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WorksheetsINTACC THEORIES
Total questions: 145
Worksheet time: 2hrs 25mins
The most common type of liability is
One that comes into existence due to a loss contingency.
One that must be estimated.
One that comes into existence due to a gain contingency.
One to be paid in cash and for which the amount and timing are known.
Which is not a characteristic of a liability?
It represents a transfer of an economic resource.
It must be paid in cash.
It arises from present obligation to other entity.
It results from past event.
Classifying liabilities as either current or noncurrent helps creditors assess
Profitability
The relative risk of an entity's liabilities
The degree of an entity's liabilities
The amount of an entity's liabilities
Short-term obligations are reported as noncurrent if
The entity has a long-term line of credit.
The entity has tentative plan to issue long-term bonds payable.
The entity has the right at the end of reporting period to defer settlement of liability for at least twelve months after the end of reporting period.
The entity has the ability to refinance on a long-term basis.
Which situation would not require a noncurrent liability to be reported as current?
The long-term debit is callable by the creditor.
The creditor has the right to demand payment due to a contractual violation.
The long-term debt matures within the upcoming year.
All of these require the current classification.
Which of the following represents a liability?
The obligation to pay for goods that an entity expects to order from suppliers next year.
The obligation to provide goods that customers have ordered and paid for during the current year.
The obligation to pay interest on a five-year note that was issued the last day of the year.
The obligation to distribute an entity's own shares.
Which does not meet the definition of a liability?
The signing of an employment contract at fixed salary.
An obligation to provide goods or services in the future.
A note payable with no specified maturity date.
An obligation that is estimated in amount.
Which of the following is a characteristic of a current liability but not a noncurrent liability?
Unavoidable obligation
Present obligation to transfer of an economic resource.
Settlement is expected within the normal operating cycle or within 12 months, whichever is longer.
The obligating event has already occurred.
Which is not a characteristic of a liability?
Present obligation
Arises from past event
Results in a transfer of economic resource
Liquidation is reasonably expected to require use of current asset.
Which of the following is not an acceptable presentation of current liabilities?
Listing current liabilities in the order of maturity.
Listing current liabilities according to amount.
Offsetting current liabilities against current assets.
Showing current liabilities in the order of liquidation.
Among the short-term obligations at year-end are 90-day notes, renewable for another 90-day period. What is the classification of the notes payable?
Current liabilities
Deferred credits
Noncurrent liabilities
Intermediate debt
At year-end, an entity has 120-day note payable outstanding. The entity has followed the policy of replacing the note rather than repaying it over the last three years. The entity's treasurer says that this policy is expect to continue indefinitely, and the arrangement is acceptable to the bank to which the note was issued. What is the proper classification of the note in the year-end statement of financial position?
Dependent on the intention of management
Dependent on the actual liability to refinance
Current liability, unless specific refinancing criteria are met
Noncurrent liability
An entity had a note payable due next year. After the end of reporting period and before the issuance of the current year financial statements, the entity issued long-term bonds payable. Proceeds from the bonds were used to repay the note when due. How should the entity classify the note payable at current year-end?
Current liability with separate disclosure of the note refinancing
Current liability with no disclosure required
Noncurrent liability with separate disclosure of the note refinancing
Noncurrent liability with no separate disclosure required
An entity has a loan due for repayment in six months time but the entity had the right to defer settlement for two years later. In which section of the statement of financial position should this loan be presented?
Current liability
Current asset
Noncurrent liability
Noncurrent asset
At year-end, an entity classified a note payable as current liability. Under what condition could the entity reclassify the note payable from current to noncurrent?
If the entity had the intent and ability to reclassify the note before the end of reporting period.
If the entity had executed an agreement to refinance the note before issuance of the financial statements.
If the entity had the intent and ability to reclassify the note before the issuance of the financial statements.
If the entity had executed an agreement to refinance the note before the end of reporting period.
