Term
On December 31, Year 2, Case, Inc., had 300,000 shares of common stock issued and outstanding. Case issued a 10% stock dividend on July 1, Year 3. On October 1, Year 3, Case purchased 24,000 shares of its common stock for its treasury and recorded the purchase by the cost method. What number of shares should be used in computing basic earnings per share for the year ended December 31, Year 3?
306,000
309,000
324,000
330,000 |
|
Definition
|
|
Term
Jen Co. had 200,000 shares of common stock and 20,000 shares of 10%, $100 par value cumulative preferred stock. No dividends on common stock were declared during the year. Net income was $2,000,000. What was Jen’s basic earnings per share?
$9.00
$9.09
$10.00
$11.11 |
|
Definition
|
|
Term
A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be dilutive?
Cumulative 8%, $50 par preferred stock.
Ten percent convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock.
Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock.
Six percent, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock. |
|
Definition
| Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock. |
|
|
Term
n computing diluted earnings per share (DEPS), the equivalent number of shares of convertible preferred stock is added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is preferred as to dividends, which amount should be added as an adjustment to the numerator (earnings available to common shareholders)?
Annual preferred dividend.
Annual preferred dividend times (1 – the income tax rate).
Annual preferred dividend times the income tax rate.
Annual preferred dividend divided by the income tax rate. |
|
Definition
| Annual preferred dividend. |
|
|
Term
The following information pertains to Ceil Co., a company whose common stock trades in a public market:
Shares outstanding at 1/1
100,000
Stock dividend at 3/31
24,000
Stock issuance at 6/30
5,000
What is the weighted-average number of shares Ceil should use to calculate its basic earnings per share (BEPS) for the year ended December 31?
120,500
123,000
126,500
129,000 |
|
Definition
|
|
Term
During the current year, Comma Co. had outstanding: 25,000 shares of common stock; 8,000 shares of $20 par, 10% cumulative preferred stock; and 3,000 bonds that are $1,000 par and 9% convertible. The bonds were originally issued at par, and each bond was convertible into 10 shares of common stock. During the year, net income was $200,000, no dividends were declared, and the tax rate was 30%. What amount was Comma’s basic earnings per share for the current year?
$6.78
$7.36
$7.07
$8.00 |
|
Definition
|
|
Term
In computing the weighted-average number of shares outstanding during the year, which of the following midyear events must be treated as if it had occurred at the beginning of the year?
Declaration and distribution of a stock dividend.
Purchase of treasury stock.
Sale of additional common stock.
Sale of convertible preferred stock. |
|
Definition
| Declaration and distribution of a stock dividend. |
|
|
Term
The weighted-average number of shares used to calculate Pubco’s BEPS amounts for the first quarter is
444,000
372,000
344,000
300,000 |
|
Definition
|
|
Term
If net income for Year 8 is $350,000, Peters should report DEPS as
$3.20
$2.95
$2.92
$2.75 |
|
Definition
|
|
Term
Earnings per share disclosures are required for
Entities with complex capital structures only.
Entities that change their capital structures during the reporting period.
Public entities only.
Public and private entities. |
|
Definition
|
|
Term
Earnings-per-share data must be reported on the face of the income statement for Income from Continuing Operations Cumulative Effect of a Change in Accounting Principle
Yes Yes
Yes No
No No
No Yes |
|
Definition
|
|
Term
In determining diluted earnings per share for a complex capital structure, which of the following is a potential common stock?
Nonconvertible
Preferred Stock
Stock Option
Yes
No
Yes
Yes
No
Yes
No
No |
|
Definition
|
|
Term
The if-converted method of computing diluted earnings per share (DEPS) amounts assumes conversion of convertible securities at the
Beginning of the earliest period reported (or at time of issuance, if later).
Beginning of the earliest period reported (regardless of time of issuance).
Middle of the earliest period reported (regardless of time of issuance).
End of the earliest period reported (regardless of time of issuance) |
|
Definition
| Beginning of the earliest period reported (or at time of issuance, if later). |
|
|
Term
In determining earnings per share, interest expense, net of applicable income taxes, on dilutive convertible debt should be
Added back to net income for basic earnings per share and ignored for diluted earnings per share.
Added back to net income for both basic and diluted earnings per share.
Deducted from net income for diluted earnings per share.
Added back to net income for diluted earnings per share. |
|
Definition
| Added back to net income for diluted earnings per share. |
|
|
Term
Collins Company reported net income of $350,000 for the year. The company had 10,000 shares of $100 par value, noncumulative, 6% preferred stock and 100,000 shares of $10 par value common stock outstanding. Also, 5,000 shares of common stock were in treasury during the year. Collins declared and paid all preferred dividends as well as a $1 per share dividend on common stock. Collins Company’s basic earnings per share of common stock for the year was
$3.50
$3.33
$2.90
$2.76 |
|
Definition
|
|
Term
Ray Company has 530,000 common shares outstanding at year end. At December 31, for basic-earnings-per-share purposes, Ray computed its weighted, average number of shares as 500,000. Prior to issuing its annual financial statements, but after year end, Ray split its stock 2 for 1. Ray’s weighted-average number of shares to be used for computing annual basic earnings per share is
500,000
530,000
1,000,000
1,060,000 |
|
Definition
|
|
Term
On January 1, Esther Pharmaceuticals had a balance of 10,000 shares of common stock outstanding. On June 1, the company issued an additional 2,000 shares of common stock for cash. A total of 5,000 shares of cumulative 6%, $100 par, nonconvertible preferred stock was outstanding all year. Esther’s net income was $120,000 for the year. The earnings per share for the year were
$7.50
$8.06
$10.00
$10.75 |
|
Definition
|
|
Term
Roy Company had 120,000 common shares and 100,000 preferred shares outstanding at the close of the prior year. During the current year Roy repurchased 12,000 common shares on March 1, sold 30,000 common shares on June 1, and sold an additional 60,000 common shares on November 1. No change in preferred shares outstanding occurred during the year. The number of shares of stock outstanding to be used in the calculation of basic earnings per share at the end of the current year is
100,000
137,500
198,000
298,000 |
|
Definition
|
|
Term
Which one of the following would most likely cause basic earnings per share to increase?
Issuing stock options when the option price is greater than the market price.
Postponing the declaration of dividends.
Selling shares of stock at a price greater than the par value.
Purchasing treasury stock. |
|
Definition
| Purchasing treasury stock. |
|
|
Term
A company had the following outstanding shares as of January 1, Year 2:
Preferred stock,
$60 par, 4%, cumulative
10,000 shares
Common stock, $3 par
50,000 shares
On April 1, Year 2, the company sold 8,000 shares of previously unissued common stock. No dividends were in arrears on January 1, Year 2, and no dividends were declared or paid during Year 2. Net income for Year 2 totaled $236,000. What amount is basic earnings per share (BEPS) for the year ended December 31, Year 2?
