T-121B-2-PREVIEW-MC (LTD-Leases)

A) 1) C, 2) B, 3) E, 4) J, 5) A

     B)   1) E, 2) H, 3) F, 4) G, 5) D

      1.   Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase.

                        Terms:           

            A.        Bond indenture           

            B.         Call feature     

            C.         Extraordinary loss       

            D.        Extraordinary gain      

            E.         Implicit rate of interest

            F.         Interest expense          

            G.        Mortgage bond

            H.        Sinking fund   

            I.          Interest fund   

            J.          Subordinated debenture          

                        Phrases:         

            ____1.Used when the rate is not stated or is materially different from the market rate.         

            ____2.Used to redeem bonds at their market price.   

            ____3.Conceptually equal to effective rate times balance.    

            ____4.Secured by real property.        

            ____5.Restructured cash payments less than carrying amount of debt.

      2.   Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase.

                        Terms:           

            A.        Convertible bonds      

            B.         Coupon bonds

            C.         Debenture bond          

            D.        Debt service ratio        

            E.         Debt to equity ratio     

            F.         Namless notes 

            G.        Installment notes         

            H.        Default to interest ratio           

            I.          Serial bonds    

            J.          Times interest earned ratio      

                        Phrases:         

            ____1.No specific assets pledged.     

            ____2.Name of owner not registered.

            ____3.Measures default risk. 

            ____4.Measures ability to service debt.         

            ____5.May become stock.

      3.   The interest rate that is printed on the bond certificate always is the same as each of the following except one, which is:

            A)   Stated rate.

            B)   Contract rate.

            C)   Nominal rate.

            D)   Effective rate.

      4.   The method used to pay interest depends on whether the bonds are:

            A)   Registered or coupon.

            B)   Mortgaged or unmortgaged.

            C)   Indentured or debentured.

            D)   Callable or redeemable.

      5.   Bond X and bond Y are both issued by the same company. Each of the bonds has a maturity value of $100,000 and they each pay interest at 8%. The current market rate of interest is 8%. Bond X matures in 7 years while bond Y matures in 10 years. Which of the following is correct?

            A)   Both bonds will sell for the same amount.

            B)   Both bonds will sell for more than $100,000.

            C)   Bond X will sell for more than bond Y.

            D)   Bond Y will sell for more than bond X.

      6.   Straight-line amortization of bond discount or premium:

            A)   Can be used for amortization of discount or premium in all cases and circumstances.

            B)   Provides the same amount of interest expense each period as does the effective interest method.

            C)   Is appropriate for deep discount bonds.

            D)   Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method.

      7.   Bonds payable should be reported as a long-term liability on the balance sheet of

            the issuing corporation at:

            A)   Face value price less any unamortized discount or plus any unamortized premium.

            B)   Current bond market price.

            C)   Face value less any unamortized premium or plus any unamortized discount.

            D)   Face value less accrued interest since the last interest payment date.

      8.   When the interest payment dates are March 1 and September 1, and the bonds are issued on July 1, the amount of interest expense to be accrued at December 31 of the year of issue would:

            A)   Not be required.

            B)   Be for six months.

            C)   Be for four months.

            D)   Be for ten months.

      9.   When the interest payment dates are March 1 and September 1, and the bonds are issued on July 1, the amount of interest expense reported on the December 31 income statement for the year of issue would be for:

            A)   Six months.

            B)   Four months.

            C)   Ten months.

            D)   Twelve months.

    10.   For a bond issue that sells for more than the bond face amount, the effective interest rate is:

            A)   The rate printed on the face of the bond.

            B)   The Wall Street Journal prime rate.

            C)   More than the rate stated on the face of the bond.

            D)   Less than the rate stated on the face of the bond.

    11.   When bonds are sold at a premium and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is:

            A)   Less than the effective interest.

            B)   Equal to the effective interest.

            C)   Greater than the effective interest.

            D)   More than if the bonds had been sold at a discount.

    12.   When bonds are sold at a discount and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is:

            A)   More than the effective interest.

            B)   Less than the effective interest.

            C)   Equal to the effective interest.

            D)   More than if the bonds had been sold at a premium.

    13.   When bonds are sold at a premium, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, one would find that the annual amount of the straight-line amortization of premium is:

            A)   Higher than the effective interest amount in the early years and less than the effective interest amount in the later years.

            B)   Less than the effective interest amount in the early years and more than the

                   effective interest amount in the later years.

            C)   Higher than the effective interest amount every year.

            D)   Less than the effective interest amount every year.

