Question 1

A capital lease represents both an asset and a liability.

Accepted Answer

A capital lease is a type of lease in which the lessee (the person leasing the asset) is treated as the owner of the asset for accounting purposes. This means that the lessee records the leased asset on their balance sheet as a property, plant, and equipment (PP&E) asset and also records a liability for the present value of the lease payments due. Therefore, a capital lease represents both an asset and a liability.

Question 2

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

Accepted Answer

Under a capital lease, the lessee is considered the owner of the asset and therefore should record depreciation. It is recorded as an expense in the income statement and reduces the value of the asset on the balance sheet. The lessor, on the other hand, should record lease receivables and recognize interest income.

Question 3

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

Accepted Answer

A capital lease is considered to be similar to a purchase, where the lessee gains ownership over the asset during the lease term. Therefore, both an asset and a liability are recorded on the lessee's balance sheet.

Question 4

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

Accepted Answer

Accounting for a defined contribution plan involves recording contributions made by the employer and employee into an account, and then tracking the investment returns on those contributions. The employer has no obligation beyond making the contributions. Accounting for a defined benefit plan, on the other hand, is more complex as it involves calculating the expected future benefits to be paid out to employees, and accounting for the investment returns needed to fulfill those obligations.

Question 5

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 6

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 an employee's years of service and salary, rather than solely on the annual contribution and earnings on the fund.

Question 7

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

Accepted Answer

This is a basic principle of corporate finance/taxation. Interest paid on debt is considered a business expense and is therefore tax-deductible, while dividends paid on stock are not considered an expense and are not tax-deductible.

Question 8

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 9

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

Accepted Answer

Both capital leases and mortgage payments involve the periodic payment of principal and interest, and the assets being financed through these arrangements are recorded on the balance sheet as liabilities.

Question 10

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 is true. When a lease requires the lessee to record an asset and a liability, the two accounts are recorded at the present value of the total lease payments required. This is because the lessee will be making periodic lease payments over the term of the lease, and the present value of those payments represents the initial value of the asset and the liability.

Question 11

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 into a portion for interest expense and a portion for the reduction of the lease liability. The interest portion is recognized as interest expense, and the reduction of the lease liability is recognized as a reduction in the liability balance. Therefore, the monthly payments are not debited solely to Rent Expense.

Question 12

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

Accepted Answer

The debt to equity ratio compares a company’s total liabilities to its total shareholder equity to determine the portion of the company’s funding that comes from debt vs. equity. It indicates the extent to which a company is financing its operations through debt or equity.

Question 13

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 responsible for most of the risks and rewards associated with the leased asset, and therefore it is recognized as an asset and liability on the lessee's balance sheet similar to a purchase made with borrowed funds. This makes it similar to an installment purchase.

Question 14

Financial leverage is also known as trading on the equity.

Accepted Answer

Financial leverage is the use of borrowed funds or debt to increase the returns on equity investments. It is also known as trading on the equity.

Question 15

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 statement is true. When bonds are sold between interest dates, any accrued interest is usually paid to the seller, and the new owner of the bonds will start receiving interest payments on the next scheduled payment date.

Question 16

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 principle requires that both the accrued interest and the amortization of a premium or discount be recorded at the end of the accounting period to match the interest expense incurred during the period with the corresponding revenue earned.

Question 17

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 18

Costs of postretirement benefits other than pension plans should be expensed when paid to the retired employee.

Accepted Answer

Costs of postretirement benefits other than pension plans, such as healthcare or life insurance, are typically accrued and recognized over the period of the employee's service before retirement and not expensed when paid to the retired employee. This is known as the accrual method of accounting.

Question 19

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 correct. The adjusting entry is necessary to ensure that the financial statements accurately reflect the interest expense and the carrying value of the bonds payable on the balance sheet.

Question 20

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

Accepted Answer

This statement is incorrect. The classification of a lease as an operating or capital lease depends on various factors such as the lease term, the present value of lease payments, and whether the lease transfers ownership of the asset to the lessee at the end of the lease term. The term of the lease does not determine its classification as an operating or capital lease.

Quiz 14: Long Term Liabilities