$3.66
$3.79
$4.07
$4.21 |
|
Definition
|
|
Term
Ashe Corp. was organized on January 1, with authorized capital of 100,000 shares of $20 par value common stock. During the year, Ashe had the following transactions affecting equity:
January 10
--
issued 25,000 shares at $22 a share
March 25
--
issued 1,000 shares for legal services when the fair value was $24 a share
September 30
--
issued 5,000 shares for a tract of land when the fair value was $26 a share
What amount should Ashe report for additional paid-in capital at December 31?
$84,000
$80,000
$54,000
$50,000 |
|
Definition
|
|
Term
Ten thousand shares of $10 par value common stock were issued initially at $15 per share. Subsequently, 1,000 of these shares were purchased as treasury stock at $13 per share. The cost method of accounting for treasury stock is used. What is the effect of the purchase of the treasury stock on the amount reported in the balance sheet on each of the following?
Additional
Total
Paid-in Capital
Equity
No effect
No effect
No effect
Decrease
Decrease
No effect
Decrease
Decrease |
|
Definition
|
|
Term
In Pugh’s December 31 statement of equity, the par value of the issued common stock should be
$550,000
$530,000
$275,000
$265,000 |
|
Definition
|
|
Term
At its date of incorporation, Glean, Inc., issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Glean acquired 30,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. Glean had made no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts?
Retained
Additional
Earnings
Paid-in Capital
Decrease
Decrease
No effect
Decrease
Decrease
No effect
No effect
No effect |
|
Definition
|
|
Term
Treasury stock was acquired for cash at a price in excess of its par value. The treasury stock was subsequently reissued for cash at a price in excess of its acquisition price. Assuming that the cost method of accounting for treasury stock transactions is used, what is the effect on retained earnings?
Acquisition of
Reissuance of
Treasury Stock
Treasury Stock
No effect
Increase
No effect
No effect
Increase
Decrease
Decrease
Increase |
|
Definition
|
|
Term
An entity declared a cash dividend on its common stock in December Year 1, payable in January Year 2. Retained earnings will
Increase on the date of declaration.
Not be affected on the date of declaration.
Not be affected on the date of payment.
Decrease on the date of payment. |
|
Definition
| Not be affected on the date of payment. |
|
|
Term
A corporation issuing stock should charge retained earnings for the fair value of the shares issued in a(n)
Employee stock bonus.
Purchase of the net assets of another entity.
10% stock dividend.
2-for-1 stock split. |
|
Definition
|
|
Term
On May 1, Rhud Corp. declared and issued a 10% common stock dividend. Prior to this dividend, Rhud had 100,000 shares of $1 par value common stock issued and outstanding. The fair value of Rhud’s common stock was $30 per share on May 1. As a result of the stock dividend, Rhud’s total equity
Increased by $300,000.
Decreased by $300,000.
Decreased by $10,000.
Did not change. |
|
Definition
|
|
Term
Cyan Corp. issued 20,000 shares of $5 par common stock at $10 per share. On December 31, Year 3, Cyan’s retained earnings were $300,000. In March Year 4, Cyan reacquired 5,000 shares of its common stock at $20 per share. In June Year 4, Cyan sold 1,000 of these shares to its corporate officers for $25 per share. Cyan uses the cost method to record treasury stock. Net income for the year ended December 31, Year 4 was $60,000. At December 31, Year 4, what amount should Cyan report as retained earnings?
$360,000
$365,000
$375,000
$380,000 |
|
Definition
|
|
Term
During the current year, Onal Co. purchased 10,000 shares of its own stock at $7 per share. The stock was originally issued at $6. The firm sold 5,000 of the treasury shares for $10 per share. The firm uses the cost method to account for treasury stock. What amount should Onal report in its income statement for these transactions?
$0
$5,000 gain.
$10,000 loss.
$15,000 gain. |
|
Definition
|
|
Term
For the last 10 years, Woody Co. has owned cumulative preferred stock issued by Hadley, Inc. During Year 2, Hadley declared and paid both the Year 2 dividend and the Year 1 dividend in arrears. How should Woody report the Year 1 dividend in arrears that was received in Year 2?
As a reduction in cumulative preferred dividends receivable.
As a retroactive change of the prior-period financial statements.
Include, net of income taxes, after Year 2 income from continuing operations.
Include in Year 2 income from continuing operations. |
|
Definition
| Include in Year 2 income from continuing operations. |
|
|
Term
Ray Corp. declared a 5% stock dividend on its 10,000 issued and outstanding shares of $2 par value common stock, which had a fair value of $5 per share before the stock dividend was declared. This stock dividend was distributed 60 days after the declaration date. By what amount did Ray’s current liabilities increase as a result of the stock dividend declaration?
$0
$500
$1,000
$2,500 |
|
Definition
|
|
Term
On July 1, Alto Corp. split its common stock 5-for-1 when the market value was $100 per share. Prior to the split, Alto had 10,000 shares of $10 par value common stock issued and outstanding. After the split, the par value of the stock
Remained at $10.
Was reduced to $8.
Was reduced to $5.
Was reduced to $2. |
|
Definition
|
|
Term
On February 1, Hyde Corp., a newly formed company, had the following stock issued and outstanding:
Common stock, no par, $1 stated value, 10,000 shares originally issued for $15 per share
Preferred stock, $10 par value, 3,000 shares originally issued for $25 per share
Hyde’s February 1 statement of equity should report
Additional
Common
Preferred
Paid-in
Stock
Stock
Capital
$150,000
$30,000
$45,000
$150,000
$75,000
$0
$10,000
$75,000
$140,000
$10,000
$30,000
$185,000 |
|
Definition
|
|
Term
During the prior year, Brad Co. issued 5,000 shares of $100 par value convertible preferred stock for $110 per share. One share of preferred stock can be converted into three shares of Brad’s $25 par-value common stock at the option of the preferred shareholder. On December 31 of the current year, when the market value of the common stock was $40 per share, all of the preferred stock was converted. What amount should Brad credit to common stock and to additional paid-in capital -- common stock as a result of the conversion?
Additional
Common Stock
Paid-in Capital
$375,000
$175,000
$375,000
$225,000
$500,000
$50,000
$600,000
$0 |
|
Definition
|
|
Term
Grid Corp. acquired some of its own common shares at a price greater than both their par value and original issue price but less than their book value. Grid uses the cost method of accounting for treasury stock. What is the impact of this acquisition on total equity and the book value per common share?
Book Value
Total Equity
per Share
Increase
Increase
Increase
Decrease
Decrease
Increase
Decrease
Decrease |
|
Definition
|
|
Term
Bal Corp. declared a $25,000 cash dividend on May 8 to shareholders of record on May 23, payable on June 3. As a result of this cash dividend, working capital
Was not affected.
Decreased on June 3.
Decreased on May 23.
Decreased on May 8. |
|
Definition
|
|
Term
When an entity declares a cash dividend, retained earnings is decreased by the amount of the dividend on the date of
Declaration.
