acc/304 week 11 final exam quiz

7/18/2019 Acc/304 Week 11 Final Exam Quiz

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ACC 304 Week 11 Final Exam – Strayer

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Week 11 Final Exam# Cha$ter 1+ Thro!,h 1-

./TA/.BLE ASSETS

.FS 2!e"tion" are aailale at the en( o* thi" cha$ter&

T5E)FALSE6Conce$t!al

1. Intangible assets derive their value from the right (claim) to receive cash in the future.

2. Internally created intangibles are recorded at cost.

3. Internally generated intangible assets are initially recorded at fair value.

4. Amortization of limited-life intangible assets should not be imacted by e!ected residualvalues.

". #ome intangible assets are not re$uired to be amortized every year.

%. &imited-life intangibles are amortized by systematic charges to e!ense over their usefullife.

'. he cost of ac$uiring a customer list from another comany is recorded as an intangibleasset.

. he cost of urchased atents should be amortized over the remaining legal life of the atent.

*. If a ne+ atent is ac$uired through modification of an e!isting atent, the remaining boo value of the original atent may be amortized over the life of the ne+ atent.

1. In a business combination, a comany assigns the cost, +here ossible, to the identifiabletangible and intangible assets, +ith the remainder recorded as good+ill.

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Intangible Assets

11. Internally generated good+ill should not be caitalized in the accounts.

12. Internally generated good+ill associated +ith a business may be recorded as an asset +hen

a firm offer to urchase that business unit has been received.

13. All intangibles are sub/ect to eriodic consideration of imairment +ith corresonding otential +rite-do+ns.

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Intangible Assets

14. If the fair value of an unlimited life intangible other than good+ill is less than its boo value, an imairment loss must be recognized.

1". If maret value of an imaired asset recovers after an imairment has been recognized, the

imairment may be reversed in a subse$uent eriod.

1%. he same recoverability test that is used for imairments of roerty, lant, and e$uimentis used for imairments of indefinite-life intangibles.

1'. 0eriodic alterations to e!isting roducts are an e!amle of research and develoment costs.

1. esearch and develoment costs that result in atents may be caitalized to the e!tent of

the fair value of the atent.

1*. esearch and develoment costs are recorded as an intangible asset if it is felt they +ill rovide economic benefits in future years.

2. ontra accounts must be reorted for intangible assets in a manner similar to accumu-lateddereciation and roerty, lant, and e$uiment.

Tr!e Fal"e An"wer"6Conce$t!al

75LT.LE C8O.CE6Conce$t!al

21. hich of the follo+ing does not describe intangible assetsa. hey lac hysical e!istence. b. hey are financial instruments.c. hey rovide long-term benefits.d. hey are classified as long-term assets.

22. hich of the follo+ing characteristics do intangible assets ossessa. 0hysical e!istence. b. laim to a secific amount of cash in the future.c. &ong-lived.d. 5eld for resale.

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Intangible Assets

23. hich characteristic is not ossessed by intangible assetsa. 0hysical e!istence. b. #hort-lived.c. esult in future benefits.d. 6!ensed over current and7or future years.

24. osts incurred internally to create intangibles area. caitalized. b. caitalized if they have an indefinite life.c. e!ensed as incurred.d. e!ensed only if they have a limited life.

2". hich of the follo+ing costs incurred internally to create an intangible asset is generallye!ensed

a. esearch and develoment costs. b. 8iling costs.c. &egal costs.d. All of the above.

2%. hich of the follo+ing methods of amortization is normally used for intangible assetsa. #um-of-the-years9-digits b. #traight-linec. :nits of roductiond. ;ouble-declining-balance

2'. he cost of an intangible asset includes all of the follo+ing except a. urchase rice. b. legal fees.c. other incidental e!enses.d. all of these are included.

2. 8actors considered in determining an intangible asset<s useful life include all of thefollo+ing except

a. the e!ected use of the asset. b. any legal or contractual rovisions that may limit the useful life.c. any rovisions for rene+al or e!tension of the asset<s legal life.d. the amortization method used.

2*. :nder current accounting ractice, intangible assets are classified asa. amortizable or unamortizable. b. limited-life or indefinite-life.

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Intangible Assets

c. secifically identifiable or good+ill-tye.d. legally restricted or good+ill-tye.

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Intangible Assets

3. omanies should test indefinite life intangible assets at least annually for=a. recoverability. b. amortization.c. imairment.d. estimated useful life.

#31. >ne factor that is not considered in determining the useful life of an intangible asset isa. salvage value. b. rovisions for rene+al or e!tension.c. legal life.d. e!ected actions of cometitors.

32. hich intangible assets are amortized

&imited-&ife Indefinite-&ifea. ?es ?es b. ?es @oc. @o ?esd. @o @o

33. he cost of urchasing atent rights for a roduct that might other+ise have seriouslycometed +ith one of the urchaser9s atented roducts should bea. charged off in the current eriod. b. amortized over the legal life of the urchased atent.

c. added to factory overhead and allocated to roduction of the urchaser9s roduct.d. amortized over the remaining estimated life of the original atent covering the roduct

+hose maret +ould have been imaired by cometition from the ne+ly atented roduct.

34. road+ay ororation +as granted a atent on a roduct on Banuary 1, 21. o rotect its atent, the cororation urchased on Banuary 1, 212 a atent on a cometing roduct+hich +as originally issued on Banuary 1, 2. ecause of its uni$ue lant, road+ayororation does not feel the cometing atent can be used in roducing a roduct. hecost of the cometing atent should bea. amortized over a ma!imum eriod of 2 years.

b. amortized over a ma!imum eriod of 1% years.c. amortized over a ma!imum eriod of * years.d. e!ensed in 212.

3". riglee, Inc. +ent to court this year and successfully defended its atent from infringe-ment by a cometitor. he cost of this defense should be charged toa. atents and amortized over the legal life of the atent. b. legal fees and amortized over " years or less.

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Intangible Assets

c. e!enses of the eriod.d. atents and amortized over the remaining useful life of the atent.

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Intangible Assets

3%. hich of the follo+ing is not an intangible asseta. rade name b. esearch and develoment costsc. 8ranchised. oyrights

3'. hich of the follo+ing intangible assets should not be amortizeda. oyrights b. ustomer listsc. 0eretual franchisesd. All of these intangible assets should be amortized.

3. hen a atent is amortized, the credit is usually made toa. the 0atent account.

b. an Accumulated Amortization account.c. a ;eferred redit account.d. an e!ense account.

3*. hen a comany develos a trademar the costs directly related to securing it shouldgenerally be caitalized. hich of the follo+ing costs associated +ith a trademar +ouldnot be allo+ed to be caitalizeda. Attorney fees. b. onsulting fees.

c. esearch and develoment fees.d. ;esign costs.

4. In a business combination, comanies record identifiable intangible assets that they canreliably measure. All other intangible assets, too difficult to identify or measure, arerecorded as=a. other assets. b. indirect costs.c. good+ill.d. direct costs.

41. Cood+ill may be recorded +hen=a. it is identified +ithin a comany. b. one comany ac$uires another in a business combination.c. the fair value of a comany<s assets e!ceeds their cost.d. a comany has e!cetional customer relations.

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Intangible Assets

42. hen a ne+ comany is ac$uired, +hich of these intangible assets, unrecorded on theac$uired comany<s boos, might be recorded in addition to good+illa. A brand name. b. A atent.c. A customer list.

d. All of the above.

43. hich of the follo+ing intangible assets could not be sold by a business to raise neededcash for a caital ro/ecta. 0atent. b. oyright.c. Cood+ill.d. rand @ame.

44. he reason good+ill is sometimes referred to as a master valuation account is becausea. it reresents the urchase rice of a business that is about to be sold. b. it is the difference bet+een the fair value of the net tangible and identifiable intangible

assets as comared +ith the urchase rice of the ac$uired business.c. the value of a business is comuted +ithout consideration of good+ill and then

good+ill is added to arrive at a master valuation.d. it is the only account in the financial statements that is based on value, all other

accounts are recorded at an amount other than their value.

4". 6aston omany and &ofton omany +ere combined in a urchase transaction. 6aston

+as able to ac$uire &ofton at a bargain rice. he sum of the fair values of identifiableassets ac$uired less the fair value of liabilities assumed e!ceeded the cost to 6aston. 0roer accounting treatment by 6aston is to reort the e!cess amount asa. a gain. b. art of current income in the year of combination.c. a deferred credit and amortize it.d. aid-in caital.

4%. 0urchased good+ill shoulda. be +ritten off as soon as ossible against retained earnings.

b. be +ritten off as soon as ossible as an e!traordinary item.c. be +ritten off by systematic charges as a regular oerating e!ense over the eriod benefited.

d. not be amortized.

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Intangible Assets

4'. he intangible asset good+ill may bea. caitalized only +hen urchased. b. caitalized either +hen urchased or created internally.c. caitalized only +hen created internally.d. +ritten off directly to retained earnings.

4. A loss on imairment of an intangible asset is the difference bet+een the asset<sa. carrying amount and the e!ected future net cash flo+s. b. carrying amount and its fair value.c. fair value and the e!ected future net cash flo+s.d. boo value and its fair value.

4*. he recoverability test is used to determine any imairment loss on +hich of the follo+ingtyes of intangible assets

a. Indefinite life intangibles other than good+ill. b. Indefinite life intangibles.c. Cood+ill.d. &imited life intangibles.

". uerhle omany needs to determine if its indefinite-life intangibles other than good+illhave been imaired and should be reduced or +ritten off on its balance sheet. heimairment test(s) to be used is (are)

ecoverability est 8air Dalue esta. ?es ?es

b. ?es @oc @o ?esd. @o @o

"1. he carrying amount of an intangible isa. the fair value of the asset at a balance sheet date. b. the asset9s ac$uisition cost less the total related amortization recorded to date.c. e$ual to the balance of the related accumulated amortization account.d. the assessed value of the asset for intangible ta! uroses.

"2. hich of the follo+ing research and develoment related costs should be caitalized anddereciated over current and future eriodsa. esearch and develoment general laboratory building +hich can be ut to alternative

uses in the future b. Inventory used for a secific research ro/ectc. Administrative salaries allocated to research and develomentd. esearch findings urchased from another comany to aid a articular research ro/ect

currently in rocess

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Intangible Assets 12 - 11



Intangible Assets

"3. hich of the follo+ing rinciles best describes the current method of accounting for research and develoment costsa. Associating cause and effect b. #ystematic and rational allocationc. Income ta! minimization

d. Immediate recognition as an e!ense

"4. 5o+ should research and develoment costs be accounted for, according to a 8inancialAccounting #tandards oard #tatementa. Eust be caitalized +hen incurred and then amortized over their estimated useful lives. b. Eust be e!ensed in the eriod incurred.c. Eay be either caitalized or e!ensed +hen incurred, deending uon the materiality

of the amounts involved.d. Eust be e!ensed in the eriod incurred unless it can be clearly demonstrated that the

e!enditure +ill have alternative future uses or unless contractually reimbursable.

"". hich of the follo+ing +ould be considered research and develomenta. outine efforts to refine an e!isting roduct. b. 0eriodic alterations to e!isting roduction lines.c. Eareting research to romote a ne+ roduct.d. onstruction of rototyes.

"%. hich of the follo+ing costs should be caitalized in the year incurreda. esearch and develoment costs.

b. osts to internally generate good+ill.c. >rganizational costs.d. osts to successfully defend a atent.

"'. esearch and develoment costsa. are intangible assets. b. may result in the develoment of a atent.c. are easily identified +ith secific ro/ects.d. all of the above.

". hich of the follo+ing is considered research and develoment costsa. 0lanned search or critical investigation aimed at discovery of ne+ no+ledge. b. ranslation of research findings or other no+ledge into a lan or design for a ne+

roduct or rocess.c. ranslation of research findings or other no+ledge into a significant imrovement of

an e!isting roduct.d. all of the above.

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Intangible Assets

"*. hich of the follo+ing is considered research and develoment costsa. 0lanned search or critical investigation aimed at discovery of ne+ no+ledge. b. ranslation of research findings or other no+ledge into a lan or design for a ne+

roduct or rocess.c. @either a nor b.

d. oth a and b.

%. hich of the follo+ing costs should be excluded from research and develoment e!ensea. Eodification of the design of a roduct b. Ac$uisition of F ; e$uiment for use on a current ro/ect onlyc. ost of mareting research for a ne+ roductd. 6ngineering activity re$uired to advance the design of a roduct to the manufacturing

stage

%1. If a comany constructs a laboratory building to be used as a research and develomentfacility, the cost of the laboratory building is matched against earnings asa. research and develoment e!ense in the eriod(s) of construction. b. dereciation deducted as art of research and develoment costs.c. dereciation or immediate +rite-off deending on comany olicy.d. an e!ense at such time as roductive research and develoment has been obtained

from the facility.

%2. >erating losses incurred during the start-u years of a ne+ business should bea. accounted for and reorted lie the oerating losses of any other business.

b. +ritten off directly against retained earnings.c. caitalized as a deferred charge and amortized over five years.d. caitalized as an intangible asset and amortized over a eriod not to e!ceed 2 years.

%3. he costs of organizing a cororation include legal fees, fees aid to the state of incororation, fees aid to romoters, and the costs of meetings for organizing the romoters. hese costs are said to benefit the cororation for the entity9s entire life. hesecosts should bea. caitalized and never amortized. b. caitalized and amortized over 4 years.

c. caitalized and amortized over " years.d. e!ensed as incurred.

