Chapter 13

1. A zero-interest-bearing note payable that is issued at a discount will not result in any
interest expense being recognized.

2. Dividends in arrears on cumulative preferred stock should be recorded as a current

liability.

3. Magazine subscriptions and airline ticket sales both result in unearned revenues.

4. Discount on Notes Payable is a contra account to Notes Payable on the balance sheet.

5. All long-term debt maturing within the next year must be classified as a current liability on
the balance sheet.

6. A short-term obligation can be excluded from current liabilities if the company intends to
refinance it on a long-term basis.

7. Many companies do not segregate the sales tax collected and the amount of the sale at
the time of the sale.

8. A company must accrue a liability for sick pay that accumulates but does not vest.

9. Companies report the amount of social security taxes withheld from employees as well as
the companies’ matching portion as current liabilities until they are remitted.

10. Accumulated rights exist when an employer has an obligation to make payment to an
employee even after terminating his employment.

11. Companies should recognize the expense and related liability for compensated absences
in the year earned by employees.

12. Companies should accrue an estimated loss from a loss contingency if information
available prior to the issuance of financial statements indicates that it is probable that a
liability has been incurred.

13. A company discloses gain contingencies in the notes only when a high probability exists
for realizing them.

14. The expected profit from a sales type warranty that covers several years should all be
recognized in the period the warranty is sold.

15. The fair value of an asset retirement obligation is recorded as both an increase to the
related asset and a liability.

16. The cause for litigation must have occurred on or before the date of the financial
statements to report a liability in the financial statements.

17. Under the expense warranty approach, companies charge warranty costs only to the
period in which they comply with the warranty.

18. Prepaid insurance should be included in the numerator when computing the acid-test
(quick) ratio.

19. Paying a current liability with cash will always reduce the current ratio.

20. Current liabilities are usually recorded and reported in financial statements at their full
maturity value.
21.Liabilities are
a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally
accepted accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the
future.

22. Which of the following is a current liability?

a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund
b. A long-term debt maturing currently, which is to be retired with proceeds from a new
debt issue
c. A long-term debt maturing currently, which is to be converted into common stock
d. None of these

23. Which of the following is true about accounts payable?

1. Accounts payable should not be reported at their present value.
2. When accounts payable are recorded at the net amount, a Purchase
Discounts account will be used.
3. When accounts payable are recorded at the gross amount, a Purchase
Discounts Lost account will be used.
a. 1
b. 2
c. 3
d. Both 2 and 3 are true.

24. Among the short-term obligations of Lance Company as of December 31, the balance
sheet date, are notes payable totaling $250,000 with the Madison National Bank. These
are 90-day notes, renewable for another 90-day period. These notes should be
classified on the balance sheet of Lance Company as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.

25. Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the
balance sheet.
c. When there is a discount on a note payable, the effective interest rate is higher than
the stated discount rate.
d. All of these are true.

26. Which of the following may be a current liability?

a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these

27. Which of the following items is a current liability?

a. Bonds (for which there is an adequate sinking fund properly classified as a long-term
investment) due in three months.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in
eleven months.
d. Bonds to be refunded when due in eight months, there being no doubt about the
marketability of the refunding issue.

28. Which of the following should not be included in the current liabilities section of the
balance sheet?
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
c. The discount on short-term notes payable
d. All of these are included
29. Which of the following is a current liability?
a. Preferred dividends in arrears
b. A dividend payable in the form of additional shares of stock
c. A cash dividend payable to preferred stockholders
d. All of these

30. Stock dividends distributable should be classified on the

a. income statement as an expense.
b. balance sheet as an asset.
c. balance sheet as a liability.
d. balance sheet as an item of stockholders' equity.

31. Of the following items, the only one which should not be classified as a current liability is
a. current maturities of long-term debt.
b. sales taxes payable.
c. short-term obligations expected to be refinanced.
d. unearned revenues.

32. An account which would be classified as a current liability is

a. dividends payable in the company's stock.
b. accounts payable—debit balances.
c. losses expected to be incurred within the next twelve months in excess of the
company's insurance coverage.
d. none of these.

33. Which of the following is a characteristic of a current liability but not a long-term liability?
a. Unavoidable obligation.
b. Present obligation that entails settlement by probable future transfer or use of cash,
goods, or services.
c. Liquidation is reasonably expected to require use of existing resources classified as
current assets or create other current liabilities.
d. Transaction or other event creating the liability has already occurred.

