ACC 563 Week 8 Quiz – Strayer University NEW

ACC/563 Week 8 Quiz – Strayer NEW
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Week 8 Quiz 6: Chapters 11 and 12

Chapter 11
Multiple Choice

1. A loss from early extinguishment of debt, if material, should be reported as a component of income
a. After cumulative effect f accounting changes and after discontinued operations of a segment of a business
b. After cumulative effect of accounting changes and before discontinued operations of a segment of a business
c. Income from continuing operations
d. Before cumulative effect of accounting changes and before discontinued operation s of a segment of a business
Answer

2. Unamortized debt discount should be reported on the balance sheet of the issuer as
a. A direct deduction from the face amount of the debt
b. A direct deduction from the present value of the debt
c. A deferred charge
d. Part of the issue costs

Answer

3. An example of an item that is not a liability is
a. Dividends payable in stock
b. Advances from customers on contracts
c. Accrued estimated warranty costs
d. The portion of long-term debt due within one year

Answer

4. If bonds are issued initially at a discount and the straight-line method of amortization is used for the discount, interest expense in the earlier years will be
a. Greater than if the compound interest method were used
b. The same as if the compound interest method were used
c. Less than if the compound interest method were used
d. Less than the amount of the interest payments

Answer

5. Cole Manufacturing Corporation issued bonds with a maturity amount of $200,000 and a maturity 10 years from date of issue. If the bonds were issued at a premium, this indicates that
a. The yield (effective or market) rate of interest exceeded the nominal (coupon) rate
b. The nominal rate of interest exceeded the yield rate
c. The yield and nominal rates coincided
d. No necessary relationship exists between the two rates

Answer

6. “Trading on the equity” (financial leverage) is likely to be a good financial strategy for stockholders of companies having
a. Cyclical high and low amounts of reported earnings
b. Steady amounts of reported earnings
c. Volatile fluctuation in reported earnings over short periods of time
d. Steadily declining amounts of reported earnings

Answer

7. Theoretically, a bond payable should be reported at the present value of the interest discounted at
a. Stated interest rate for both principal and interest
b. Effective interest rate for both principal and interest
c. Stated interest rate for principal and effective interest rate for interest
d. Effective interest rate for principal and stated interest rate for interest

Answer

8. A threat of expropriation of assets that is reasonably possible, and for which the amount of loss can be reasonably estimated, is an example of a (an)
a. Loss contingency that should be disclosed, but not accrued
b. Loss contingency that should be accrued and disclosed
c. Appropriation of retained earnings against which losses should be charged
d. General business risk which should not be accrued and need not be disclosed

Answer

9. When it is necessary to impute an interest rate in connection with a note payable, the rate should be
a. Two-thirds of the prime rate effective at the time the obligation is incurred
b. The same as that used in the GNP Implicit Price Deflator
c. At least equal to the rate at which the debtor can obtain financing of a similar nature from other sources at the date of the transaction
d. As near zero as can be justified

Answer

10. Taft Company sells Lee Company a machine, the usual cash price of which is $10,000, in exchange for an $11,800 non-interest-bearing note due three years from date. If Taft records the note at $10,000, the overall effect will be
a. A correct sales price and correct interest revenue
b. A correct sales price and understated interest revenue
c. An understated sales price and understated interest revenue
d. An overstated interest price and understated interest revenue

Answer

11. In the situation described in problem 10, if Lee records the asset and note at $11,800, the overall effect will be
a. A correct acquisition cost and correct interest expense
b. A correct acquisition cost and understated interest expense
c. An understated acquisition cost and understated interest expense
d. An overstated acquisition cost and understated interest expense

Answer

12. How would the amortization of premium bonds payable affect each of the following?
Carrying value of
Bond Net Income
a. Increase Decrease
b. Increase Increase
c. Decrease Decrease
d. Decrease Increase

Answer

13. For a trouble debt restructuring involving only modification of terms, it is appropriate for a debtor to recognize a gain when the carrying amount of the debt
a. Exceeds the total future cash payments specified by the new terms
b. Is less than the total future cash payments specified by the new terms
c. Exceeds the present value specified by the new terms
d. Is less than the present value specified by the new terms

Answer

14. How should the value of warrants attached to a debt security be account for?
a. No value assigned
b. A separate portion of paid-in capital
c. An appropriation of retained earnings
d. A liability