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Intangible Assets

%4. hich of the follo+ing +ould not be considered an F ; activitya. Adatation of an e!isting caability to a articular re$uirement or customer9s need. b. #earching for alications of ne+ research findings.c. &aboratory research aimed at discovery of ne+ no+ledge.d. oncetual formulation and design of ossible roduct or rocess alternatives.

%". hich of the follo+ing intangible assets should be sho+n as a searate item on the balancesheeta. Cood+ill b. 8ranchisec. 0atentd. rademar

%%. he notes to the financial statements should include information about ac$uired intangible

assets, and aggregate amortization e!ense for ho+ many succeeding yearsa. % b. "c. 4d. 3

%'. hich of the follo+ing should be reorted under the G>ther 6!enses and &ossesH sectionof the income statementa. Cood+ill imairment losses. b. rade name amortization e!ense.

c. 0atent imairment lossesd. @one of the above.

%. he total amount of atent cost amortized to date is usuallya. sho+n in a searate Accumulated 0atent Amortization account +hich is sho+n contra

to the 0atents account. b. sho+n in the current income statement.c. reflected as credits in the 0atents account.d. reflected as a contra roerty, lant and e$uiment item.

%*. Intangible assets are reorted on the balance sheeta. +ith an accumulated dereciation account. b. in the roerty, lant, and e$uiment section.c. searately from other assets.d. none of the above.

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Intangible Assets

'. hich of the follo+ing is often reorted as an e!traordinary itema. Amortization e!ense. b. Imairment losses for intangible assets other than good+ill.c. Imairment losses on good+ill.d. @one of the above.

'1. hich of the follo+ing is often reorted as an e!traordinary itema. Amortization e!ense. b. Imairment losses for intangible assets.c. esearch and develoment costs.d. @one of the above.

'2. hich of the follo+ing costs incurred +ith develoing comuter soft+are for internal useshould be caitalized

a. 6valuation of alternatives. b. oding.c. raining.d. Eaintenance.

'3. hen develoing comuter soft+are to be sold, +hich of the follo+ing costs should becaitalizeda. ;esigning. b. oding.c. esting.

d. @one of the above.

'4. aitalized costs incurred to develo internal use comuter soft+are should be amortizedusing the=a. ercent-of-revenue aroach. b. ercent-of-comletion aroach.c. straight-line aroach.d. accelerated amortization aroach.

'". aitalized costs incurred +hile develoing comuter soft+are to be sold should beamortized using the=a. lo+er of the straight-line method or the ercent-of-revenue method. b. higher of the ercent-of-revenue method or the ercent-of-comletion method.c. lo+er of the ercent-of-revenue method or the ercent-of-comletion method.d. higher of the straight-line method or the ercent-of-revenue method.

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Intangible Assets

7!lti$le Choice An"wer"6Conce$t!al

75LT.LE C8O.CE6Com$!tational

'%. &ynne ororation ac$uired a atent on Eay 1, 212. &ynne aid cash of J4, to the

seller. &egal fees of J1, +ere aid related to the ac$uisition. hat amount should bedebited to the atent accounta. J1, b. J3*,c. J4,d. J41,

''. ontreras ororation ac$uired a atent on Eay 1, 212. ontreras aid cash of J3",to the seller. &egal fees of J* +ere aid related to the ac$uisition. hat amount should be debited to the atent account

a. J* b. J34,1c. J3",d. J3",*

'. Eini or. ac$uires a atent from Ea!i o. in e!change for 2," shares of Eini or.<sJ" ar value common stoc and J*, cash. hen the atent +as initially issued toEa!i o., Eini or.<s stoc +as selling at J'." er share. hen Eini or. ac$uired the atent, its stoc +as selling for J* a share. Eini or. should record the atent at +hatamount

a. J12," b. J1,'"c. J112,"d. J*,

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Intangible Assets

'*. Alonzo o. ac$uires 3 atents from #ha$ or. for a total of J3,. he atents +erecarried on #ha$<s boos as follo+s= 0atent AA= J",K 0atent = J2,K and 0atent =J3,. hen Alonzo ac$uired the atents their fair values +ere= 0atent AA= J2,K0atent = J24,K and 0atent = J%,. At +hat amount should Alonzo record0atent

a. J1, b. J2,c. J2,d. J22",

. Beff ororation urchased a limited-life intangible asset for J1", on Eay 1, 21. Ithas a useful life of 1 years. hat total amount of amortization e!ense should have beenrecorded on the intangible asset by ;ecember 31, 212a. J -- b. J3,

c. J4,d. J4",

1. ich ororation urchased a limited-life intangible asset for J2', on Eay 1, 21. Ithas a useful life of 1 years. hat total amount of amortization e!ense should have beenrecorded on the intangible asset by ;ecember 31, 212a. J --. b. J"4,c. J'2,d. J1,

2. homson omany incurred research and develoment costs of J1, and legal feesof J2, to ac$uire a atent. he atent has a legal life of 2 years and a useful life of 1years. hat amount should homson record as 0atent Amortization 6!ense in the firstyeara. J --. b. J 2,.c. J %,.d. J12,.

3. 6&> ororation urchased a atent for J1, on #etember 1, 21. It had a usefullife of 1 years. >n Banuary 1, 212, 6&> sent J44, to successfully defend the atentin a la+suit. 6&> feels that as of that date, the remaining useful life is " years. hatamount should be reorted for atent amortization e!ense for 212a. J41,2. b. J4,.c. J3',%.d. J31,2.

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Intangible Assets

4. ;ans ororation urchased a atent for J*, on #etember 1, 21. It had a usefullife of 1 years. >n Banuary 1, 212, ;ans sent J22, to successfully defend the atent in a la+suit. ;ans feels that as of that date, the remaining useful life is " years.hat amount should be reorted for atent amortization e!ense for 212a. J2%,.

b. J2,.c. J1,.d. J1"%,.

". he general ledger of Dance ororation as of ;ecember 31, 212, includes the follo+ingaccounts=

oyrights J 3,;eosits +ith advertising agency (+ill be used to romote good+ill) 2',;iscount on bonds ayable ',6!cess of cost over fair value of identifiable net assets of

Ac$uired subsidiary 44,rademars *,

In the rearation of Dance9s balance sheet as of ;ecember 31, 212, +hat should bereorted as total intangible assetsa. J"3,. b. J""',.c. J"%,.d. J"',.

%. In Banuary, 2, 8indley ororation urchased a atent for a ne+ consumer roduct for J*%,. At the time of urchase, the atent +as valid for fifteen years. ;ue to thecometitive nature of the roduct, ho+ever, the atent +as estimated to have a useful lifeof only ten years. ;uring 213 the roduct +as ermanently removed from the maretunder governmental order because of a otential health hazard resent in the roduct.hat amount should 8indley charge to e!ense during 213, assuming amortization isrecorded at the end of each yeara. J%4,. b. J4,.c. J*%,.d. J%4,.

'. ;ay omany urchased a atent on Banuary 1, 212 for J%,. he atent had aremaining useful life of 1 years at that date. In Banuary of 213, ;ay successfully defendsthe atent at a cost of J2',, e!tending the atent<s life to 12731724. hat amount of amortization e!ense +ould Lerr record in 213a. J%, b. J%',"c. J'2,"d. J*,

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Intangible Assets

. >n Banuary 2, 212, Llein o. bought a trademar from oyce, Inc. for J1,2,. Anindeendent research comany estimated that the remaining useful life of the trademar +as 1 years. Its unamortized cost on oyce<s boos +as J*,. In Llein<s 212income statement, +hat amount should be reorted as amortization e!ensea. J12,.

b. J *,.c. J %,.d. J 4",.

*. A comany ac$uires a atent for a drug +ith a remaining legal and useful life of si! yearson Banuary 1, 211 for J2,1,. he comany uses straight-line amortization for atents. >n Banuary 2, 213, a ne+ atent is received for a timed-release version of thesame drug. he ne+ atent has a legal and useful life of t+enty years. he least amount of amortization that could be recorded in 213 isa. J3",.

b. J ',.c. J *",4"4.d. J ,".

*. lue #y omany<s 12731712 balance sheet reorts assets of J',", and liabilities of J3,,. All of lue #y<s assets< boo values aro!imate their fair value, e!cet for land, +hich has a fair value that is J4", greater than its boo value. >n 12731712,5orace im ororation aid J',%", to ac$uire lue #y. hat amount of good+illshould 5orace im record as a result of this urchasea. J --

b. J1",c. J2,',d. J3,1",

*1. ;otel omany<s 12731712 balance sheet reorts assets of J12,, and liabilities of J",,. All of ;otel<s assets< boo values aro!imate their fair value, e!cet for land,+hich has a fair value that is J, greater than its boo value. >n 12731712, 6gbertororation aid J12,2, to ac$uire ;otel. hat amount of good+ill should 6gbertrecord as a result of this urchasea. J --

b. J 2,c. J4,4,d. J",2,

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Intangible Assets

*2. 8loyd omany urchases 5aeger omany for J3,2, cash on Banuary 1, 213. he boo value of 5aeger omany<s net assets, as reflected on its ;ecember 31, 212 balancesheet is J2,4,. An analysis by 8loyd on ;ecember 31, 212 indicates that the fair value of 5aeger<s tangible assets e!ceeded the boo value by J24,, and the fair valueof identifiable intangible assets e!ceeded boo value by J1,. 5o+ much good+ill

should be recognized by 8loyd omany +hen recording the urchase of 5aeger omanya. J -- b. J'2,c. J4,d. J3,

*3. Ceneral 0roducts omany bought #ecial 0roducts ;ivision in 212 and aroriatelyrecorded J", of good+ill related to the urchase. >n ;ecember 31, 213, the fair value of #ecial 0roducts ;ivision is J4,, and it is carried on Ceneral 0roduct<s

boos for a total of J3,4,, including the good+ill. An analysis of #ecial 0roducts;ivision<s assets indicates that good+ill of J4, e!ists on ;ecember 31, 213. hatgood+ill imairment should be recognized by Ceneral 0roducts in 213a. J. b. J2,.c. J",.d. J3,.

*4. ;uring 212, ond omany urchased the net assets of Eay ororation for J2,,.>n the date of the transaction, Eay had J%, of liabilities. he fair value of Eay9s

assets +hen ac$uired +ere as follo+s=urrent assets J 1,, @oncurrent assets 2,"2,

J3,%,

5o+ should the J1,, difference bet+een the fair value of the net assets ac$uired(J3,,) and the cost (J2,,) be accounted for by onda. he J1,, difference should be credited to retained earnings. b. he J1,, difference should be recognized as a gain.c. he current assets should be recorded at J1,, and the noncurrent assets should

be recorded at J1,"2,.

d. A deferred credit of J1,, should be set u and then amortized to income over a eriod not to e!ceed forty years.

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Intangible Assets

*". he follo+ing information is available for arley omany<s atents=

ost J2,",arrying amount 1,2*,6!ected future net cash flo+s 1,2,8air value *'",

arley +ould record a loss on imairment of a. J *,. b. J 31",.c. J1,2*,.d. J1,3,.

*%. 5arrel omany ac$uired a atent on an oil e!traction techni$ue on Banuary 1, 212 for J',",. It +as e!ected to have a 1 year life and no residual value. 5arrel usesstraight-line amortization for atents. >n ;ecember 31, 213, the e!ected future cash

flo+s e!ected from the atent +ere e!ected to be J*, er year for the ne!t eightyears. he resent value of these cash flo+s, discounted at 5arrel<s maret interest rate, isJ4,2,. At +hat amount should the atent be carried on the ;ecember 31, 213 balance sheeta. J',", b. J',2,c. J%,,d. J4,2,

*'. Ealrom Eanufacturing omany ac$uired a atent on a manufacturing rocess on Banuary

1, 212 for J%,2",. It +as e!ected to have a 1 year life and no residual value.Ealrom uses straight-line amortization for atents. >n ;ecember 31, 213, the e!ectedfuture cash flo+s e!ected from the atent +ere e!ected to be J", er year for thene!t eight years. he resent value of these cash flo+s, discounted at Ealrom<s maretinterest rate, is J3,,. At +hat amount should the atent be carried on the ;ecember 31, 213 balance sheeta. J%,2", b. J",,c. J4,,d. J3,,

*. +ilight ororation ac$uired 6nd-of-the-orld 0roducts on Banuary 1, 212 for J,,, and recorded good+ill of J1,", as a result of that urchase. At ;ecember 31, 212, the 6nd-of-the-orld 0roducts ;ivision had a fair value of J%,,. he netidentifiable assets of the ;ivision (e!cluding good+ill) had a fair value of J",, atthat time. hat amount of loss on imairment of good+ill should +ilight record in 212a. J -- b. J",c. J',

12 - 23



Intangible Assets

d. J1,2,

12 - 24



Intangible Assets

**. Bens ororation ac$uired &inebrin 0roducts on Banuary 1, 212 for J%,,, andrecorded good+ill of J1,12", as a result of that urchase. At ;ecember 31, 212,&inebrin 0roducts had a fair value of J",1,. he net identifiable assets of the&inebrin (e!cluding good+ill) had a fair value of J4,3", at that time. hat amountof loss on imairment of good+ill should Bens record in 212

a. J -- b. J3'",c. J"2",d. J*,

1. In 212, 6d+ards ororation incurred research and develoment costs as follo+s=

Eaterials and e$uiment J *,0ersonnel 13,Indirect costs 1",

J3',

hese costs relate to a roduct that +ill be mareted in 211. It is estimated that these costs+ill be recoued by ;ecember 31, 21". he e$uiment has no alternative future use.hat is the amount of research and develoment costs that should be e!ensed in 212a. J. b. J22,.c. J2,.d. J3',.