Record.
Payment.
Declaration or record, whichever is earlier. |
|
Definition
|
|
Term
The format displayed is used by Gee, Inc., for its Year 4 statement of changes in equity. When both the 100% and the 5% stock dividends were declared and distributed, Gee’s common stock was selling for more than its $1 par value.
Common
Additional
Stock
Paid-In
Retained
$1 par
Capital
Earnings
Balance at 1/1/Year 4
$90,000
$800,000
$175,000
Additions and deductions:
100% stock dividend
5% stock dividend
Balance at 12/31/Year 4
How would the 100% stock dividend affect the additional paid-in capital and retained earnings amounts reported in Gee’s Year 4 statement of changes in equity?
Additional
Paid-in Capital
Retained Earnings
Increase
Increase
Increase
Decrease
No change
Increase
No change
Decrease |
|
Definition
|
|
Term
The format displayed is used by Gee, Inc., for its Year 4 statement of changes in equity. When both the 100% and the 5% stock dividends were declared and distributed, Gee’s common stock was selling for more than its $1 par value.
Common
Additional
Stock
Paid-In
Retained
$1 par
Capital
Earnings
Balance at 1/1/Year 4
$90,000
$800,000
$175,000
Additions and deductions:
100% stock dividend
5% stock dividend
Balance at 12/31/Year 4
How would the 5% stock dividend affect the additional paid-in capital and retained earnings amounts reported in Gee’s Year 4 statement of equity?
Additional
Paid-in Capital
Retained Earnings
Increase
Decrease
Increase
Increase
No change
Decrease
No change
Increase |
|
Definition
|
|
Term
What type of bonds mature in installments?
Debenture.
Term.
Variable rate.
Serial. |
|
Definition
|
|
Term
The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest
Less the present value of all future interest payments at the market (effective) 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 (effective) rate of interest.
Plus the present value of all future interest payments at the rate of interest stated on the bond |
|
Definition
| Plus the present value of all future interest payments at the market (effective) rate of interest. |
|
|
Term
Album Co. issued 10-year $200,000 debenture bonds on January 2. The bonds pay interest semiannually. Album uses the effective interest method to amortize bond premiums and discounts. The carrying amount of the bonds on January 2 was $185,953. A journal entry was recorded for the first interest payment on June 30, debiting interest expense for $13,016 and crediting cash for $12,000. What is the annual stated interest rate for the debenture bonds?
6%
7%
12%
14% |
|
Definition
|
|
Term
A company issues bonds at 98, with a maturity value of $50,000. The entry the company uses to record the original issue should include which of the following?
A debit to bond discount of $1,000.
A credit to bonds payable of $49,000.
A credit to bond premium of $1,000.
A debit to bonds payable of $50,000. |
|
Definition
| A debit to bond discount of $1,000. |
|
|
Term
On January 31, Year 4, Beau Corp. issued $300,000 maturity value, 12% bonds for $300,000 cash. The bonds are dated December 31, Year 3, and mature on December 31, Year 13. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should Beau report in its September 30, Year 4, balance sheet?
$27,000
$24,000
$18,000
$9,000 |
|
Definition
|
|
Term
Webb Co. has outstanding a 7%, 10-year bond with a $100,000 face amount. The bond was originally sold to yield 6% annual interest. Webb uses the effective-interest method to amortize bond premium. On June 30, Year 3, the carrying amount of the outstanding bond was $105,000. What amount of unamortized premium on the bond should Webb report in its June 30, Year 4, balance sheet?
$1,050
$3,950
$4,300
$4,500 |
|
Definition
|
|
Term
On January 2, Vole Co. issued bonds with a face value of $480,000 at a discount to yield 10%. The bonds pay interest semiannually. On June 30, Vole paid bond interest of $14,400. After Vole recorded amortization of the bond discount of $3,600, the bonds had a carrying amount of $363,600. What amount did Vole receive upon issuing the bonds?
$360,000
$367,200
$476,400
$480,000 |
|
Definition
|
|
Term
During Year 4, Eddy Corp. incurred the following costs in connection with the issuance of bonds:
Printing and engraving
$ 30,000
Legal fees
160,000
Fees paid to independent accountants
for registration information
20,000
Commissions paid to underwriter
300,000
What amount should be recorded as a deferred charge to be amortized over the term of the bonds?
$510,000
$480,000
$300,000
$210,000 |
|
Definition
|
|
Term
On March 1, Year 1, Somar Co. issued 20-year bonds at a discount. By September 1, Year 6, the bonds were quoted at 106 when Somar exercised its right to retire the bonds at 105. How should Somar report the bond retirement on its Year 6 income statement?
A gain in continuing operations.
A loss in continuing operations.
An extraordinary gain.
An extraordinary loss. |
|
Definition
| A loss in continuing operations. |
|
|
Term
On June 2, Year 1, Tory, Inc., issued $500,000 of 10%, 15-year bonds at par. Interest is payable semiannually on June 1 and December 1. Bond issue costs were $6,000, and Tory uses the straight-line method of amortizing bond issue costs. On June 2, Year 6, Tory retired half of the bonds at 98. What is the net carrying amount that Tory should use in computing the gain or loss on retirement of debt?
$250,000
$248,000
$247,000
$246,000 |
|
Definition
|
|
Term
On January 1, Year 1, Fox Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. These bonds were to mature on January 1, Year 11, but were callable at 101 anytime after December 31, Year 4. Interest was payable semiannually on July 1 and January 1. On July 1, Year 6, Fox called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Fox’s gain or loss in Year 6 on this early extinguishment of debt was a
$30,000 gain.
$22,000 gain.
$10,000 loss.
$8,000 gain. |
|
Definition
|
|
Term
On January 1, Year 2, Pine Corp. sold 200 of its 8%, $1,000 bonds at 97 plus accrued interest. The bonds are dated October 1, Year 1, and mature on October 1, Year 11. Interest is payable semiannually on April 1 and October 1. Accrued interest for the period October 1, Year 1, to January 1, Year 2, amounted to $4,000. On January 1, Year 2, Pine should report bonds payable, net of discount, at
$196,000
$194,150
$194,000
$190,150 |
|
Definition
|
|
Term
When the effective interest method of amortization is used for bonds issued at a premium, the amount of interest payable for an interest period is calculated by multiplying the
Face value of the bonds at the beginning of the period by the contractual interest rate.
Face value of the bonds at the beginning of the period by the effective interest rates.
Carrying value of the bonds at the beginning of the period by the contractual interest rate.
Carrying value of the bonds at the beginning of the period by the effective interest rates. |
|
Definition
| Face value of the bonds at the beginning of the period by the contractual interest rate. |
|
|
Term
Which of the following is generally associated with the terms of convertible debt securities?
An interest rate that is lower than nonconvertible debt.
An initial conversion price that is less than the market value of the common stock at time of issuance.
A noncallable feature.
