Question 1

Which of the following is true regarding SIC 12, "Consolidation--Special Purpose Entities", and FIN 46R, "Consolidation of Variable Interest Entities"?

Accepted Answer

The answer of Which of the following is true regarding...

Question 2

On December 31, 2010, International Refining Company purchased machinery having a cash selling price of $85,933.75. The company paid $10,000 down and agreed to finance the remainder by making four equal payments each December 31 at the implicit interest rate of 12%.

Accepted Answer

The answer of On December 31, 2010, International Refining Company...

Question 3

An entity would be considered the primary beneficiary of a variable interest entity (VIE) if the entity

Accepted Answer

The primary beneficiary of a VIE is the entity that has both the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. Providing the majority of financial support indicates a significant obligation to absorb losses or receive benefits.

Question 4

A variable interest in a variable interest entity (VIE) may arise from all of the following except

Accepted Answer

A variable interest in a VIE can arise from management contracts, service contracts, and leases, but not from defined-benefit pension plans.

Question 5

Debt securities frequently are issued with a convertible feature that permits the holder to convert the bond certificates into a determinable number of shares of common stock at any time before the conversion privilege expires. The conversion feature offers many advantages and some disadvantages both to the issuer and the investor, however.
Required:
Identify the advantages of convertible debt both to the issuer and the investor.

Accepted Answer

The answer of Debt securities frequently are issued with a...

Question 6

On February 1, 2010, AmeriGas sold $300,000, 12 percent, ten-year bonds at 96 plus accrued interest. Interest is payable semiannually on June 1 and December 1. The bond issue was dated December 1, 2009. On July 31, 2011, $150,000 of the issue was reacquired at 95 plus accrued interest.
Make the entries on the issuer's books for the sale of the bonds, the payment of interest, amortization of premium or discount, and accrual of interest, and reacquisition as needed for 2010 and 2011. Straight-line amortization is recorded at the end of the calendar year and accruals are reversed. (Round all calculations.)

Accepted Answer

The answer of On February 1, 2010, AmeriGas sold $300,000,...

Question 7

On December 31, 2011, Roberts Corporation's current liabilities total $60,000 and long-term liabilities total $160,000. Working capital at December 31, 2011, is equal to $90,000. If Roberts Corporation's debt-to-equity ratio is .40 to 1, total long-term assets must equal

Accepted Answer

The debt-to-equity ratio is 0.40, meaning total liabilities are 40% of equity. Total liabilities are $220,000 ($60,000 + $160,000). Therefore, equity is $550,000 ($220,000 / 0.40). Total assets equal liabilities plus equity, which is $770,000. Subtracting current assets ($150,000, derived from working capital $90,000 + current liabilities $60,000) from total assets gives long-term assets of $620,000.

Question 8

On June 1, 2011, Jefferson Controls, Inc. issued $12,000,000 of 10 percent bonds to yield 12 percent. Interest is payable semiannually on May 31 and November 30. The bonds mature in 15 years. Jefferson Controls, Inc. is a calendar-year corporation.

Accepted Answer

The answer of On June 1, 2011, Jefferson Controls, Inc....

Question 9

Monumental Studios, in an effort to promote the release of their new movie "Ninjas from Space," began a national sales promotion campaign. Two coupons from specially marked boxes (one coupon in each box) of "Sugar Charms" cereal are redeemable for one ticket to the show. Tickets cost Monumental $1.50 each. Monumental estimates that 40 percent of the coupons will be redeemed. At the end of 2011, the following information is available:
  
What is the estimated liability for premium claims outstanding at December 31, 2011?

Accepted Answer

The answer of Monumental Studios, in an effort to promote...

Question 10

In an effort to increase sales, Rofix Company began a sales promotion campaign on June 30, 2011. Part of this promotion included placing a special coupon in each package of candy bars sold. Customers were able to redeem ten coupons for a Frisbee. Each premium costs Rofix $1.50. Rofix estimated that 60 percent of the coupons issued will be redeemed. For the six months ended December 31, 2011, the following information is available:
  
What is the estimated liability for premium claims outstanding at December 31, 2011?

Accepted Answer

The answer of In an effort to increase sales, Rofix...