Answer

15. For the issuer of a 10-year term bond, the amount of amortization using the interest method would increase each year if the bond was sold at a
Discount Premium
a. No No
b. Yes Yes
c. No Yes
d. Yes No

Answer

16. Gain contingencies are usually recognized in the income statement when
a. Realized
b. Occurrence is reasonably possible and the amount can be reasonably estimated
c. Occurrence is probable and the amount can be reasonably estimated
d. The amount can be reasonably estimated

Answer

17. An estimated loss from a loss contingency should be accrued when
a. It is probable at the date of the financial statements that a loss has been incurred and the amount of the loss can be reasonably estimated
b. The loss has been incurred by the date of the financial statements and the amount of the loss may be material
c. It is probable at the date of the financial statements that a loss has been incurred and the amount of the loss may be material
d. It is probable that a loss will be incurred in a future period and the amount of the loss can be reasonably estimated

Answer

18. When the issuer of bonds exercises the call provision to retire the bonds, the excess of the cash paid over the carrying amount of the bonds should be recognized separately as a (an)
a. Extraordinary loss
b. Extraordinary gain
c. Loss from continuing operations
d. Loss from discontinued operations

Answer

19. A two-year note was issued in an arm’s-length transaction at face value solely for cash at the beginning of the year. There were no other rights or privileges exchanged. The interest rate is specified at 10 percent per year. Principal and interest are payable at maturity. The prevailing rate of interest for a loan of this type is 15 percent per year. What annual interest rate should be used to record interest expense for this year and next year?
This year Next Year
a. 10 percent 15 percent
b. 10 percent 10 percent
c. 15 percent 10 percent
d. 15 percent 15 percent

Answer
20. The interest rate used to calculate the cash interest payments by the issuer of bonds is
a. The market rate of interest
b. The effective interest rate
c. The stated interest rate
d. Equal to the actual interest expense rate

Answer

21. Ace Corporation has a debt to total assets ratio of 65%. This tells the user of Ace’s financial statements
a. Ace is getting a 35% return on its assets
b. There is a risk Ace cannot pay its debts as they come due
c. 65% of the assets are financed by the stockholders
d. Ace should issue more debt to reduce its risk

Answer

22. Trading on the equity (leverage) refers to the
a. Amount of working capital
b. Amount of capital provided by owners
c. Use of borrowed money to increase the return to owners
d. Number of times interest is earned

Answer

23. The current accounting treatment for convertible debt is to treat it as straight debt. This treatment can be defended on what basis?

a. Convertible debt is a complex financial instrument.
b. Convertible debt comprises two financial instruments – a debt instrument and the option to convert.
c. The debt instrument and the option to convert are not separable.
d. The option to convert is equity.

Answer

24. XYZ Company’s yearend is December 31, 20×1 and its financial statements are issued in the following March. On January 24, 20×2. A 10 year note payable came due and was paid by issuing XYZ common stock to the creditor. In its December 31, 20×1 balance sheet, XYZ should
a. Report the note as a current liability because it was due on January 24, 20×2 – only 24 days after the year end.
b. Report the note as a long-term liability because it was not paid off with a current asset or replaced by another current liability.
c. Report the note as a long-term liability because it was extinguished (paid off) on January 24, 20×2 – only 24 days after the year end.
d. Report the note as a long-term liability because it was a 10 year note.

Answer

25. A zero coupon bond is different from a typical bond issue because
a. The investor can clip the coupons and get paid for the periodic interest on the bond while a typical bond does not have coupons.
b. It is reported in the balance sheet net of the discount on the bond.
c. The zero coupon bond’s deep discount is reported as an asset and a typical bond that is issued at a discount is reported net of the discount.
d. It does not pay any periodic interest while the typical bond does.

Answer

26. An unearned revenue is an example of a(an)
a. Deferred credit.
b. Accrued liability.
c. Customer billing that takes place before a job is finished.
d. Accounts receivable.

Answer

27. A deferred credit meets the definition of a liability because
a. It is a probable future sacrifice of assets as the result of a past transaction or event.
b. It is a present obligation to transfer assets to another entity.
c. It is an accrual representing an obligation to pay money in the future.
d. It is a present obligation to provide services to another entity.