A feature to subordinate the security to nonconvertible debt. |
|
Definition
| An interest rate that is lower than nonconvertible debt. |
|
|
Term
A 5-year term bond was issued on January 1, Year 1, at a discount. The carrying amount of the bond at December 31, Year 2, will be
Higher than the carrying amount at December 31, Year 1.
Lower than the carrying amount at December 31, Year 1.
The same as the carrying amount at January 1, Year 1.
Higher than the carrying amount at December 31, Year 3. |
|
Definition
| Higher than the carrying amount at December 31, Year 1. |
|
|
Term
A company 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 company 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 the unamortized bond discount.
A debit to the unamortized bond premium. |
|
Definition
| An interest expense that is greater than the cash payment made to bondholders. |
|
|
Term
On March 1, Clark Co. issued bonds at a discount. Clark incorrectly used the straight-line method instead of the effective-interest method to amortize the discount. How were the following amounts affected by the error as of December 31?
Bond Carrying
Retained
Amount
Earnings
Overstated
Overstated
Understated
Understated
Overstated
Understated
Understated
Overstated |
|
Definition
|
|
Term
How is the carrying amount of a bond payable affected by amortization of the following?
Discount
Premium
Increase
Increase
Decrease
Decrease
Increase
Decrease
Decrease
Increase |
|
Definition
|
|
Term
On March 1, Year 1, Cain Corp. issued, at 103 plus accrued interest, 200 of its 9%, $1,000 bonds. The bonds are dated January 1, Year 1, and mature on January 1, Year 11. Interest is payable semiannually on January 1 and July 1. Cain paid bond issue costs of $10,000. Cain should realize net cash receipts from the bond issuance of
$216,000
$209,000
$206,000
$199,000 |
|
Definition
|
|
Term
On January 1, Year 13, Hart, Inc., redeemed its 15-year bonds of $500,000 par value for 102. They were originally issued on January 1, Year 1, at 98 with a maturity date of January 1, Year 16. The bond issue costs relating to this transaction were $20,000. Hart properly amortizes discounts, premiums, and bond issue costs using the straight-line method. What amount of loss should Hart recognize on the redemption of these bonds?
$16,000
$12,000
$10,000
$0 |
|
Definition
|
|
Term
Nola Co. has a portfolio of marketable equity securities that it does not intend to sell in the near term. How should Nola classify these securities, and how should it report unrealized gains and losses from these securities?
Classify as
Report in
Trading securities
A component of income from continuing operations
Available-for-sale securities
Other comprehensive income (OCI)
Trading securities
Other comprehensive income (OCI)
Available-for-sale securities
A component of income from continuing operations |
|
Definition
Available-for-sale securities
Other comprehensive income (OCI) |
|
|
Term
An available-for-sale debt security was purchased on September 1, Year 4, between interest dates. The next interest payment date was February 1, Year 5. Because of a permanent decline in fair value, the cost of the debt security substantially exceeded its fair value at December 31, Year 4. On the balance sheet at December 31, Year 4, the debt security should be carried at
Fair value plus the accrued interest paid.
Fair value.
Cost plus the accrued interest paid.
Cost. |
|
Definition
|
|
Term
Sun Corp. had investments in trading securities costing $650,000. On June 30, Year 2, Sun decided to hold the investments indefinitely and accordingly reclassified them as available-for-sale on that date. The investments’ fair value was $575,000 at December 31, Year 1, $530,000 at June 30, Year 2, and $490,000 at December 31, Year 2.
What amount of loss should Sun report in its Year 2 earnings?
$45,000
$85,000
$120,000
$160,000 |
|
Definition
|
|
Term
When the fair value of an investment in debt securities exceeds its carrying amount, how should each of the following assets be reported at the end of the year?
Held-to-Maturity
Available-for-Sale
Securities
Securities
Fair value
Carrying amount
Carrying amount
Fair value
Carrying amount
Carrying amount
Fair value
Fair value |
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Definition
Carrying amount
Fair value |
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Term
On both December 31, Year 1, and December 31, Year 2, Kopp Co.’s only available-for-sale security had the same fair value, which was below amortized cost. Kopp considered the decline in value to be temporary in Year 1 but other than temporary in Year 2. At the end of both years the security was classified as a noncurrent asset. Kopp could not exercise significant influence over the investee, and the security was not the hedged item in a fair value hedge. What should be the effects of the determination that the decline was other than temporary on Kopp’s Year 2 net noncurrent assets and net income?
No effect on both net noncurrent assets and net income.
No effect on net noncurrent assets and decrease in net income.
Decrease in net noncurrent assets and no effect on net income.
Decrease in both net noncurrent assets and net income. |
|
Definition
| No effect on net noncurrent assets and decrease in net income. |
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|
Term
In Year 1, a company reported in other comprehensive income an unrealized holding loss on an investment in available-for-sale securities. During Year 2, these securities were sold at a loss equal to the unrealized loss previously recognized. The reclassification adjustment should include which of the following?
The unrealized loss should be credited to the investment account.
The unrealized loss should be credited to the other comprehensive income account.
The unrealized loss should be debited to the other comprehensive income account.
The unrealized loss should be credited to beginning retained earnings. |
|
Definition
| The unrealized loss should be credited to the other comprehensive income account. |
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Term
In Year 5, Lee Co. acquired, at a premium, Enfield, Inc., 10-year bonds as a long-term investment. At December 31, Year 6, Enfield’s bonds were quoted at a small discount. Which of the following situations is the most likely cause of the decline in the bonds’ fair value?
Enfield issued a stock dividend.
Enfield is expected to call the bonds at a premium, which is less than Lee’s carrying amount.
Interest rates have declined since Lee purchased the bonds.
Interest rates have increased since Lee purchased the bonds. |
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Definition
| Interest rates have increased since Lee purchased the bonds. |
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|
Term
On January 1, Year 1, Purl Corp. purchased as a long-term investment $500,000 face amount of Shaw, Inc.’s 8% bonds for $456,200. The bonds were purchased to yield 10% interest. The bonds mature on January 1, Year 6, and pay interest annually on January 1. Purl uses the effective interest method of amortization. What amount (rounded to nearest $100) should Purl report on its December 31, Year 2, balance sheet for these held-to-maturity bonds?
$468,000
$466,200
$461,800
$456,200 |
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Definition
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Term
An investor uses the equity method to account for an investment in common stock. After the date of acquisition, the investment account of the investor is
Not affected by its share of the earnings or losses of the investee.
Not affected by its share of the earnings of the investee, but is decreased by its share of the losses of the investee.
Increased by its share of the earnings of the investee, but is not affected by its share of the losses of the investee.
Increased by its share of the earnings of the investee, and is decreased by its share of the losses of the investee. |
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Definition
| Increased by its share of the earnings of the investee, and is decreased by its share of the losses of the investee. |
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|
Term
On January 1, Point, Inc., purchased 10% of Iona Co.’s common stock. Point purchased additional shares bringing its ownership up to 40% of Iona’s common stock outstanding on August 1. During October, Iona declared and paid a cash dividend on all of its outstanding common stock. How much income from the Iona investment should Point’s income statement report?
