Question 1

Bonds that are secured by stocks and bonds of other corporations are called

Accepted Answer

Collateral trust bonds are secured by a pledge of securities, such as stocks or bonds of other corporations, which are held in trust for the bondholders. This type of bond uses the securities as collateral to back the bond issue.

Question 2

A bond premium should be reported in the balance sheet

Accepted Answer

A bond premium is reported in the balance sheet as a direct addition to the face amount of the bond. This reflects the additional amount investors are willing to pay over the bond's face value, and it is amortized over the life of the bond to reduce the bond's interest expense.

Question 3

Bond issue costs, such as printing costs, legal fees, commissions, etc. are most appropriately accounted for by

Accepted Answer

Bond issue costs are capitalized as an asset (Unamortized Bond-Issue Costs) and then amortized over the life of the bond, reflecting the period over which the bond benefits from these costs.

Question 4

When debt is extinguished before its maturity date, any difference between the reacquisi-tion price of outstanding debt and its net carrying amount per books should be

Accepted Answer

The difference between the reacquisition price of the debt and its net carrying amount should be recognized currently in income as a loss or gain, reflecting the immediate financial impact of the extinguishment.

Question 5

The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as a(n)

Accepted Answer

The correct method treats any gain or loss from the early extinguishment of debt as the difference between the reacquisition price and the net carrying amount of the debt, which should be recognized in the period of redemption. This approach reflects the immediate financial impact of the extinguishment on the entity's financial statements.

Question 6

Mark Ward is a farmer who owns land which borders on the right-of-way of Northern Railroad. On August 10, 2008, due to Northern's admitted negligence, hay on the farm was set on fire and burned. Ward had had a dispute with the railroad for several years concerning the ownership of a small parcel of land. The representative of the railroad has offered to assign any rights which the railroad may have in the land to Ward in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Ward appears inclined to accept the railroad's offer. Northern Railroad's 2008 financial statements should include the following related to the incident:

Accepted Answer

The answer of Mark Ward is a farmer who owns...

Question 7

A contingency is defined by FASB Statement No. 5 as an

Accepted Answer

A contingency involves uncertainty about a potential gain or loss that will be resolved by future events, as defined by FASB Statement No. 5.

Question 8

Which of the following loss contingencies is normally accrued?

Accepted Answer

Obligations related to product warranties are normally accrued because they are probable and can be reasonably estimated, in accordance with accounting standards.

Question 9

If a loss is either probable or estimable, but not both, and if there is at least a reasonable possibility that a liability may have been incurred, the proper accounting treatment would be reflected by which of the following?

Accepted Answer

For accounting purposes, when a loss is either probable or estimable but not both, and there is at least a reasonable possibility of a liability, the appropriate action is to disclose the nature of the contingency and an estimate of the possible loss or range of loss (or state that an estimate cannot be made) in the footnotes to the financial statements. This approach ensures transparency without prematurely recognizing a loss that may not occur.

Question 10

Wilson Company is involved in a litigation suit concerning the clean-up of old underground oil storage tanks on property it sold to a housing development company five years ago. The attorneys for Wilson Company cannot give a best estimate for the probable liability; however, the attorneys state that the liability to Wilson Company will probably fall within a range of $2 million to $10 million. According to the SEC, what should Wilson Company record with regards to this environmental liability?

Accepted Answer

When a range of potential losses exists and no single amount within the range is more likely than any other, the company should record the minimum amount of the range, which in this case is $2 million.

Question 11

Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty

Accepted Answer

The liability for the warranty should be reported as part current and part long-term because the warranty covers three years, meaning part of the liability will be due within the next year (current liability) and the rest will be due in the following two years (long-term liability).

Question 12

Lopez Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2008. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Lopez recall all cans of this paint sold in the last six months. The management of Lopez estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?

Accepted Answer

This situation should be recognized as both an operating expense and a liability of $800,000 in the financial statements. This is because the event (the recall) is a probable future outflow of resources (money) resulting from past transactions or events (the sale of the hazardous paint), and the amount can be reasonably estimated.

Question 13

Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be

Accepted Answer

According to accounting principles, when a loss is probable and the amount can be reasonably estimated, the loss contingency should be accrued. This means the estimated loss from product warranties should be recorded in the financial statements.

Question 14

Marx Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and

Accepted Answer

The loss and liability should be reported if the cause for action occurred during the accounting period covered by the financial statements, as it relates to events that existed at the balance sheet date.

Question 15

Which of the following is an example of "off-balance-sheet financing"?
1) Non-consolidated subsidiary
2) Special purpose entity
3) Operating leases

Accepted Answer

All of these options are examples of off-balance-sheet financing. Non-consolidated subsidiaries, special purpose entities, and operating leases are methods used by companies to keep certain financial obligations or assets off their primary balance sheet, thereby affecting financial ratios and potentially reducing perceived risk or liability.

Question 16

When a business enterprise enters into what is referred to as off-balance-sheet financing, the company

Accepted Answer

Off-balance-sheet financing is a legitimate and common financial strategy used by companies to improve their balance sheet by not recording certain assets and liabilities directly on the balance sheet. This can make the company's financial position appear stronger, potentially making it easier and cheaper to obtain credit. It is not intended to conceal debt from shareholders but rather to manage how the company's financial health is presented.

Question 17

Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements?

Accepted Answer

The correct answer is D because companies are required to disclose the amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years, not the present value of those payments or the present value of scheduled interest payments. This information helps investors and creditors assess the company's future cash outflows and financial health.

Question 18

Edson Corp. signed a three-month, zero-interest-bearing note on November 1, 2008 for the purchase of $150,000 of inventory. The face value of the note was $152,205. Assuming Edson used a "Discount on Note Payable" account to initially record the note and that the discount will be amortized equally over the 3-month period, the adjusting entry made at December 31, 2008 will include a

Accepted Answer

$152,205 - $150,000 = $2,205
$2,205 × 2/3 = $1,470.

Question 19

On January 1, 2008, Bleeker Co. issued eight-year bonds with a face value of $ 1,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:
 
-The present value of the interest is

Accepted Answer

($1,000,000 × .03) × 11.652 = $349,560

Question 20

On January 1, 2008, Bleeker Co. issued eight-year bonds with a face value of $ 1,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:
 
-The issue price of the bonds is

Accepted Answer

$534,000 + $349,560 = $883,560

Quiz 12: Accounting for Liabilities