Inter a cc Theories 1 9 - master budget PDF

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THEORIES:CHAPTER 1: The most common type of liability is d. One to be paid in cash and for which the amount Which is not a characteristic of a liability? b It must be payable in cash. Classifying liabilities as either current or noncurrent helps creditors assess b The relative risk of an entity's li...

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THEORIES: CHAPTER 1: 1. The most common type of liability is d. One to be paid in cash and for which the amount 2. Which is not a characteristic of a liability? b It must be payable in cash. 3. Classifying liabilities as either current or noncurrent helps creditors assess b The relative risk of an entity's liabilities 4. Short-term obligations are reported as noncurrent if C The entity has the discretion to refinance as long-term. 5. Which situation would not require that noncurrent liabilities be reported as current? d. All of these require the current classification. 6. Which of the following represents a liability? B the obligation to provide goods that customers have ordered and paid for during the current year 7. Which does not meet the definition of a liability? a The signing of a an employment contract at fixed salary 8. Which of the following is a characteristic of a current liability but not a noncurrent liability? C. Settlement is expected within the normal operating cycle or within 12 months, whichever is longer. 9. Which of the following is not considered a characteristic of a liability? d. Liquidation is reasonably expected to require use of current assets 10 Which of the following is not an acceptable presentation of current liabilities? c. Offsetting current liabilities against assets that are to be applied to their liquidation ----1. Among the short-term obligations at year-end are 90-day notes, renewable for another 90-day period. What is the classification of the notes payable? a Current liabilities 2. At year-end, an entity has 120-day note payables outstanding. The entity has followed the policy of replacing the note rather than repaying it over the last three years. The entity's

treasurer says that this policy is expected to continue indefinitely, and the arrangement is acceptable to the bank to which the note was issued. What is the proper classification of the note in the year-end statement of financial position? c Current liability, unless specific refinancing criteria are met 3. An entity had a note payable due next year. After the end of reporting period and before the issuance of the current year financial statements, the entity issued long-term bonds payable. Proceeds from the bonds were used to repay the note when due. How should the entity classify the note payable at current year-end? a. Current liability with separate disclosure of the note refinancing 4. An entity has a loan due for repayment in six months’ time, but the entity has the option to refinance for repayment two years later. The entity plans to refinance this loan. In which section of the statement of financial position should this loan be presented? c. Noncurrent liabilities 5. At year-end, an entity classified a note payable as current liability. Under what condition could the entity reclassify the note payable from current to noncurrent? d. If the entity has executed an agreement to refinance the note before the end of reporting period. -------1. The most relevant measurement of liabilities at initial recognition should always reflect c.) The credit standing of the entity 2. Which statement best describes the term liability? d. A present obligation arising from past event 3. What is the relationship between present value and the concept of a liability? a. Present value is used to measure certain liabilities. 4. If a long-term debt becomes callable due to the violation of a loan covenant B The debt should be reclassified as current. 5. What is the classification of debt callable by the creditor b. Current liability -------1. Advance payments from customers represent a. Liabilities until the product is provided. 2. Revenue associated with gift card sales should be recognized c. When the probability of gift card redemption is viewed as remote.

3. All else equal, a large increase in unearned revenue in the current period would be expected to produce what effect on revenue in a future period? a. Large increase because unearned revenue becomes revenue when earned. 4. When a product is delivered for which a customer advance has been previously received, the appropriate journal entry includes d. A debit to liability and credit to revenue 5. When cash is received from customers in the form of a refundable deposit, the cash account is increased with a corresponding increase in a. Current liability -----1. A department store received cash and issued a gift certificate that is redeemable in merchandise. When the gift certificate was issued b. Deferred revenue account should be increased 2. A retail store received cash and issued gift certificate that are redeemable in merchandise. How would the deferred revenue account be affected by the redemption and nonredemption of certificates, respectively? b. Decrease and Decrease 3. An entity received an advance payment for special order goods that are to be manufactured and delivered within six months. How should the advance payment be reported? c. Current liability 4. At year-end, an entity sold refundable merchandise coupon. The entity received a certain amount for each coupon redeemable next year for merchandise with a certain retail price. At year-end, how should the entity report these coupon transactions? b. Unearned revenue at the cash received 5. How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the statement of financial position before the performance? d. Unearned revenue for the entire proceeds 6. Magazine subscriptions collected in advance should be treated as b. Deferred revenue in the liability section 7. Under a royalty agreement with another entity, an entity will receive royalties from the assignment of a patent for four years. The royalties received in advance should be reported as revenue b. In the period earned