10% of Iona’s income for January 1 to July 31 plus 40% of Iona’s income for August 1 to December 31.
40% of Iona’s income for August 1 to December 31 only.
40% of Iona’s income.
Amount equal to dividends received from Iona. |
|
Definition
| 10% of Iona’s income for January 1 to July 31 plus 40% of Iona’s income for August 1 to December 31. |
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|
Term
When an investor uses the equity method to account for investments in common stock, the investment account will be increased when the investor recognizes
A proportionate interest in the net income of the investee.
A cash dividend received from the investee.
Periodic amortization of the goodwill related to the purchase.
Depreciation related to the excess of fair value over the carrying amount of the investee’s depreciable assets at the date of purchase by the investor. |
|
Definition
| A proportionate interest in the net income of the investee. |
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|
Term
Larkin Co. has owned 25% of the common stock of Devon Co. for a number of years and has the ability to exercise significant influence over Devon. The following information relates to Larkin’s investment in Devon during the most recent year:
Carrying amount of Larkin’s investment in Devon at the beginning of the year
$200,000
Net income of Devon for the year
600,000
Total dividends paid to Devon’s stockholders during the year
400,000
What is the carrying amount of Larkin’s investment in Devon at year end?
$100,000
$200,000
$250,000
$350,000 |
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Definition
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|
Term
An investor purchased a bond as a long-term investment on January 2. The investor’s carrying amount at the end of the first year will be highest if the bond is purchased at a
Discount and amortized by the straight-line method.
Discount and amortized by the effective interest method.
Premium and amortized by the straight-line method.
Premium and amortized by the effective interest method. |
|
Definition
| Premium and amortized by the effective interest method. |
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|
Term
On January 2, Year 4, Early Co. purchased as a short-term investment a $1 million face amount Thomas Co. 8% bond for $910,000 to yield 10%. The bonds mature on January 1, Year 11, and pay interest annually on January 1. On December 31, Year 4, the bonds had a fair value of $945,000. On February 13, Year 5, Early sold the bonds for $920,000. In its December 31, Year 4, income statement, what amount should Early report in earnings as a gain or loss on the bond, if it elected the fair value option (FVO) on January 2, Year 4?
$35,000
$24,000
$(1,000)
$0 |
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Definition
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|
Term
On July 1, Year 1, Cody Co. paid $1,198,000 for 10%, 20-year bonds with a face amount of $1 million. Interest is paid on December 31 and June 30. The bonds were purchased to yield 8%. Cody uses the effective interest rate method to recognize interest income from this investment. The bonds are properly classified as held-to-maturity. What should be reported as the carrying amount of the bonds in Cody’s December 31, Year 1, balance sheet?
$1,207,900
$1,198,000
$1,195,920
$1,193,050 |
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Definition
|
|
Term
The following information was extracted from Gil Co.’s December 31 balance sheet:
Noncurrent assets:
Available-for-sale securities (carried at fair value)
$96,450
Equity:
Accumulated other comprehensive income (OCI)
Unrealized gains and losses on available-for-sale securities
(19,800)
Historical cost of the available-for-sale securities was
$63,595
$76,650
$96,450
$116,250 |
|
Definition
|
|
Term
When the fair value of an investment in debt securities exceeds its amortized cost, how should each of the following debt securities be reported at the end of the year, given no election of the fair value option?
Debt Securities Classified As
Held-to-Maturity
Available-for-Sale
Amortized cost
Amortized cost
Amortized cost
Fair value
Fair value
Fair value
Fair value
Amortized cost |
|
Definition
|
|
Term
Securities held primarily for sale in the near term to generate income on short-term price differences are known as
Available-for-sale securities.
Equity securities.
Held-to-maturity securities.
Trading securities. |
|
Definition
|
|
Term
Unrealized gains and losses on trading securities should be presented in the
Statement of financial position.
Income statement.
Notes to the financial statements.
Statement of retained earnings. |
|
Definition
|
|
Term
An investor purchased a bond classified as a long-term investment between interest dates at a discount. At the purchase date, the carrying amount of the bond is more than the
Cash Paid
Face Amount
to Seller
of Bond
No
Yes
No
No
Yes
No
Yes
Yes |
|
Definition
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|
Term
Under IFRS, all of the following are conditions that must be met for recognizing revenue from a sale of goods, except
Transaction costs can be reliably measured.
The entity has transferred the significant risks and rewards of ownership.
The entity has received the full consideration from the sale.
The amount of the transaction can be reliably measured. |
|
Definition
| The entity has received the full consideration from the sale. |
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|
Term
Which of the following is a difference between IFRS and U.S. GAAP regarding revenue recognition?
IFRS allow both the percentage-of-completion and completed contract methods.
IFRS have different requirements for a sale of goods or performance of a service.
IFRS contain more detailed requirements than U.S. GAAP.
Both sets of standards use the same requirements. |
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Definition
| IFRS have different requirements for a sale of goods or performance of a service. |
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Term
Under a royalty agreement with another entity, a company will receive royalties from the assignment of a patent for 3 years. The royalties received should be reported as revenue
At the date of the royalty agreement.
In the period earned.
In the period received.
Evenly over the life of the royalty agreement. |
|
Definition
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|
Term
Revenues of an entity are usually measured by the exchange values of the assets or liabilities involved. Recognition of revenue does not occur until
The revenue is realizable.
The revenue is realized and earned.
Products or services are exchanged for cash or claims to cash.
The entity has substantially accomplished what it agreed to do. |
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Definition
| The revenue is realized and earned. |
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|
Term
Which of the following bases is the best indication that rental revenue should be recognized as realized and earned?
The collection of cash.
The passage of time.
The signing of the rental contract.
Production and delivery. |
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Definition
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|
Term
A department store ordinarily recognizes revenue when
Merchandise to be held for resale is received from suppliers.
Payment is received from customers.
Customers receive merchandise.
Preparation of merchandise for resale has been completed. |
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Definition
| Customers receive merchandise. |
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Term
Robin Gavaskar, who recently founded a company that produces baseball bats and balls, wants to determine her company’s policy for revenue recognition. According to the revenue recognition principle, the most appropriate time to recognize revenue would be when
The sale occurs.
Cash is received.
Production is completed.
Quarterly financial statements are prepared. |
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Definition
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|
Term
Which of the following are acceptable formats for reporting comprehensive income?
In one continuous financial statement
In a statement of changes in equity
In a separate statement of net income
In two separate but consecutive financial statements
I and II only.
I, II, and III only.
III and IV only.
I and IV only. |
|
Definition
|
|
Term
Other comprehensive income (OCI) includes
Foreign currency items and extraordinary items.
Translation adjustments and the gain or loss on disposal of a segment of a business.
