Question 1

Under IFRS, gains and losses due to changes in interest rates on long term debt subsequent to issuance are recorded in which of the following?

Accepted Answer

The answer of Under IFRS, gains and losses due to...

Question 2

When compared with a company recording an asset as a capital lease, the return-on-assets (ROA) and debt-to-equity for a company using an operating lease are: $$\begin{array} { l l l } 
& \text { ROA } & \text { Debt-to-equity } \
\hline\text { A) } & \text { Higher } & \text { Higher } \
\text { B) } & \text { Higher } & \text { Lower } \
\text { C) } & \text { Lower } & \text { Higher } \
\text { D) } & \text { Lower } & \text { Lower }
\end{array}$$

Accepted Answer

When a company uses an operating lease, the asset is not recorded on the balance sheet, leading to a higher ROA since assets are lower. Debt-to-equity is lower because there is less (or no) debt recorded related to the lease.

Question 3

In a defined-benefit pension plan, the relationship between the amount funded and the amount reported as pension expense is as follows:

Accepted Answer

In a defined-benefit pension plan, the amount recognized as pension expense in the financial statements can vary from the actual amount funded. This is because pension expense is calculated based on actuarial assumptions and estimates about future employment benefits, while the funded amount is the actual contribution made to the pension plan. Therefore, pension expense may be greater than, equal to, or less than the amount funded, depending on the circumstances and assumptions used.

Question 4

An analyst is reviewing the financial statements of a company and notices that the company reports a pension liability on its balance sheet.What does the pension liability represent?

Accepted Answer

Pension liability represents the difference between the pension plan obligations (the amount the company expects to pay out to retirees in the future) and the pension plan assets (the funds the company has set aside to meet those obligations). If the obligations exceed the assets, the company reports a pension liability.

Question 5

Brandon Corporation has leased an asset that they are correctly recording as a capital lease.When they signed the lease the asset was recorded at $39,925.The interest rate used in the calculations is 8%, the asset has an expected useful life to Brandon of 8 years, and the annual lease payment is $10,000.The total expense related to the lease reported on Brandon's income statement in the first year of the lease is closest to?

Accepted Answer

To calculate the total expense related to the lease reported on Brandon's income statement in the first year, we need to consider the amortization of the asset and the interest expense.

First, we calculate the annual amortization of the asset:
$39,925 / 8 years = $4,990.63 per year

Then, we calculate the interest expense on the lease:
Beginning lease liability = $39,925
Interest expense = Beginning lease liability x Interest rate = $39,925 x 8% = $3,194

Total expense related to the lease reported on Brandon's income statement in the first year:
$4,990.63 (amortization) + $3,194 (interest expense) = $8,184.63

Therefore, the closest answer is C)$8,184.

Question 6

On January 1, 2014, Alert Construction signed a lease for a machine for $15,000 per year for 7 years.The first payment is due on December 31, 2014.The lease covers 70 per cent of the asset's useful life, and Alert expects to return the asset at the end of the lease.If Alert had borrowed money to buy the machine, they estimate the interest rate would have been 8%.The expense that would be recorded for the lease on the income statement in 2014 is closest to?

Accepted Answer

The answer of On January 1, 2014, Alert Construction signed...

Question 7

All of the following are criteria for capitalizing a lease except?

Accepted Answer

Being unrelated companies is not a criteria for capitalizing a lease. The other three choices are criteria for determining whether a lease should be capitalized or not.

Question 8

How is the pension expense calculated for a defined-contribution pension plan?

Accepted Answer

In a defined-contribution pension plan, the pension expense for the employer is based on the required contributions made by the employer to the plan during the period. The contributions are typically defined in the plan agreement and do not depend on the contributions made by the employee or the expected future benefits.

Question 9

How is the pension expense calculated for a defined-benefit plan?

Accepted Answer

The pension expense for a defined-benefit plan is calculated based on the expected portion of future benefits that were earned during the period. This is determined by estimating the future benefits that employees will receive based on their years of service and compensation level, and then determining the portion of those benefits that were earned in the current period. Factors such as changes in interest rates, mortality rates, and other assumptions can also impact the calculation of the pension expense.

Question 10

If a company has an operating lease for an asset, which of the following entries for the lease payment is correct? 
a) Dr. Lease obligation
Cr. Cash
b) Dr. Amortization expense
Cr. Cash
c) Dr. Rent expense
Dr. Amortization expense
Cr. Cash
d) Dr. Rent expense
Cr. Cash

Accepted Answer

For an operating lease, the lease payment is typically recognized as a rent expense. Therefore, the correct journal entry is to debit rent expense and credit cash.

Question 11

On January 1, 2014, O'Connor Construction signed a lease for a machine for $15,000 per year for 8 years.The first payment is due on December 31, 2014.The lease covers 80 per cent of the asset's useful life, and O'Connor expects to keep the asset till the end of the lease.If O'Connor had borrowed money to buy the machine, they estimate the interest rate would have been 8%.The expense that would be recorded for the lease on the income statement in 2014 is closest to?

Accepted Answer

The first step is to calculate the total lease payments over the 8-year lease period. This would be:
$15,000 per year x 8 years = $120,000

Since the lease covers 80% of the asset's useful life, this means that the asset's total useful life is:
$120,000 / 0.8 = $150,000

The implied interest rate in the lease would be:
(1 - 0.8) / 0.8 = 0.25 or 25%

To calculate the lease expense for 2014, we need to use the interest rate implicit in the lease to calculate the present value of the lease payments.