The most relevant measurement of liabilities at initial recognition should always reflect
The expectation of the management
Historical cost
The credit standing of the entity
The single most likely minimum possible amount
Which statement best describes the term liability
An excess of equity over current assets
Resources to meet financial commitments when due
The residual interest in the assets of the entity
A present obligation arising from past event
What is the relationship between present value and liability?
Present value is used to measure certain liabilities.
Present value is not used to measure liabilities.
Present value is used to measure all liabilities.
Present value is used to measure current liabilities.
If a long-term debt becomes callable due to the violation of a loan covenant
The debt may continue to be classified as noncurrent.
The debt should be reclassified as current.
Cash must be reserved to pay the debt.
Retained earnings must be restricted.
What is the classification of debt callable by the creditor?
Noncurrent liability
Current liability
Current liability if the creditor intends to call the debt within one year
Current liability if it is probable that the creditor will call the debt within one year
A department store received cash and issued a gift certificate redeemable in merchandise. When the gift certificate was issued
Deferred revenue account should be decreased
Deferred revenue account should be increased
Revenue account should be decreased
Revenue account should be increased
All else equal, a large increase in unearned revenue in the current period would be expected to produce what effect on revenue in a future period?
Large increase in future revenue because unearned revenue becomes revenue when earned.
Large decrease in future revenue because unearned revenue implies that less revenue has been earned which reduces future revenue.
No effect.
Large decrease in future revenue because unearned revenue indicates collection problems that will reduce net revenue in future period.
An entity received an advance payment for special order goods that are to be manufactured and delivered within six months. How should the advance payment be reported?
Deferred charge
Contra asset account
Current liability
Noncurrent liability
At year-end, an entity sold refundable merchandise coupons. The entity received a certain amount for each coupon redeemable next year for merchandise with a certain retail price. At year-end, how should the entity report these coupon transactions?
Unearned revenue at the merchandise's retail price
Unearned revenue at the cash received
Revenue at the merchandise's price
Revenue at the cash received.
How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the statement of financial position before the performance?
Revenue for the entire proceeds
Revenue to the extent of related costs expanded
Unearned revenue to the extent of related costs expanded
Unearned revenue for the entire proceeds
Magazine subscriptions collected in advance should be accounted for as
A contra account to magazine subscriptions receivable
Deferred revenue in the liability section
Deferred revenue in the shareholders' equity section
Magazine subscription revenue in the income statement in the period collected
Under a royalty agreement with another entity, an entity will receive royalties from the assignment of a patent for four years. The royalties received in advance should be reported as revenue
In the period received
In the period earned
Evenly over the life of the royalty agreement
At the date of the royalty agreement
An entity is a retailer of home appliances and offers a service contract on each appliance sold. Collections received for service contracts should be recorded as an increase in a
Deferred revenue account
Sales contracts receivable valuation account
Shareholders' equity valuation account
Service revenue account
An entity sells machines that include a three-year warranty. Service calls under the warranty are performed by an independent mechanic under a contract with the entity. Based on experience, warranty costs are expected to be incurred for each machine sold. When should the entity recognize the warranty costs?
Evenly over the life of the warranty
When the service calls are performed
When payments are made to the mechanic
When the machines are sold
At the end of the current year, an entity received an advance payment of 60% of the sales price for special order goods to be manufactured and delivered within five months. At the same time, the entity subcontracted for production of the special order goods at a price equal to 40% of the main contract price. What liabilities should be reported in the year-end statement of financial position?
None
Deferred revenue equal to 60% of the main contract price and payable to subcontractor equal to 40% of the main contract price
Deferred revenue equal to 60% of the main contract price and no payable to subcontractor
No deferred revenue but payable to subcontractor is reported at 40% of the main contract price
The cost of customer premium offer should be charged to expense
When the related product is sold.
When the premium offer expires.
Over the life cycle of the product.
When the premium is claimed.
The accounting concept that requires recognition of a liability for customer premium offer is
Time period
Prudence
Historical cost
Matching principle
Accounting for cost of incentive program for frequent customer purchases involves
Recording an expense and a liability each period.
Recording a liability and a reduction of revenue.