Gains and losses on certain derivatives designated, qualifying, and effective as foreign-currency hedging instruments.
Unrealized gains and losses on available-for-sale securities and the gain or loss on a derivative hedging the fair value of a recognized asset or liability. |
|
Definition
| Gains and losses on certain derivatives designated, qualifying, and effective as foreign-currency hedging instruments. |
|
|
Term
Comprehensive income is best defined as
Net income excluding extraordinary gains and losses.
The change in net assets for the period including contributions by owners and distributions to owners. Total revenues minus total expenses.
The change in net assets for the period excluding owner transactions. |
|
Definition
| The change in net assets for the period excluding owner transactions. |
|
|
Term
Which of the following is a component of other comprehensive income?
Minimum accrual of vacation pay.
Cumulative currency-translation adjustments.
Changes in market value of inventory.
Unrealized gain or loss on trading securities. |
|
Definition
| Cumulative currency-translation adjustments. |
|
|
Term
According to IFRS, when a complete set of financial statements is presented, how are other comprehensive income (OCI) and its components reported?
May be reported in a single statement of comprehensive income or disclosed in a statement of changes in equity. Must be reported in a separate statement.
Must be reported in a separate statement or in a single statement of comprehensive income reporting all items of income and expense for the period.
They are not required to be reported under IFRS. |
|
Definition
| Must be reported in a separate statement or in a single statement of comprehensive income reporting all items of income and expense for the period. |
|
|
Term
Which of the following items should be reported in other comprehensive income (OCI)?
Unrealized loss on an investment classified as a trading security.
Unrealized loss on an investment classified as an available-for-sale security.
Realized loss on an investment classified as an available-for-sale security.
Cumulative effect of a change in accounting principle. |
|
Definition
| Unrealized loss on an investment classified as an available-for-sale security. |
|
|
Term
On a statement of comprehensive income prepared in accordance with IFRS, which of the following line items is not included?
Finance costs.
Extraordinary items.
Tax expense.
Revenue. |
|
Definition
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|
Term
State Co. recognizes construction revenue and expenses using the percentage-of-completion method. During Year 6, a single long-term project was begun, which continued through Year 7. Information on the project follows:
Year 6
Year 7
Accounts receivable from
construction contract
$100,000
$300,000
Construction costs incurred
105,000
192,000
Construction in progress
122,000
364,000
Partial billings on contract
100,000
420,000
Gross profit recognized from the long-term construction contract in Year 7 should be
$50,000
$108,000
$120,000
$228,000 |
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Definition
|
|
Term
How should the balances of progress billings and construction in progress be shown at reporting dates prior to the completion of a long-term contract?
Progress billings as deferred income, construction in progress as a deferred expense.
Progress billings as income, construction in progress as inventory.
Net, as a current asset if debit balance and current liability if credit balance.
Net, as gross profit from construction if credit balance, and loss from construction if debit balance. |
|
Definition
| Net, as a current asset if debit balance and current liability if credit balance. |
|
|
Term
A company began work on a long-term construction contract in Year 1. The contract price was $3,000,000. Year-end information related to the contract is as follows:
Year 1
Year 2
Year 3
Estimated total cost
$2,000,000
$2,000,000
$2,000,000
Cost incurred
700,000
900,000
400,000
Billings
800,000
1,200,000
1,000,000
Collections
600,000
1,200,000
1,200,000
Under the percentage-of-completion method, the gross profit to be recognized in Year 1 is
$(100,000)
$100,000
$200,000
$350,000 |
|
Definition
|
|
Term
A building contractor has a fixed-price contract to construct a large building. It is estimated that the building will take 2 years to complete. Progress billings will be sent to the customer at quarterly intervals. Which of the following describes the preferable point for revenue recognition for this contract if the outcome of the contract can be estimated reliably?
After the contract is signed.
As progress is made toward completion of the contract.
As cash is received.
When the contract is completed. |
|
Definition
| As progress is made toward completion of the contract. |
|
|
Term
Which of the following is used in calculating the gross profit recognized in the fourth and final year of a contract accounted for by the percentage-of-completion method?
Actual
Gross Profit
Total Costs
Previously Recognized
Yes
Yes
Yes
No
No
Yes
No
No |
|
Definition
|
|
Term
A construction company reports the following:
Year 1
Year 2
Construction costs
$100
$200
Estimated cost to complete at year-end
300
0
The contract price is $1,000. Under IFRS, what is the profit recognized in Year 2?
$150
$400
$550
$800 |
|
Definition
|
|
Term
| When accounting for income taxes, a temporary difference occurs in which of the following scenarios? An item is included in the calculation of net income but is neither taxable nor deductible. An item is included in the calculation of net income in one year and in taxable income in a different year. An item is no longer taxable due to a change in the tax law. The accrual method of accounting is used. |
|
Definition
| An item is included in the calculation of net income in one year and in taxable income in a different year. |
|
|
Term
Under IFRS, a deferred tax asset is
Required to be reduced by a valuation allowance if it is more likely than not that some portion will not be realized.
Measured by applying the tax rates effective when the asset is realized.
Recognized to the extent that realization is probable.
Recognized to reflect the deferred tax consequences of a taxable temporary difference. |
|
Definition
| Recognized to the extent that realization is probable. |
|
|
Term
Milzan Co., which began operations on January 1, Year 2, recognizes income from long-term construction contracts under the percentage-of-completion method in its financial statements and under the completed-contract method for income tax reporting. Income under each method follows:
Completed-
Percentage-
Year
Contract
of-Completion
Year 2
$ --
$300,000
Year 3
400,000
600,000
Year 4
700,000
850,000
There are no other temporary differences. If the applicable tax rate is 25%, Milzan should report in its balance sheet at December 31, Year 4, a deferred income tax liability of
$87,500
$105,000
$162,500
$195,000 |
|
Definition
|
|
Term
Fern Co. has net income, before taxes, of $200,000, including $20,000 interest revenue from municipal bonds and $10,000 paid for officers’ life insurance premiums where the company is the beneficiary. The tax rate for the current year is 30%. What is Fern’s effective tax rate?
27.0%
28.5%
30.0%
31.5% |
|
Definition
|
|
Term
Leer Corp.’s pretax income for the current year is $100,000. The temporary differences between amounts reported in the financial statements and the tax return are as follows:
Depreciation in the financial statements was $8,000 more than tax depreciation.
The equity method of accounting resulted in financial statement income of $35,000.
A $25,000 dividend was received from an equity-method investee during the year, which is eligible for the 80% dividends received deduction (DRD).
Leer’s effective income tax rate is 30%. In its income statement, Leer should report a current provision for income taxes of
$26,400
$23,400
$21,900
$18,600 |
|
Definition
|
|
Term
Ignoring the alternative minimum tax provisions, what amount should Mont report at December 31 as its current federal income tax liability?
$96,000
$114,000
$150,000
$162,000 |
|
Definition
|
|
Term
According to U.S. GAAP, which of the following items should affect current income tax expense for Year 3?
