the books).21)______22)Hedging is one method of minimizing foreign exchange risk.22)______23)The present value of any bond payable issued between interest-payment dates willinclude any interest accrued since the last interest payment date.23)______24)Debt issue costs on long-term debt are expensed upon issue.24)______25)An increase in interest rates may make bond defeasance more attractive to the issuingcorporation.25)______26)A company issuing shares to comply with its debt covenants for cash wouldsimultaneously decrease (improve) its debt-to-assets and debt-to equity ratios.26)______MULTIPLE CHOICE.Choose the one alternative that best completes the statement or answers the question.27)Bonds payable (due 5 years from the balance sheet date) should be classified as follows:27)______A)A contingent liability.B)A current liability.C)A long-term liability.D)An element of the owners' equity.28)AB sold its 10-year bond at a discount. In reporting the bonds and the related discount ona balance sheet shortly thereafter, the discount should be:28)______A)Added to the bonds.B)Recorded as expense in the period of sale.C)Deducted from the bonds payable.D)Reported as a deferred charge.29)JMR bought 15 Z Corporation's $1,000 bonds for $15,270 total, on April 1, 2014, (fiveyears prior to maturity). The bonds pay 8% semi-annual interest on April 1 and October1. On December 31, 2014, the bonds had a market value of $14,950 (not a permanentdecline). JMR purchased these bonds at:29)______A)A discount plus accrued interest.B)Par plus accrued interest.C)A discount.D)Par.E)

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A premium.30)R Company was indebted to A Inc. at January 1, 2014. The note called for a $25,000payment to be made on December 31, 2014 and also on December 31, 2015. The notewas non-interest bearing yet 10% was the prevailing rate at the time the note was issued.What is the book value of the note on R's January 1, 2014 balance sheet (rounded)?30)______A)$50,000B)$47,727C)$38,962D)$47,500E)$43,38831)$5,000 (face value) of bonds with a book value of $4,300 was retired 4 years and 9months prior to maturity. The dollar amount (excluding interest) paid to retire the bondswas $4,700. The entry to record the retirement would include:31)______A)dr. bonds payable $4,700B)dr. bonds payable $5,000C)cr. unusual gain $400D)cr. cash $4,30032)ER issued for $2,060,000, two thousand of its 9%, $1,000 callable bonds. The bonds aredated January 1, 2019, and mature many years from now. Interest is payablesemi-annually on January 1 and July 1. The bonds can be called by the issuer at $102 onany interest payment date after December 31, 2023. The unamortized bond premium was$28,000 at December 31, 2021, and the market price of the bonds was $99 on this date.In its December 31, 2021, balance sheet, at what amount should GC report the carryingvalue of the bonds?32)______A)$1,980,000B)$2,032,000C)$2,040,000D)$2,028,000E)Cannot answer; the bond term is not given33)Gains or losses from the early extinguishment of debt, if material, should be:33)______A)recognized as an extraordinary item in the period of extinguishment.B)amortized over the life of the new issue.C)recognized in income as ordinary gains and losses or as unusual items.D)amortized over the remaining original life of the extinguished issue.34)All of the following are true with respect to sinking funds except:34)______A)A sinking fund may make the investment more attractive to investors.B)A sinking fund may be handled by a trustee or by the individual company.C)Once the sinking fund is established, the company has no more responsibility to thedebt.D)A sinking fund is a cash fund that is restricted for retiring the debt of a company.35)The rate of interest specified on the face of the debt is called the:35)______A)Yield interest rate.B)Stated interest rate.C)Effective interest rate.D)Market interest rate.36)The rate of interest used to discount the future cash payments on a debt to the cashequivalent borrowed is least likely to be described by which of the following terms:36)______A)Prevailing interest rate.B)Effective interest rate.C)Stated interest rate.D)Yield interest rate.37)KR issued bonds payable with a face amount of $200,000 and a maturity date ten yearsfrom date of issuance. If the bonds were issued at a premium, this indicated that:37)______

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