M4

Question 1

Short-term debt that is expected to be refinanced is classified as long-term to the extent of post-balance sheet refinancing. Support must exist for the refinancing. The $250,000 was paid prior to refinancing and should be included as a current liability.

Question 2

Costs to relocate employees are costs associated with exit and disposal activities

Question 3

The reported liability is the present value of the future obligation, which is the estimated fair value of the liability

Question 4

The full range of possible settlements should be disclosed. The actual settlement did not occur until after the financial statements were issued.

Answer 4

Gain contingencies should be disclosed in the notes unless the likelihood of the gain being realized is remote

Question 5

Any change in the value of the liability after the property has been fully depreciated will be recognized in profit or loss.

Question 6

A contingent liability that is probable and estimable must be recognized. If all amounts within a range of values are equally likely, then the lowest amount in the range is the measurement amount

Question 7

Only footnote disclosure is required for a “reasonably possible” (not “probable”) loss

Question 8

Gain contingencies should be disclosed with care taken not to mislead users of the financial statements as to the likelihood of realization.

Question 9

The likelihood of loss on the drug lawsuit is reasonably possible and is disclosed on the financial statement notes but not accrued on the financial statements.

Question 10

Gain contingencies are not recognized in the financial statements because to do so may cause recognition of revenue prior to its realization. Gain contingencies are recorded when the gain is realized.

Question 11

A loss contingency involves a possible future loss whose existence is proven by subsequent events. Pending or threatened litigation is an example of a loss contingency, as litigation could result in an obligation and subsequent outflow of resources if the lawsuit is settled and payment is required.

Question 12

Contingent liabilities are recorded when they are probable and estimable. Although GAAP requires accrual of the best estimate, in the event that only a range of liabilities is known, the minimum amount of the range is recorded.

Question 13

The financial statements reflect loss contingencies when the loss is probable and can be reasonably estimated.

Question 14

Unearned revenue at the coupon sales price (the cash received amount).

Answer 14

The transaction is recorded at the cash received amount (coupon sales price), because it is more objective than the retail price of the merchandise for which it can be exchanged.

Question 15

Imputed interest on non-interest bearing note is reported as interest expense

Question 17

The discount on a note payable should be reported on the balance sheet as a direct reduction from the face amount of the note.

Question 18

Because the term of the Alpha note does not exceed one year, it is recorded at its face amount of $10,000, while the two-year Omega note must be reported at the present value of the obligation calculated using the market interest rate of 8%

Question 19

The correct presentation of a note payable is to show the face amount, less a discount on the liability itself at the imputed interest rate

Question 20

Financial instruments in the form of shares that are mandatorily redeemable and represent an unconditional obligation of the issuer to satisfy the obligation by transferring assets at a specified date are presented as liabilities and not equity according to U.S. GAAP.

Question 21

To determine the market price of a bond, the present value of the principal is added to the present value of all interest payments, using the market interest rate

Question 22

Serial bonds are pre-numbered bonds that the issuer may call and redeem a portion by serial number.

Answer 22

Serial bonds are bonds that mature in installments

Question 23

Term bonds are bonds that have a single fixed maturity date

Question 24

Variable rate bonds have interest rates that change

Question 25

Debentures are unsecured bonds.

Question 26

Because the warrants are detachable, the issue price of the bonds and warrants together should be allocated based on each component’s fair values on the issuance date

Question 27

The long-term liabilities will increase by the difference between the carrying amount of the old 15-year bond and the face amount (issuing price) of the new 10-year bond.

Answer 27

Bond liability is shown on the balance sheet net of unamortized discount.

Question 28

difference between ordinary annuity vs annuity ?

Question 29

With an increasing carrying value each period, interest expense will increase by a larger amount every year (the increase in interest expense is larger in the later years than in the earlier years).

Question 30

The bond premium is amortized over the life of the bond with amortized amounts decreasing interest expense each period. If interest expense is not appropriately decreased, then interest expense will be overstated. The overstating of interest expense will lead to the understatement of net income, which is then closed to stockholder’s equity. This will result in the understatement of stockholder’s equity

Question 31

When a discount on a bond or note is amortized, the discount amortization increases interest expense for the period.

Question 32

The interest payable on a bond is calculated by taking the face value of the bond at the beginning of the period and multiply this amount by the contractual interest rate

Question 33

When debt is issued at a discount, interest expense over the term of the debt equals the cash interest paid plus amortization of the discount.

Question 34

When debt is issued at a discount, interest expense over the term of the debt equals the cash interest paid plus amortization of the discount.