34. Which of the following is not considered a part of the definition of a liability?
a. Unavoidable obligation.
b. Transaction or other event creating the liability has already occurred.
c. Present obligation that entails settlement by probable future transfer or use of cash,
goods, or services.
d. Liquidation is reasonably expected to require use of existing resources classified as
current assets or create other current liabilities.

35. Why is the liability section of the balance sheet of primary importance to bankers?
a. To evaluate the entity's credit quality.
b. To assist in understanding the entity's liquidity.
c. To better understand sources of repayment.
d. To evaluate operating efficiency.

36. What is the relationship between current liabilities and a company's operating cycle?
a. Liquidation of current liabilities is reasonably expected within the company's
operating cycle (or one year if less).
b. Current liabilities are the result of operating transactions.
c. Current liabilities can't exceed the amount incurred in one operating cycle.
d. There is no relationship between the two.

37. What is the relationship between present value and the concept of a liability?
a. Present values are used to measure certain liabilities.
b. Present values are not used to measure liabilities.
c. Present values are used to measure all liabilities.
d. Present values are only used to measure long-term liabilities.

38. What is a discount as it relates to zero-interest-bearing notes payable?

a. The discount represents the lender's costs to underwrite the note.
b. The discount represents the credit quality of the borrower.
c. The discount represents the cost of borrowing.
d. The discount represents the allowance for uncollectible amounts.
39. Where is debt callable by the creditor reported on the debtor's financial statements?
a. Long-term liability.
b. Current liability if the creditor intends to call the debt within the year, otherwise a
long-term liability.
c. Current liability if it is probable that creditor will call the debt within the year,
otherwise a long-term liability.
d. Current liability.

40. Which of the following is not a condition necessary to exclude a short-term obligation
from current liabilities?
a. Intend to refinance the obligation on a long-term basis.
b. Obligation must be due with one year.
c. Demonstrate the ability to complete the refinancing.
d. Subsequently refinance the obligation on a long-term basis.

Chapter 14
1. Companies usually make bond interest payments semiannually, although the interest
rate is generally expressed as an annual rate.

2. A mortgage bond is referred to as a debenture bond.

3. Bond issues that mature in installments are called serial bonds.

4. If the market rate is greater than the coupon rate, bonds will be sold at a premium.

5. The interest rate written in the terms of the bond indenture is called the effective yield or
market rate.

6. The stated rate is the same as the coupon rate.

7. Amortization of a premium increases bond interest expense, while amortization of a

discount decreases bond interest expense.

8. A bond may only be issued on an interest payment date.

9. The cash paid for interest will always be greater than interest expense when using
effective-interest amortization for a bond.

10. Bond issue costs are capitalized as a deferred charge and amortized to expense over
the life of the bond issue.

11. The replacement of an existing bond issue with a new one is called refunding.

12. If a long-term note payable has a stated interest rate, that rate should be considered to
be the effective rate.

13. The implicit interest rate is the rate that equates the cash received with the amounts
received in the future.

14. An unrealized holding gain or loss is the net change in the fair value of the liability from
one period to another, exclusive of interest expense recognized but not recorded.

15. Off-balance-sheet financing is an attempt to borrow monies in such a way to minimize

the reporting of debt on the balance sheet.

16. The debt to total assets ratio will go up if an equal amount of assets and liabilities are
added to the balance sheet.

17. If a company plans to retire long-term debt from a bond retirement fund, it should report
the debt as current.

18. The times interest earned ratio is computed by dividing income before interest expense
by interest expense.
*19. The loss to be recognized by a creditor on an impaired loan is the difference between
the investment in the loan and the expected undiscounted future cash flows from the
loan.

*20. In a troubled debt restructuring, the loss recognized by the creditor will equal the gain
recognized by the debtor.

21.An example of an item which is not a liability is

a. dividends payable in stock.
b. advances from customers on contracts.
c. accrued estimated warranty costs.
d. the portion of long-term debt due within one year.

22. The covenants and other terms of the agreement between the issuer of bonds and the
lender are set forth in the
a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.

23. The term used for bonds that are unsecured as to principal is
a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.
P
24. Bonds for which the owners' names are not registered with the issuing corporation are
called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.
S
25. Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.
S
26. If bonds are issued initially at a premium and the effective-interest method of
amortization is used, interest expense in the earlier years will be
a. greater than if the straight-line method were used.
b. greater than the amount of the interest payments.
c the same as if the straight-line method were used.
d. less than if the straight-line method were used.

27. The interest rate written in the terms of the bond indenture is known as the
a. coupon rate.
b. nominal rate.
c. stated rate.
d. coupon rate, nominal rate, or stated rate.

28. The rate of interest actually earned by bondholders is called the

a. stated rate.
b. yield rate.
c. effective rate.
d. effective, yield, or market rate.