Answer

28. The physical capital maintenance concept of income would require that a company’s bonds payable be
a. Reported in the balance sheet at their amortized issue price and that changes in their market values be reported in earnings.
b. Reported in the balance sheet at their amortized issue price and that changes in their market values not be reported in earnings.
c. Reported in the balance sheet at their fair market values and that changes in their market values be reported in earnings.
d. Reported in the balance sheet at their fair market values and that changes in their market values be reported in other comprehensive income.

Answer

29. ABC Company has a note payable that is due six months after its year end. Under which of the following conditions will ABC be able to classify the note as a long term debt.
a. ABC cannot classify the note as long term because it is due within the current operating cycle or one year, whichever is longer.
b. ABC can classify the note as long term because it is due next year.
c. ABC can classify the note as long term because management intends to refinance it with long term debt and has an agreement to do so with a qualified creditor.
d. ABC can classify the note as long term because it is a 10 year note and management intends to pay the maturity value at the end of the 10 year period.

Answer

30. Current accounting treatment for gain contingencies is different from the accounting treatment for loss contingencies. Which accounting concept is this differential concept consistent with?
a. Conservatism
b. Materiality
c. Full disclosure
d. Revenue recognition

Answer

31. In general, derivative instruments are
a. Not reported in a company’s balance sheet because their impact on the company is not yet known..
b. Reported in the balance sheet at fair value and changes in their fair value are reported in earnings.
c. Reported in the balance sheet at historical cost and changes in their fair value are reported in earnings.
d. Reported in the balance sheet at fair value and changes in their fair value are reported in other comprehensive income.

Answer

32. Under a troubled debt restructuring that results in a modification of terms the debtor will report interest expense when
a. The debtor reports a gain on restructuring.
b. The future cash flows under the restructuring agreement are less than the company’s obligation at the date the restructuring takes place.
c. Always because the troubled debtor has a new agreement that obligates the company to make payments in the future.
d. The debtor reports no gain on restructuring.

Answer
Essay

1. List and discuss five factors that may be employed to determine if a particular financial instrument is a debt or equity security.

2. Discuss the definition and the proper accounting for mandatorily redeemable preferred stock.

3. Discuss the four basic reasons why a corporation may wish to issue debt rather than equity securities

4. Define the following terms:
a. Mortgage bonds

b. Debenture bonds

5. Explain how the selling price of a bond is determined.

6. What is a zero coupon bond? Discuss accounting for zero-coupon bonds.

7. Discuss the difference between the straight-line and the effective interest methods of bond premium or discount amortizations.

8. List the three methods of accounting for bonds refunding. Under current GAAP, how are
9. Discuss the factors that might motivate corporate management to decide to issue convertible debt.

10. Discuss accounting for long-term notes payable as originally described in APB Opinion No. 21.

11. Discuss accounting for contingencies

12. What is a derivative? Describe the accounting treatment for fair value and cash flow hedges required by SFAS No. 133.

13. Define the following terms:
a. Forward

b. Future

c. Option

d. Swap

e. Hybrid

14. What is a troubled debt restructuring? How is a troubled debt restructuring accomplished?

15. Obtain the financial statements of a company and ask the students to compute the:
a. Long-term debt to assets ratio
b. Interest coverage ratio
c. Debt service coverage ratio

16. How are compound financial instruments accounted for under IAS No. 32?

17. According to IAS No. 39, when are financial liabilities recognized?

EXAMPLE TEST QUESTIONS

Chapter 12

Multiple Choice

1. With respect to the difference between taxable income and pretax accounting income, the tax effect of the undistributed earnings of a subsidiary included in consolidated income should normally be
a. Accounted for as a timing difference
b. Accounted for as a permanent difference
c. Ignored because it must be based on estimates and assumptions
d. Ignored because it cannot be presumed that all undistributed earnings of a subsidiary will be transferred to the parent company

Answer

2. Income tax allocation procedures are not appropriate when
a. An extraordinary loss will cause the amount of income tax expense to be less than the tax on ordinary net income
b. An extraordinary gain will cause the amount of income tax expense to be greater than the tax on ordinary net income
c. Differences between net income for tax purposes and financial reporting occur because tax laws and financial accounting principles do not concur on the items to be recognized as revenue and expense
d. Differences between net income for tax purposes and financial reporting occur that will not reverse.