11. 5all o. incurred research and develoment costs in 213 as follo+s=

Eaterials used in research and develoment ro/ects J 4",6$uiment ac$uired that +ill have alternate future uses in future research

and develoment ro/ects 3,,;ereciation for 213 on above e$uiment ",0ersonnel costs of ersons involved in research and develoment ro/ects '",onsulting fees aid to outsiders for research and develoment ro/ects 3,Indirect costs reasonably allocable to research and develoment ro/ects 22",

J",22",

he amount of research and develoment costs charged to 5all9s 213 income statementshould bea. J1,',. b. J2,,.c. J2,22",.d. J4,',.

12 - 25



Intangible Assets

12. &oazia Inc. incurred the follo+ing costs during the year ended ;ecember 31, 213=

&aboratory research aimed at discovery of ne+ no+ledge J23,osts of testing rototye and design modifications 4",Muality control during commercial roduction, including routine testing

of roducts 2',onstruction of research facilities having an estimated useful life of

% years but no alternative future use 3%,

he total amount to be classified and e!ensed as research and develoment in 213 isa. J%",. b. J*",.c. J%3",.d. J33",.

13. Eaelle ororation incurred the follo+ing costs in 212=

Ac$uisition of F; e$uiment +ith a useful life of 4 years in F; ro/ects J%,

#tart-u costs incurred +hen oening a ne+ lant 14,Advertising e!ense to introduce a ne+ roduct ',6ngineering costs incurred to advance a roduct to full

roduction stage ",

hat amount should Eaelle record as research F develoment e!ense in 212a. J %", b. J '4,c. J1,1,d. J1,24,

14. &eeer ororation incurred the follo+ing costs in 212=

Ac$uisition of F; e$uiment +ith a useful life of 4 years in F; ro/ects J,

ost of maing minor modifications to an e!isting roduct 14,Advertising e!ense to introduce a ne+ roduct ',6ngineering costs incurred to advance a roduct to full

roduction stage '",

hat amount should &eeer record as research F develoment e!ense in 212a. J *", b. J *4,c. J1,4",d. J1,%4,

12 - 26



Intangible Assets

1". 0latteville ororation has the follo+ing account balances at 12731712=

Amortization e!ense J 3,Cood+ill 42,0atent, net of J*, amortization 21,

hat amount should 0latteville reort for intangible assets on the 12731712 balance sheeta. J21, b. J3,c. J%3,d. J%%,

1%. #hangra-&a omany incurred J2,, (J", in 211 and J1,", in 212) todevelo a comuter soft+are roduct. J%, of this amount +as e!ended beforetechnological feasibility +as established in early 212. he roduct +ill earn futurerevenues of J4,, over its "-year life, as follo+s= 212 N J1,,K 213 N J1,,K 214 N J,K 21" N J,K and 21% N J4,. hat ortion of the

J2,, comuter soft+are costs should be e!ensed in 212a. J3", b. J4,c. J4",d. J1,",

1'. &ogan omany incurred J4,, (J1,1, in 211 and J2,*, in 212) todevelo a comuter soft+are roduct. J1,2, of this amount +as e!ended beforetechnological feasibility +as established in early 212. he roduct +ill earn futurerevenues of J,, over its "-year life, as follo+s= 212 N J2,,K 213 N

J2,,K 214 N J1,%,K 21" N J1,%,K and 21% N J,. hat ortion of the J4,, comuter soft+are costs should be e!ensed in 212a. J',. b. J'",.c. J,.d. J2,*,.

1. Celler Inc. incurred J', of caitalizable costs to develo comuter soft+are during212. he soft+are +ill earn total revenues over its 4-year life as follo+s= 212 -J4,K 213 - J",K 214 - J%,K and 21" - J",. hat amount of the

comuter soft+are costs should be e!ensed in 212a. J', b. J14,c. J1'",d. J24",

12 - 27



Intangible Assets

1*. riiani Inc. incurred J, of caitalizable costs to develo comuter soft+are during212. he soft+are +ill earn total revenues over its "-year life as follo+s= 212 -J",K 213 - J%,K 214 - J%,K 21" - J2,K and 21% - J1,. hatamount of the comuter soft+are costs should be e!ensed in 212a. J2,

b. J1%,c. J1,d. J2%%,%%'

11. riiani Inc. incurred J*, of caitalizable costs to develo comuter soft+are during212. he soft+are +ill be used internally over its "-year life. hat amount of thecomuter soft+are costs should be e!ensed in 212a. J*, b. J1,c. J22,"

d. J3,

7!lti$le Choice An"wer"6Com$!tational

75LT.LE C8O.CE6CA A(a$te(

111. &oez or. incurred J1,2%, of research and develoment costs to develo a roductfor +hich a atent +as granted on Banuary 2, 2. &egal fees and other costs associated+ith registration of the atent totaled J24,. >n Earch 31, 213, &oez aid J4",for legal fees in a successful defense of the atent. he total amount caitalized for the atent through Earch 31, 213 should be

a. J%*,. b. J1,",.c. J1,'1,.d. J1,*",.

12 - 28



Intangible Assets

112. >n Bune 3, 213, ey, Inc. e!changed 4, shares of #eely or. J3 ar value commonstoc for a atent o+ned by Core o. he #eely stoc +as ac$uired in 213 at a cost of J11,. At the e!change date, #eely common stoc had a fair value of J4% er share, andthe atent had a net carrying value of J22, on Core9s boos. ey should record the atent at

a. J11,. b. J12,.c. J14,.d. J22,.

113. >n Eay ", 213, Eac;ougal or. e!changed %, shares of its J2" ar value treasurycommon stoc for a atent o+ned by Easset o. he treasury shares +ere ac$uired in212 for J13",. At Eay ", 213, Eac;ougal9s common stoc +as $uoted at J34 er share, and the atent had a carrying value of J1%", on Easset9s boos. Eac;ougalshould record the atent at

a. J13",. b. J1",.c. J1%",.d. J24,.

114. 6ly o. bought a atent from aden or. on Banuary 1, 213, for J4",. Anindeendent consultant retained by 6ly estimated that the remaining useful life at Banuary1, 213 is 1" years. Its unamortized cost on aden<s accounting records +as J22",K the atent had been amortized for " years by aden. 5o+ much should be amortized for theyear ended ;ecember 31, 213 by 6ly o.

a. J. b. J22,".c. J3,.d. J4",.

11". Banuary 2, 21, Loll, Inc. urchased a atent for a ne+ consumer roduct for J4",.At the time of urchase, the atent +as valid for 1" yearsK ho+ever, the atent<s useful life+as estimated to be only 1 years due to the cometitive nature of the roduct. >n;ecember 31, 213, the roduct +as ermanently +ithdra+n from the maret under governmental order because of a otential health hazard in the roduct. hat amount

should Loll charge against income during 213, assuming amortization is recorded at theend of each yeara. J 4", b. J2',c. J31",d. J3%,

12 - 29



Intangible Assets

11%. >n Banuary 1, 2*, ussell omany urchased a coyright for J2,,, having anestimated useful life of 1% years. In Banuary 213, ussell aid J3, for legal fees in asuccessful defense of the coyright. oyright amortization e!ense for the year ended;ecember 31, 213, should bea. J.

b. J12",.c. J143,'".d. J1",.

11'. hich of the follo+ing legal fees should be caitalized

&egal fees to &egal fees to successfullyobtain a coyright defend a trademar

a. @o @o b. @o ?esc. ?es ?es

d. ?es @o

11. hich of the follo+ing costs of good+ill should be amortized over their estimated usefullives

osts of good+ill from a osts of develoing business combination good+ill internally

a. @o @o b. @o ?esc. ?es ?esd. ?es @o

11*. ;uring 213, &eon o. incurred the follo+ing costs=

esting in search for rocess alternatives J 3",osts of mareting research for ne+ roduct 2",Eodification of the formulation of a rocess "%,esearch and develoment services erformed by ec or. for &eon 42",

In &eon9s 213 income statement, research and develoment e!ense should bea. J"%,. b. J*",.

c. J1,33",.d. J1,"",.

12 - 30



Intangible Assets

12. iley o. incurred the follo+ing costs during 213=

#ignificant modification to the formulation of a chemical roduct J1%,rouble-shooting in connection +ith breado+ns during commercial

roduction 1",ost of e!loration of ne+ formulas 2,

#easonal or other eriodic design changes to e!isting roducts 1",&aboratory research aimed at discovery of ne+ technology 2'",

In its income statement for the year ended ;ecember 31, 213, iley should reortresearch and develoment e!ense of a. J%3",. b. J'",.c. J2,.d. J*',.

7!lti$le Choice An"wer"6CA A(a$te(

12 - 31



Intangible Assets

.FS 95EST.O/S

Tr!e%Fal"e 9!e"tion"

1. As in :.#. CAA0, under I8# the costs associated +ith research and develoment are

segregated into t+o comonents.2. osts in the research hase are e!ensed under :.#. CAA0, but caitalized under I8#.

3. osts in the research hase are al+ays e!ensed under both I8# and :.#. CAA0.

4. I8# differs from :.#. CAA0 in the develoment hase in that costs are caitalized oncetechnological feasibility is achieved.

". he increased accetance of I8# has caused costs associated +ith internally generatedintangible assets to be caitalized under :.#. CAA0.

%. I8# ermits some caitalization of internally generated intangible assets, if it is robablethere +ill be a future benefit and the amount can be readily measured.

'. hile I8# re$uires an imairment test at each reorting date for long-lived assets, it re$uiresno such test for intangibles once a legal or useful life has been determined.

. I8# allo+s reversal of imairment losses +hen there has been a change in economicconditions or in the e!ected use of the asset. :nder :.# CAA0, imairment losses cannot bereversed for assets to be held and used.

*. I8# and :.#. CAA0 are similar in the accounting for imairments of assets held for disosal.

1. :nder :.#. CAA0, imairment loss is measured as the e!cess of the carrying amount over theassets discounted cash flo+.

An"wer" to Tr!e%Fal"e#

7!lti$le)Choice 9!e"tion"

1. As in :.#. CAA0, under I8# the costs associated +ith research and develoment aresegregated intoa. t+o comonents, the research hase and the roduction hase. b. t+o comonents, the research hase and the develoment hase.c. three comonents, the lanning hase, the research hase and the roduction hase.d. three comonents, the analysis hase, the develoment hase and the roduction hase.

12 - 32



Intangible Assets

2. In accounting for internally generated intangible assets, :.#. CAA0 re$uires thata. all costs, no matter ho+ immaterial, be caitalized. b. only material costs be caitalized.c. lanned costs be caitalized, +hile costs in e!cess of lan be e!ensed.d. all costs be e!ensed.

3. he follo+ing costs are incurred during the research and develoment hases of a laser bonescanner

&aboratory research aimed at discovery of ne+ no+ledge J%,#earch for alication of ne+ research findings 4,#alaries of research staff designing ne+ laser bone scanner 1,2,Eaterial, labor and overhead costs of rototye laser scanner ",osts of testing rototye and design modifications 4",6ngineering costs incurred to advance the laser scanner to full roduction stage

(technological feasibility reached) ',

Identify +hich of these are research hase items and +ill be immediately e!ensed under:.#. CAA0 and I8#.

:.#. CAA0 I8#a. J1,, J1,, b. 2,2, 1,2,c. 4,2, 4,2,d. 4,2, 3,",

4. he follo+ing costs are incurred during the research and develoment hases of a laser bonescanner

&aboratory research aimed at discovery of ne+ no+ledge J%,#earch for alication of ne+ research findings 4,#alaries of research staff designing ne+ laser bone scanner 1,2,Eaterial, labor and overhead costs of rototye laser scanner ",osts of testing rototye and design modifications 4",6ngineering costs incurred to advance the laser scanner to full roduction stage (technological feasibility reached)

',

Identify +hich of these are develoment hase items and +ill be immediately e!ensed under:.#. CAA0 and I8#.

:.#. CAA0 I8#a. J1,, J1,, b. 2,2, 1,2,c. 2,2, 3,2,d. 3,2, 3,2,

". he rimary I8# related to intangible assets and imairments is found ina. IA# 3 and IA# 1. b. IA# 1% and IA# 3%.

12 - 33



Intangible Assets

c. IA# 1 and IA# 34.d. IA# 3 and IA# 3%.

12 - 34



Intangible Assets

%. I8# allo+s reversal of imairment losses +hena. the reversal is greater than the amount of the original imairment. b. the reversal falls in a subse$uent fiscal year of the comany9s oerations.c. there has been a change in economic conditions or in the e!ected use of the asset.d. reversal of imairment losses is never allo+ed.

'. :nder :.#. CAA0, imairment lossesa. can be reversed but only if the reversal is greater than the amount of the original

imairment. b. can be reversed but only if the reversal falls in a subse$uent fiscal year of the comany9s

oerations.c. cannot be reversed for assets to be held and used.d. none of the above.