PV of lease payments = $15,000 / (1 + 0.25) = $12,000

Therefore, the lease expense for 2014 would be:
$12,000 - $0 = $12,000 (since the first payment is not due until December 31, 2014)

However, we also need to consider the impact of the 8% interest rate that O'Connor could have borrowed money at. This means that the lease expense also needs to be adjusted for the interest that would have been paid on a loan.

Interest on loan = $15,000 x 8% = $1,200

So, the total lease expense for 2014 would be:
$12,000 + $1,200 = $13,200

Since none of the answer choices match $13,200, the closest option is D) $15,516. This represents the total lease payments over the 8-year lease period (calculated above) discounted at 8% for one year:
PV of lease payments for one year = $9,174
Interest on loan = $15,000 x 8% = $1,200
Lease expense = $9,174 + $1,200 = $10,374
$10,374 x 1.5 (to account for the first payment not being due until December 31, 2014) = $15,516.

Question 12

Which of the following would most likely be recorded as a capital lease for accounting purposes?

Accepted Answer

A capital lease is recognized as a purchase of an asset, and therefore must meet one of the following criteria: (a) the lease transfers ownership of the asset to the lessee by the end of the lease term; (b) the lease contains an option to purchase the asset at a bargain price; (c) the lease term is equal to 75% or more of the estimated economic life of the asset; or (d) the present value of the lease payments is equal to or greater than 90% of the fair value of the asset. Option C is the only choice that meets any of these criteria, as the 20-year lease on a piece of manufacturing equipment likely meets the third criterion. Therefore, it is most likely to be recorded as a capital lease.

Question 13

In 2010 Coopermine Ltd.issued 10-year, 5% coupon bonds at par.In 2013 interest rates on similar debt have increased to 6%.What is the effect of the change in interest rates on Coopermine Ltd.'s 2013 financial statements?

Accepted Answer

Since the bonds were issued at par and are a fixed-rate debt instrument, changes in market interest rates after issuance do not affect the interest expense recorded on the financial statements. The interest expense and the carrying value of the bond remain constant over its life, assuming it is not revalued or marked to market.

Question 14

Most of the information regarding a company's long term debt can be found:

Accepted Answer

Information about a company's long-term debt can typically be found in the notes to the financial statements, which provide additional details about a company's financial situation. The balance sheet may provide some information about long-term debt, but it may not include all the necessary details. The management discussion and analysis section of the annual report may touch on the topic of long-term debt, but it is not the primary source of information. The cash flow statement may provide some information about debt repayment, but it may not provide a complete picture of a company's long-term debt.

Question 15

Which of the following criteria would lead to a lease's being accounted for as a capital lease?

Accepted Answer

A lease is considered a capital lease if the present value of the lease payments equals or exceeds 90% of the fair market value of the leased asset. Choice C directly addresses this criterion.

Question 16

An analyst is reviewing the financial statements of a company and notices that the company reports a pension plan asset on its balance sheet.What does the pension plan asset represent?

Accepted Answer

The pension plan asset represents the market value of all pension plan assets, which includes investments made by the pension fund to secure future pension payments.

Question 17

Under IFRS, if an interest rate decreases after a bond is issued, the company should:

Accepted Answer

Under IFRS, changes in market interest rates after a bond is issued do not affect the financial statements directly in terms of recognizing gains or losses in net income or other comprehensive income. However, IFRS requires disclosure of the fair value of financial instruments, including bonds, in the notes to the financial statements if it is different from their carrying amount. This helps users of the financial statements understand the market risk associated with the financial instruments.

Question 18

If a company had capitalized a lease on an asset, which of the following entries for the lease payment would be correct? 
a) Dr. Lease obligation
Cr. Cash
b) Dr. Amortization expense Cr. Cash
c) Dr. Lease obligation
Dr. Amortization expense Cr. Cash
d) Dr. Interest expense
Dr. Lease obligation
Cr. Cash

Accepted Answer

When a company capitalizes a lease, the lease payments are split into two parts: the reduction of the lease liability (lease obligation) and interest expense. This is reflected in option D, where both Interest expense and Lease obligation are debited, indicating the payment of interest and the reduction of the principal amount of the lease liability, respectively, with Cash being credited to show the outflow of cash for the lease payment.

Question 19

Johan Limited.has a $100,000 bond outstanding with an unamortized discount of $5,679.The company has decided to retire the bonds for a cost of $102,000.The journal entry to record the retirement of the bonds will include which of the following?

Accepted Answer

When the bond is retired, the company will have to pay $102,000 which is greater than the face value of bond ($100,000). In addition, there is an unamortized discount of $5,679. Therefore, the total loss on redemption of bonds will be $102,000 - $100,000 + $5,679 = $7,679. Thus, the correct journal entry will include a Loss on redemption of bonds of $7,679, which is option C.

Question 20

Kingston Corporation recently retired $1,000,000 worth of bonds early for $997,500.They reported a gain related to the retirement of the bonds of $24,250.What was the unamortized bond discount or premium at the time of retirement?

Accepted Answer

The gain on the retirement of the bonds was $24,250, and the bonds were retired for $997,500, which is $2,500 less than their face value of $1,000,000. This means that the original bond issue must have been at a discount, and the unamortized amount of this discount at the time of retirement was the difference between the gain reported ($24,250) and the amount paid below par ($2,500), which equals $21,750. Therefore, it was a premium of $21,750.

Quiz 9: Liabilities