Interest on a Year 1 tax deficiency paid in Year 3.
Penalty on a Year 1 tax deficiency paid in Year 3.
Change in income tax rate for Year 3.
Change in income tax rate for Year 4. |
|
Definition
| Change in income tax rate for Year 3. |
|
|
Term
Hut Co. has temporary taxable differences that will reverse during the next year and add to taxable income. These differences relate to noncurrent assets. Deferred income taxes based on these temporary differences should be classified in Hut’s balance sheet as a
Current asset.
Noncurrent asset.
Current liability.
Noncurrent liability. |
|
Definition
|
|
Term
Ajax Corp. has an effective tax rate of 30%. On January 1, Year 1, Ajax purchased equipment for $100,000. The equipment has a useful life of 10 years. What amount of current tax benefit will Ajax realize during Year 1 by using the 150% declining balance method of depreciation for tax purposes instead of the straight-line method?
$1,500
$3,000
$4,500
$5,000 |
|
Definition
|
|
Term
Under IFRS, a deferred tax asset valuation allowance is
The difference between the recorded amount of the deferred tax asset and any net operating loss carryback.
The portion of the deferred tax asset with a more than 50% probability of being realized.
The deferred tax asset times the applicable tax rate.
Not required to be recognized. |
|
Definition
| Not required to be recognized. |
|
|
Term
Ram’s effective income tax rate is 34% for Year 1. What amount should Ram report in its Year 1 income statement as the current provision for income taxes?
$34,000
$153,000
$255,000
$289,000 |
|
Definition
|
|
Term
Lion Co.’s income statement for its first year of operations shows pretax income of $6,000,000. In addition, the following differences existed between Lion’s tax return and records:
Tax
Accounting
Return
Records
Uncollectible accounts expense
$220,000
$250,000
Depreciation expense
860,000
570,000
Tax-exempt interest revenue
–
50,000
Lion’s current year tax rate is 30% and the enacted rate for future years is 40%. What amount should Lion report as deferred tax expense in its income statement for the year?
$148,000
$124,000
$104,000
$78,000 |
|
Definition
|
|
Term
Brass Co. reported income before income tax expense of $60,000 for Year 2. Brass had no permanent or temporary differences for tax purposes. Brass has an effective tax rate of 30% and a $40,000 net operating loss carryforward from Year 1. What is the maximum income tax benefit that Brass can realize from the loss carryforward for Year 2?
$12,000
$18,000
$20,000
$40,000 |
|
Definition
|
|
Term
In its first 4 years of operations, Alder, Inc.’s depreciation for income tax purposes exceeded its depreciation for financial statement purposes. This temporary difference was expected to reverse over the next 3 years. Alder had no other temporary differences. Alder’s balance sheet for its fourth year of operation should include
A noncurrent contra asset for the effects of the difference between asset bases for financial statement and income tax purposes.
Both current and noncurrent deferred tax assets.
A current deferred tax liability only.
A noncurrent deferred tax liability only. |
|
Definition
| A noncurrent deferred tax liability only. |
|
|
Term
What deferred tax amounts will appear on Lucas’s statement of financial position at the end of Year 2?
Assets
Liabilities
Current
Noncurrent
Current
Noncurrent
$0
$1,000
$5,000
$0
$7,000
$1,000
$1,000
$9,000
$1,000
$0
$0
$7,000
$10,000
$7,000
$9,000
$14,000 |
|
Definition
|
|
Term
Which of the following should be disclosed in an entity’s financial statements related to deferred taxes?
The types and amounts of existing temporary differences.
The types and amounts of existing permanent differences.
The nature and amount of each type of operating loss and tax credit carryforward.
I and II only.
I and III only.
II and III only.
I, II, and III. |
|
Definition
|
|
Term
Intraperiod income tax allocation arises because
Items included in the determination of taxable income may be presented in different sections of the financial statements.
Income taxes must be allocated between current and future periods.
Certain revenues and expenses appear in the financial statements either before or after they are included in taxable income.
Certain revenues and expenses appear in the financial statements but are excluded from taxable income |
|
Definition
| Items included in the determination of taxable income may be presented in different sections of the financial statements. |
|
|
Term
Income-tax-basis financial statements differ from those prepared under GAAP because they
Do not include nontaxable revenues and nondeductible expenses in determining income.
Include detailed information about current and deferred income tax liabilities.
Contain no disclosures about capital and operating lease transactions.
Recognize certain revenues and expenses in different reporting periods. |
|
Definition
| Recognize certain revenues and expenses in different reporting periods. |
|
|
Term
The relationship between income tax currently payable and income tax expense is that income tax currently payable
Is always equal to income tax expense.
May be greater than but not less than income tax expense.
May be less than but not greater than income tax expense.
May differ from income tax expense. |
|
Definition
| May differ from income tax expense. |
|
|
Term
A deferred tax asset must be reduced by a valuation allowance if it is
Probable that some portion will not be realized.
Reasonably possible that some portion will not be realized.
More likely than not that some portion will not be realized.
Likely that some portion will not be realized. |
|
Definition
| More likely than not that some portion will not be realized. |
|
|
Term
One criterion for a capital lease is that the term of the lease must equal a minimum percentage of the leased property’s estimated economic life at the inception of the lease. What is this minimum percentage?
51%
75%
80%
90% |
|
Definition
|
|
Term
Lease M does not contain a bargain purchase option, but the lease term is equal to 90% of the estimated economic life of the leased property. Lease P does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75% of the estimated economic life of the leased property. How should the lessee classify these leases?
Lease M
Lease P
Capital lease
Operating lease
Capital lease
Capital lease
Operating lease
Capital lease
Operating lease
Operating lease |
|
Definition
Capital lease
Capital lease |
|
|
Term
The present value of minimum lease payments should be used by the lessee in determining the amount of a lease liability under a lease classified by the lessee as a(n)
Capital Lease
Operating Lease
Yes
Yes
Yes
No
No
No
No
Yes |
|
Definition
|
|
Term
Robbin, Inc., leased a machine from Ready Leasing Co. The lease qualifies as a capital lease and requires 10 annual payments of $10,000 beginning immediately. The lease specifies an interest rate of 12% and a purchase option of $10,000 at the end of the tenth year, even though the machine’s estimated value on that date is $20,000. Robbin’s incremental borrowing rate is 14%.
The present value of an annuity due of 1 at:
12% for 10 years is 6.328
14% for 10 years is 5.946
The present value of 1 at:
12% for 10 years is .322
14% for 10 years is .270
What amount should Robbin record as lease liability at the beginning of the lease term?
$62,160
$64,860
$66,500
$69,720 |
|
Definition
|
|
Term
Babson’s recorded capital lease liability immediately after the first required payment should be
$48,620
$44,070
$35,620
$31,070 |
|
Definition
|
|
Term
Steam Co. acquired equipment under a capital lease for 6 years. Minimum lease payments were $60,000 payable annually at year end. The interest rate was 5% with an annuity factor for 6 years of 5.0757. The present value of the payments was equal to the fair market value of the equipment. What amount should Steam report as interest expense at the end of the first year of the lease?