. I8# and :.#. CAA0a. are diametrically oosed in their accounting for imairments of assets held for disosal.

b. are similar in the accounting for imairments of assets held for disosal.c. are moving to+ard common ground in their accounting for imairments of assets held for

disosal.d. are moving further aart in their accounting for imairments of assets held for disosal.

*. :nder I8#, costs in the develoment hase area. never caitalized, but e!ensed as they are under :.#. CAA0. b. caitalized if they e!ceed develoment hase costs incurred for reviously successful

ventures.c. caitalized once technological feasibility is achieved.d. caitalized on an interim basis, but then e!ensed rior to the end of the comany9s fiscal

year.

An"wer" to 7!lti$le Choice#

12 - 35



Intangible Assets

Short An"wer

1. riefly describe some of the similarities and differences bet+een :.#. CAA0 and I8# +ithresect to the accounting for intangible assets.

2. riefly discuss the convergence efforts that are under+ay in the area of intangible assets.

C8ATE 13

C5E/T L.AB.L.T.ES A/: CO/T./E/C.ES



1. A zero-interest-bearing note ayable that is issued at a discount +ill not result in any intereste!ense being recognized.

2. ;ividends in arrears on cumulative referred stoc should be recorded as a current liability.

3. Eagazine subscritions and airline ticet sales both result in unearned revenues.

4. ;iscount on @otes 0ayable is a contra account to @otes 0ayable on the balance sheet.

". All long-term debt maturing +ithin the ne!t year must be classified as a current liability onthe balance sheet.

%. A short-term obligation can be e!cluded from current liabilities if the comany intends torefinance it on a long-term basis.

'. Eany comanies do not segregate the sales ta! collected and the amount of the sale at thetime of the sale.

. A comany must accrue a liability for sic ay that accumulates but does not vest.

*. omanies reort the amount of social security ta!es +ithheld from emloyees as +ell as thecomanies< matching ortion as current liabilities until they are remitted.

1. Accumulated rights e!ist +hen an emloyer has an obligation to mae ayment to anemloyee even after terminating his emloyment.

12 - 36



Intangible Assets

11. omanies should recognize the e!ense and related liability for comensated absences inthe year earned by emloyees.

12. omanies should accrue an estimated loss from a loss contingency if information available rior to the issuance of financial statements indicates that it is robable that a liability has

been incurred.

13. A comany discloses gain contingencies in the notes only +hen a high robability e!ists for realizing them.

14. he e!ected rofit from a sales tye +arranty that covers several years should all berecognized in the eriod the +arranty is sold.

1". he fair value of an asset retirement obligation is recorded as both an increase to the relatedasset and a liability.

1%. he cause for litigation must have occurred on or before the date of the financial statementsto reort a liability in the financial statements.

1'. :nder the e!ense +arranty aroach, comanies charge +arranty costs only to the eriod in+hich they comly +ith the +arranty.

1. 0reaid insurance should be included in the numerator +hen comuting the acid-test ($uic)ratio.

1*. 0aying a current liability +ith cash +ill al+ays reduce the current ratio.

2. urrent liabilities are usually recorded and reorted in financial statements at their fullmaturity value.



21. &iabilities area. any accounts having credit balances after closing entries are made. b. deferred credits that are recognized and measured in conformity +ith generally

acceted accounting rinciles.c. obligations to transfer o+nershi shares to other entities in the future.d. obligations arising from ast transactions and ayable in assets or services in the future.

12 - 37



Intangible Assets

22. hich of the follo+ing is a current liabilitya. A long-term debt maturing currently, +hich is to be aid +ith cash in a sining fund b. A long-term debt maturing currently, +hich is to be retired +ith roceeds from a ne+

debt issuec. A long-term debt maturing currently, +hich is to be converted into common stoc

d. @one of these

23. hich of the follo+ing is true about accounts ayable

1. Accounts ayable should not be reorted at their resent value.2. hen accounts ayable are recorded at the net amount, a 0urchase ;iscounts

account +ill be used.3. hen accounts ayable are recorded at the gross amount, a 0urchase ;iscounts

&ost account +ill be used.a. 1 b. 2c. 3

d. oth 2 and 3 are true.

24. Among the short-term obligations of &ance omany as of ;ecember 31, the balance sheetdate, are notes ayable totaling J2", +ith the Eadison @ational an. hese are *-day notes, rene+able for another *-day eriod. hese notes should be classified on the balance sheet of &ance omany asa. current liabilities. b. deferred charges.c. long-term liabilities.d. intermediate debt.

2". hich of the follo+ing is not true about the discount on short-term notes ayablea. he ;iscount on @otes 0ayable account has a debit balance. b. he ;iscount on @otes 0ayable account should be reorted as an asset on the balance

sheet.c. hen there is a discount on a note ayable, the effective interest rate is higher than the

stated discount rate.d. All of these are true.

2%. hich of the follo+ing may be a current liabilitya. ithheld Income a!es b. ;eosits eceived from ustomers

c. ;eferred evenued. All of these

2'. hich of the follo+ing items is a current liabilitya. onds (for +hich there is an ade$uate sining fund roerly classified as a long-term

investment) due in three months. b. onds due in three years.c. onds (for +hich there is an ade$uate aroriation of retained earnings) due in eleven

months.

12 - 38



Intangible Assets

d. onds to be refunded +hen due in eight months, there being no doubt about themaretability of the refunding issue.

2. hich of the follo+ing should not be included in the current liabilities section of the balance sheet

a. rade notes ayable b. #hort-term zero-interest-bearing notes ayablec. he discount on short-term notes ayabled. All of these are included

2*. hich of the follo+ing is a current liabilitya. 0referred dividends in arrears b. A dividend ayable in the form of additional shares of stoc c. A cash dividend ayable to referred stocholdersd. All of these

3. #toc dividends distributable should be classified on thea. income statement as an e!ense. b. balance sheet as an asset.c. balance sheet as a liability.d. balance sheet as an item of stocholders9 e$uity.

12 - 39



Intangible Assets

31. >f the follo+ing items, the only one +hich should not be classified as a current liability isa. current maturities of long-term debt. b. sales ta!es ayable.c. short-term obligations e!ected to be refinanced.d. unearned revenues.

32. An account +hich +ould be classified as a current liability isa. dividends ayable in the comany9s stoc. b. accounts ayableOdebit balances.c. losses e!ected to be incurred +ithin the ne!t t+elve months in e!cess of the

comany9s insurance coverage.d. none of these.

33. hich of the follo+ing is a characteristic of a current liability but not a long-term liabilitya. :navoidable obligation. b. 0resent obligation that entails settlement by robable future transfer or use of cash,

goods, or services.c. &i$uidation is reasonably e!ected to re$uire use of e!isting resources classified as

current assets or create other current liabilities.d. ransaction or other event creating the liability has already occurred.

34. hich of the follo+ing is not considered a art of the definition of a liabilitya. :navoidable obligation. b. ransaction or other event creating the liability has already occurred.c. 0resent obligation that entails settlement by robable future transfer or use of cash,

goods, or services.d. &i$uidation is reasonably e!ected to re$uire use of e!isting resources classified as

current assets or create other current liabilities.

3". hy is the liability section of the balance sheet of rimary imortance to banersa. o evaluate the entity9s credit $uality. b. o assist in understanding the entity9s li$uidity.c. o better understand sources of reayment.d. o evaluate oerating efficiency.

3%. hat is the relationshi bet+een current liabilities and a comany9s oerating cyclea. &i$uidation of current liabilities is reasonably e!ected +ithin the comany9s oerating

cycle (or one year if less).

b. urrent liabilities are the result of oerating transactions.c. urrent liabilities can9t e!ceed the amount incurred in one oerating cycle.d. here is no relationshi bet+een the t+o.

3'. hat is the relationshi bet+een resent value and the concet of a liabilitya. 0resent values are used to measure certain liabilities. b. 0resent values are not used to measure liabilities.c. 0resent values are used to measure all liabilities.d. 0resent values are only used to measure long-term liabilities.

12 - 40



Intangible Assets

3. hat is a discount as it relates to zero-interest-bearing notes ayablea. he discount reresents the lender9s costs to under+rite the note. b. he discount reresents the credit $uality of the borro+er.c. he discount reresents the cost of borro+ing.d. he discount reresents the allo+ance for uncollectible amounts.

3*. here is debt callable by the creditor reorted on the debtor9s financial statementsa. &ong-term liability. b. urrent liability if the creditor intends to call the debt +ithin the year, other+ise a long-

term liability.c. urrent liability if it is robable that creditor +ill call the debt +ithin the year,

other+ise a long-term liability.d. urrent liability.

4. hich of the follo+ing is not a condition necessary to e!clude a short-term obligationfrom current liabilities

a. Intend to refinance the obligation on a long-term basis. b. >bligation must be due +ith one year.c. ;emonstrate the ability to comlete the refinancing.d. #ubse$uently refinance the obligation on a long-term basis.

41. hich of the follo+ing does not demonstrate evidence regarding the ability to consummatea refinancing of short-term debta. Eanagement indicated that they are going to refinance the obligation. b. Actually refinance the obligation.c. 5ave caacity under e!isting financing agreements that can be used to refinance the

obligation.

d. 6nter into a financing agreement that clearly ermits the entity to refinance theobligation.

42. A comany has not declared a dividend on its cumulative referred stoc for the ast threeyears. hat is the re$uired accounting treatment or disclosure in this situationa. ecord a liability for cumulative amount of referred stoc dividends not declared. b. ;isclose the amount of the dividends in arrears.c. ecord a liability for the current year9s dividends only.d. @o disclosure or recognition is re$uired.

43. hich of the follo+ing situations may give rise to unearned revenue

a. 0roviding trade credit to customers. b. #elling inventory.c. #elling magazine subscritions.d. 0roviding manufacturer +arranties.

44. hich of the follo+ing statements is correcta. A comany may e!clude a short-term obligation from current liabilities if the firm

intends to refinance the obligation on a long-term basis.

12 - 42



Intangible Assets

b. A comany may e!clude a short-term obligation from current liabilities if the firm candemonstrate an ability to consummate a refinancing.

c. A comany may e!clude a short-term obligation from current liabilities if it is aid off after the balance sheet date and subse$uently relaced by long-term debt before the balance sheet is issued.

d. @one of these.4". he ability to consummate the refinancing of a short-term obligation may bedemon- strated by

a. actually refinancing the obligation by issuing a long-term obligation after the date of the balance sheet but before it is issued.

b. entering into a financing agreement that ermits the enterrise to refinance the debt ona long-term basis.

c. actually refinancing the obligation by issuing e$uity securities after the date of the balance sheet but before it is issued.

d. all of these.

4%. hich of the follo+ing statements is false?a. A comany may e!clude a short-term obligation from current liabilities if the firm

intends to refinance the obligation on a long-term basis and demonstrates an ability tocomlete the refinancing.

b. ash dividends should be recorded as a liability +hen they are declared by the board of directors.

c. :nder the cash basis method, +arranty costs are charged to e!ense as they are aid.d. 8IA ta!es +ithheld from emloyees9 ayroll checs should never be recorded as a

liability since the emloyer +ill eventually remit the amounts +ithheld to thearoriate ta!ing authority.

4'. hich of the follo+ing is not a correct statement about sales ta!esa. #ales ta!es are an e!ense of the seller. b. Eany comanies record sales ta!es in the sales account.c. If sales ta!es are included in the sales account, the first ste to find the amount of sales

ta!es is to divide sales by 1 lus the sales ta! rate.d. All of these are true.

#4. If a short-term obligation is e!cluded from current liabilities because of refinancing, thefootnote to the financial statements describing this event should include all of thefollo+ing information except a. a general descrition of the financing arrangement.

b. the terms of the ne+ obligation incurred or to be incurred.c. the terms of any e$uity security issued or to be issued.d. the number of financing institutions that refused to refinance the debt, if any.

#4*. In accounting for comensated absences, the difference bet+een vested rights andaccumulated rights isa. vested rights are normally for a longer eriod of emloyment than are accumulated

rights. b. vested rights are not contingent uon an emloyee9s future service.

12 - 43



Intangible Assets

c. vested rights are a legal and binding obligation on the comany, +hereas accumulatedrights e!ire at the end of the accounting eriod in +hich they arose.

d. vested rights carry a stiulated dollar amount that is o+ed to the emloyeeKaccumulated rights do not reresent monetary comensation.

0

". An emloyee9s net (or tae-home) ay is determined by gross earnings minus amounts for income ta! +ithholdings and the emloyee9sa. ortion of 8IA ta!es and unemloyment ta!es. b. and emloyer9s ortion of 8IA ta!es, and unemloyment ta!es.c. ortion of 8IA ta!es, unemloyment ta!es, and any voluntary deductions.d. ortion of 8IA ta!es and any voluntary deductions.

"1. hich of these is not included in an emloyer9s ayroll ta! e!ensea. 8.I..A. (social security) ta!es b. 8ederal unemloyment ta!esc. #tate unemloyment ta!esd. 8ederal income ta!es

"2. hich of the follo+ing is a condition for accruing a liability for the cost of comensationfor future absencesa. he obligation relates to the rights that vest or accumulate. b. 0ayment of the comensation is robable.c. he obligation is attributable to emloyee services already erformed.d. All of these are conditions for the accrual.

