INTERMEDIATE ACCOUNTING- QUIZ 2- PRACTICE MATERIALS PDF

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Summary

A note that does not include an interest rate should be recorded at: (M2**) A. Its face amount at all times B. Its present value at all times. C. Its face amount if the difference between face and present value is material. D. Its present value if the difference between face and present value is mat...

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1.

A note that does not include an interest rate should be recorded at: (M2**) A. Its face amount at all times B. Its present value at all times. C. Its face amount if the difference between face and present value is material. D. Its present value if the difference between face and present value is material.

2.

A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank P80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation? (M1) A. The amount of interest expense will remain constant over the 10-year period. K W & W 1e B. The balance of mortgage payable will remain a constant amount over the 10-year period. C. The balance of mortgage payable at a given statement of financial position date will be reported as a non-current liability. D. The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.

3.

A debt instrument with no ready market is exchanged for property whose fair value is currently indeterminable. When such a transaction takes place (E) A. the present value of the debt instrument must be approximated using an imputed interest rate. B. it should not be recorded on the books of either party until the fair value of the property becomes evident. C. the directors of both entities involved in the transaction should negotiate a value to be assigned to the property. D. the board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction. K W & W 1e

4.

Norton Corp. does not elect the fair value option for recording its financial liabilities. The discount resulting from the determination of a note payable’s present value should be reported on its balance sheet as a(n) A. Deferred credit separate from the note. B. Addition to the face amount of the note. C. Deferred charge separate from the note. D. Direct reduction from the face amount of the note. Wiley 2012

5.

In accounting for notes payable, determine the incorrect statement: A. Notes payable irrevocably designated at FVPL shall be measured initially and subsequently at fair value. Transaction costs are not included in determining the proper measurement of the note. B. Notes payable at amortized cost shall be measured initially at present value if the note is longterm, non-interest bearing. C. Notes payable at amortized cost shall be measured initially at face value if the note is shortterm, non-interest bearing and discounting is immaterial. D. Notes payable at amortized cost shall be measured initially at present value if the note is longterm and bearing an interest which is considered to be reasonable.

6.

S1:

7.

8.

Gain on extinguishment of liability from asset swap is computed as the difference between fair value of the asset given and fair value of the liability extinguished. S2: A note has undergone a substantial modification of terms if the gain or loss on extinguishment is more than 10% of the carrying amount of the old financial liability. A. True, false C. False, false B. False, true D. True, true In computing the initial carrying amount of note payable, A. Direct origination costs are added to the face value of the loan. B. Origination fees are deducted from the face value of the loan. C. Indirect origination costs are deducted from the face value of the loan. D. Direct origination costs are added to the face value of the loan while origination fees are deducted from the face value of the loan. If an entity extinguished its existing notes payable through equity swap, which of the following statements is true? S1: The equity instruments are measured at their fair value even if the fair value and carrying amount of the liability extinguished can be determined and existing. S2: Share premium is computed as the amount in excess of the gain on extinguishment over the par value of the shares issued. A. True, false C. False, false

B.

False, true

D.

True, true

9.

In a debt settlement in which the debt is continued with modified terms, a gain should be recognized at the date of settlement whenever the (E**) A. carrying amount of the debt is less than the total future cash flows. K W & W 1e B. present value of the debt is less than the present value of the future cash flows. C. present value of the debt is greater than the present value of the future cash flows. D. carrying amount of the debt is greater than the present value of the future cash flows.

10.

On September 30, OKLAHOMA CORP. borrowed P1,000,000 on a 9% note payable. OKLAHOMA paid the first of four quarterly payments of P264,200 when due on December 30. In its income statement for the year, what amount should World report as interest expense? (M1*) A. P0 C. P22,500 B. P14,200 D. P30,000 AICPA R06 SOLUTION: Interest expense (Sep. 30 – Dec. 31) (P1,000,000 x 9% x 3/12) P22,500

11.

On January 1, 2010, MEMPHIS CORP. sold property to GRIZZLIES CORP. There was no established exchange price for the property, and GRIZZLIES gave MEMPHIS a P2,000,000 zero-interest-bearing note payable in 5 equal annual installments of P400,000, with the first payment due December 31, 2010. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was P1,555,861 at January 1, 2010. What should be the balance of the Notes Payable account on the books of GRIZZLIES at December 31, 2010 after adjusting entries are made, assuming that the effective-interest method is used? (M1) A. P1,115,861 C. P1,555,861 B. P1,295,888 D. P2,000,000 K W & W 1e SOLUTION: Amortization (Difference) Date 0% 9% Principal Repayment Carrying Amount Nominal Interest Effective Interest 01/01/2010 P1,555,861 12/31/2010 ₱ ₱ 140,027 ₱ 400,000 ₱ 1,295,888

12.

On January 1, Year One, a company buys three acres of land for exactly P800,000 with the amount to be paid on December 31, Year Three. Interest of 3 percent (P24,000) will be paid each December 31 although a 10 percent annual rate is viewed as reasonable. The present value of P1 in three years at 10 percent annual interest is .75. The present value of an ordinary annuity of P1 for three years at 10 percent annual interest is 2.49. The present value of an annuity due of P1 for three years at 10 percent annual interest is 2.74. On a December 31, Year One balance sheet, at what amount should the company report as the liability for this land? (M1) A P353,414 C P701,736 B P636,000 D P856,000 SOLUTION: PV of Principal (P800,000 x 0.75) P600,000 PV of Nominal Interest (P24,000x 2.49) 59,760 PV of notes payable (Initial measurement) P659,760 Amortization (Difference) Date 0% 10% Principal Repayment Carrying Amount Nominal Interest Effective Interest 01/01/Year 1 P659,760 12/31/Year 1 ₱ 24,000 ₱ 65,976 ₱ ₱ 701,736

13.

LOS ANGELES BANK grants a ten-year loan to LAKERS CORP. in the amount of P150,000 with a stated interest rate of 6%. Payments are due monthly, and are computed to be P1,665. LOS ANGELES BANK incurs P4,000 of direct loan origination costs and P2,000 of indirect loan origination costs. In addition, LOS ANGELES BANK charges LAKERS CORP. a four-point nonrefundable loan origination fee. LAKERS, the borrower, has a carrying amount of (M1) A. P144,000 C. P150,000 B. P148,000 D. P152,000 Wiley 2012 SOLUTION: Face value P150,000 Origination fee (4% x P150,000) (6,000) Initial measurement of loans payable P144,000...