Recording an expense and an asset reduction.
Recording an expense and revenue each period.
Accounting for cost of customer incentive program
Requires probability estimation.
Follows the matching principle.
Is a loss contingency situation.
All of these are correct.
Providing a monetary rebate program
Is accounted for similarly to a premium offer
Creates an expense for the seller in the period of sale.
Creates a liability for the seller at the time of sale.
Is normally not recognized.
The accrual approach in accounting for warranty
Is required for income tax reporting.
Is frequently justified on the basis of expediency.
Finds the expense account being charged when the seller performs in compliance with the warranty.
Should be used whenever the warranty is an integral and inseparable part of the sale.
Which of the following best describes the accrual approach of accounting for warranty cost?
Expensed when paid
Expensed when warranty claims are certain
Expensed based on estimate in year of sale
Expensed when incurred
Which of the following best describes the expense as incurred approach of accounting for warranty cost
Expensed based on estimate in year of sale
Expensed when liability is accrued
Expensed when warranty claims are certain
Expensed when incurred
What is the classification of the estimated warranty liability in a three-year warranty?
Noncurrent
Current
Partly current and partly noncurrent
No need for disclosure
Which of the following is a characteristic of the accrual of warranty but not the sale of warranty?
Warranty liability
Warranty expense
Unearned warranty revenue
Warranty revenue
What is the accounting for the transaction price of a contract of sale with customer coupons for free product, discount or rebate?
Entirely as product sales revenue
Allocated to customer options equal to stand-alone selling and the balance to product sales
Allocated between product sales revenue and coupons based on stand-alone selling price
Entirely as coupon revenue
What is the stand-alone selling price of free product coupons?
Nothing
Fair value less cost of disposal
Selling price of free product
Selling price of free product adjusted for expected redemption
What is the stand-alone selling price of discount coupons?
Discount on customer purchases during the year
Discount on costumer future purchases
Discount on customer purchases during the year adjusted by expected redemption
Discount on customer future purchases adjusted by expected redemption
What is the stand-alone selling price of rebate coupons?
Discount on products sold during the current year
Discount on products sold during the current year adjusted by expected redemption
Cost of products sold
Fair value of rebate coupons
The nonredemption of gift certificates is called
Breakage
Forfeiture
Rebate
Waiver
Advance payments from customers represent
Liabilities until the product is provided.
A component of shareholder's equity.
Assets until the product is provided.
Revenue upon receipt of advance payment.
An entity sells appliances that include a three-year warranty. Service calls under warranty are performed by an independent mechanic under a contract with the entity. Based on experience, warranty costs are expected to be incurred for each machine sold. When should the entity recognize these warranty costs?
Evenly over the life of the warranty
When the service calls are performed
When payments are made to the mechanic
When the machines are sold
Which is the correct definition of a provision?
A possible obligation arising from past event
A liability of uncertain timing or amount
A liability which cannot be easily measured
An obligation to transfer funds to an entity
A provision shall be recognized as liability when
An entity has a present obligation as a result of past event.
It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
The amount of the obligation can be measured reliably.
All of these are required for the recognition of a provision as liability.
A legal obligation is an obligation that is derived from all of the following, except
Legislation
A contract
Other operation of law
An established pattern of past practice
An entity has an established pattern of practice or stated policy that has created valid expectation that it will accept certain responsibilities.
Constructive obligation
Legal obligation
Onerous obligation
Present obligation
It is an event that creates a legal or constructive obligation because the entity has no other realistic alternative but to settle obligation.
Obligating event
Past event
Subsequent event
Current event
An outflow of resources embodying economic benefits is regarded as "probable" when
The probability that the event will occur is greater than the probability that the event will not occur.
The probability that the event will not occur is greater than the probability that the event will occur.
The probability that the event will occur is the same as the probability that the event will not occur.
The probability that the event will occur is 90% likely.
Where range of possible outcomes, and each point in that range is as likely as any other, the range to be used is
Minimum
Maximum
Midpoint
Sum of the minimum and maximum
When the provision involves a large population of items, the estimate of the amount
Reflects the weighting of all possible outcomes by their associated probabilities.