8. An entity is a retailer of home appliances and offers a service contract on each appliance sold. Collections received for service contracts should be recorded as an increase in a a. Deferred revenue account

9. An entity sells appliances that include a three-year warranty. Service calls under the warranty are performed by an independent mechanic under a contract with the entity. Based on experience, warranty costs are expected to be incurred for each machine sold. When should the entity recognize these warranty costs? d. When the machines are sold 10. At the end of the current year, an entity received an advance payment of 60% of the sales price for special order goods to be manufactured and delivered within five months. At the same time, the entity subcontracted for production of the special order goods at a price equal to 40% of the main contract price. What liabilities should be reported in the year-end statement of financial position? C Deferred revenue equal to 60% of the main contract price and no payable to subcontractor

CHAPTER 2:

1. The cost of customer premium offer should be charged to expense (A) a. When the related product is sold. b. When the premium offer expires. c. Over the life cycle of the product to which the premium relates. d. When the premium is claimed.

2. The accounting concept that requires recognition of a liability for customer premium offer is (D) a. Time period b. Prudence c. Historical cost d. Matching principle

3. Accounting for cost of incentive program for frequent customer purchases involves (A)

a.Recording an expense and a liability each period. b. Recording a liability and a reduction of revenue each period. c. Recording an expense and an asset reduction each period. d. Recording an expense and revenue each period.

4. Accounting for cost of incentive program for customer purchases (D) a. Requires probability estimation. b. Follows the matching principle. c. ls a loss contingency situation. d. All of these are correct.

5. Providing a monetary rebate program (D) a. Is accounted for similarly to a premium offer b. Creates an expense for the seller in the period of sale. c. Creates a liability for the seller at the time of sale. a.All of these are correct

CHAPTER 3:

The accrual approach in accounting for warranty a. Is required for income tax reporting. b. Is frequently justified on the basis of expediency. C. Finds the expense account being charged when the seller performs in compliance with the warranty. d. Represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.

2. Which of the following best describes the accrual approach of accounting for warranty cost? a. Expensed when paid

b. Expensed when warranty claims are certain C. Expensed based on estimate in year of sale d. Expensed when incurred

3. Which of the following best describes the expense as incurred approach of accounting for warranty cost? a. Expensed based on estimate in year of sale b. Expensed when liability is accrued C. Expensed when warranty claims are certain d. Expensed when incurred

4, What is the classification of the estimated warranty liability in a three-year warranty? a. Noncurrent b. Current C. Partly current and partly noncurrent d. No need for disclosure

5. Which of the following is a characteristic of the accrual of warranty but not the sale of warranty? a. Warranty liability b. Warranty expense C. Unearned warranty revenue d. Warranty revenue