"3. A liability for comensated absences such as vacations, for +hich it is e!ected thatemloyees +ill be aid, shoulda. be accrued during the eriod +hen the comensated time is e!ected to be used by

emloyees. b. be accrued during the eriod follo+ing vesting.c. be accrued during the eriod +hen earned.d. not be accrued unless a +ritten contractual obligation e!ists.

"4. he amount of the liability for comensated absences should be based on

1. the current rates of ay in effect +hen emloyees earn the right tocomensated absences.

2. the future rates of ay e!ected to be aid +hen emloyees usecomensated time.

3. the resent value of the amount e!ected to be aid in future eriods.

a. 1. b. 2.c. 3.d. 6ither 1 or 2 is accetable.

"". hat are comensated absencesa. :naid time off. b. A form of healthcare.c. 0ayroll deductions.

12 - 44



Intangible Assets

d. 0aid time off.

"%. hich gives rise to the re$uirement to accrue a liability for the cost of comensatedabsencesa. 0ayment is robable.

b. 6mloyee rights vest or accumulate.c. Amount can be reasonably estimated.d. All of the above.

"'. :nder +hat conditions is an emloyer re$uired to accrue a liability for sic aya. #ic ay benefits can be reasonably estimated. b. #ic ay benefits vest.c. #ic ay benefits e$ual 1P of the ay.d. #ic ay benefits accumulate.

12 - 45



Intangible Assets

". hich of the follo+ing ta!es does not reresent a common ayroll deductiona. 8ederal income ta!es. b. 8IA ta!es.c. #tate unemloyment ta!es.d. #tate income ta!es.

"*. hat is a contingencya. An e!isting situation +here certainty e!ists as to a gain or loss that +ill be resolved

+hen one or more future events occur or fail to occur. b. An e!isting situation +here uncertainty e!ists as to ossible loss that +ill be resolved

+hen one or more future events occur.c. An e!isting situation +here uncertainty e!ists as to ossible gain or loss that +ill not be

resolved in the foreseeable future.d. An e!isting situation +here uncertainty e!ists as to ossible gain or loss that +ill be

resolved +hen one or more future events occur or fail to occur.

%. hen is a contingent liability recordeda. hen the amount can be reasonably estimated. b. hen the future events are robable to occur and the amount can be reasonably

estimated.c. hen the future events are robable to occur.d. hen the future events +ill ossibly occur and the amount can be reasonably

estimated.

%1. hich of the follo+ing is an e!amle of a contingent liabilitya. >bligations related to roduct +arranties. b. 0ossible receit from a litigation settlement.

c. 0ending court case +ith a robable favorable outcome.d. a! loss carryfor+ards.

%2. hich of the follo+ing terms is associated +ith recording a contingent liabilitya. 0ossible. b. &iely.c. emote.d. 0robable.

%3. hich of the follo+ing is the roer +ay to reort a gain contingencya. As an accrued amount.

b. As deferred revenue.c. As an account receivable +ith additional disclosure e!laining the nature of thecontingency.

d. As a disclosure only.

%4. hich of the follo+ing contingencies need not be disclosed in the financial statements or the notes theretoa. 0robable losses not reasonably estimable b. 6nvironmental liabilities that cannot be reasonably estimated

12 - 46



Intangible Assets

c. Cuarantees of indebtedness of othersd. All of these must be disclosed.

12 - 47



Intangible Assets

%". hich of the follo+ing sets of conditions +ould give rise to the accrual of a contingencyunder current generally acceted accounting rincilesa. Amount of loss is reasonably estimable and event occurs infre$uently. b. Amount of loss is reasonably estimable and occurrence of event is robable.c. 6vent is unusual in nature and occurrence of event is robable.

d. 6vent is unusual in nature and event occurs infre$uently.

%%. Beff ec is a farmer +ho o+ns land +hich borders on the right-of-+ay of the @orthernailroad. >n August 1, 212, due to the admitted negligence of the ailroad, hay on thefarm +as set on fire and burned. ec had had a disute +ith the ailroad for several yearsconcerning the o+nershi of a small arcel of land. he reresentative of the ailroad hasoffered to assign any rights +hich the ailroad may have in the land to ec in e!changefor a release of his right to reimbursement for the loss he has sustained from the fire. ec aears inclined to accet the ailroad9s offer. he ailroad9s 212 financial statementsshould include the follo+ing related to the incident=a. recognition of a loss and creation of a liability for the value of the land.

b. recognition of a loss only.c. creation of a liability only.d. disclosure in note form only.

%'. A contingency can be accrued +hena. it is certain that funds are available to settle the disuted amount. b. an asset may have been imaired.c. the amount of the loss can be reasonably estimated and it is robable that an asset has

been imaired or a liability incurred.d. it is robable that an asset has been imaired or a liability incurred even though the

amount of the loss cannot be reasonably estimated.

%. A contingent liabilitya. definitely e!ists as a liability but its amount and due date are indeterminable. b. is accrued even though not reasonably estimated.c. is not disclosed in the financial statements.d. is the result of a loss contingency.

%*. o record an asset retirement obligation (A>), the cost associated +ith the A> isa. e!ensed. b. included in the carrying amount of the related long-lived asset.c. included in a searate account.

d. none of these.

'. A comany is legally obligated for the costs associated +ith the retirement of a long-livedasseta. only +hen it hires another arty to erform the retirement activities. b. only if it erforms the activities +ith its o+n +orforce and e$uiment.c. +hether it hires another arty to erform the retirement activities or erforms the

activities itself.d. +hen it is robable the asset +ill be retired.

12 - 48



Intangible Assets

'1. Assume that a manufacturing cororation has (1) good $uality control, (2) a one-year oerating cycle, (3) a relatively stable attern of annual sales, and (4) a continuing olicyof guaranteeing ne+ roducts against defects for three years that has resulted in material but rather stable +arranty reair and relacement costs. Any liability for the +arrantya. should be reorted as long-term.

b. should be reorted as current.c. should be reorted as art current and art long-term.d. need not be disclosed.

'2. >rtiz ororation, a manufacturer of household aints, is rearing annual financialstatements at ;ecember 31, 212. ecause of a recently roven health hazard in one of its aints, the government has clearly indicated its intention of having >rtiz recall all cans of this aint sold in the last si! months. he management of >rtiz estimates that this recall+ould cost J,. hat accounting recognition, if any, should be accorded thissituationa. @o recognition

b. @ote disclosure onlyc. >erating e!ense of J, and liability of J,d. Aroriation of retained earnings of J,

'3. Information available rior to the issuance of the financial statements indicates that it is robable that, at the date of the financial statements, a liability has been incurred for obligations related to roduct +arranties. he amount of the loss involved can be reasonablyestimated. ased on the above facts, an estimated loss contingency should bea. accrued. b. disclosed but not accrued.c. neither accrued nor disclosed.

d. classified as an aroriation of retained earnings.

0'4. 6sinosa o. has a loss contingency to accrue. he loss amount can only be reasonablyestimated +ithin a range of outcomes. @o single amount +ithin the range is a better estimate than any other amount. he amount of loss accrual should bea. zero. b. the minimum of the range.c. the mean of the range.d. the ma!imum of the range.

#'". ;ean omany becomes a+are of a la+suit after the date of the financial statements, but

before they are issued. A loss and related liability should be reorted in the financialstatements if the amount can be reasonably estimated, an unfavorable outcome is highly robable, anda. the ;ean omany admits guilt. b. the court +ill decide the case +ithin one year.c. the damages aear to be material.d. the cause for action occurred during the accounting eriod covered by the financial

statements.

12 - 50



Intangible Assets

#'%. :se of the accrual method in accounting for roduct +arranty costsa. is re$uired for federal income ta! uroses. b. is fre$uently /ustified on the basis of e!ediency +hen +arranty costs are immaterial.c. finds the e!ense account being charged +hen the seller erforms in comliance +ith

the +arranty.

d. reresents acceted ractice and should be used +henever the +arranty is an integraland insearable art of the sale.

''. hich of the follo+ing best describes the accrual method of accounting for +arrantycostsa. 6!ensed +hen aid. b. 6!ensed +hen +arranty claims are certain.c. 6!ensed based on estimate in year of sale.d. 6!ensed +hen incurred.

'. hich of the follo+ing best describes the cash-basis method of accounting for +arrantycosts

a. 6!ensed based on estimate in year of sale. b. 6!ensed +hen liability is accrued.c. 6!ensed +hen +arranty claims are certain.d. 6!ensed +hen incurred.

'*. hich of the follo+ing is a characteristic of the e!ense +arranty aroach, but not thesales +arranty aroacha. 6stimated liability under +arranties. b. arranty e!ense.c. :nearned +arranty revenue.d. arranty revenue.

. An electronics store is running a romotion +here for every video game urchased, thecustomer receives a couon uon checout to urchase a second game at a "P discount.he couons e!ire in one year. he store normally recognized a gross rofit margin of 4P of the selling rice on video games. 5o+ +ould the store account for a urchaseusing the discount couona. he reduction in sales rice attributed to the couon is recognized as remium e!ense. b. he difference bet+een the cost of the video game and the cash received is recognized

as remium e!ense.c. 0remium e!ense is not recognized.d. he difference bet+een the cost of the video game and the selling rice rior to the

couon is recognized as remium e!ense.

1. hat condition is necessary to recognize an asset retirement obligationa. omany has an e!isting legal obligation and can reasonably estimate the amount of

the liability. b. omany can reasonably estimate the amount of the liability.c. omany has an e!isting legal obligation.d. >bligation event has occurred.

12 - 51



Intangible Assets

2. hich of the follo+ing are not factors that are considered +hen evaluating +hether or notto record a liability for ending litigationa. ime eriod in +hich the underlying cause of action occurred. b. he tye of litigation involved.c. he robability of an unfavorable outcome.

d. he ability to mae a reasonable estimate of the amount of the loss.

12 - 52



Intangible Assets

3. 5o+ do you determine the acid-test ratioa. he sum of cash and short-term investments divided by short-term debt. b. urrent assets divided by current liabilities.c. urrent assets divided by short-term debt.d. he sum of cash, short-term investments and net receivables divided by current

liabilities.

4. hat does the current ratio inform you about a comanya. he e!tent of slo+-moving inventories. b. he efficient use of assets.c. he comany9s li$uidity.d. he comany9s rofitability.

#". hich of the follo+ing is not accetable treatment for the resentation of currentliabilitiesa. &isting current liabilities in order of maturity

b. &isting current liabilities according to amountc. >ffsetting current liabilities against assets that are to be alied to their li$uidationd. #ho+ing current liabilities immediately belo+ current assets to obtain a resentation of

+oring caital

0%. he ratio of current assets to current liabilities is called thea. current ratio. b. acid-test ratio.c. current asset turnover ratio.d. current liability turnover ratio.

'. Accrued liabilities are disclosed in financial statements bya. a footnote to the statements. b. sho+ing the amount among the liabilities but not e!tending it to the liability total.c. an aroriation of retained earnings.d. aroriately classifying them as regular liabilities in the balance sheet.

. he numerator of the acid-test ratio consists of a. total current assets. b. cash and maretable securities.c. cash and net receivables.d. cash, maretable securities, and net receivables.

*. 6ach of the follo+ing are included in both the current ratio and the acid-test ratio e!ceta. cash. b. short-term investments.c. net receivables.d. inventory.

12 - 53



Intangible Assets



*. Claus or. signed a three-month, zero-interest-bearing note on @ovember 1, 212 for the urchase of J2", of inventory. he face value of the note +as J2"3,%'". AssumingClaus used a G;iscount on @ote 0ayableH account to initially record the note and that thediscount +ill be amortized e$ually over the 3-month eriod, the ad/usting entry made at;ecember 31, 212 +ill include aa. debit to ;iscount on @ote 0ayable for J1,22". b. debit to Interest 6!ense for J2,4".c. credit to ;iscount on @ote 0ayable for J1,2"".

d. credit to Interest 6!ense for J2,4".

*1. he effective interest on a 12-month, zero-interest-bearing note ayable of J3,,discounted at the ban at P isa. ."1P. b. P.c. 11.4*P.d. .'P.

12 - 54



Intangible Assets

*2. >n #etember 1, 5ydra urchased J13,3 of inventory items on credit +ith the terms171", net 3, 8> destination. 8reight charges +ere J2. 0ayment for the urchase +asmade on #etember 1. Assuming 5ydra uses the eretual inventory system and the netmethod of accounting for urchase discounts, +hat amount is recorded as inventory fromthis urchase

a. J13,1%'. b. J13,44'.c. J13,".d. J13,3.

*3. #odium Inc. borro+ed J2, on Aril 1. he note re$uires interest at 12P and rincialto be aid in one year. 5o+ much interest is recognized for the eriod from Aril 1 to;ecember 31a. J. b. J33,%.c. J,4.

d. J2",2.

*4. ollier borro+ed J3", on >ctober 1 and is re$uired to ay J3%, on Earch 1.hat amount is the note ayable recorded at on >ctober 1 and ho+ much interest isrecognized from >ctober 1 to ;ecember 31a. J3", and J. b. J3", and J%,.c. J3%, and J.d. J3", and J1,.

*". 0urest o+es J2 million that is due on 8ebruary 2. he comany borro+s J1,%, on

8ebruary 2" ("-year note) and uses the roceeds to ay do+n the J2 million note and usesother cash to ay the balance. 5o+ much of the J2 million note is classified as long-termin the ;ecember 31 financial statements.a. J2,,. b. J.c. J1,%,.d. J4,.

