MGAB02H3 Chapter Notes - Chapter 10: Promissory Note, Current Liability, Deferred Income
1. A creditor is reviewing Hoffman Electronicsâ statements ofretained earnings for the last 3 years. The creditor is trying todetermine whether a substantial loan should be given to HoffmanElectronics. Which question will most likely be answered byreviewing the statement of retained earnings?
a. Does Hoffman Electronics make risky investments that impedethe cash flow of the firm?
b. What was the ending permanent account balance for HoffmanElectronics last quarter?
c. What assets owned by Hoffman Electronics are valuable enoughto cover debt repayment?
d. Does Hoffman Electronics have enough earnings to pay bothdividends and debts?
2. True or false. By reviewing a companyâs statement of retainedearnings over multiple reporting periods, an investor can evaluatethe companyâs future growth potential based on net incomechanges.
3. A creditor would most likely be interested in reviewing afirmâs statement of retained earnings to determine if the firm
a. exhibits liquidity.
b.can repay its debt obligations.
c.makes risky investments.
d.has sufficient receivables.
4. On statement of cash flow, the repayment of loans iscategorized as a cash flow from ____activities.
5."Fill in the blank" question: select the correct answer.
In a statement of cash flows, cash inflows that result fromproviding goods to customers are included in the section calledâcash flows from_______ activities.
6. Creditors want to know whether Photon, Inc. uses itsavailable cash to purchase new equipment. Which section of thestatement of cash flows would provide this information?
a.Cash flows from operating activities
b.Cash flows from sales activities
c.Cash flows from financing activities
d.Cash flows from investing activities
7. Creditors are examining the statement of cash flows forPhoton, Inc. Which of the following questions can be answered byreviewing the statement of cash flows?
a. What is the average net income of Photon?
b.What type of assets does Photon possess?
c.Does Photon reset its temporary accounts?
d.Does Photon pay its bills when they are due?
1. All of the following are characteristics of currentliabilities except:
a. they may involve estimated amounts. b. they are due withinone year or within the operating cycle, whichever is longer. c.they may be replaced with a new short-term liability rather thanbeing paid in cash. d. all three of the above are characteristic ofcurrent liabilities.
2. Which of the following is an example of a contingentliability?
a. A corporate long-term employment contract with the chiefexecutive officer. b. A lawsuit pending against a restaurant chainfor improper preparation of food. c. A liability for notes payablewith interest included in the face amount. d. The liability forfuture warranty repairs on computers sold during the currentperiod
. 3. A company will have to pay a $50,000 liability in 4 years.How much must be deposited now into a bank account earning 8%compounded semiannually to fully fund the future payment? HINT: PVof $1 The solution to this problem requires time value of moneycalculations. Reference to Tables 9-1 through 9-4 in the text isnecessary to complete the calculations.
a. $35,500 b. $36,535 c. $36,665 d. $34,000
4. On October 1, Lawrence Company borrowed $60,000 from FourthNational Bank on a 1-year, 7% note. If the company's fiscal yearends as of December 31, Lawrence should make an entry toincrease
a. interest payable, $1,050. b. prepaid interest, $3,150. c.notes payable, $1,050. d. interest expense, $4,200.
5. Warranty expenses are the result of the selling companyâsestimate of the number of units sold during the current year thatmay become defective and need repair or replacement during thewarranty period.
a. True b. False
6. Estimated liability for product warranties to be paid in thefuture is a long term liability.
a. True b. False
7. The future value of equal semi-annual payments of $500 at 8%compounded semiannually for 4 years is HINT: FV of Annuity of $1The solution to this problem requires time value of moneycalculations. Reference to Tables 9-1 through 9-4 in the text isnecessary to complete the calculations.
a. $ 868 b. $9,320 c. $2,000 d. $4,607
8. What is the correct classification of the account: Discounton Notes Payable?
a. a revenue b. a contra liability c. an asset d. an expense
9. If the annual interest is 12%, but the compounding is donequarterly, then the interest rate is 3% per period.
a. True b. False
10. A convertible bond is one where a. the issuer can convertfrom
a fixed interest rate to a floating one. b. the issuer canconvert it from long-term to short-term. c. the issuer can retirethe bond before its specified due date. d. the holder can convertthe bond into common stock at a future time.
11. Which of the following statements regarding serial bonds istrue?
a.They are likely to be issued by food companies.
b. They have shorter lives than term bonds.
c.They are strongly backed by the issuer's collateral.
d. The bonds do not all mature on the same date.
12. Bonds are a popular source of financing because
a.bond interest expense is deductible for tax purposes, whiledividends paid on stock are not.
b. financial analysts tend to downgrade a company that hasraised large amounts of cash by frequent issues of stock.
c. a company having cash flow problems can postpone payment ofinterest to bondholders.
d. the bondholders can always convert their bonds into stock ifthey choose.
13. When determining the amount of interest to be paid on abond, which of the following information is not necessary?
a.The face amount of the bonds
b. The selling price of the bonds
c.The face rate of interest on the bonds
d. The length of the interest period, annually or semiannually14. Which of the following statements is correct?
a.Bonds are issued at a price that reflects the stated rate ofinterest on the day the bond is purchased.
b. If the face rate of interest on a bond is not equal to themarket rate of interest, then the company desiring to issue thebonds must reprint its bond certificates.
c.The actual issue price of a bond represents the present valueof all future cash flows related to the bond.
d. The market rate of interest has no bearing on the sellingprice of the bonds.