CHAPTER 4: 1. Which is the correct definition of a provision? ANSWER: A liability of uncertain timing or uncertain amount 2. A provision shall be recognized when ANSWER: All of these are required for the recognition of a provision 3. A legal obligation is an obligation that is derived from all of the following, except: ANSWER: An established pattern of practice 4. A constructive obligation is an obligation ANSWER: That is derived from an entity’s action that the entity will accept certain responsibilities because of past practice or published policy. -The entity has created a valid exception in other parties that it will discharge those responsibilities. 5. It is an event that creates a legal or constructive obligation because the entity has no other realistic alternative but to settle the obligation. ANSWER: Obligation event 6. An outflow of resources embodying economic benefits is regarded as “probable” when ANSWER: The probability that the event will occur is greater than the probability that the event will not occur 7. Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the range to be used is the ANSWER: Midpoint 8. When the provision involves a large population of items, the estimate of the amount ANSWER: Reflects the weighting of all possible outcomes by their associated probabilities. 9. When the provision arises from a single obligation, the estimate of the amount ANSWER: Is the individual most likely outcome adjusted for the effect of other possible outcomes. 10. Which statement is incorrect when the expenditure required to settle a provision is expected to be reimbursed by another party? ANSWER: The reimbursement shall be “netted” against the estimated liability for the provision. ------1. A provision shall be recognized for ANSWER: Obligations for plant decommissioning costs

2. Provisions shall be recognized for all of the following, except ANSWER: Future refurbishment costs due to introduction of a new computer system 3. An entity is closing one of its operating divisions, and the conditions for making restructuring provision have been met…..Which of the following costs should be included in the restructuring provision? ANSWER: Contractually required costs of retiring staff being made redundant from the division being closed. 4. An entity has been served a legal notice at year-end by the Department of Environment and Natural Resources to fit smoke detectors in its factory on or before middle of the next year….How should the entity treat this in the financial statements at year-end? ANSWER: No provision is recognized at year-end because there is no present obligation for the future expenditure… 5. An entity operates chemical plants. The published policies include a commitment to making good any damage caused to the environment by its operations. The entity has always honored this commitment. Which of the following scenarios relating to the entity would give rise to a provision? ANSWER: A chemical spill from one of the entity’s plants has caused harm to the surrounding area and wildlife. --------1. An entity did not record an accrual for a present obligation but disclose the nature of the obligation and the range of the loss. How likely is the loss? ANSWER: Reasonably possible 2. The likelihood that the future event will or will not occur can be expressed by a range of outcome. Which range means that the future event occurring is very slight? ANSWER: Remote 3. An expropriation of asset which is imminent and for which the amount of loss can be reasonably estimated should be ANSWER: Accrued and disclosed 4. A present obligation that is probable and for which the amount can be reliably estimated should ANSWER: Be accrued by debiting an expense account and crediting a liability account 5. General and unspecified contingencies should ANSWER: Not be accrued and need not be disclosed. --------

1. Contingent liabilities will or will not become actual liabilities depending on ANSWER: The outcome of a future event 2. A contingent liability shall be recognized when ANSWER: The amount of the loss can be reliably measured and it is probable prior to issuance of financial statements that a liability has been incurred. 3. How should a contingent liability be reported in the financial statements when it is reasonably possible? ANSWER: As a disclosure only 4. Disclosure usually is not required for ANSWER: Contingent loss that is remote and measurable 5. Reporting in the financial statement is required for ANSWER: Loss contingency that is probable and measurable 6. A contingent liability ANSWER: Is the result of a loss contingency 7. A contingent liability is ANSWER: An event which is not recognized because it is not probable that an outflow will be required or the amount cannot be reliably estimated. 8. Which statement is incorrect concerning a contingent liability? ANSWER: A contingent liability is both probable and measurable 9. A contingent liability ANSWER: Has a most probable value of zero but may require a payment if a given future event occurs 10. Which of the following is not considered when evaluating whether or not to record a liability for pending litigation? ANSWER: The type of litigation involved ------CHAPTER 5: 1. Most corporate bonds are ANSWER: Debenture bonds 2. The method used to pay interest depends on whether the bonds are: ANSWER: Registered or coupon