*%. Dista ne+saers sold %, of annual subscritions at J12" each on #etember 1. 5o+much unearned revenue +ill e!ist as of ;ecember 31a. J.

b. J",.c. J2",.d. J'",.

*'. 0urchase etailer made cash sales during the month of >ctober of J221,. he sales aresub/ect to a %P sales ta! that +as also collected. hich of the follo+ing +ould be includedin the summary /ournal entry to reflect the sale transactionsa. ;ebit ash for J221,. b. redit #ales a!es 0ayable for J12,"1.

12 - 55



Intangible Assets

c. redit #ales evenue for J2,4*.d. redit #ales a!es 0ayable for J13,2%.

12 - 56



Intangible Assets

*. >n 8ebruary 1, 212, after issuance of its financial statements for 211, 5ouse omanyentered into a financing agreement +ith &ebo an, allo+ing 5ouse omany to borro+u to J%,, at any time through 214. Amounts borro+ed under the agreement bear interest at 2P above the ban9s rime interest rate and mature t+o years from the date of loan. 5ouse omany resently has J2,2", of notes ayable +ith 8irst @ational an

maturing Earch 1", 212. he comany intends to borro+ J3,'", under theagreement +ith &ebo and li$uidate the notes ayable to 8irst @ational. he agreement +ith&ebo also re$uires 5ouse to maintain a +oring caital level of J*,, and rohibitsthe ayment of dividends on common stoc +ithout rior aroval by &ebo an. 8romthe above information only, the total short-term debt of 5ouse omany as of the;ecember 31, 212 balance sheet date isa. J. b. J2,2",.c. J3,,.d. J%,,.

**. >n ;ecember 31, 212, Irey o. has J4,, of short-term notes ayable due on8ebruary 14, 213. >n Banuary 1, 213, Irey arranged a line of credit +ith ounty an +hich allo+s Irey to borro+ u to J3,, at one ercent above the rime rate for threeyears. >n 8ebruary 2, 213, Irey borro+ed J2,4, from ounty an and usedJ1,, additional cash to li$uidate J3,4, of the short-term notes ayable. heamount of the short-term notes ayable that should be reorted as current liabilities on the;ecember 31, 212 balance sheet +hich is issued on Earch ", 213 isa. J. b. J%,.c. J1,,.d. J1,%,.

5"e the *ollowin, in*ormation *or 2!e"tion" 100 an( 101&

#tine o. is a retail store oerating in a state +ith a %P retail sales ta!. he retailer may ee 2Pof the sales ta! collected. #tine o. records the sales ta! in the #ales evenue account. heamount recorded in the #ales evenue account during Eay +as J222,%.

1. he amount of sales ta!es (to the nearest dollar) for Eay isa. J13,*. b. J12,%.c. J13,3"%.d. J14,1"'.

11. he amount of sales ta!es ayable (to the nearest dollar) to the state for the month of Eayisa. J12,2%. b. J12,34.c. J13,*.d. J13,'3.

12 - 57



Intangible Assets

12. Doat, Inc., is a retail store oerating in a state +ith a "P retail sales ta!. he state la+ rovides that the retail sales ta! collected during the month must be remitted to the stateduring the follo+ing month. If the amount collected is remitted to the state on or beforethe t+entieth of the follo+ing month, the retailer may ee 3P of the sales ta! collected.>n Aril 1, 212, Doat remitted J13", ta! to the state ta! division for Earch 212

retail sales. hat +as Doat 9s Earch 212 retail sales sub/ect to sales ta!a. J2,'1%,. b. J2,%%,.c. J2,,.d. J2,'41,%%'.

13. Benins ororation has J2,", of short-term debt it e!ects to retire +ith roceedsfrom the sale of *, shares of common stoc. If the stoc is sold for J2 er sharesubse$uent to the balance sheet date, but before the balance sheet is issued, +hat amount of short-term debt could be e!cluded from current liabilitiesa. J1,,

b. J2,",c. J',d. J

14. 6rmler ororation has J1,, of short-term debt it e!ects to retire +ith roceedsfrom the sale of ", shares of common stoc. If the stoc is sold for J2 er sharesubse$uent to the balance sheet date, but before the balance sheet is issued, +hat amount of short-term debt could be e!cluded from current liabilitiesa. J1,, b. J1,,c. J,

d. J

1". 0reston o., +hich has a ta!able ayroll of J',, is sub/ect to 8:A ta! of %.2P and astate contribution rate of ".4P. 5o+ever, because of stable emloyment e!erience, thecomany<s state rate has been reduced to 2P. hat is the total amount of federal and stateunemloyment ta! for 0reston o.a. J1,* b. J"',4c. J2,d. J1*,%

1%. oar o., +hich has a ta!able ayroll of J%,, is sub/ect to 8:A ta! of %.2P and astate contribution rate of ".4P. 5o+ever, because of stable emloyment e!erience, thecomany<s state rate has been reduced to 2P. hat is the total amount of federal and stateunemloyment ta! for oar o.a. J',2 b. J4*,2c. J24,d. J1%,

12 - 58



Intangible Assets

1'. A comany gives each of its " emloyees (assume they +ere all emloyed continuouslythrough 212 and 213) 12 days of vacation a year if they are emloyed at the end of theyear. he vacation accumulates and may be taen starting Banuary 1 of the ne!t year. heemloyees +or hours er day. In 212, they made J21 er hour and in 213 they madeJ24 er hour. ;uring 213, they too an average of * days of vacation each. he

comany<s olicy is to record the liability e!isting at the end of each year at the +age ratefor that year. hat amount of vacation liability +ould be reflected on the 212 and 213 balance sheets, resectivelya. J1,K J14,4 b. J11",2K J144,c. J1,K J144,d. J11",2K J14,4

1. A comany gives each of its " emloyees (assume they +ere all emloyed continuouslythrough 212 and 213) 12 days of vacation a year if they are emloyed at the end of theyear. he vacation accumulates and may be taen starting Banuary 1 of the ne!t year. he

emloyees +or hours er day. In 212, they made J24." er hour and in 213 theymade J2 er hour. ;uring 213, they too an average of * days of vacation each. hecomany<s olicy is to record the liability e!isting at the end of each year at the +age ratefor that year. hat amount of vacation liability +ould be reflected on the 212 and 213 balance sheets, resectivelya. J11',%K J1%3, b. J134,4K J1%,c. J11',%K J1%,d. J134,4K J1%3,

1*. he total ayroll of eeter omany for the month of >ctober, 212 +as J%,, of

+hich J1", reresented amounts aid in e!cess of J1%, to certain emloyees.J", reresented amounts aid to emloyees in e!cess of the J', ma!imumsub/ect to unemloyment ta!es. J1", of federal income ta!es and J1", of uniondues +ere +ithheld. he state unemloyment ta! is 1P, the federal unemloyment ta! is .P, and the current 8.I..A. ta! is '.%"P on an emloyee<s +ages to J1%, and 1.4"Pin e!cess of J1%,. hat amount should eeter record as ayroll ta! e!ensea. J1*','. b. J1,4.c. J3,4.d. J4',4.

:se the follo+ing information for $uestions 11 and 111.Dargas omany has 3" emloyees +ho +or -hour days and are aid hourly. >n Banuary 1,211, the comany began a rogram of granting its emloyees 1 days of aid vacation each year.Dacation days earned in 211 may first be taen on Banuary 1, 212. Information relative to theseemloyees is as follo+s=

5ourly Dacation ;ays 6arned Dacation ;ays :sed?ear ages by 6ach 6mloyee by 6ach 6mloyee211 J21." 1

12 - 59



Intangible Assets

212 22." 1 213 23.'" 1 1

Dargas has chosen to accrue the liability for comensated absences at the current rates of ay ineffect +hen the comensated time is earned.

11. hat is the amount of e!ense relative to comensated absences that should be reorted onDargas<s income statement for 211a. J. b. J"',4.c. J%3,.d. J%,2.

111. hat is the amount of the accrued liability for comensated absences that should bereorted at ;ecember 31, 213a. J'*,1. b. J'",%.

c. J%%,".d. J'*,.

112. alount ays a +eely ayroll of J1', that includes federal ta!es +ithheld of J2",4, 8IA ta!es +ithheld of J1",', and 41() +ithholdings of J1,. hat is theeffect of assets and liabilities from this transactiona. Assets decrease J1', and liabilities do not change. b. Assets decrease J12,2 and liabilities increase J41,1.c. Assets decrease J12,2 and liabilities decrease J41,1.d. Assets decrease J11,2 and liabilities increase J"*,1.

113. alount rovides its emloyees t+o +ees of aid vacation er year. As of ;ecember 31,%" emloyees have earned t+o +ees of vacation time to be taen the follo+ing year. If the average +eely salary for these emloyees is J1,14, +hat is the re$uired /ournalentrya. ;ebit #alaries and ages 6!ense for J14,2 and credit #alaries and ages 0ayable

for J14,2. b. @o /ournal entry re$uired.c. ;ebit #alaries and ages 0ayable for J14',% and credit #alaries and ages 6!ense

for J14',%.d. ;ebit #alaries and ages 6!ense for J'4,1 and credit #alaries and ages 0ayable

for J'4,1.

114. ender 8oot Inc. is involved in litigation regarding a faulty roduct sold in a rior year.he comany has consulted +ith its attorney and determined that it is ossible that theymay lose the case. he attorneys estimated that there is a 4P chance of losing. If this isthe case, their attorney estimated that the amount of any ayment +ould be J",.hat is the re$uired /ournal entry as a result of this litigationa. ;ebit &itigation 6!ense for J", and credit &itigation liability for J",. b. @o /ournal entry is re$uired.c. ;ebit &itigation 6!ense for J2, and credit &itigation &iability for J2,.

12 - 60



Intangible Assets

d. ;ebit &itigation 6!ense for J3, and credit &itigation &iability for J3,.

11". ecycle 6!loration is involved +ith innovative aroaches to finding energy reserves.ecycle recently built a facility to e!tract natural gas at a cost of J1" million. 5o+ever,ecycle is also legally resonsible to remove the facility at the end of its useful life of

t+enty years. his cost is estimated to be J21 million (the resent value of +hich is Jmillion). hat is the /ournal entry re$uired to record the asset retirement obligationa. @o /ournal entry re$uired. b. ;ebit @atural Cas 8acility for J21,, and credit Asset etirement >bligation for

J21,,c. ;ebit @atural Cas 8acility for J%,, and credit Asset etirement >bligation for

J%,,.d. ;ebit @atural Cas 8acility for J,, and credit Asset etirement >bligation for

J,,.11%. arranty4: rovides e!tended service contracts on electronic e$uiment sold through

ma/or retailers. he standard contract is for three years. ;uring the current year,

arranty4: rovided 42, such +arranty contracts at an average rice of J1 each.elated to these contracts, the comany sent J4, servicing the contracts during thecurrent year and e!ects to send J2,1, more in the future. hat is the net rofit thatthe comany +ill recognize in the current year related to these contractsa. J*2,. b. J3,2,.c. J3,%%'.d. J'34,.

11'. 6lectronics4: manufactures high-end +hole home electronic systems. he comany rovides a one-year +arranty for all roducts sold. he comany estimates that the

+arranty cost is J2 er unit sold and reorted a liability for estimated +arranty costsJ'. million at the beginning of this year. If during the current year, the comany sold%, units for a total of J243 million and aid +arranty claims of J*,, on currentand rior year sales, +hat amount of liability +ould the comany reort on its balancesheet at the end of the current yeara. J3,,. b. J4,2,.c. J1,,.d. J12,,.