Answer

3. Which of the following would cause a deferred tax expense?
a. Writedown of goodwill due to impairment
b. Use of equity method where undistributed earnings of a 30 percent owned investee are related to probable future dividends
c. Premiums paid on insurance carried by company (beneficiary) on its officers or employees
d. Income is taxed at capital gains rates

Answer

4. Differences between taxable income and pretax accounting income arising from transactions that, under applicable tax laws and regulations, will not be offset by corresponding differences or “turn around” in future periods is a definition of
a. Permanent differences
b. Timing differences
c. Intraperiod tax allocation
d. Interperiod tax allocation

Answer

5. The tax effect of a difference between taxable income and pretax accounting income attributable to losses of a subsidiary is normally recognized for
a. Neither carrybacks nor carryforwards
b. Both carrybacks and carryforwards
c. Carrybacks but not carryforwards
d. Carryforwards but not carrybacks

Answer

6. Which of the following is not affected by tax allocation within a period?
a. Income before extraordinary items
b. Extraordinary events
c. Adjustments of prior periods
d. Operating revenues

Answer

7. Under the comprehensive deferred interperiod method of tax allocation, deferred taxes are determined on the basis of
a. Tax rates in effect when the timing differences originate without adjustment for subsequent changes in tax rates
b. Tax rates expected to be in effect when the items giving rise to the timing differences reverse themselves
c. Net valuations of assets or liabilities
d. Averages determined on an industry-by-industry basis

Answer

8. The accounting recognition of the benefit from a tax loss carryforward in most situations should be reported as
a. A reduction of the loss in the year of the loss with an appropriate valuation allowance
b. A prior period adjustment in whichever year the benefit is realized
c. An extraordinary item in the year in which the benefit is realized
d. An item on the retained earnings statement, not the income statement

Answer

9. Intraperiod tax allocation arises because
a. Items included in the determination of taxable income may be presented in different sections of the financial statements
b. Income taxes must be allocated between current and future periods
c. Certain revenues and expenses appear in the financial statements either before or after they are included in taxable income
d. Certain revenues and expenses appear in the financial statements but are excluded from taxable income

Answer

10. Assuming no prior period adjustments, would the following affect net income?
Interperiod Intraperiod
Income tax Income tax
Allocation Allocation
a. Yes Yes
b. Yes No
c. No Yes
d. No No

Answer

11. A machine with a 10-year useful life is being depreciated on a straight-line basis for financial statement purposes, and over 5 years for income tax purposes under the accelerated recovery cost system. Assuming that the company is profitable and that there are and have been no other timing differences, the related deferred income taxes would be reported in the balance sheet at the end of the first year of the estimated useful life as a
a. Current liability
b. Current asset
c. Noncurrent liability
d. Noncurrent asset

Answer

12. Smith Corporation owns only 25 percent of the voting stock of Jones Corporation, but exercises significant influence over its operating and financial policies. The tax effect of differences between taxable income and pretax accounting income attributable to undistributed earnings of Jones Corporation should be
a. Accounted for as a timing difference
b. Accounted for as a permanent difference
c. Ignored because it must be based on estimates and assumptions
d. Ignored because Smith holds less than 51 percent of the voting stock of Jones

Answer

13. A company has four “deferred income tax” accounts arising from timing differences involving (1) current assets, (2) noncurrent assets, (3) current liabilities, and (4) noncurrent liabilities. The presentation of these four “deferred income tax “ accounts in the statement of financial position should be shown as
a. A single net amount
b. A net current and a net noncurrent amount
c. Four accounts with no netting permitted
d. Valuation adjustments of the related assets and liabilities that gave rise to the deferred tax

Answer

14. A company’s only temporary difference results from using double declining balance depreciation for tax purposes and straight-line depreciation for financial reporting. The company purchases new plant assets each year. If currently enacted tax law will result in a higher tax rate for all future tax years, which accounting approach for deferred taxes will result in the lowest net income for this current year?
a. Nonallocation of deferred taxes.
b. Partial allocation of deferred taxes under the asset/liability method.
c. Comprehensive allocation of deferred taxes under the asset/liability method.
d. Comprehensive allocation of deferred taxes under the deferred method.