Question 11

Much of the dissatisfaction about Enron's accounting centered around its use of special purpose entities (SPEs, now referred to by the FASB as variable interest entities or VIEs). Enterprises such as Enron have used VIEs to avoid reporting assets and liabilities for which they are responsible, to defer the reporting of losses that have already been incurred, or to report gains that do not exist. In response both to the abuses of VIEs and to the fragmented and incomplete accounting standards regarding VIEs, the FASB has proposed a new accounting interpretation. Current accounting standards require an enterprise to include subsidiaries in which it has a controlling financial interest in its consolidated financial statements. The focus of current standards is on a parent-subsidiary relationship established through voting ownership interests. The relationship between a business enterprise and a VIE is established through other means.
The proposed interpretation would explain how to identify a VIE that is not subject to control through voting ownership interests and would require each enterprise involved with such a VIE to determine whether it provides financial support to the VIE through a variable interest. If an enterprise holds a majority of the variable interests of a VIE or a significant variable interest that is greater than any other party's variable interest, then that enterprise would be the primary beneficiary and would be required to include the VIE in its consolidated financial statements.
Explain what is meant by the term "variable interests."

Accepted Answer

The answer of Much of the dissatisfaction about Enron's accounting...

Question 12

On December 31, 2011, Carlton Corporation's current liabilities total $50,000 and long-term liabilities total $150,000. Working capital at December 31, 2011, is equal to $80,000. If Carlton Corporation's debt-to-equity ratio is .32 to 1, total long-term assets must equal

Accepted Answer

The answer of On December 31, 2011, Carlton Corporation's current...

Question 13

On December 31, 2011, Anderson Company's current liabilities total $55,000 and long-term liabilities total $155,000. Working capital at December 31, 2011, is equal to $85,000. If Anderson Company's debt-to-equity ratio is .30 to 1, total long-term assets must equal

Accepted Answer

The answer of On December 31, 2011, Anderson Company's current...

Question 14

On January 1, 2010, Kate Products issued ten-year convertible bonds of $1,800,000 at 105. Interest is payable semiannually on June 30 and December 31 at a rate of 12 percent. On June 30, 2012, the company retired bonds of $150,000 at 102 plus accrued interest. Straight-line amortization is recorded at the end of the calendar year.

Accepted Answer

The answer of On January 1, 2010, Kate Products issued...

Question 15

The Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivatives and Hedging Activities," as part of its project on financial instruments and its effort to deal with off-balance-sheet financing.
Explain what is meant by the term "off-balance-sheet financing" and give two reasons why "off-balance-sheet financing" is attractive to the management of an enterprise.

Accepted Answer

The answer of The Financial Accounting Standards Board issued Statement...

Question 16

Johnson Corporation bought a new machine and agreed to pay for it in equal annual installments of $6,000 at the end of each of the next five years. Assume the prevailing interest rate for this type of transaction is 12%. Assume the present value of an ordinary annuity of $1 at 12% for five periods is 3.60. The future amount of an ordinary annuity of $1 at 12% for five periods is 6.35. The present value of $1 at 12% is 0.567. How much should Johnson record as the note payable on the balance sheet if financial statements were prepared today?

Accepted Answer

To calculate the present value of the note payable, we need to find the present value of the annuity of $6,000 for five years, which is:

PV = PMT x PVIFA
PV = $6,000 x 3.60
PV = $21,600

Therefore, Johnson should record $21,600 as the note payable on the balance sheet if financial statements were prepared today. The correct answer is B.

Question 17

On January 2, 2006, Picard Enterprises issued $2,400,000 of 8 percent, 15-year semiannual coupon bonds to yield 7.5 percent. Each bond is convertible into 40 shares of $15 par common stock, which was trading at $20 per share on the date of the bond issue. The bonds were issued at 106. Without the conversion feature, the bonds would have been issued for 104.5.
On January 3, 2011, all of the bonds were converted into common stock. The market price of the stock was $28 per share on the date of conversion. The issue premium is amortized using the straight-line method.

Accepted Answer

The answer of On January 2, 2006, Picard Enterprises issued...

Question 18

On May 1, 2010, J. Cumming acquired $300,000 of Carpenter Enterprises 12 percent bonds due in five years with interest payable semiannually on May 1 and November. The bonds were purchased at $323,165--a price to return 10 percent on the investment. On November 1, 2010, and May 1, 2011, Cumming collected the interest on the bonds. On August 1, 2011, Cumming sold the bonds at 107 plus accrued interest.
Rounding figures to the nearest dollar, provide the entries required to record the:

Accepted Answer

The answer of On May 1, 2010, J. Cumming acquired...

Question 19

The globalization of business has caused many changes in how enterprises are managed. One such change is illustrated by U.S. enterprises obtaining loans denominated in foreign currencies.
Identify reasons why such borrowings may occur.

Accepted Answer

The answer of The globalization of business has caused many...

Question 20

Footnote disclosures for long-term liabilities provide information that is not conveniently presented in the balance sheet. Although detailed disclosure requirements exist for certain specialized obligations, a set of general disclosure requirements is applicable to most enterprises.
Identify the general disclosure requirements for long-term liabilities.

Accepted Answer

The answer of Footnote disclosures for long-term liabilities provide information...

Quiz 12: Debt Financing