Question 1

On January 1,2014,DWW borrowed $400,000 cash and signed a one-year,12 percent interest-bearing note payable.Assuming a 40 percent average income tax rate for DWW Corporation,the net effective interest rate on this note was:

Accepted Answer

To calculate the net effective interest rate, we need to take into account the tax impact on the interest payment. The interest expense on the note payable is $48,000 (12% of $400,000). However, since DWW Corporation can deduct the interest expense from its taxable income, the after-tax interest expense is only $28,800 ($48,000 x 0.6).

To calculate the net effective interest rate, we divide the after-tax interest expense by the amount of the loan:

Net effective interest rate = after-tax interest expense / loan amount
                      = $28,800 / $400,000
                      = 0.072 or 7.2%

Therefore, the answer is C) 7.2 percent.

Question 2

On September 1,2012,Company B signed a $7,392,two-year non-interest-bearing note payable in full on August 31,2014.Company B received $6,000 cash.What was the yield or effective rate of interest?

Accepted Answer

The yield or effective rate of interest is 11 percent. This is calculated by using the formula:Yield = (Face value - Present value) / Present value x (360 / Days)In this case, the face value is $7,392, the present value is $6,000, and the days are 730 (from September 1, 2012 to August 31, 2014).Plugging these values into the formula, we get:Yield = (7,392 - 6,000) / 6,000 x (360 / 730)= 1,392 / 6,000 x 0.4932= 0.1101, or 11.01%

Question 3

A retail store has completed certain transactions that management believes may have caused current liabilities.Indicate by check mark whether the following items should be classified as current liabilities.Assume a December 31 year-end.

Accepted Answer

The answer of A retail store has completed certain transactions...

Question 4

On January 1,2014,JG purchased a machine and gave a $30,000 three-year,8% note.The market or "going" interest rate was 12%.The annual interest payments are to be paid on each December 31.On January 1,2014,JG should record the net liability amount determined as follows:

Accepted Answer

The present value of the note should be calculated using the market interest rate of 12%, not the stated rate of 8%, to reflect the true cost of borrowing.

Question 5

KR Corporation was involved in a lawsuit with the Government alleging inadequate air pollution control facilities at its Glowworm plant site during 2013.At December 31,2016,it appeared probable the Government would settle for approximately $150,000.This event should be recorded (i.e.,recognized)in 2016 as a(n):

Accepted Answer

The event should be recorded as a loss on the lawsuit (operating expense) in 2016 since it is probable that the settlement will occur, and the amount can be reasonably estimated. This would be recognized as a current liability on the balance sheet as of December 31, 2016.

Question 6

XY Company owed a $45,489 due on January 1,2015.An agreement was reached to pay it off in five equal annual payments,starting on December 31,2015.The interest rate was 10 percent.The total amount of interest paid under the terms of the agreement was (round annual payment to nearest $1):

Accepted Answer

The answer of XY Company owed a $45,489 due on...

Question 7

A company had sales of $1 million.Coupons in the amount of $1 per $10 in sales were given to paying customers.History has shown that 50% of all coupons are redeemed.Which of the following statements is correct?

Accepted Answer

A provision for $50,000 must be recognized because 50% of the $100,000 worth of coupons are expected to be redeemed.

Question 8

Which of the following statements is correct?

Accepted Answer

The answer of Which of the following statements is correct?
...

Question 9

Contingent liabilities will or will not become actual liabilities depending on:

Accepted Answer

Contingent liabilities depend on the outcome of a future event to determine if they will become actual liabilities.

Question 10

VCR Company owed a $73,311 debt due on January 1,2012.An agreement was reached to pay it off in three equal annual payments of $30,000 each,starting on December 31,2012.The interest rate was 11 percent.The balance in the liability account of VCR Company on January 1,2014 is (round annual payment to nearest $1):

Accepted Answer

The balance on January 1, 2014, is the present value of the remaining payments. After the first payment on December 31, 2012, the remaining balance is reduced by the principal portion of the payment. The second payment on December 31, 2013, further reduces the balance. The remaining balance is the present value of the final payment due on December 31, 2014, discounted at 11%.

Question 11

Long-term obligations (i.e.,debts)that is callable for early payment:

Accepted Answer

Long-term obligations that are callable for early payment must be reported as current liabilities by the debtor if they are callable on demand. This is because they have the potential to be called and require payment in the near future. Even if there are no current violations of the debt covenant, if the liability is callable on demand it must still be reported as a current liability on the balance sheet.

Question 12

Which of the following contingencies should be accrued in the accounts and reported in the financial statements?

Accepted Answer

The estimated expenses of a one-year product warranty should be accrued because it is probable and can be reasonably estimated, meeting the criteria for accrual under accounting standards.

