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, 20x1 and its financial statements are issued
in the following March. On January 24,
20x2. A 10 year note payable came due
and was paid by issuing XYZ common stock to the creditor. In its December 31, 20x1 balance sheet, XYZ
should
a. Report
the note as a current liability because it was due on January 24, 20x2 – 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, 20x2 – 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
https://www.blogger.com/blogger.g?blogID=986672644511081080#editor/src=sidebarc. 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.
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