Use the following information for questions 29 and 30:

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are
sold to yield 8%.

29. One step in calculating the issue price of the bonds is to multiply the principal by the
table value for
 a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.

30. Another step in calculating the issue price of the bonds is to

a. multiply $10,000 by the table value for 10 periods and 10% from the present value of
an annuity table.
b. multiply $10,000 by the table value for 20 periods and 5% from the present value of
an annuity table.
c. multiply $10,000 by the table value for 20 periods and 4% from the present value of
an annuity table.
d. none of these.

31. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years
from date of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.

32. If bonds are initially sold at a discount and the straight-line method of amortization is
used, interest expense in the earlier years will
a. exceed what it would have been had the effective-interest method of amortization
been used.
b. be less than what it would have been had the effective-interest method of
amortization been used.
c. be the same as what it would have been had the effective-interest method of
amortiza-tion been used.
d. be less than the stated (nominal) rate of interest.

33. Under the effective-interest method of bond discount or premium amortization, the
periodic interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.

34. When the effective-interest method is used to amortize bond premium or discount, the
periodic amortization will
a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
c. increase if the bonds were issued at a premium.
d. increase if the bonds were issued at either a discount or a premium.

35. If bonds are issued between interest dates, the entry on the books of the issuing
corporation could include a
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.

36. When the interest payment dates of a bond are May 1 and November 1, and a bond
issue is sold on June 1, the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.

37. Theoretically, the costs of issuing bonds could be

a. expensed when incurred.
b. reported as a reduction of the bond liability.
c. debited to a deferred charge account and amortized over the life of the bonds.
d. any of these.
38. The printing costs and legal fees associated with the issuance of bonds should
a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
c. be accumulated in a deferred charge account and amortized over the life of the
bonds.
d. not be reported as an expense until the period the bonds mature or are retired.

39. Treasury bonds should be shown on the balance sheet as

a. an asset.
b. a deduction from bonds payable issued to arrive at net bonds payable and
outstanding.
c. a reduction of stockholders' equity.
d. both an asset and a liability.

40. An early extinguishment of bonds payable, which were originally issued at a premium, is
made by purchase of the bonds between interest dates. At the time of reacquisition
a. any costs of issuing the bonds must be amortized up to the purchase date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase date.
d. all of these.

Chapter 15

1. A corporation is incorporated in only one state regardless of the number of states in

which it operates.

2. The preemptive right allows stockholders the right to vote for directors of the company.

3. Common stock is the residual corporate interest that bears the ultimate risks of loss.

4. Earned capital consists of additional paid-in capital and retained earnings.

5. True no-par stock should be carried in the accounts at issue price without any additional
paid-in capital reported.

6. Companies allocate the proceeds received from a lump-sum sale of securities based on
the securities’ par values.

7. Companies should record stock issued for services or noncash property at either the fair
value of the stock issued or the fair value of the consideration received.

8. Treasury stock is a company’s own stock that has been reacquired and retired.

9. The cost method records all transactions in treasury shares at their cost and reports the
treasury stock as a deduction from capital stock.

10. When a corporation sells treasury stock below its cost, it usually debits the difference
between cost and selling price to Paid-in Capital from Treasury Stock.

11. Participating preferred stock requires that if a company fails to pay a dividend in any
year, it must make it up in a later year before paying any common dividends.

12. Callable preferred stock permits the corporation at its option to redeem the outstanding
preferred shares at stipulated prices.

13. The laws of some states require that corporations restrict their legal capital from
distribution to stockholders.

14. The SEC requires companies to disclose their dividend policy in their annual report.

15. All dividends, except for liquidating dividends, reduce the total stockholders’ equity of a
corporation.
16. Dividends payable in assets of the corporation other than cash are called property
dividends or dividends in kind.

17. When a stock dividend is less than 20-25 percent of the common stock outstanding, a
company is required to transfer the fair value of the stock issued from retained earnings.

18. Stock splits and large stock dividends have the same effect on a company’s retained
earnings and total stockholders’ equity.
19. The rate of return on common stock equity is computed by dividing net income by the
average common stockholders’ equity.

20. The payout ratio is determined by dividing cash dividends paid to common stockholders
by net income available to common stockholders.

21.The residual interest in a corporation belongs to the

a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.

22. The pre-emptive right of a common stockholder is the right to

a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preferred stockholders.
d. exclude preferred stockholders from voting rights.

