Exam 1

Question 1

Liabilities

Answer 1

1. Are probable, future sacrifices of economic benefits.
2. Arise from present obligations (to transfer goods or provide services) to other entities.
3. Result from past transactions or events.

Question 2

current liabilities

Answer 2

1. obligations payable within one year or within
   the firm’s operating cycle, whichever is longer.
2. expected to be satisfied with
   current assets or by the creation of other current liabilities

Question 3

Classifying liabilities as either current or long term helps investors and creditors assess

Answer 3

relative risk of a business’s liabilities.

Question 4

How are Current liabilities ordinarily reported

Answer 4

at their maturity amounts

Question 5

The most common obligations reported as current liabilities

Answer 5

accounts payable, notes payable,

commercial paper, income tax liability, dividends payable, and accrued liabilities

Question 6

Amounts reported on the face of the balance sheet seldom are sufficient to adequately describe
current liabilities

Answer 6

Additional descriptions are provided in disclosure notes.

Question 7

Accounts payable

Answer 7

obligations to suppliers of merchandise or of services purchased on open
account.

Question 8

Trade notes payable

Answer 8

differ from accounts payable in that they are formally recognized by a written
promissory note. Often these are of a somewhat longer term than open accounts and bear interest

Question 9

noncommitted

line of credit

Answer 9

an informal agreement that permits a company to borrow up to a prearranged limit
without having to follow formal loan procedures and paperwork

Question 10

committed line of credit

Answer 10

a more formal agreement that usually requires the firm to pay a
commitment fee to the bank.

Question 11

Calculate Interest

Answer 11

Face Amt x Interest x Time to maturity as a fraction

Question 12

noninterest-bearing note

Answer 12

interest is deducted (or discounted) from the face amount to determine the cash proceeds made
available to the borrower at the outset

Question 13

Journal entry for interest bearing note

Answer 13

Cash, Notes payable at issuance and Interest Expense, Notes payable, cash with maturity

Question 14

Journal entry for noninterest-bearing note

Answer 14

cash, discount, n/p at issuance and interest expense, discount, n/p, cash with maturity

Question 15

effective interest rate

Answer 15

result of noninterest-bearing note to yield a higher interest rate than the stated rate. calculated by interest divided by amt borrowed

Question 16

SECURED LOANS

Answer 16

a specified asset of the

borrower is pledged as collateral or security for the loan.

Question 17

what are normally pledged for short-term loans

Answer 17

Inventory or accounts receivable

Question 18

factoring receivables.

Answer 18

the receivables actually are sold outright to a finance company as a means of
short-term financing

Question 19

Commercial paper

Answer 19

unsecured notes sold in

minimum denominations of $25,000 with maturities ranging from 30 to 270 days

Question 20

the cash a company receives from using short-term notes to borrow
funds as well as the cash it uses to repay the notes are reported among cash flows from

Answer 20

financing

activities.

Question 21

the cash a company receives from accounts payable, interest

payable, and bonuses payable, are reported among cash flows from

Answer 21

operating activities (are integrally related to a company’s primary operations)

Question 22

Accrued liabilities

Answer 22

expenses already incurred but not yet paid (accrued expenses)

Question 23

sick pay

Answer 23

quite often meets the conditions for accrual, but accrual is not mandatory
because future absence depends on future illness, which usually is not a certainty

Question 24

The reason is that in most settings outsiders (like banks, bondholders, and shareholders)
consider debt that is payable currently to be riskier than debt that need not be paid for some time,

Answer 24

because the current payable requires the company to be able to access the necessary cash relatively
soon.

Question 25

The currently maturing portion of a long-term debt must be reported as

Answer 25

current liability

Question 26

Short-term obligations (including the callable obligations we discussed in the previous section) that
are expected to be refinanced on a long-term basis can be reported as noncurrent, rather than current,
liabilities only if two conditions are met:

Answer 26

1. (1) the firm must intend to refinance on a long-term basis, and
2. (2) the firm must actually have demonstrated the ability to refinance on a long-term basis

Question 27

Long-term obligations (bonds, notes, lease liabilities, deferred tax liabilities) usually are reclassified
and reported as current liabilities when

Answer 27

they become payable within the upcoming year (or operating

cycle, if longer than a year).

Question 28

Obligations Callable by the Creditor classified as?

Answer 28

current liabilities

Question 29

Classification of Liabilities to be Refinanced. Under U.S. GAAP

Answer 29

classified as long-term liabilities if refinancing is completed before the date of
issuance of the financial statements

Question 30

Classification of Liabilities to be Refinanced Under IFRS

Answer 30

refinancing must be completed before the balance

sheet date

Question 31

loss contingency

Answer 31

an existing uncertainty as to whether a loss really exists, where the
uncertainty will be resolved only when some future event occurs

Question 32

GAAP definition of loss contingencies

Answer 32

1. Probable - Confirming event is likely to occur.
2. Reasonably possible - The chance the confirming event will occur is more than remote but less than
   likely.
3. Remote - The chance the confirming event will occur is slight.

