Question 1

Under IFRS, which of the following would most likely be classified as a current liability?
A) mortgage payable
B) bonds payable
C) bank indebtedness
D) contingent liability

Accepted Answer

Bank indebtedness is typically classified as a current liability under IFRS because it usually represents short-term borrowing that is expected to be settled within the next 12 months.

Question 2

McMichael Exhibits Inc. received its annual property tax bill for $26,200 in January. It was paid when due on March 31. McMichael Exhibits year end is Dec 31. The Dec 31 balances should be
A) $6,550 for Prepaid Property Tax; $19,650 for Property Tax Expense.
B) $0 for Prepaid Property Tax; $0 for Property Tax Payable.
C) $6,550 for Prepaid Property Tax; $6,550 for Property Tax Payable.
D) $2,183 for Prepaid Property Tax; $24,017 for Property Tax Expense.

Accepted Answer

The answer of McMichael Exhibits Inc. received its annual property...

Question 3

"Off-balance-sheet financing" refers to a situation where liabilities are recorded in the income statement instead of the statement of financial position.

Accepted Answer

Off-balance-sheet financing refers to keeping certain liabilities or assets off the company's balance sheet to improve financial ratios, not recording them in the income statement.

Question 4

Which of the following statements is false?
A) Notes payable usually require the borrower to pay interest.
B) Notes payable are sometimes used instead of accounts payable.
C) Most notes and bank loans are non-interest bearing.
D) Notes payable reflect a promise to repay a specified amount of money either at a fixed future date or on demand.

Accepted Answer

Most notes and bank loans are interest-bearing, meaning they require the borrower to pay interest over the life of the loan.

Question 5

The entry to record interest expense on a bank loan payable is a
A) debit to interest expense and credit to note payable.
B) debit to note payable and credit to interest revenue.
C) debit to interest payable and credit to interest revenue.
D) debit to interest expense and credit to interest payable.

Accepted Answer

Interest expense is recorded as a debit to interest expense and a credit to interest payable, reflecting the obligation to pay interest.

Question 6

The effective-interest method is required for companies reporting under IFRS, but optional for companies using ASPE if other methods do not result in material differences.

Accepted Answer

The statement is true. Under IFRS, the effective-interest method is required for financial instruments, including bonds, loans, and other debt securities, while under ASPE it is optional unless other methods do not result in material differences.

Question 7

Interest (finance) expenses are separately reported in the "other gain and revenues" section of the income statement.

Accepted Answer

Interest expenses are typically reported under "interest expense" in the income statement, not under "other gains and revenues."

Question 8

Use the following information to answer questions.
Angel Eyes Corporation operates on a calendar year basis. The company is in its first year of operations and received its annual property tax bill on March 31 for $21,000. The bill is due May 1. Even though the company records adjusting entries on a monthly basis, no entries related to property taxes have been recorded.
-The March 31 entry to record property tax should be
A) debit property tax expense $5,250 and credit property tax payable $5,250.
B) debit property tax expense $21,000 and credit property tax payable $21,000.
C) debits to prepaid property tax and property tax expense for $15,750 and $5,250, respectively and credits to property tax payable and cash for $15,750 and $5,250, respectively.
D) debits to prepaid property tax and property tax expense for $15,750 and $5,250, respectively and credit to property tax payable for $21,000.

Accepted Answer

The property tax expense for the first quarter is $5,250 ($21,000 x 3/12). The remaining $15,750 ($21,000 - $5,250) is a prepaid expense.

Question 9

All transactions between bondholders and other investors must be recorded by the issuing corporation.

Accepted Answer

Transactions between bondholders and other investors are not recorded by the issuing corporation. Instead, they are typically facilitated through a third-party intermediary, such as a broker or exchange.

Question 10

Detailed information such as a list showing the amounts of non-current debt that is scheduled to be paid off in each of the next five years should be disclosed in the notes to the financial statements.

Accepted Answer

This information is required to be disclosed in the notes to the financial statements in order to provide users with a clear picture of the company's debt obligations in the near future.

Question 11

Amortization of a bond premium decreases interest expense recorded by the issuer.

Accepted Answer

Amortization of a bond premium decreases the amount of interest expense recorded by the issuer, as the premium contributes to a lower effective interest rate over the life of the bond.

Question 12

The face value of a bond is the amount of principal and interest due at the maturity date.

Accepted Answer

The face value of a bond is the amount of principal that is paid back to the investor at the maturity date, not including interest payments. Interest is paid separately according to the bond's terms.

Question 13

Use the following information to answer questions.
Angel Eyes Corporation operates on a calendar year basis. The company is in its first year of operations and received its annual property tax bill on March 31 for $21,000. The bill is due May 1. Even though the company records adjusting entries on a monthly basis, no entries related to property taxes have been recorded.
-Assuming appropriate adjusting entries were completed for the April month end, what entry should be recorded for the payment on May 1?
A) debit prepaid property tax $21,000 and credit cash $21,000
B) debits to prepaid property tax and property tax expense for $14,000 and $7,000, respectively and credit to cash for $21,000
C) debits to prepaid property tax and property tax payable for $14,000 and $7,000, respectively and credit to cash $21,000
D) debit property tax payable $15,750 and credit to cash $15,750.

