Question 1

Under an operating lease, the lessee

Accepted Answer

Under an operating lease, the lessee should debit Rent Expense to record the periodic lease payments. There is no capitalization of the leased asset or recognition of a liability on the balance sheet, so options A, C, and D are incorrect.

Question 2

The advantages of financial leverage accrue primarily to

Accepted Answer

The advantage of financial leverage is that it magnifies returns to the stockholders. When a company earns profits, part of it goes to pay interest on debt and the rest goes to the stockholders as dividends. With financial leverage, the interest expense on debt can result in higher earnings per share and a higher return on equity for the stockholders.

Question 3

Which of the following is an example of off-balance-sheet financing?

Accepted Answer

Off-balance-sheet financing refers to financing activities that are not shown on the balance sheet of a company. Leases are an example of off-balance-sheet financing because while they involve the use of an asset, they do not show up as a liability on the balance sheet. Bonds, notes, and dividends, on the other hand, are all financing activities that are typically recorded on a company's balance sheet.

Question 4

A company with income before income taxes of $97,000, and $20,000 in interest expense, has an interest coverage ratio of

Accepted Answer

The interest coverage ratio is calculated as (Income before income taxes + Interest expense) / Interest expense. Here, it is ($97,000 + $20,000) / $20,000 = 5.85, which rounds to 5.9 times.

Question 5

The interest coverage ratio equals income before income taxes plus interest expense divided by

Accepted Answer

The interest coverage ratio is calculated as income before income taxes plus interest expense divided by interest expense. This measures a company's ability to meet its interest obligations.

Question 6

Under a capital lease, the lessee does not record which of the following?

Accepted Answer

Under a capital lease, the lessee records both the leased asset and the related liability on their balance sheet. Depreciation on the leased asset is also recorded. However, rent expense is not recorded because the lessee is considered the owner of the asset and is making payments towards ownership, rather than just renting it.

Question 7

Under a defined contribution pension plan,

Accepted Answer

Under a defined contribution pension plan, the employer's obligation is limited to making specified contributions to the plan, making the accounting for annual pension expense straightforward.

Question 8

All of the following are operating leases except a

Accepted Answer

A and C are also operating leases because they have the characteristics of an operating lease - they are relatively short-term and do not transfer ownership of the asset to the lessee. B could potentially be an operating lease if it meets certain criteria, but based on the information provided, it is unclear. On the other hand, D is a finance lease because it includes an option to buy the asset at the end of the lease at a small amount, which transfers ownership of the asset to the lessee.

Question 9

The entry to record the issuance of bonds between interest payment dates will include a debit to Bond Interest Expense.

Accepted Answer

The answer of The entry to record the issuance of...

Question 10

When bonds are converted to stock, any excess carrying value of the bonds over the par value of the stock is to be recorded as Additional Paid-in Capital.

Accepted Answer

This is true. When bonds are converted to stock, any excess carrying value of the bonds over the par value of the stock is recorded as Additional Paid-in Capital on the balance sheet. This is because the company is receiving more value for the bonds than the par value of the stock, and this excess value is considered a contribution from the investors.

Question 11

Which of the following qualifies as a capital lease?

Accepted Answer

A lease qualifies as a capital lease if it meets one of the following criteria: (1) the lease transfers ownership of the asset to the lessee at the end of the lease term, (2) the lease contains a bargain purchase option to buy the asset, (3) the lease term represents 75% or more of the asset's useful life, or (4) the present value of the lease payments represents 90% or more of the fair market value of the asset. In this scenario, choice C represents a lease that meets criteria (3), as the lease term represents the entire useful life of the machine.

Question 12

The matching rule dictates that both the accrued interest and the amortization of a premium or discount be recorded at the year end.

Accepted Answer

The matching rule requires that both the accrued interest and the amortization of a premium or discount be recorded at the end of the year in order to accurately reflect the expenses and revenues of the entity. This ensures that expenses and revenues are matched and recorded in the same reporting period to provide more accurate financial statements.

Question 13

Issuing bonds between interest payment dates will have the effect of decreasing a bond issuance discount or increasing a bond issuance premium.

Accepted Answer

The answer of Issuing bonds between interest payment dates will...

Question 14

Other postretirement benefits should be expensed

Accepted Answer

Other postretirement benefits are a form of compensation for an employee's service and should be recognized as an expense as the employee earns them. This is in accordance with the matching principle of accounting, which requires expenses to be recognized when the related revenues are earned or when the related benefits are received. Therefore, other postretirement benefits should be expensed as the employee earns them, not on the retirement date, as they are received, or when the employee is hired.

Question 15

If bonds are retired by an issuer by purchase on the open market at a price below the bonds' carrying value, a gain will result.

Accepted Answer

When bonds are retired by an issuer by purchase on the open market at a price below the bonds' carrying value, a gain will result because the issuer is essentially buying back their debt at a lower price than it is currently valued on their financial statements, resulting in a gain or profit.

Question 16

An adjustment must be made at the end of an accounting period to accrue the interest expense on bonds payable and to amortize any related premium or discount from the last interest payment date to the end of the fiscal year.

Accepted Answer

This statement is true. Accrual accounting requires that expenses and revenues are recognized in the period in which they are incurred or earned, not necessarily when payment is made or received. Therefore, to accurately reflect the interest expense and related premium or discount of bonds payable for the fiscal year, an adjusting entry is required at the end of the period.

Question 17

The debt to equity ratio is expressed in terms of

Accepted Answer

The debt to equity ratio is expressed in terms of "times," indicating how many times the total debt is compared to the shareholders' equity.

Question 18

Which of the following statements best describes the behavior over time of the components of equal mortgage payments?

Accepted Answer

In equal mortgage payments, the amount paid towards principal gradually increases over time while the amount paid towards interest gradually decreases. This is because the interest is charged on the outstanding balance, and as the balance decreases with each payment, the interest charged reduces accordingly. Therefore, payment of principal increases and interest expense decreases over time.

Question 19

It is the bondholder rather than the issuer who may exercise the call feature of a callable bond.

Accepted Answer

It is the issuer who has the right to exercise the call feature of a callable bond, allowing them to redeem the bond before its maturity date.

Question 20

Deferred income taxes arise when

Accepted Answer

Deferred income taxes arise when there is a discrepancy between financial reporting requirements and income tax filing requirements. This means that the income or expense has been recognized for financial accounting purposes, but may not be recognized for tax purposes or may be recognized in a different period for tax purposes, resulting in a timing difference. This timing difference creates a temporary difference, which gives rise to deferred tax assets or liabilities.

Quiz 13: Long Term Liabilities