11. A comany offers a cash rebate of J1 on each J4 acage of light bulbs sold during 212.

5istorically, 1P of customers mail in the rebate form. ;uring 212, 3,, acagesof light bulbs are sold, and 1%, J1 rebates are mailed to customers. hat is the rebatee!ense and liability, resectively, sho+n on the 212 financial statements dated ;ecember 31a. J3,K J3, b. J3,K J14,c. J14,K J14,d. J1%,K J14,

12 - 61



Intangible Assets

11*. A comany buys an oil rig for J2,, on Banuary 1, 212. he life of the rig is 1years and the e!ected cost to dismantle the rig at the end of 1 years is J4, (resentvalue at 1P is J1"4,22). 1P is an aroriate interest rate for this comany. hate!ense should be recorded for 212 as a result of these eventsa. ;ereciation e!ense of J24,

b. ;ereciation e!ense of J2, and interest e!ense of J1",422c. ;ereciation e!ense of J2, and interest e!ense of J4,d. ;ereciation e!ense of J21",42 and interest e!ense of J1",422

12. Qiegler omany self insures its roerty for fire and storm damage. If the comany +ereto obtain insurance on the roerty, it +ould cost them J1,", er year. he comanyestimates that on average it +ill incur losses of J1,2, er year. ;uring 212,J"2", +orth of losses +ere sustained. 5o+ much total e!ense and7or loss should berecognized by Qiegler omany for 212a. J"2", in losses and no insurance e!ense b. J"2", in losses and J%'", in insurance e!ense

c. J in losses and J1,2, in insurance e!ensed. J in losses and J1,", in insurance e!ense

121. A comany offers a cash rebate of J2 on each J% acage of batteries sold during 212.5istorically, 1P of customers mail in the rebate form. ;uring 212, %,, acagesof batteries are sold, and 21, J2 rebates are mailed to customers. hat is the rebatee!ense and liability, resectively, sho+n on the 212 financial statements dated ;ecember 31a. J1,2,K J1,2, b. J1,2,K J',c. J',K J',

d. J42,K J',

122. A comany buys an oil rig for J3,, on Banuary 1, 212. he life of the rig is 1years and the e!ected cost to dismantle the rig at the end of 1 years is J%, (resentvalue at 1P is J231,33). 1P is an aroriate interest rate for this comany. hate!ense should be recorded for 212 as a result of these eventsa. ;ereciation e!ense of J3%, b. ;ereciation e!ense of J3, and interest e!ense of J23,133c. ;ereciation e!ense of J3, and interest e!ense of J%,d. ;ereciation e!ense of J323,133 and interest e!ense of J23,133

123. ;uring 211, Danelt o. introduced a ne+ line of machines that carry a three-year +arranty against manufacturer<s defects. ased on industry e!erience, +arranty costs areestimated at 2P of sales in the year of sale, 3P in the year after sale, and 4P in the secondyear after sale. #ales and actual +arranty e!enditures for the first three-year eriod +ereas follo+s=

#ales Actual arranty 6!enditures211 J %, J *,212 1,", %",213 2,1, 13",

12 - 62



Intangible Assets

J4,2, J2*,

hat amount should Danelt reort as a liability at ;ecember 31, 213a. J b. J12,c. J"4,

d. J1%*,

124. 0almer 8rosted 8laes omany offers its customers a ottery cereal bo+l if they send in 3 bo!tos from 0almer 8rosted 8laes bo!es and J1. he comany estimates that %P of the bo!tos +ill be redeemed. In 212, the comany sold %'", bo!es of 8rosted 8laes andcustomers redeemed 33, bo!tos receiving 11, bo+ls. If the bo+ls cost 0almer omany J3 each, ho+ much liability for outstanding remiums should be recorded at theend of 212a. J2', b. J",c. J'",

d. J13,

12 - 63



Intangible Assets

12". ;uring 211, #tabler o. introduced a ne+ line of machines that carry a three-year +arranty against manufacturer<s defects. ased on industry e!erience, +arranty costs areestimated at 2P of sales in the year of sale, 3P in the year after sale, and 4P in the secondyear after sale. #ales and actual +arranty e!enditures for the first three-year eriod +ereas follo+s=

#ales Actual arranty 6!enditures211 J 4, J %,212 1,, 4,213 1,4, *,

J2,, J13%,

hat amount should #tabler reort as a liability at ;ecember 31, 213a. J b. J2,c. J3%,d. J11%,

12%. &eEay 8rosted 8laes omany offers its customers a ottery cereal bo+l if they send in 4 bo!tos from &eEay 8rosted 8laes bo!es and J1. he comany estimates that %P of the bo!tos +ill be redeemed. In 212, the comany sold ", bo!es of 8rosted 8laes andcustomers redeemed 22, bo!tos receiving "", bo+ls. If the bo+ls cost &eEayomany J3 each, ho+ much liability for outstanding remiums should be recorded at theend of 212a. J1", b. J4,c. J%,d. J4,

:se the follo+ing information for $uestions 12', 12, and 12*.

Eott o. includes one couon in each bag of dog food it sells. In return for eight couons,customers receive a leash. he leashes cost Eott J3 each. Eott estimates that 4 ercent of thecouons +ill be redeemed. ;ata for 212 and 213 are as follo+s=

212 213ags of dog food sold ", %,&eashes urchased 1, 22,ouons redeemed 12, 1",

12'. he remium e!ense for 212 is

a. J3',". b. J4",.c. J"2,".d. J'",.

12. he remium liability at ;ecember 31, 212 isa. J11,2". b. J1",.c. J2%,2".

12 - 64



Intangible Assets

d. J3,.

12 - 65



Intangible Assets

12*. he remium liability at ;ecember 31, 213 isa. J1%,'" b. J31,'".c. J33,'".d. J%3,'".

13. inter o. is being sued for illness caused to local residents as a result of negligence onthe comany9s art in ermitting the local residents to be e!osed to highly to!ic chemicalsfrom its lant. inter9s la+yer states that it is robable that inter +ill lose the suit and befound liable for a /udgment costing inter any+here from J1,%, to J,,.5o+ever, the la+yer states that the most robable cost is J4,,. As a result of theabove facts, inter should accruea. a loss contingency of J1,%, and disclose an additional contingency of u to

J%,4,. b. a loss contingency of J4,, and disclose an additional contingency of u to

J3,2,.

c. a loss contingency of J4,, but not disclose any additional contingency.d. no loss contingency but disclose a contingency of J1,%, to J,,.

131. @ance omany estimates its annual +arranty e!ense as 2P of annual net sales. hefollo+ing data relate to the calendar year 212=

@et sales J1,",arranty liability account

alance, ;ec. 31, 212 J1, debit before ad/ustmentalance, ;ec. 31, 212 ", credit after ad/ustment

hich one of the follo+ing entries +as made to record the 212 estimated +arranty

e!ensea. arranty 6!ense ................................................................. 3,etained 6arnings (rior-eriod ad/ustment) ............. ",arranty &iability ...................................................... 2",

b. arranty 6!ense ................................................................. 2",etained 6arnings (rior-eriod ad/ustment) ........................ ",

arranty &iability ...................................................... 3,

c. arranty 6!ense ................................................................. 2,arranty &iability ...................................................... 2,

d. arranty 6!ense ................................................................. 3,arranty &iability ...................................................... 3,

132. In 212, 0ayton ororation began selling a ne+ line of roducts that carry a t+o-year +arranty against defects. ased uon ast e!erience +ith other roducts, the estimated+arranty costs related to dollar sales are as follo+s=

8irst year of +arranty 2P#econd year of +arranty "P

#ales and actual +arranty e!enditures for 212 and 213 are resented belo+=

212 213

12 - 66



Intangible Assets

#ales J%, J,Actual +arranty e!enditures 2, 4,

12 - 67



Intangible Assets

hat is the estimated +arranty liability at the end of 213a. J3,. b. J",.c. J*,.d. J1%,.

133. >n Banuary 3, 212, oyer or. o+ned a machine that had cost J3,. heaccumulated dereciation +as J1,, estimated salvage value +as J1,, and fair value +as J4,. >n Banuary 4, 212, this machine +as irrearably damaged by 0ineor. and became +orthless. In >ctober 212, a court a+arded damages of J4,against 0ine in favor of oyer. At ;ecember 31, 212, the final outcome of this case +asa+aiting aeal and +as, therefore, uncertain. 5o+ever, in the oinion of oyer<s attorney,0ine<s aeal +ill be denied. At ;ecember 31, 212, +hat amount should oyer accrue for this gain contingencya. J4,. b. J3*,.

c. J3,.d. J.

134. 8uller 8ood omany distributes to consumers couons +hich may be resented (on or before a stated e!iration date) to grocers for discounts on certain roducts of 8uller. hegrocers are reimbursed +hen they send the couons to 8uller. In 8uller9s e!erience, "Pof such couons are redeemed, and generally one month elases bet+een the date a grocer receives a couon from a consumer and the date 8uller receives it. ;uring 212 8uller issued t+o searate series of couons as follo+s=

onsumer Amount ;isbursedIssued >n otal Dalue 6!iration ;ate as of 12731712

171712 J", %73712 J23%,'71712 '2, 12731712 3,

he only /ournal entries to date recorded debits to couon e!ense and credits to cash of J'1",. he ;ecember 31, 212 balance sheet should include a liability for unredeemedcouons of a. J. b. J%,.c. J124,.d. J3%,.

13". 0resented belo+ is information available for Eorton omany.

urrent Assetsash J 4,#hort-term investments '",Accounts receivable %1,Inventory 11,0reaid e!enses 3,

otal current assets J2,

otal current liabilities are J11,. he acid-test ratio for Eorton is

12 - 68



Intangible Assets

a. 2."" to 1. b. 2.2' to 1.c. 1.2' to 1.d. .'2 to 1.


12 - 69



Intangible Assets


13%. hich of the follo+ing is generally associated +ith ayables classified as accounts ayable

0eriodic 0ayment #ecured

of Interest by ollaterala. @o @o b. @o ?esc. ?es @od. ?es ?es

13'. >n Banuary 1, 212, eyer o. leased a building to 5eins or. for a ten-year term at anannual rental of J14,. At incetion of the lease, eyer received J"%, covering thefirst t+o years9 rent of J2, and a security deosit of J2,. his deosit +ill not be returned to 5eins uon e!iration of the lease but +ill be alied to ayment of rent for the last t+o years of the lease. hat ortion of the J"%, should be sho+n as a current

and long-term liability, resectively, in eyer9s ;ecember 31, 212 balance sheeturrent &iability &ong-term &iability

a. J J"%, b. J14, J2,c. J2, J2,d. J2, J14,

13. >n #etember 1, 212, 5erman o. issued a note ayable to @ational an in the amountof J1,,, bearing interest at 12P, and ayable in three e$ual annual rincial ayments of J%,. >n this date, the ban9s rime rate +as 11P. he first ayment for interest and rincial +as made on #etember 1, 213. At ;ecember 31, 213, 5erman

should record accrued interest ayable of a. J'2,. b. J%%,.c. J4,.d. J44,.

13*. Included in Dernon or.9s liability account balances at ;ecember 31, 212, +ere thefollo+ing=

'P note ayable issued >ctober 1, 212, maturing #etember 3, 213 J2",P note ayable issued Aril 1, 212, ayable in si! e$ual annual

installments of J1", beginning Aril 1, 213 %,

Dernon9s ;ecember 31, 212 financial statements +ere issued on Earch 31, 213. >nBanuary 1", 213, the entire J%, balance of the P note +as refinanced by issuanceof a long-term obligation ayable in a lum sum. In addition, on Earch 1, 213, Dernonconsummated a noncancelable agreement +ith the lender to refinance the 'P, J2",note on a long-term basis, on readily determinable terms that have not yet beenimlemented. >n the ;ecember 31, 212 balance sheet, the amount of the notes ayablethat Dernon should classify as short-term obligations isa. J1'",.

12 - 70



Intangible Assets

b. J12",.c. J",.d. J.

14. 6dge omany<s salaried emloyees are aid bi+eely. >ccasionally, advances made to

emloyees are aid bac by ayroll deductions. Information relating to salaries for thecalendar year 213 is as follo+s=

12731712 127317136mloyee advances J24, J 3%,Accrued salaries ayable 13, #alaries e!ense during the year 1,3,#alaries aid during the year (gross) 1,2",

At ;ecember 31, 213, +hat amount should 6dge reort for accrued salaries ayablea. J1,. b. J1%,.c. J144,.

d. J",.

141. isen or.9s ayroll for the ay eriod ended >ctober 31, 212 is summarized as follo+s=

8ederal Amount of ages #ub/ect;eartment otal Income a! to 0ayroll a!es0ayroll ages ithheld 8.I..A. :nemloyment8actory J '", J *, J', J32,#ales 22, 3, 1%, 2,>ffice 1, 2, , O

J11", J14, J*4, J34,

Assume the follo+ing ayroll ta! rates=8.I..A. for emloyer and emloyee 'P each:nemloyment 3P

hat amount should isen accrue as its share of ayroll ta!es in its >ctober 31, 212 balance sheeta. J21,%. b. J1",2.c. J14,1.d. J',%.

142. 8elton o. sells ma/or household aliance service contracts for cash. he service

contracts are for a one-year, t+o-year, or three-year eriod. ash receits from contractsare credited to unearned service contract revenues. his account had a balance of J'2,at ;ecember 31, 211 before year-end ad/ustment. #ervice contract costs are charged asincurred to the service contract e!ense account, +hich had a balance of J1, at;ecember 31, 211. >utstanding service contracts at ;ecember 31, 211 e!ire as follo+s=

;uring 212 ;uring 213 ;uring 214J1", J24, J1",

12 - 71



Intangible Assets

hat amount should be reorted as unearned service contract revenues in 8elton9s;ecember 31, 211 balance sheeta. J"4,. b. J4*",.c. J3%,.

d. J33,.

143. ?ount rading #tam o. records stam service revenue and rovides for the cost of redemtions in the year stams are sold to licensees. ?ount9s ast e!erience indicates thatonly P of the stams sold to licensees +ill be redeemed. ?ount9s liability for stamredemtions +as J%,, at ;ecember 31, 211. Additional information for 212 is asfollo+s=

#tam service revenue from stams sold to licensees J4,,ost of redemtions 2,'2,

If all the stams sold in 212 +ere resented for redemtion in 213, the redemtion cost

+ould be J2,,. hat amount should ?ount reort as a liability for stam redemtionsat ;ecember 31, 212a. J',2,. b. J",2,.c. J4,,.d. J3,2,.

144. @eer o. has a robable loss that can only be reasonably estimated +ithin a range of outcomes. @o single amount +ithin the range is a better estimate than any other amount.he loss accrual should bea. zero.

b. the ma!imum of the range.c. the mean of the range.d. the minimum of the range.