3. Zero-coupon bonds: ANSWER: Offer a return in the form of a deep discount off the face amount 4. To evaluate the risk and quality of an individual bond issue, investors rely heavily on ANSWER: Bond ratings provided by investment houses 5. Bonds payable should be reported as noncurrent at: ANSWER: Face amount less any unamortized discount plus any unamortized premium 6. The discount on bonds payable is reported as: ANSWER: A contra liability 7. In the amortization schedule for discount on bonds payable: ANSWER: The total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid, 8. An amortization schedule for bonds issued at a premium ANSWER: Is a schedule that reflects the changes in the bonds payable over the term to maturity. 9. When bonds are retired prior to maturity date: ANSWER: The issuer probably will report an ordinary gain or loss. 10. An entity has bonds outstanding during a year in which the market rate of interest has risen. The entity elected the fair value option. What will the entity report for the year? ANSWER: Interest expense and a gain -----1. Bonds that mature on a single date are called: ANSWER: Term bonds 2. Bonds issued with schedule maturities at various dates are called: ANSWER: Serial bonds 3. Debentures are: ANSWER: Unsecured bonds 4. How would the amortization of premium on bonds payable affect the carrying amount of bond and net income respectively? ANSWER: Decrease and Increase

5. How would the amortization of discount on bonds payable affect the carrying amount of bond and net income respectively? ANSWER: Increase and Decrease 6. Unamortized bond discount should be reported as: ANSWER: Direct deduction from the face amount of the bond 7. When the interest payments 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: ANSWER: Increased by accrued interest from May 1 and June 1 8. The issuer of a bond sold at face amount with interest payable February 1 and August 1 should report: ANSWER: Liability for accrued interest 9. A bond issued on June 1 has interest payment dates of April 1 and October 1. Bond interest expense for the current year ended December 31 is for a period of: ANSWER: Seven months 10. A bond was issued at a discount with a call provision. When the bond issuer exercised the call provision on an interest date, the amount of bond liability derecognized should have equaled the: ANSWER: Face amount less unamortized discount

CHAPTER 6: 1. What is the interest rate written on the face of the bond? ANSWER: Coupon rate, nominal rate or stated rate 2. What is the rate of interest actually incurred? ANSWER: Market, yield or effective rate 3. When the effective interest method is used, the periodic amortization would ANSWER: Increase if the bonds were issued at either a discount or a premium 4. The discount on bond payable is charged to interest expense ANSWER: Using the effective interest method 5. Bond issue cost ANSWER: All of these relate to bond issue cost 6. Under the effective interest method of amortization, the interest expense is equal to ANSWER: The market rate of interest multiplied by the beginning carrying amount of the bonds

7. When interest expense for the current year is more than interest paid, the bonds were issued at: ANSWER: A discount 8. When interest expense for the current year is less than interest paid, the bonds were issued at: ANSWER: A premium 9. Bonds usually sell at: ANSWER: Present value 10. Which statement is true about bonds payable? ANSWER: The specific provisions of a bond issue are described in a document called bond indenture ----1. When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is ANSWER: Greater than the effective interest 2. When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is ANSWER: Less than the effective interest 3. When bonds are sold at a discount and the effective interest method is used, at each interest payment date, the interest expense ANSWER: Increases 4. When bonds are sold at a premium and the effective interest method is used, at each interest payment date, the interest expense ANSWER: Decreases 5. Interest expense is ANSWER: The effective rate times the carrying amount of the bond during the interest period ------1. What is the effective interest rate of a bond measure at amortized cost? ANSWER: The interest rate that exactly discounts estimated future cash payments through the expected life of the bond or when appropriate, a shorter period to the net carrying amount of the bond

2. For a bond issue which sells less than face value, the market rate of interest is ANSWER: Higher than rate stated on the bond 3. What is the market rate of interest of a bond issue which sells for more than face value? ANSWER: Less than rate stated on the bond 4. If bonds are issued at a premium, this indicates that ANSWER: The nominal rate exceeds the yield rate 5. Which of the following is true for a bond maturing on a single date when the effective interest method of amortizing bond discount is used? ANSWER: Interest expense increases each six-month period 6. In theory, the proceeds from the sale of a bond will ...