15. Endeavor Company issued 20-year bonds with a coupon rate of6% when the market rate of interest was 9%. This means that thebonds were issued
a.at a premium. b. at a discount. c.at the face value. d. withan additional 3 years of interest.
16. Which of the following statements regarding leases isfalse?
a. Lease agreements are a popular form of financing the purchaseof assets because leases do not require a large initial outlay ofcash.
b. Accounting recognizes two types of leases--operating andcapital leases.
c. If a lessor classifies a lease as a capital lease, then thelessee records a lease liability on its balance sheet.
d. If a lease is classified as an operating lease, the lesseerecords a lease liability on its balance sheet.
17. Which of the following accounts would not appear on thebalance sheet of a lessee company recording a capital lease?
a. Accumulated depreciation on the leased asset
b. Lease obligation in the current liability section
c. Lease obligation in the long-term liability section
d. Rent expense on the income statement
Read the 2015 annual report of Air France â KLM and answer the 20 questions asked regarding the accounting issues. Link is provided below:
1. Air France-KLM reports âConsolidated statement of recognized income and expensesâ for the year ended December 31, 2015. If this statement was a U.S. GAAP statement, what would be the title of this statement?
a. Consolidated statement of total net income
b. Consolidated statement of other comprehensive income
c. Consolidated statement of comprehensive income
d. Consolidated statement of recognized net income
2. What method does Air France-KLM use for the Statement of Cash Flows?
a. Indirect method
b. Direct method
c. Gross method
d. Net method
3. The basic and diluted earnings per share for the year ended December 31, 2015, indicates that Air France-KLM has:
a. no convertible debts.
b. some dilutive securities.
c. no preferred stocks.
d. some treasury stocks.
4. What method is used to account for investments in companies over which Air France-KLM can âexercise significant influence on financial and operating policy decisions?â
a. Cost method
b. Liability method
c. Equity method
d. Fair value method
5. Sale of passenger tickets is accounted for at the time of ticket sale as:
a. Sales revenue
b. Deferred revenue
c. Contingent asset
d. No recognition
6. How does Air France account for business combination costs other than those related to the issuance of debt or equity securities?
a. Expensed as incurred
b. Capitalized as incurred
c. Included in goodwill
d. Used to offset fair value of the acquisition
7. Which of the following is not an âaccumulated other comprehensive incomeâ item among those reported in the âreserves and retained earningsâ in the 2015 consolidated balance sheet of Air France-KLM?
a. Available for sale securities reserves.
b. Derivatives reserves.
c. Legal reserves.
d. Pension defined benefits reserves.
8. What is the carrying amount of investments in debt and equity securities that are classified as available-for-sale?
a. Fair value Cost
b. Amortized cost
c. Lower of cost or market
9. Inventories are carried at:
a. The lower of the first-in-first-out cost or net realizable value.
b. The first-in-first-out cost.
c. The lower of the weighted-average cost or net realizable value.
d. The weighted-average cost.
10. Air France-KLM classifies its frequent flyer programs as:
a. Noncurrent liability
b. Current liability
c. Current asset
d. Other debt
11. The followings are included in Air France-KLMâs intangible assets, except for:
b. Leased aircraft
c. Customer relationships
d. Slots for takeoff and landing
12. Air France-KLM reports bank overdrafts as:
a. A contra account to cash and cash equivalents.
b. A current liability.
c. An expense.
d. A bank deposits in transit.
13. Which method does Air France-KLM use to record depreciation expense for its flight equipment?
a. The activity-based method.
b. The sum-of-yearsâ-digit method.
c. The straight-line method.
d. The group method.
14. Which accounting standards does Air France-KLM use?
a. U.S. GAAP
b. French GAAP
c. Netherlands GAAP
d. International Financial Reporting Standards
15. As of December 31, 2015, what assets are held for sale?
16. Which of the following is included in âincome from operating activitiesâ but not in âincome from current operations?
a. Sale of aircraft equipment
b. Research and development costs
c. Bad debt expense
d. Interest revenue
17. Which of the following is not true about accounting treatment for the overhaul cost of major airframe and engine?
a. The cost is treated as separate asset component.
b. The cost is capitalized.
c. The cost is depreciated over the remaining useful life.
d. The cost is expensed as incurred.
18. How are financial assets accounted for if the Air France-KLM intends to sell them in the near future to realize capital gains?
a. At fair value with fair value changes recognized in the current period profit and loss
b. At fair value with fair value changes recognized as other comprehensive income
c. At cost with no recognition of fair value changes
d. At amortized cost with no recognition of fair value changes
19. Which of the following is not true about impairment test?
a. Tangible fixed assets, intangible assets, goodwill, and other assets with indefinite useful life are subject to an impairment test.
b. The impairment test is done at least once a year.
c. Recoverable value is the lower of the net realizable value and value in use.
d. The value in use is determined according to the discounted future cash flow method.
20. Which of the following is not an âother non-current income and expensesâ item?
a. Restructuring costs
b. Gains and losses on disposal of shares available for sale
c. Gains and losses on disposal of subsidiaries and affiliates
d. Gains and losses on sale of trading securities