Question 33

GAAP Accounting Treatment of Loss Contingencies

Answer 33

1. Probable and known or easily estimated - accrue for loss contingency
2. Probable yet not easily estimated - disclosure note
3. Reasonably possible - disclosure note
4. Remote - no disclosure or accrual needed

Question 34

accounting for warranties

Answer 34

The costs of satisfying guarantees should be recorded as expenses in the same accounting period
the products are sold.
1. Record sales for the year (Cash/AR and Sales Rev)
2. Estimate the Warranty Liability over the life of the warranty (Warranty Exp and Estimated War. Liability)
3. Cost incurred to satisfy any claims (Estimated War. Liability and cash/wages payable/supplies)

Question 35

accounting for extended warranties

Answer 35

1. record sale (cash/AR and unearned sales rev)

2. Record earned rev over life of warranty (unearned rev and revenue)

Question 36

Gain Contingencies

Answer 36

an uncertain situation that might result in a gain

Question 37

GAAP gain contingency reporting

Answer 37

1. conservatism - never accrued

2. material gains are reported in disclosure notes when future realization is probable

Question 38

IFRS Gain Contingencies reporting

Answer 38

1. accrued if their future realization is “virtually certain” to occur
2. material gains are reported in disclosure notes when future realization is “more likely than not” (greater than 50 percent)

Question 39

Periodic interest

Answer 39

stated percentage of face amount (variously referred to as the stated rate, coupon rate, or nominal
rate)

Question 40

Bonds

Answer 40

obligate the issuing corporation to repay a stated amount (variously referred to as the
principal, par value, face amount, or maturity value) at a specified maturity date and periodic interest between issue date and maturity date.

Question 41

bond indenture

Answer 41

describes the specific promises made to bondholders

Question 42

debenture bond

Answer 42

secured only by the “full faith and

credit” of the issuing corporation. No specific assets are pledged as security.

Question 43

mortgage bond,

Answer 43

backed by a lien on specified real estate owned by the issuer. typically will command a lower
interest rate

Question 44

coupon bonds

Answer 44

(sometimes called bearer bonds). The name of the owner of a coupon
bond was not registered. Instead, to collect interest on a coupon bond the holder actually clipped an
attached coupon and redeemed it in accordance with instructions in the indenture.

Question 45

registered bonds

Answer 45

Today most corporate bonds. Interest checks are mailed directly to the owner of
the bond, whose name is registered with the issuing company

Question 46

Serial bonds

Answer 46

provide a more structured (and less popular) way to retire bonds on a piecemeal basis.
Serial bonds are retired in installments during all or part of the life of the issue

Question 47

Convertible bonds

Answer 47

are retired as a consequence of bondholders choosing to convert them into shares
of stock.

Question 48

Recording a Bond

Answer 48

1. issuance (face amt of bond) (issuer - cash and bond payable) and (investor - investment in bonds and cash)
2. UNLESS there is a variance in market rate to state rate, then determine the present value of the bond and record a discount or premium. (issuer - DR Cash and discount then CR Bond Payble) (investor - DR Investment in bonds and CR discount and cash) opposite for premium

Question 49

bond premium

Answer 49

may sell for more than face

amount due to a more favorable stated rate to the market or effective rate

Question 50

bond discount

Answer 50

may sell for less than face amount

amount due to a unfavorable stated rate to the market or effective rate

Question 51

the effective interest method

Answer 51

the market rate of interest multiplied by the outstanding balance of the debt.

Question 52

debt issue costs

Answer 52

Costs of issuing debt securities are recorded as a debit to an asset account, “debt issue costs,”
and amortized to expense over the term to maturity.

Question 53

cash flow impact of loans

Answer 53

Borrowing is a financing activity; lending is an investing activity. Paying or receiving interest is an operating activity.

Question 54

The debt to equity ratio

Answer 54

indicates the extent of trading on the equity, or financial leverage. (total liabilities/shareholder equity)

Question 55

When Apex classifies its liabilities as either current or long-term, it helps creditors assess Apex’s:

Answer 55

Relative risk of not meeting its obligations

Question 56

Other things being equal, most managers would prefer to report liabilities as noncurrent rather than current. The logic behind this preference is that the long-term classification permits the company to report:

Answer 56

A more favorable Current ratio

Question 57

Accumulated Other Comprehensive Income reflects changes in the fair value of which type of securities?

Answer 57

Securities accounted for as Available for sale securities

Question 58

For long-term bonds, “Interest Expense” is usually computed as

Answer 58

The effective interest rate times the carrying amount of the debt outstanding during the interest period

Question 59

zero-coupon bonds

Answer 59

These bonds are especially suitable for tax-deferred or tax-exempt purposes

Issuers of these bonds must record semi-annual or annual interest expense

These bonds are sold at a deep-discount

Question 60

When callable bonds are retired prior to their maturity date

Answer 60

The issuing company will usually report a non-operating gain or loss

Question 61

The interest rate that is attached to the specific bond issue in the bond indenture may be referred to as

Answer 61

Nominal rate or
Stated rate or
Coupon rate

Question 62

Jesse “owns” a home with a 30-year mortgage and makes a monthly mortgage payment. The agreement under which this occurs is most likely a/an

Answer 62

Installment note

Question 63

The rate of interest that is typically used to compute the debit to INTEREST EXPENSE on a long-term bond, and that is based on the market rate of interest when the bond is sold, is called the

Answer 63

Effective rate