Is determined as the individual most likely outcome.
May be the individual most likely outcome adjusted for the effect of other possible outcomes.
Midpoint if the possible outcomes.
When the provision arises from a single obligation, the estimate of the amount
Reflects the weighting of all possible outcomes.
Is determined as the individual most likely outcome.
Is the individual most likely outcome adjusted for the effect of other possible outcomes.
Midpoint of the possible outcomes.
The present value in a range of possible outcomes all discounted using the same rate would be
The most-likely outcome
The maximum outcome
The minimum outcome
The sum of probability-weighted present value
For which of the following should a provision be recognized?
Future operating losses
Obligations under insurance contracts
Reductions in fair value of financial instruments
Obligations for plant decommissioning costs
Provisions shall be recognized for all of the following, except
Cleaning-up costs of contaminated land when an oil entity has a published policy that it will undertake to clean up all contamination that it causes.
Restructuring costs after a binding sale agreement has been signed.
Rectification costs relating to defective products sold.
Future refurbishment costs due to introduction of a new computer system.
An entity is closing one of its operating divisions, and the conditions for making restructuring provision have been met. The closure will happen in the first quarter of the next financial year.
At the current year-end, the entity has announced the formal plan publicly and is calculating the restructuring provision.
Which of the following costs should be included in the restructuring provision?
Retraining staff continuing to be employed
Relocation costs relating to staff moving to other divisions
Contractually required costs of retiring staff being made redundant from the division being closed
Future operating losses of the division being closed up to the date of closure
An entity operates chemical plants. The published policies include a commitment to making good any damage caused to the environment by the operations. The entity has always honored this commitment. Which of the following scenarios would give rise to an environmental provision?
On past experience it is likely that a chemical spill which would result in having to pay fines and penalties will occur in the next year.
Recent research suggests there is a possibility that the entity's actions may damage surrounding wildlife.
The government has outlined plans for a new law requiring all environmental damage to be rectified.
A chemical spill from one of the entity's plants has caused harm to the surrounding area and wildlife.
An entity has been served a legal notice at year-end by the Department of Environment and Natural Resources to fit smoke detectors in its factory on or before middle of next year. The cost of fitting smoke detector can be measured reliably. How should the entity treat this in the financial statements at year-end?
Recognize a provision for the current year equal to the estimated amount.
Recognize a provision for the current year equal to one-half only of the estimated amount.
No provision is recognized at year-end because there is no present obligation for the future expenditure since the entity can avoid the future expenditure by changing the method of operations but disclosure is required.
Ignore the event.
Contingent liabilities will or will not become actual liabilities depending on
Whether probable and measurable.
The degree of uncertainty.
The present condition suggesting a liability.
The outcome of a future event.
A contingent liability shall be recognized when
Any lawsuit is actually filed against an entity.
It is certain that funds are available to pay the amount of the claim.
It is probable that a liability has been incurred but the amount cannot be reliably measured.
The amount of the loss can be reliably measured and it is probable prior to issuance of financial statements that a liability has been incurred.
How should a contingent liability be reported in the financial statements when it is reasonably possible?
As a deferred liability
As an accrued liability
As a disclosure only
As an account payable
Disclosure usually is not required for
Contingent gain that is probable and measurable.
Contingent loss that is possible and measurable.
Contingent loss that is probable and cannot be reliably measured.
Contingent loss that is remote and measurable.
Reporting in the financial statements is required for
Loss contingency that is probable and measurable.
Gain contingency that is probable and measurable.
Loss contingency that is possible and measurable.
All loss contingencies
A contingent liability
Definitely exists as a liability but the amount and due date are indeterminable.
Is accrued even though not reasonably estimated.
Is the result of a loss contingency.
Is not recognized in the financial statements.
A contingent liability is
An estimated liability.
An event which is not recognized because it is not probable that an outflow will be required or the amount cannot be reliably estimated.
A potential large liability.