$0
$3,000
$15,227
$18,000 |
|
Definition
|
|
Term
On January 1, Year 4, Nori Mining Co. (lessee) entered into a 5-year lease for drilling equipment. Nori accounted for the acquisition as a capital lease for $240,000, which includes a $10,000 bargain purchase option. At the end of the lease, Nori expects to exercise the bargain purchase option. Nori estimates that the equipment’s fair value will be $20,000 at the end of its 8-year life. Nori regularly uses straight-line depreciation on similar equipment. For the year ended December 31, Year 4, what amount should Nori recognize as depreciation expense on the leased asset?
$48,000
$46,000
$30,000
$27,500 |
|
Definition
|
|
Term
Howe Co. leased equipment to Kew Corp. on January 2, Year 4, for an 8-year period expiring December 31, Year 11. Equal payments under the lease are $600,000 and are due on January 2 of each year. The first payment was made on January 2, Year 4. The list selling price of the equipment is $3,520,000, and its carrying cost on Howe’s books is $2.8 million. The lease is appropriately accounted for as a sales-type lease. The present value of the lease payments at an imputed interest rate of 12% (Howe’s incremental borrowing rate) is $3.3 million. What amount of profit on the sale should Howe report for the year ended December 31, Year 4?
$720,000
$500,000
$90,000
$0 |
|
Definition
|
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Term
On January 1, Year 4, Jaffe Co. leased a machine to Pender Co. for 10 years, with $10,000 payments due at the beginning of each year effective at the inception of the lease. The machine cost Jaffe $55,000. The lease is appropriately accounted for as a sales-type lease by Jaffe. The present value of the 10 rent payments over the lease term discounted appropriately at 10% was $67,600. The estimated salvage value of the machine at the end of 10 years is equal to the disposal costs. How much interest revenue should Jaffe record from the lease for the year ended December 31, Year 4?
$5,500
$5,760
$6,760
$12,600 |
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Definition
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Term
Able Co. leased equipment to Baker under a noncancelable lease with a transfer of title. Will Able record depreciation expense on the leased asset and interest revenue related to the lease?
Depreciation expense
Interest revenue
Yes
Yes
Yes
No
No
No
No
Yes |
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Definition
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Term
Bain Co. entered into a 10-year lease agreement for a new piece of equipment worth $500,000. At the end of the lease, Bain will have the option to purchase the equipment. Which of the following would require the lease to be accounted for as a capital lease?
Graded The lease includes an option to purchase stock in the company.
The estimated useful life of the leased asset is 12 years.
The present value of the minimum lease payments is $400,000.
The purchase option at the end of the lease is at fair market value. |
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Definition
| The estimated useful life of the leased asset is 12 years. |
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Term
On January 2, Ashe Company entered into a 10-year, noncancelable lease requiring year-end payments of $100,000. Ashe’s incremental borrowing rate is 12%, while the lessor’s implicit interest rate, known to Ashe, is 10%. Present value factors for an ordinary annuity for 10 periods are 6.145 at 10%, and 5.650 at 12%. Ownership of the property remains with the lessor at expiration of the lease. There is no bargain purchase option. The leased property has an estimated economic life of 12 years. What amount should Ashe capitalize for this leased property on January 2?
$1,000,000
$614,500
$565,000
$0 |
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Definition
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Term
A lessee had a 10-year capital lease requiring equal annual payments. The reduction of the lease liability in Year 2 should equal
The current liability shown for the lease at the end of Year 1.
The current liability shown for the lease at the end of Year 2.
The reduction of the lease obligation in Year 1.
One-tenth of the original lease liability. |
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Definition
| The current liability shown for the lease at the end of Year 1. |
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Term
On January 1, Blaugh Co. signed a long-term lease for an office building. The terms of the lease required Blaugh to pay $10,000 annually, beginning December 30, and continuing each year for 30 years. The lease qualifies as a capital lease. On January 1, the present value of the lease payments is $112,500 at the 8% interest rate implicit in the lease. In Blaugh’s December 31 balance sheet, the capital lease liability should be
$102,500
$111,500
$112,500
$290,000 |
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Definition
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Term
On January 1, Year 1, West Co. entered into a 10-year lease for a manufacturing plant. The annual minimum lease payments are $100,000. In the notes to the December 31, Year 2, financial statements, what amounts of subsequent years’ lease payments should be disclosed?
Amounts for
Aggregate Amount
Appropriate
for the Period
Required Period
Thereafter
$100,000
$0
$300,000
$500,000
$500,000
$300,000
$500,000
$0 |
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Definition
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Term
On January 1, Year 1, JCK Co. signed a contract for an 8-year lease of its equipment with a 10-year life. The present value of the 16 equal semiannual payments in advance equaled 85% of the equipment’s fair value. The contract had no provision for JCK, the lessor, to give up legal ownership of the equipment. Should JCK recognize rent or interest revenue in Year 3, and should the revenue recognized in Year 3 be the same or smaller than the revenue recognized in Year 2?
Year 3 Revenues
Year 3 Amount Recognized
Recognized
Compared with Year 2
Rent
The same
Rent
Smaller
Interest
The same
Interest |
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Definition
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Term
In a lease that is recorded as a sales-type lease by the lessor, interest revenue
Should be recognized in full as revenue at the lease’s inception.
Should be recognized over the period of the lease using the straight-line method.
Should be recognized over the period of the lease using the effective-interest method.
Does not arise. |
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Definition
| Should be recognized over the period of the lease using the effective-interest method. |
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Term
Which of the following is a characteristic of a capital lease?
The lease term is substantially less than the estimated economic life of the leased property.
The lease contains a bargain-purchase option.
The present value of the minimum lease payments at the beginning of the lease term is 75% or more of the fair value of the property at the inception of the lease.
The future obligation does not appear in the balance sheet of the lessee. |
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Definition
| The lease contains a bargain-purchase option. |
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Term
Which of the following factors most likely indicates that a lease should be accounted for as a finance lease under IFRS?
The present value (PV) of the minimum lease payments is at least equal to the majority of the fair value of the leased property.
The lease agreement provides for the transfer of ownership of the leased property.
The lease term equals at least 50% the remaining estimated useful life of the leased property.
The lessee guarantees the residual value of the leased property. |
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Definition
| The lease agreement provides for the transfer of ownership of the leased property. |
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Term
For a capital lease, the amount recorded initially by the lessee as a liability should normally
Exceed the total of the minimum lease payments.
Exceed the present value of the minimum lease payments at the beginning of the lease.
Equal the total of the minimum lease payments.
Equal the present value of the minimum lease payments at the beginning of the lease. |
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Definition
| Equal the present value of the minimum lease payments at the beginning of the lease. |
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