Question 1

Under a capital lease,the lessee,not the lessor,should record depreciation.

Accepted Answer

Under a capital lease, the lessee has the ownership of the leased asset and therefore, should record depreciation. The lessor should not record any depreciation as they do not own the asset.

Question 2

Under a capital lease,each monthly payment is debited by the lessee to Rent Expense.

Accepted Answer

Under a capital lease, each monthly payment is split between interest expense and reduction of the lease liability, and not debited entirely to Rent Expense.

Question 3

The debt to equity ratio is a measure of financial leverage.

Accepted Answer

The debt to equity ratio is a commonly used financial ratio that measures the amount of debt used to finance a company's assets compared to the amount of equity. It is a measure of financial leverage, and a higher debt to equity ratio indicates that a company has more debt relative to equity.

Question 4

Interest on debt is tax-deductible to the issuing corporation,whereas dividends on stock are not.

Accepted Answer

This is a correct statement. Interest paid on debt is tax-deductible for the issuing corporation, while dividends paid on stock are not tax-deductible. This means that the company can lower its taxable income by deducting the interest expenses from its revenue when calculating its tax liability. However, dividends are paid from the company's profits after it has paid taxes on its income, and they are taxed as income for the recipient.

Question 5

The interest coverage ratio is expressed as a percentage.

Accepted Answer

The interest coverage ratio is expressed as a numerical ratio, not as a percentage. It measures a company's ability to make interest payments on its debt, calculated by dividing earnings before interest and taxes (EBIT) by the interest expense.

Question 6

Accounting for capital leases can be thought of as similar to accounting for mortgage payments.

Accepted Answer

Both capital leases and mortgage payments involve periodic payments for the use of an asset over a fixed term, and require recognition of interest expense and a reduction in the liability balance over time.

Question 7

Under a defined benefit pension plan,retirement benefits are based entirely on the annual contribution to the fund plus earnings thereon.

Accepted Answer

Under a defined benefit pension plan, retirement benefits are based on a formula that takes into account factors such as years of service and salary history, rather than just the contributions and earnings of the fund.

Question 8

When the terms of a lease require that the lessee record an asset and a liability,the two accounts are recorded at the present value of the total lease payments required.

Accepted Answer

This statement is true. When a lease requires the lessee to record an asset and liability, the accounts are recorded at the present value of the lease payments. This is because the lessee is effectively borrowing the use of the leased asset for the duration of the lease, and the present value of the lease payments represents the value of that borrowing.

Question 9

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 10

Accounting for a defined contribution pension plan is simpler than accounting for a defined benefit plan.

Accepted Answer

Accounting for a defined contribution pension plan is simpler because the employer's obligation is limited to making contributions to the plan based on a predetermined formula, with no further responsibility for the performance of the plan's assets or the payment of future retirement benefits. In contrast, accounting for a defined benefit plan requires detailed calculations to determine the employer's obligations for funding future retirement benefits, as well as ongoing monitoring of the plan's assets and liabilities.

Question 11

When bonds are sold between interest dates,the interest collected when the bonds are sold is returned to investors on the next interest payment date.

Accepted Answer

This is known as accrued interest and is typically paid to the buyer of the bonds, rather than the seller.

Question 12

Financial leverage is also known as trading on the equity.

Accepted Answer

Financial leverage refers to the use of borrowed capital to increase the potential return on investment, which is also known as trading on equity.

Question 13

A capital lease represents both an asset and a liability.

Accepted Answer

A capital lease results in the lessee recording the leased asset as an asset on the balance sheet and the lease obligation as a liability.

Question 14

When bonds are sold between the interest payment dates,the issuing corporation pays to investors the interest that has accrued since the last interest payment date.

Accepted Answer

When bonds are sold between interest payment dates, the buyer pays the seller the accrued interest since the last interest payment date, not the issuing corporation.

Question 15

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 16

Leases of short-term assets are operating leases,and leases of long-term assets are capital leases.

Accepted Answer

The classification of leases as operating or capital (finance) leases does not depend on the term of the asset being leased but on specific criteria set by accounting standards, such as the transfer of ownership, purchase options, lease term length in relation to the asset's useful life, present value of lease payments, and whether the leased asset is of a specialized nature.

Question 17

A capital lease is a lease of property,plant,or equipment that is in effect an installment purchase.

Accepted Answer

A capital lease is structured in a way that the lessee is treated as the owner of the property, plant or equipment and is required to make fixed periodic payments similar to loan installments. This type of lease is considered a form of financing and is recorded as a liability on the lessee's balance sheet.

Question 18

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 is true as per generally accepted accounting principles (GAAP). Accruing interest expense and amortizing premiums/discounts on bonds payable is necessary to accurately reflect the company's financial position and performance for the current accounting period.

Question 19

Under a capital lease,the lessee records both an asset and a liability.

Accepted Answer

In a capital lease, the lessee is considered to have virtually purchased the asset and therefore, records both an asset and a liability on their balance sheet.

Question 20

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 year end in order to accurately match the expenses with the corresponding revenues or gains. This helps to ensure proper financial reporting and accuracy in financial statements.

Quiz 11: Long-Term Liabilities