Accepted Answer

The adjusting entry at April month end would have debited property tax expense for $7,000 and credited prepaid property tax for $7,000. This means that at the time of payment, the prepaid property tax balance is $14,000 ($21,000 - $7,000). The entry to record the payment would therefore be to debit prepaid property tax for $14,000 and credit cash for $21,000.

Question 14

Roofer's Inc. had an operating line of credit of $100,000 and overdrew its bank balance to result in a negative cash balance of $33,000 at year-end. This would be reported in the statement of financial position as
A) a current liability of $33,000.
B) a non-current liability of $67,000.
C) a current asset of $67,000.
D) a current asset of $(33,000).

Accepted Answer

A negative cash balance due to an overdraft is reported as a current liability, as it represents an obligation to repay the bank within a short period.

Question 15

Which of the following statements is true?
A) If any portion of a non-current liability is to be paid in the next year, the entire debt should be classified as a current liability.
B) "Current maturities of non-current debt" refers to the amount of interest on notes payable that must be paid in the current year.
C) Even though current and non-current debt must be shown separately on the statement of financial position, it is not necessary to prepare a journal entry to recognize this.
D) A non- current liability is an obligation that is expected to be paid within one year.

Accepted Answer

Current and non-current debts are shown separately on the financial statements, but no journal entry is needed for this classification.

Question 16

Interest expense on a note payable, with interest due at maturity, is
A) always equal to zero.
B) accrued over the life of the note.
C) only recorded at the time the note is issued.
D) only recorded at maturity when the note is paid.

Accepted Answer

Interest expense on a note payable is accrued over the life of the note because it represents the cost of borrowing money, which accumulates over time until the note matures.

Question 17

Failure to record a liability will probably
A) result in overstated net income.
B) result in overstated total liabilities and shareholders' equity.
C) have no effect on net income.
D) result in overstated total assets.

Accepted Answer

Failure to record a liability means that expenses or obligations are not recognized, leading to an understatement of expenses and an overstatement of net income.

Question 18

The terms of an operating line of credit and a notes (loans) payable are disclosed in the notes to the financial statements.

Accepted Answer

Both operating lines of credit and notes payable are forms of financing and are typically disclosed in the notes to the financial statements, including information such as interest rates, repayment terms, and any associated collateral or guarantees.

Question 19

If the market interest rate at the date of a bond issue is greater than the coupon interest rate, the bond will be issued at a premium.

Accepted Answer

If the market interest rate is greater than the coupon interest rate, the bond will be issued at a discount, not a premium.

Question 20

If bonds are issued at a discount, the issuing corporation will pay a principal amount that is less than the face amount of the bonds on the maturity date.

Accepted Answer

When bonds are issued at a discount, the issuing corporation still pays the full face amount of the bonds on the maturity date; the discount refers to the bonds being sold for less than their face value at issuance, not affecting the maturity value.

Quiz 10: Reporting and Analyzing Liabilities

Under IFRS, which of the following would most likely be classified as a current liability?

McMichael Exhibits Inc. received its annual property tax bill for $26,200 in January. It was paid when due on March 31. McMichael Exhibits year end is Dec 31. The Dec 31 balances should be

"Off-balance-sheet financing" refers to a situation where liabilities are recorded in the income statement instead of the statement of financial position.

Which of the following statements is false?

The entry to record interest expense on a bank loan payable is a

The effective-interest method is required for companies reporting under IFRS, but optional for companies using ASPE if other methods do not result in material differences.

Interest (finance) expenses are separately reported in the "other gain and revenues" section of the income statement.

All transactions between bondholders and other investors must be recorded by the issuing corporation.

Detailed information such as a list showing the amounts of non-current debt that is scheduled to be paid off in each of the next five years should be disclosed in the notes to the financial statements.

Amortization of a bond premium decreases interest expense recorded by the issuer.

The face value of a bond is the amount of principal and interest due at the maturity date.

Roofer's Inc. had an operating line of credit of $100,000 and overdrew its bank balance to result in a negative cash balance of $33,000 at year-end. This would be reported in the statement of financial position as

Which of the following statements is true?

Interest expense on a note payable, with interest due at maturity, is

Failure to record a liability will probably

The terms of an operating line of credit and a notes (loans) payable are disclosed in the notes to the financial statements.

If the market interest rate at the date of a bond issue is greater than the coupon interest rate, the bond will be issued at a premium.

If bonds are issued at a discount, the issuing corporation will pay a principal amount that is less than the face amount of the bonds on the maturity date.