    14.   On January 1, 2000, Packard Corporation issued 1,000 of its 8%, $1,000 bonds at 96. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2010. Packard paid $50,000 in bond issue cost. Packard uses the straight-line amortization method. What is the bond carrying value reported on the December 31, 2000 balance sheet?

            A)   $1,045,000.

            B)   $1,040,000.

            C)   $969,000.

            D)   $964,000.

    15.   On January 1, 2000, Heart Corporation issued 1,000 of its 8%, $1,000 bonds at 96. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2010. Heart paid $50,000 in bond issue cost. Heart uses the straight-line amortization. The amount of interest expense for the year is:

            A)   $80,000.

            B)   $84,000.

            C)   $76,000.

            D)   $89,000.

Use the following to answer questions 16-20:

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2000. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

Payment    Cash    Effective Decrease in Outstanding         

                                Interest      Balance        Balance

                                                                     8,640,967           

       1        300,000   345,639      45,639       8,686,606           

       2        300,000   347,464      47,464       8,734,070           

       3        300,000   349,363      49,363       8,783,433           

       4        300,000

    16.   What is the stated annual rate of interest on the bonds?

            A)   3%.

            B)   4%.

            C)   6%.

            D)   8%.

    17.   What is the effective annual rate of interest on the bonds?

            A)   3%.

            B)   4%.

            C)   6%.

            D)   8%.

    18.   What is the interest expense on the bonds in 2001?

            A)   $700,700.

            B)   $600,000.

            C)   $351,337.

            D)   $100,700.

    19.   What is the carrying value of the bonds as of December 31, 2001?

            A)   $8,834,770.

            B)   $8,686,606.

            C)   $8,734,070.

            D)   $8,783,433.

    20.   What would be the total interest cost of the bonds over their full term?

            A)   $1,359,033.

            B)   $4,640,967.

            C)   $6,000,000.

            D)   $7,359,033.

II.  Leases (20 questions; 50 pts.)

     A)   1) E, 2) D, 3) F, 4) A, 5) B

     B)   1) A, 2) B, 3) H, 4) D, 5)E

    21.   Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase.

                       Terms:           

            A.        Capital leases 

            B.        Depreciable assets      

            C.        Direct financing lease

            D.        Executory costs          

            E.         Lease disclosure         

            F.         Lessor's minimum lease payments     

            G.        Loss to lessee 

            H.        Present value of minimum lease payments    

            I.          Sale-leaseback payments        

            J.          Lessor expenditures   

                        Phrases:         

            ____1. Substance over form. 

            ____2. Leasehold improvements.      

            ____3. Amount capitalized by lessee.           

            ____4. Capital lease expense.            

            ____5. Gross and net amounts of lease.

    22.   Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase.

                        Terms:           

            A.        Additional lessor conditions  

            B.        Bargain purchase option        

            C.        Collectibility  

            D.        Depreciation period longer than lease term   

            E.         Disclosure only          

            F.         Gross method 

            G.        Lessee's minimum lease payments     

            H.        Lessor's net investment          

            I.          Net method    

            J.          Contingency expense 

                        Phrases:         

            ____1. Contingent rentals.     

            ____2. Title transfers to lessee.          

            ____3. Typically used by lessor but not lessee          

            ____4. Realization principle. 

            ____5. Purchase price less than fair market value.

    23.   Distinguishing between operating and non-operating leases is due in large part

            to the accounting concept of:

            A)   Conservatism.

            B)   Materiality.

            C)   Substance over form.

            D)   Historical cost.

    24.   If the lessee and lessor use different interest rates to account for a capital lease,

            then:

            A)   Total expenses for the lessee will be different from the lessor's total revenues.

            B)   Total expenses for the lessee will equal the lessor's total revenues.

            C)   GAAP has been violated by at least one party.

            D)   The lessee will report more net income for the year.

    25.   Crystal Corporation recorded a lease payment as follows:

                  Rent expense                                                2,000                       

                       Cash                                                                        2,000        

            Crystal must have a(n)

            A)   Operating lease.

            B)   Leveraged lease.

            C)   Capital lease.

            D)   Direct financing lease.

    26.   The appropriate asset value reported on the balance sheet by the lessee for an operating lease is:

            A)   Present value of the minimum lease payments.

            B)   Sum of the minimum lease payments.

            C)   Fair value of the asset at the inception of the lease.

            D)   Zero, unless a prepayment or accrual is involved.

    27.   Of the four criteria for a capital lease, the one that most often is the decisive criteria is:

            A)   The 75% of economic life test.