Question 13

A company has been sued for damages as a result of illness caused to local residents due to the emission of highly toxic chemicals from its plant.The company's legal firm advises that it is probable that the company will lose the suit and that it probably will result in a judgment of $2 million to $10 million in damages.However,the legal firm believes that the most probable amount of the loss will be $6 million,and that the suit will be terminated about three years hence.The company has no other lawsuits pending.
(a)Should the company disclose this event in the year the suit was filed? (check one)_____ No; _____ Note only; _____ A loss in the income statement.
(b)If a loss should be reported,give the journal entry required:

Accepted Answer

The answer of A company has been sued for damages...

Question 14

Constructive obligations may arise from:

Accepted Answer

Constructive obligations can arise from warranty obligations as they represent a company's commitment to repair or replace defective products, creating an expectation among customers that the company will fulfill this obligation.

Question 15

XYZ borrowed $60,000 for one year and signed an 18 percent,interest-bearing note payable.Assuming XYZ has an income tax rate of 45 percent,the net effective rate was:

Accepted Answer

To calculate the net effective rate, we need to take into account both the interest rate and the income tax rate. The formula for net effective rate is:

Net effective rate = Interest rate x (1 - Income tax rate)

Plugging in the values from the question, we have:

Net effective rate = 18% x (1 - 45%) = 9.9%

Therefore, the net effective rate is 9.9%, which corresponds to choice B.

Question 16

Under IFRS,which of the following will only require only a note disclosure as a contingency?

Accepted Answer

Contingencies that have a remote chance of occurring do not require recognition, but only disclosure in the notes to the financial statements.

Answer: A, C, and D 
 Contingencies that are probable and estimable, or have uncertain but high probabilities of occurring, require recognition and measurement in the financial statements, as well as disclosure in the notes. Cash discounts given for early payment by customers do not involve uncertainties, so they do not require recognition or disclosure as a contingency.

Question 17

By law,a fleet of aircraft must be subject to a major overhaul every 5 years as part of its scheduled maintenance program.Which of the following statements is correct?

Accepted Answer

The cost of the overhaul should be deferred and amortized over the 5-year period leading up to the overhaul, in order to match the expense with the benefits received over that period. This is consistent with the matching principle of accounting. Therefore, option A is incorrect because accruals should not be made in each of the 5 years preceding the overhaul. Option B is incorrect because the costs should not be expensed as incurred, but rather should be deferred and amortized. Option D is incorrect because a continuity schedule is not necessary for this situation, as the estimated cost of the overhaul should be included in the regular financial statements.

Question 18

A firm sells products covered by a three-year warranty.From the past experience of the other firms in the industry,the firm expects to incur warranty costs equal to 1% of sales.Firm sales were $40,000 and $50,000 in 2013 and 2014 respectively.In 2014,the firm spent $200 to repair goods sold in 2013,and $300 to repair goods sold in 2014.The firm received no warranty servicing demands from customers in 2013,the firm's first year of operations.What is the balance in the warranty liability account on January 1,2014?

Accepted Answer

The firm expects warranty costs to be 1% of sales. In 2013, sales were $40,000, so the expected warranty liability is 1% of $40,000, which is $400. Since no warranty servicing demands were made in 2013, the entire $400 remains as a liability on January 1, 2014.

Question 19

Ryan Company borrow $45,000 US when the exchange rate for US $1.00 is Cdn.$1.46.When the debt was repaid the exchange rate changes to US $1.00 = Cdn.$1.38.Ryan Company records the amount on the date of exchange as:

Accepted Answer

When Ryan Company borrowed $45,000 US at an exchange rate of US $1.00 = Cdn.$1.46, they received Cdn. $65,700 ($45,000 multiplied by 1.46). When they repaid the debt, the exchange rate was US $1.00 = Cdn.$1.38. Therefore, the amount of Cdn. dollars needed to repay $45,000 US was Cdn. $62,100 ($45,000 multiplied by 1.38). Thus, Ryan Company saved Cdn. $3,600 ($65,700 - $62,100) in the repayment. This saved amount is recorded as a foreign exchange gain.

Question 20

Information obtained prior to the issuance of the current period's financial statements of KG Company indicates that it is probable that,at the date of the financial statements,a liability will be incurred for obligations related to product warranties on products sold during the current period.During the past three years,product warranty costs have been approximately 1 1/2 percent of annual sales revenue.An estimated loss contingency should be:

Accepted Answer

According to the information provided, it is probable that a liability will be incurred for product warranties on products sold during the current period. Therefore, under the accrual basis of accounting, a liability should be accrued in the accounts and reported in the financial statements. The estimated loss contingency should be recorded as a liability and an expense in the current period's financial statements, which will reflect the matching principle of accounting. Choice A is incorrect because a loss contingency should be recognized if it is probable and the amount can be reasonably estimated. Choice B is incorrect because recognizing the liability as an appropriation of retained earnings does not follow the accrual principle of accounting. Choice D is incorrect because disclosing the liability in the notes to the financial statements without accruing it in the accounts would be incomplete and not reflect the true financial position and performance of the company.

Quiz 1: The Framework for Financial Reporting