A potential small liability.
An entity received notification of legal action. How should the probable and measurable loss be reported?
As a loss recorded in other comprehensive income
As a loss in the income statement and a contingent liability
As a loss in the income statement and a provision
In the notes to financial statements
A contingent liability
Has a most probable value of zero but may require a payment if a given future event occurs.
Definitely exists as a liability.
Is reported as current liability.
Is not disclosed in the financial statements.
Which of the following is not considered when evaluating whether or not record a liability for pending litigation?
Time period of the underlying cause of action
The type of litigation involved
The probability of an unfavorable outcome
The ability to make a reliable estimate of the loss
Contingent asset is usually recognized when
Realized
Occurrence is reasonably possible and the amount can be reliably measured
Occurrence is probable and measurable
The amount can be reliably measured
Which is the proper treatment of contingent asset?
An accrued account
Deferred income
An account receivable
A disclosure only
Gain contingency that is remote and measurable
Must be disclosed in a note to financial statements.
May be disclosed in a note to financial statements.
Must be reported in the body of the financial statements.
Should not be reported or disclosed.
Which is the proper way to report contingent asset, receipt of which is virtually certain?
As an asset
As unearned revenue
As a disclosure only
No disclosure and no accrual
What is the proper treatment of a patent infringement case of the plaintiff with probable favorable outcome and a measurable settlement?
No reporting is required at this time
Disclosure
A gain for the minimum settlement
A gain for the probable settlement
An entity did not record an accrual for a present obligation but disclose the nature of the obligation and the range of the loss. How likely is the loss?
Remote
Reasonably possible
Probable
Certain
The likelihood that the future event will or will not occur can be expressed by a range of outcome. Which range means that the future event occurring is very slight?
Probable
Reasonably possible
Certain
Remote
An expropriation of asset which is imminent and for which the loss can be reasonably estimated should be
Accrued
Disclosed
Accrued and disclosed
Ignored
A present obligation that is probable and for which the amount can be reliably estimated should
Not be accrued but disclosed.
Be accrued by debiting retained earnings and crediting a liability.
Be accrued by debiting an expense and crediting retained earnings.
Be accrued by debiting an expense and crediting a liability.
General or unspecified contingencies should
Be accrued in the financial statements and disclosed.
Not be accrued and need not be disclosed.
Not be accrued but should be disclosed.
Be accrued but need not be disclosed.
Most corporate bonds are
Mortgage bonds
Debenture bonds
Secured bonds
Collateral bonds
The method used to pay interest depends on whether the bonds are
Registered or coupon
Mortgaged or unmortgaged
Indebentured or debentured
Callable or redeemable
Zero-coupon bonds
Offer a return in the form of a deep discount off the face amount
Result in zero interest expense for the issuer
Result in zero interest revenue for the investor
Are reported as shareholders' equity by the issuer.
Bonds payable should be reported as noncurrent at
Face amount less any unamortized discount or plus any unamortized premium
Current market price
Face amount less any unamortized premium or plus any unamortized discount
Face amount less accrued interest since the last interest payment dates
In the amortization of discount on bonds payable
The interest expense is less with each successive interest payment
The total effective interest is equal to the amount of the discount plus the total cash interest paid
The carrying amount of the bonds payable declines eventually to face amount
The reduction in the discount in less with each successive interest payment
Bonds payable not designated at fair value through profit loss shall be measured initially at
Fair value
Fair value plus bond issue cost
Fair value minus bond issue cost
Face amount
The amortized cost of bonds payable means
Face amount plus premium on bonds payable
Face amount minus discount on bonds payable
Face amount minus bond issue cost
Face amount plus premium on bonds payable or minus discount on bonds payable
Which statement is true about the fair value option for measuring bonds payable?
The effective interest method of amortization must be used to calculate interest expense.
Discount or premium is disclosed in the notes to the financial statements.
The fair value of the bond and the principal obligation value must be disclosed.
If the fair value option is elected, it must be applied to all bonds.