23. The pre-emptive right enables a stockholder to

a. share proportionately in any new issues of stock of the same class.
b. receive cash dividends before other classes of stock without the pre-emptive right.
c. sell capital stock back to the corporation at the option of the stockholder.
d. receive the same amount of dividends on a percentage basis as the preferred
stockholders.
S
24. In a corporate form of business organization, legal capital is best defined as
a. the amount of capital the state of incorporation allows the company to accumulate
over its existence.
b. the par value of all capital stock issued.
c. the amount of capital the federal government allows a corporation to generate.
d. the total capital raised by a corporation within the limits set by the Securities and
Exchange Commission.
S
25. Stockholders of a business enterprise are said to be the residual owners. The term
residual owner means that shareholders
a. are entitled to a dividend every year in which the business earns a profit.
b. have the rights to specific assets of the business.
c. bear the ultimate risks and uncertainties and receive the benefits of enterprise
ownership.
d. can negotiate individual contracts on behalf of the enterprise.

26. Total stockholders' equity represents

a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by the enterprise.
c. a claim against a portion of the total assets of an enterprise.
d. only the amount of earnings that have been retained in the business.

27. A primary source of stockholders' equity is

a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by stockholders.
d. both income retained by the corporation and contributions by stockholders.

28. Stockholders' equity is generally classified into two major categories:

a. contributed capital and appropriated capital.
b. appropriated capital and retained earnings.
c. retained earnings and unappropriated capital.
 d. earned capital and contributed capital.

29. The accounting problem in a lump sum issuance is the allocation of proceeds between
the classes of securities. An acceptable method of allocation is the
a. pro forma method.
b. proportional method.
c. incremental method.
d. either the proportional method or the incremental method.

30. When a corporation issues its capital stock in payment for services, the least appropriate
basis for recording the transaction is the
a. market value of the services received.
b. par value of the shares issued.
c. market value of the shares issued.
d. Any of these provides an appropriate basis for recording the transaction.

31. Direct costs incurred to sell stock such as underwriting costs should be accounted for as
1. a reduction of additional paid-in capital.
2. an expense of the period in which the stock is issued.
3. an intangible asset.
a. 1
b. 2
c. 3
d. 1 or 3

32. A "secret reserve" will be created if

a. inadequate depreciation is charged to income.
b. a capital expenditure is charged to expense.
c. liabilities are understated.
d. stockholders' equity is overstated.
P
33. Which of the following represents the total number of shares that a corporation may
issue under the terms of its charter?
a. authorized shares
b. issued shares
c. unissued shares
d. outstanding shares
S
34. Stock that has a fixed per-share amount printed on each stock certificate is called
a. stated value stock.
b. fixed value stock.
c. uniform value stock.
d. par value stock.
S
35. Which of the following is not a legal restriction related to profit distributions by a
corporation?
a. The amount distributed to owners must be in compliance with the state laws
governing corporations.
b. The amount distributed in any one year can never exceed the net income reported
for that year.
c. Profit distributions must be formally approved by the board of directors.
d. Dividends must be in full agreement with the capital stock contracts as to
preferences and participation.
S
36. In January 2012, Finley Corporation, a newly formed company, issued 10,000 shares of
its $10 par common stock for $15 per share. On July 1, 2012, Finley Corporation
reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of
these treasury shares
a. decreased total stockholders' equity.
b. increased total stockholders' equity.
c. did not change total stockholders' equity.
d. decreased the number of issued shares.
P
37. Treasury shares are
a. shares held as an investment by the treasurer of the corporation.
 b. shares held as an investment of the corporation.
c. issued and outstanding shares.
d. issued but not outstanding shares.

38. When treasury stock is purchased for more than the par value of the stock and the cost
method is used to account for treasury stock, what account(s) should be debited?
a. Treasury stock for the par value and paid-in capital in excess of par for the excess of
the purchase price over the par value.
b. Paid-in capital in excess of par for the purchase price.
c. Treasury stock for the purchase price.
d. Treasury stock for the par value and retained earnings for the excess of the
purchase price over the par value.
39. “Gains" on sales of treasury stock (using the cost method) should be credited to
a. paid-in capital from treasury stock.
b. capital stock.
c. retained earnings.
d. other income.

40. Porter Corp. purchased its own par value stock on January 1, 2012 for $20,000 and
debited the treasury stock account for the purchase price. The stock was subsequently
sold for $12,000. The $8,000 difference between the cost and sales price should be
recorded as a deduction from
a. additional paid-in capital to the extent that previous net "gains" from sales of the
same class of stock are included therein; otherwise, from retained earnings.
b. additional paid-in capital without regard as to whether or not there have been
previous net "gains" from sales of the same class of stock included therein.
c. retained earnings.
d. net income.