Answer

15. Which of the following is not an argument that an advocate of nonallocation of deferred taxes might use to support his/her position?
a. Income taxes result only from taxable income.
b. Income taxes are an expense of doing business and should be treated the same as other expenses of doing business under accrual accounting.
c. Income taxes are not levied on individual items of income or expense.
d. The current provision for income taxes is a better predictor of future cash flows than is income tax expense that includes deferred taxes.

Answer

16. Which of the following is an argument that an advocate of interperiod income tax allocation might use to support his/her position?
a. Income taxes result from taxable income.
b. Income taxes are an expense of doing business and should be treated the same as other expenses of doing business under accrual accounting.
c. Nonallocation of income taxes hides an economic difference between a company that employs tax strategies that reduce current tax payments than one that does not.
d. Income taxes are not incurred in anticipation of future benefits, nor are they expirations of cost to provide facilities to generate revenues.

Answer

17. A net operating loss carryover that occurs in a company’s second year of operations
a. May cause a company to report a tax benefit in the current period income statement.
b. Has no effect on income tax expense of the current period because no taxes are paid.
c. Causes a company to report a deferred income tax liability for taxes that are not paid currently.
d. Results in future taxable amounts.

Answer

18. Which of the following will result in a deferred tax asset?
a. Using the installment sales method for tax purposes, while using point of sale for financial reporting.
b. Reporting an unrealized gain for a trading security.
c. Using accelerated depreciation for tax purposes and straight-line depreciation for financial reporting.
d. Reporting an expected loss on from a lawsuit in the income statement, when it cannot be reported on the tax return until it is actually incurred.

Answer

19. Which of the following will result in a deferred tax liability?
a. A net operating loss carryover.
b. Reporting an unrealized gain for a trading security.
c. Reporting an unrealized gain for an available-for-sale security.
d. Reporting an expected loss on from a lawsuit in the income statement, when it cannot be reported on the tax return until it is actually incurred.

Answer

20. Which of the following causes a permanent difference between taxable income and financial accounting income?
a. The useful life of an asset is 10 years. The asset is depreciated over 7 years for tax purposes.
b. Rent received in advance is taxable upon receipt.
c. A life insurance premium paid by the corporation on a policy that names the corporation as the beneficiary.
d. A penalty paid to a bank when a CD is cashed before its maturity date.

Answer
21. Which of the following approaches to interperiod tax allocation best represents an example of the matching principle?
a. The deferred method of interperiod income tax allocation
b. Discounting deferred income taxes
c. Nonallocation of income taxes
d. The asset/liability method of income tax allocation.

Answer

22. A company that has both short-term deferred tax assets of $22,000, long-term deferred tax liabilities of $36,000, short-term deferred tax liabilities of $51,000 and short-term deferred tax assets of $60,000 should report
a. A current asset for $22,000, a current liability for $36,000, a long-term asset for $60,000, and a long-term liability for $51,000.
b. A current liability for $14,000 and a long-term asset for $9,000.
c. A current asset for $5,000.
d. A current liability for $14,000, a long-term asset for $60,000, and a long-term liability for $51,000.

Answer

23. An increase in the deferred income tax asset valuation allowance
a. Occurs when there is an operating loss carryforward.
b. Has no effect on income tax expense.
c. Occurs when there is an expected increase in future taxable icnome.
d. Increases income tax expense.

Answer

Essay

1. What are the objectives of accounting for income taxes?

2. Define the following types of differences between financial accounting income and taxable income:

3. Describe the three types of permanent differences.`

4. List and give examples of the f our types of differences that cause financial accounting income to be either greater than or less than taxable income.

5. Describe the accounting treatment for net operating losses.

6. Discuss the arguments for and against interperiod tax allocation.

7. Discuss the arguments for comprehensive vs. partial allocation of interperiod taxes.

8. Discuss the arguments for and against discounting deferred taxes.

9. Define the following:
a. Deferred method of income tax allocation

b. Asset-liability method of income tax allocation

c. Net-of-tax method

10. Discuss how SFAS No. 109, now FASB ASC 740, changed the accounting for deferred tax assets.

11. Describe the use of the valuation allowance for deferred tax assets.

12. Describe accounting for uncertain tax positions under FIN No. 48, now FASB ASC 740-10-25.

13. Discuss the rationale behind the calculation of a company’s earnings conservatism ratio.