An entity has bonds outstanding on which the market rate of interest has risen. The entity elected the fair value option. What will the entity report for the year?
Interest expense and a gain
Interest expense and a loss
A gain and no interest expense
A loss and no interest expense
To evaluate the risk and quality of an individual bond issue, investors rely heavily on
Bond ratings provided by investment houses
Newspaper articles
Bond interest payments
The audit report
Bonds that mature on a singe date are called
Term bonds
Serial bonds
Callable bonds
Convertible bonds
Bonds issued with scheduled maturities at various dates are called
Convertible bonds
Terms bonds
Serial bonds
Callable bonds
Debentures are
Unsecured bonds
Secured bonds
Ordinary bonds
Serial bonds
How would the amortization of premium on bonds payable affect the carrying amount of bonds payable and net income, respectively?
Increase and Decrease
Increase and Increase
Decrease and Decrease
Decrease and Increase
How would the amortization of discount on bonds payable affect the carrying amount of bonds payable and net income, respectively?
Increase and Decrease
Increase and Increase
Decrease and Decrease
Decrease and Increase
Unamortized bond discount should be reported as
Direct deduction from the face amount of the bond
Direct deduction from the present value of the bond
Deferred charge
Part of the bond issue cost
When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be
Decreased by accrued interest from June 1 to November 1
Decreased by accrued interest from May 1 to June 1
Increased by accrued interest from June 1 to November 1
Increased by accrued interest from May 1 to June 1
The issuer of bond sold at face amount with interest payable February 1 and August 1 should report
Liability for accrued interest
An addition to bonds payable
Increase in deferred charge
Contingent liability
A bond issued on June 1 has interest payment dates of April 1 and October 1. Bond interest expense for the current year ended December 31 is for a period of
Three months
Four months
Six months
Seven months
A bond was issued at a discount with a call provision. When the bond issuer exercised the call provision on an interest date, the amount of bond liability derecognized should have equaled the
Call price
Call price less unamortized discount
Face amount less unamortized discount
Face amount plus unamortized discount
When bonds are sold between interest dates, any accrued interest is credited to
Interest payable
Interest revenue
Interest receivable
Bonds payable
Which statement is true about accrued interest on bonds sold between interest dates?
The accrued interest is computed at the effective rate.
The accrued interest will be paid to the seller when the bonds mature.
The accrued interest is extra income to the buyer.
All of the statements are not true.
Which statement is true about a premium on bonds payable?
The premium on bonds payable is a contra shareholders equity account.
The premium on bonds payable is an account that appears only on the books of the investor.
The premium on bonds payable increases when amortization entries are made until maturity date.
The premium on bonds payable decreases when amortization entries are made until the balance reaches zero at maturity date.
The amortization of discount on bonds payable
Decreases the face amount of bonds payable.
Decreases the amount of interest expense.
Decreases the carrying amount of bonds payable.
Increases the carrying amount of bonds payable.
The carrying amount of a bond liability is
Call price of the bond plus bond discount or minus bond premium.
Face amount of the bond plus related premium or minus related discount.
Face amount of the bond plus related discount or minus related premium.
Maturity value of the bond plus related discount or minus related premium.
The proceeds from the issue of the bonds payable
Will always be equal to the face amount.
Will always be less than the face amount.
Will always be more than the face amount.
May be equal, more or less than the face amount depending on market interest rate.
An extinguishment of bonds payable originally issued at a premium is made by purchase of the bonds between interest dates. Which statement is true at the time of extinguishment?
Any costs of issuing the bonds payable must be amortized up to the purchase date.
The premium on bonds payable must be amortized up to the purchase date.
Interest mut be accrued from the last interest date to the purchase date.
All of these statements are true.
When bonds are retired prior to maturity with proceeds from a new bond issue, any gain or loss from the early extinguishment should be
Amortized over the remaining original life of the retired bond issue.
Amortized over the life of the new bond issue.
Recognized in retained earnings.
Recognized in income from continuing operations.
An entity neglected to amortize the discount on outstanding bonds payable. What is the effect of the failure to record discount amortization on interest expense and bond carrying amount, respectively?