            B)   The transfer of title.

            C)   The 90% of fair value test.

            D)   The bargain purchase option.

    28.   Additional lessor conditions for classification as a nonoperating lease are consistent with the criteria of the:

            A)   Matching principle.

            B)   Cause and effect principle.

            C)   Materiality concept.

            D)   Realization principle.

    29.   Of the four criteria for a capital lease, which two are not applied if the lease begins during the final quarter of the asset's useful life?

            A)   The 75% test and the bargain purchase option.

            B)   The 90% test and the 75% test.

            C)   The 90 % test is the only one to which this applies.

            D)   The bargain purchase and the passage of title criteria.

    30.   When the total expenses over the life of an operating lease are compared to the total expenses over the life of a capital lease, one will find that:

            A)   The expenses of a capital lease are greater than the expenses of the operating lease.

            B)   The expenses of the capital lease and operating lease are equal.

            C)   The expenses of an operating lease are greater than the expenses of a capital lease.

            D)   No meaningful comparison can be made.

    31.   Since the lease payments under a lease agreement are normally paid at the beginning of each period, the appropriate compound interest table to be used to determine the amount at which the leased asset should be recorded is the:

            A)   Ordinary annuity table.

            B)   Present value of $1 table.

            C)   Present value of an annuity due table.

            D)   Future value of an annuity due table.

    32.   For the lessee to account for a lease as a capital lease, the lease must meet:

            A)   All four of the criteria specified by SFAS No. 13.

            B)   Any one of the six criteria specified by SFAS No. 13.

            C)   Any two of the criteria specified by SFAS No. 13.

            D)   Any one of the four criteria specified by SFAS No. 13.

    33.   The lessee normally measures the lease liability to be recorded as the:

            A)   The future value of the minimum lease payments.

            B)   The sum of the cash payments over the term of the lease.

            C)   Present value of the minimum lease payments.

            D)   The fair market value of the leased asset.

    34.   Prepayments made on an operating lease are considered to be:

            A)   A lease expense.

            B)   A depreciable asset.

            C)   Executory costs.

            D)   A prepayment of rent.

    35.   For a capital lease, an amount equal to the present value of the minimum lease payments should be recorded by the lessee as a(n):

            A)   Asset and a liability.

            B)   Asset and a different amount should be recorded as a liability.

            C)   Liability and a different amount should be recorded as an asset.

            D)   Expense.

    36.   A sales-type lease differs from a direct financing lease in only one respect:

            A)   The lessor receives a manufacturer's or dealer's profit.

            B)   The lessor receives more interest than on a direct financing lease.

            C)   The lessor receives less interest than on a direct financing lease.

            D)   The lessor uses a longer amortization period than on a direct financing lease.

    37.   For a leased asset under a lease that qualifies as a capital lease, the depreciation period used by the lessee must be:

            A)   The same period that was used by the lessor.

            B)   The useful life to the lessee.

            C)   The term of the lease regardless of the lease provisions.

            D)   The remaining life of the asset at the time the lease agreement took effect.

    38.   On December 31, 2000, Focus Corporation leased equipment to Kansas Company for a 5-year period. The annual lease payment, excluding executory costs is $80,000. The interest rate for this lease is 10%. The payments are due on December 31 of each year. The first payment was made on December 31, 2000. The normal cash price for this type of equipment is $250,000 while the cost to Focus was $210,000. For the year ended December 31, 2000, by what amount will Focus's pretax earnings increase from this lease?

            A)   $48,000.

            B)   $40,000.

            C)   $80,000.

            D)   $57,000.

    39.   ABC Company leased equipment to Best Corporation under a lease agreement that qualifies as a direct financing lease. The cost of the asset is $120,000. The lease qualifies as a capital lease because of the 90% rule. The expected economic life of the asset is ten years. The lease term is 5 years. The asset is expected to have a residual value of $2,000 at the end of ten years. Using the straight-line method, what would Best record as annual depreciation?

            A)   $23,600.

            B)   $12,200.

            C)   $12,000.

            D)   $11,800.

    40.   EFG leased equipment from JKL on December 31, 2000. The lease is a 10-year lease with annual payments of $25,000 due on December 31 of each year. The present value of the lease (at a 10% implicit interest rate) is $170,000. EFG's incremental borrowing rate is 12% for this type of lease. What should be the balance in EFG's lease liability at December 31, 2001?

            A)   $137,400.

            B)   $134,500.

            C)   $134,400.

            D)   $132,000.