Understated and understated
Understated and overstated
Overstated and overstated
Overstated and understated
An entity neglected to amortize the premium on outstanding bonds payable. What is the effect of the failure to record premium amortization on interest expense and bond carrying amount, respectively?
Understated and understated
Understated and overstated
Overstated and overstated
Overstated and understated
What is the interest rate written on the face of the bond?
Coupon rate
Nominal rate
Stated rate
Coupon rate, nominal rate or stated rate
What is the rate of interest actually incurred?
Market rate
Yield rate
Effective rate
Market, yield or effective rate
When the effective interest method is used, the periodic amortization would
Increase if the bonds were issued at a discount.
Decrease if the bonds were issued at a premium.
Increase if the bonds were issued at a premium.
Increase if the bonds were issued at either a discount or a premium.
A discount on bond payable is charged to interest expense
Equally over the life of the bond
Only in the year the bond is issued
Using the effective interest method
Only in the year the bond matures
Using the effective interest method of amortization, the interest expense is equal to
The stated rate of interest multiplied by the face amount of the bonds.
The market rate of interest multiplied by the face amount of the bonds.
The stated rate of interest multiplied by the beginning carrying amount of the bonds.
The market rate of interest multiplied by the beginning carrying amount of the bonds.
When interest expense for the current year is more than interest paid, the bonds were issued at
A discount
A premium
Face amount
An indeterminable amount
When interest expense for the current year is less than interest paid, the bonds were issued at
A discount
A premium
Face amount
An indeterminable amount
Bond issue cost
Is included in the measurement of the bonds payable measured at amortized cost.
Is amortized using the interest method over the life of the bonds payable.
Will effectively increase the market rate of interest.
All of these relate to bond issue cost.
Bonds usually sell at
Maturity amount
Face amount
Present value
Statistical expected value
Which statement is true about bonds payable?
The specific provisions of a bond issue are described in a document called bond indenture.
Periodic interest expense is the stated interest rate times the amount of bond outstanding.
Bonds will sell for a premium when the market rate of interest exceeds stated rate.
The initial sale price of bond represents the sum of all future cash outflows.
When bonds are sold at a premium at each subsequent interest payment date, the cash paid is
Less than the effective interest
Equal to the effective interest
Greater than the effective interest
More than if the bonds had been sold at a discount.
When bonds are sold at a discount, at each interest payment date, the interest expense
Increases
Decreases
Remains the same
Is equal to the change in carrying amount.
When bonds are sold at a premium, at each interest payment date, the interest expense
Remains constant
Is equal to the change in carrying amount.
Increases
Decreases
Interest expense is
The effective rate times the carrying amount of the bond during the interest period.
The stated rate times the face amount of the bond.
The effective rate times the face amount of the bond.
The stated interest rare times the carrying amount.
What is the effective interest rate of a bond measured at amortized cost?
The stated rate of the bond.
The interest rate currently charged by the entity or by others for similar bond.
The interest rate that exactly discounts estimated future cash payments through the expected life of the bond or when appropriate, a shorter period to the net carrying amount of the bond.
The basic risk-free interest rate that is derived from observable government bond prices.
For a bond issue which sells for less than face amount, the market rate of interest is
Dependent on rate stated in the bond
Equal to rate stated on the bond
Less than rate stated on the bond
Higher than rate stated on the bond
What is the market rate of interest for a bond issue which sells for more than face amount?
Less than rate stated on the bond
Equal to rate stated on the bond
Higher than rate stated on the bond
Independent of rate stated on the bond
If bonds are issued at a premium, this indicates that
The yield rate of interest exceeds the nominal rate
The nominal rate of interest exceeds the yield rate
The yield and nominal rates coincide
No necessary relationship exists between the two rates
Which statement is true for a bond maturing on a single date when the effective interest method of amortizing discount on bonds payable is used?
Interest expense as a percentage of the bond carrying amount varies from period to period
Interest expense increases each six-month period
Interest expense remains constant each six-month period
Nominal interest rate exceeds effective interest rate
The market price of a bond issued at a discount is the present value of the principal amount at the market rate of interest
Less the present value of all future interest payments at the market rate of interest.
Less the present value of all future interest payments at the rate of interest stated on the bond.
Plus the present value of all future interest payments at the market rate of interest.
Plus the present value of all future interest payments at the rate of interest stated on the bond.
In theory, the proceeds from the sale of a bond would be equal to
The face amount of the bond
The present value of the principal amount due at the end of the life of the bond plus the present value of the interest payments made during the life of the bond
The face amount of the bond plus the present value of the interest payments made during the life of the bond
The sum of the face amount of the bond and the periods interest payments
Under international accounting standard, the valuation method used for bonds payable is
Historical cost
Discounted cash flow valuation at current yield rate
Maturity amount
Discounted cash flow valuation at yield rate at issuance
How should an entity calculate the net proceeds to be received from bond issuance?
Discount the bonds at the stated rate of interest.
Discount the bonds at the market rate of interest.
Discount the bonds at that stated rate of interest and deduct bond issuance cost.
Discount the bonds at the market rate of interest and deduct bond issuance cost.
An entity issued a bond with a stated rate of interest that is less than the effective interest rate on the date of issuance. The bond was issued on one of the interest payment dates. What should the entity report on the first interest payment date?
An interest expense that is less than the cash payment made to bondholders.
An interest expense that is greater than the cash payment made to bondholders.
A debit to discount on bond payable.
A debit to premium on bond payable.
Which statement is incorrect where the expenditure required to settle a provision is expected to be reimbursed by another party?
The reimbursement shall be recognized only when it is virtually certain that the reimbursement would be received if the entity settles the obligation.
The amount of the reimbursement shall not exceed the amount of the provision.
In the income statement, the expense relating to the provision may be presented net of the reimbursement.
The reimbursement shall not be treated as separate asset but netted against the estimated liability for the provision.
An amortization schedule for bonds issued at a premium
Summarizes the amortization of the premium on bonds payable, a contra-asset account
Is reported in the statement of financial position
Is a schedule that reflects the changes in the bonds payable over the term maturity
All of these are correct
The proceeds from an issue of bonds with share warrants should not be allocated between the liability and equity components when
The fair value of the warrants is not readily available.
The exercise of the warrants within the next reporting period seems remote.
The warrants issued are nondetachable.
The proceeds should be allocated between liability and equity under all of these circumstances.
The major difference between convertible bonds and bonds issued with share warrants is that upon exercise of the warrants
The shares are held by the issuer for a certain period before they are issued to the warrant holder.
The holder has to pay a certain amount to obtain the shares.
The shares involved are restricted.
No share premium can be part of the transaction.
When convertible bond is not converted but paid at maturity
A gain or loss is recorded for the difference between the carrying amount of the bond and the present value of the cash flows.
The amount allocated to equity is recorded as a gain.
The amount allocated to equity is recorded as a loss.
The carrying amount of the bond equal to face amount is derecognized.
On March 31, Ashley, Inc.'s bondholders exchanged their convertible bonds for ordinary shares. The carrying amount of these bonds on Ashley's books was less than the market value but greater than the par value of the ordinary shares issued. Which of the following statements correctly states an effect of this conversion?
Shareholders' equity is increased.
Share premium is decreased.
Retained earnings is increased.
An extraordinary loss is recognized.
When debt is issued at a discount, interest expense over the term of debt equals the cash interest paid
Minus discount.
Minus discount minus par value.
Plus discount.
Plus discount plus par value.
A retail store received cash and issued gift certificates that are redeemable in merchandise. How would the deferred revenue account be affected by the redemption and no redemption of certificates, respectively?
Decrease and No effect
Decrease and Decrease
No effect and No effect
No effect and Decrease
A probable and measurable contingent asset should be
Recognized and disclosed.
Classified as an appropriation of retained earnings.
Disclosed but not recognized.
Neither recognized nor disclosed.