14". ;uring 212, 6aton o. introduced a ne+ roduct carrying a t+o-year +arranty againstdefects. he estimated +arranty costs related to dollar sales are 2P +ithin 12 monthsfollo+ing sale and 3P in the second 12 months follo+ing sale. #ales and actual +arrantye!enditures for the years ended ;ecember 31, 212 and 213 are as follo+s=

Actual arranty #ales 6!enditures

212 J , J12,

213 1,, 3",J1,, J4',

At ;ecember 31, 213, 6aton should reort an estimated +arranty liability of a. J. b. J1",.c. J3",.d. J43,.

12 - 72



Intangible Assets

14%. In Earch 213, an e!losion occurred at Lir o.9s lant, causing damage to area roerties. y Eay 213, no claims had yet been asserted against Lir. 5o+ever, Lir9smanagement and legal counsel concluded that it +as reasonably ossible that Lir +ould be held resonsible for negligence, and that J4,, +ould be a reasonable estimate of the damages. Lir9s J",, comrehensive ublic liability olicy contains a J4,

deductible clause. In Lir9s ;ecember 31, 212 financial statements, for +hich theauditor9s field+or +as comleted in Aril 213, ho+ should this casualty be reorteda. As a note disclosing a ossible liability of J4,,. b. As an accrued liability of J4,.c. As a note disclosing a ossible liability of J4,.d. @o note disclosure of accrual is re$uired for 212 because the event occurred in 213.


.FS 95EST.O/S

Tr!e % Fal"e 9!e"tion"

1. #hort-term debt obligations are classified as current liabilities unless an agreement torefinance is comleted before the financial statements are issued.

2. 8or uroses of recognizing a rovision,HrobableH is defined as more liely than not

3. A 0rovision differs from other liabilities in that there is greater uncertainty about the timingand amount of settlement.

4. I8# allo+s for reduced disclosure of contingent liabilities if the disclosure could increasethe comanyRs chance of losing a la+suit.

". ontingent liabilities are not reorted in the financial statements but may be disclosed in thenotes to the financial statements if the lielihood of an unfavorable outcome is ossible.

%. A comany can e!clude a short-term obligation from current liablities if it intends torefinance the obligation and has an unconditional right to defer settlement of the obligationfor at least 12 months follo+ing the due date.

'. 0rovisions are only recorded if it is liely that the comany +ill have to settle an obligationat some oint in the future.

. An onerous contract is one in +hich the unavoidable costs of satisfying the obligations

out+eigh the economic benefits to be received.*. ontingent assets are not reorted in the statement of financial osition.

1. I8# uses the term GcontigentH for assets and liabilities not recognized in the financialstatement.

An"wer" to Tr!e % Fal"e#

C8ATE 14

12 - 73



Intangible Assets

LO/)TE7 L.AB.L.T.ES


T5E FALSE6Conce$t!al

1. omanies usually mae bond interest ayments semiannually, although the interest rate isgenerally e!ressed as an annual rate.

2. A mortgage bond is referred to as a debenture bond.

3. ond issues that mature in installments are called serial bonds.

4. If the maret rate is greater than the couon rate, bonds +ill be sold at a remium.

". he interest rate +ritten in the terms of the bond indenture is called the effective yield or maret rate.

%. he stated rate is the same as the couon rate.

'. Amortization of a remium increases bond interest e!ense, +hile amortization of adiscount decreases bond interest e!ense.

. A bond may only be issued on an interest ayment date.

*. he cash aid for interest +ill al+ays be greater than interest e!ense +hen using

effective-interest amortization for a bond.

1. ond issue costs are caitalized as a deferred charge and amortized to e!ense over the lifeof the bond issue.

11. he relacement of an e!isting bond issue +ith a ne+ one is called refunding.

12. If a long-term note ayable has a stated interest rate, that rate should be considered to bethe effective rate.

13. he imlicit interest rate is the rate that e$uates the cash received +ith the amounts

received in the future.

14. An unrealized holding gain or loss is the net change in the fair value of the liability fromone eriod to another, e!clusive of interest e!ense recognized but not recorded.

1". >ff-balance-sheet financing is an attemt to borro+ monies in such a +ay to minimize thereorting of debt on the balance sheet.

12 - 74



Intangible Assets

1%. he debt to total assets ratio +ill go u if an e$ual amount of assets and liabilities areadded to the balance sheet.

1'. If a comany lans to retire long-term debt from a bond retirement fund, it should reortthe debt as current.

1. he times interest earned ratio is comuted by dividing income before interest e!ense byinterest e!ense.

1*. he loss to be recognized by a creditor on an imaired loan is the difference bet+een theinvestment in the loan and the e!ected undiscounted future cash flo+s from the loan.

2. In a troubled debt restructuring, the loss recognized by the creditor +ill e$ual the gainrecognized by the debtor.



21. An e!amle of an item +hich is not a liability isa. dividends ayable in stoc. b. advances from customers on contracts.c. accrued estimated +arranty costs.d. the ortion of long-term debt due +ithin one year.

22. he covenants and other terms of the agreement bet+een the issuer of bonds and the lender are set forth in thea. bond indenture. b. bond debenture.c. registered bond.d. bond couon.

23. he term used for bonds that are unsecured as to rincial isa. /un bonds. b. debenture bonds.

c. indebenture bonds.d. callable bonds.

024. onds for +hich the o+ners9 names are not registered +ith the issuing cororation arecalleda. bearer bonds. b. term bonds.c. debenture bonds.d. secured bonds.

12 - 75



Intangible Assets

#2". onds that ay no interest unless the issuing comany is rofitable are calleda. collateral trust bonds. b. debenture bonds.c. revenue bonds.

d. income bonds.

#2%. If bonds are issued initially at a remium and the effective-interest method of amortizationis used, interest e!ense in the earlier years +ill bea. greater than if the straight-line method +ere used. b. greater than the amount of the interest ayments.c the same as if the straight-line method +ere used.d. less than if the straight-line method +ere used.

2'. he interest rate +ritten in the terms of the bond indenture is no+n as thea. couon rate.

b. nominal rate.c. stated rate.d. couon rate, nominal rate, or stated rate.

2. he rate of interest actually earned by bondholders is called thea. stated rate. b. yield rate.c. effective rate.d. effective, yield, or maret rate.

5"e the *ollowin, in*ormation *or 2!e"tion" +; an( 30#

8o! o. issued J1, of ten-year, 1P bonds that ay interest semiannually. he bonds aresold to yield P.

2*. >ne ste in calculating the issue rice of the bonds is to multily the rincial by the tablevalue for a. 1 eriods and 1P from the resent value of 1 table. b. 2 eriods and "P from the resent value of 1 table.c. 1 eriods and P from the resent value of 1 table.d. 2 eriods and 4P from the resent value of 1 table.

3. Another ste in calculating the issue rice of the bonds is to

a. multily J1, by the table value for 1 eriods and 1P from the resent value of an annuity table.

b. multily J1, by the table value for 2 eriods and "P from the resent value of anannuity table.

c. multily J1, by the table value for 2 eriods and 4P from the resent value of anannuity table.

d. none of these.

12 - 76



Intangible Assets

31. eich, Inc. issued bonds +ith a maturity amount of J2, and a maturity ten years fromdate of issue. If the bonds +ere issued at a remium, this indicates thata. the effective yield or maret rate of interest e!ceeded the stated (nominal) rate. b. the nominal rate of interest e!ceeded the maret rate.c. the maret and nominal rates coincided.

d. no necessary relationshi e!ists bet+een the t+o rates.

12 - 77



Intangible Assets

32. If bonds are initially sold at a discount and the straight-line method of amortization is used,interest e!ense in the earlier years +illa. e!ceed +hat it +ould have been had the effective-interest method of amortization been

used. b. be less than +hat it +ould have been had the effective-interest method of amortization

been used.c. be the same as +hat it +ould have been had the effective-interest method of amortiza-

tion been used.d. be less than the stated (nominal) rate of interest.

33. :nder the effective-interest method of bond discount or remium amortization, the eriodic interest e!ense is e$ual toa. the stated (nominal) rate of interest multilied by the face value of the bonds. b. the maret rate of interest multilied by the face value of the bonds.c. the stated rate multilied by the beginning-of-eriod carrying amount of the bonds.d. the maret rate multilied by the beginning-of-eriod carrying amount of the bonds.

34. hen the effective-interest method is used to amortize bond remium or discount, the eriodic amortization +illa. increase if the bonds +ere issued at a discount. b. decrease if the bonds +ere issued at a remium.c. increase if the bonds +ere issued at a remium.d. increase if the bonds +ere issued at either a discount or a remium.

3". If bonds are issued bet+een interest dates, the entry on the boos of the issuing cororationcould include aa. debit to Interest 0ayable.

b. credit to Interest eceivable.c. credit to Interest 6!ense.d. credit to :nearned Interest.

3%. hen the interest ayment dates of a bond are Eay 1 and @ovember 1, and a bond issue issold on Bune 1, the amount of cash received by the issuer +ill bea. decreased by accrued interest from Bune 1 to @ovember 1. b. decreased by accrued interest from Eay 1 to Bune 1.c. increased by accrued interest from Bune 1 to @ovember 1.d. increased by accrued interest from Eay 1 to Bune 1.

3'. heoretically, the costs of issuing bonds could bea. e!ensed +hen incurred. b. reorted as a reduction of the bond liability.c. debited to a deferred charge account and amortized over the life of the bonds.d. any of these.

3. he rinting costs and legal fees associated +ith the issuance of bonds shoulda. be e!ensed +hen incurred. b. be reorted as a deduction from the face amount of bonds ayable.

12 - 78



Intangible Assets

c. be accumulated in a deferred charge account and amortized over the life of the bonds.d. not be reorted as an e!ense until the eriod the bonds mature or are retired.

12 - 79



Intangible Assets

3*. reasury bonds should be sho+n on the balance sheet asa. an asset. b. a deduction from bonds ayable issued to arrive at net bonds ayable and outstanding.c. a reduction of stocholders9 e$uity.d. both an asset and a liability.

4. An early e!tinguishment of bonds ayable, +hich +ere originally issued at a remium, ismade by urchase of the bonds bet+een interest dates. At the time of reac$uisitiona. any costs of issuing the bonds must be amortized u to the urchase date. b. the remium must be amortized u to the urchase date.c. interest must be accrued from the last interest date to the urchase date.d. all of these.

41. he generally acceted method of accounting for gains or losses from the earlye!tinguishment of debt treats any gain or loss asa. an ad/ustment to the cost basis of the asset obtained by the debt issue.

b. an amount that should be considered a cash ad/ustment to the cost of any other debtissued over the remaining life of the old debt instrument.

c. an amount received or aid to obtain a ne+ debt instrument and, as such, should beamortized over the life of the ne+ debt.

d. a difference bet+een the reac$uisition rice and the net carrying amount of the debt+hich should be recognized in the eriod of redemtion.

042. SIn-substance defeasanceS is a term used to refer to an arrangement +herebya. a comany gets another comany to cover its ayments due on long-term debt. b. a governmental unit issues debt instruments to cororations.c. a comany rovides for the future reayment of a long-term debt by lacing urchased

securities in an irrevocable trust.d. a comany legally e!tinguishes debt before its due date.

043. A cororation borro+ed money from a ban to build a building. he long-term note signed by the cororation is secured by a mortgage that ledges title to the building as security for the loan. he cororation is to ay the ban J, each year for 1 years to reay theloan. hich of the follo+ing relationshis can you e!ect to aly to the situationa. he balance of mortgage ayable at a given balance sheet date +ill be reorted as a

long-term liability. b. he balance of mortgage ayable +ill remain a constant amount over the 1-year

eriod.

c. he amount of interest e!ense +ill decrease each eriod the loan is outstanding, +hilethe ortion of the annual ayment alied to the loan rincial +ill increase each eriod.d. he amount of interest e!ense +ill remain constant over the 1-year eriod.

#44. A debt instrument +ith no ready maret is e!changed for roerty +hose fair value iscurrently indeterminable. hen such a transaction taes lacea. the resent value of the debt instrument must be aro!imated using an imuted

interest rate.

12 - 80



Intangible Assets

b. it should not be recorded on the boos of either arty until the fair value of the roerty becomes evident.

c. the board of directors of the entity receiving the roerty should estimate a value for the roerty that +ill serve as a basis for the transaction.

d. the directors of both entities involved in the transaction should negotiate a value to be

assigned to the roerty.4". hen a note ayable is issued for roerty, goods, or services, the resent value of the note

is measured bya. the fair value of the roerty, goods, or services. b. the fair value of the note.c. using an imuted interest rate to discount all future ayments on the note.d. any of these.

4%. hen a note ayable is e!changed for roerty, goods, or services, the stated interest rateis resumed to be fair unlessa. no interest rate is stated.

b. the stated interest rate is unreasonable.c. the stated face amount of the note is materially different from the current cash sales

rice for similar items or from current fair value of the note.d. any of these.

4'. If a comany chooses the fair value otion, a decrease in the fair value of the liability isrecorded by creditinga. onds 0ayable. b. Cain on estructuring of ;ebt.c. :nrealized 5olding Cain7&oss-Income.d. @one of these.

4. hich of the follo+ing is an e!amle of Soff-balance-sheet financingS

1. @on-consolidated subsidiary.2. #ecial urose entity.3. >erating leases.

a. 1 b. 2c. 3d. All of these are e!amles of Soff-balance-sheet financing.S

#4*. hen a business enterrise enters into +hat is referred to as off-balance-sheet financing,

the comanya. is attemting to conceal the debt from shareholders by having no information about the

debt included in the balance sheet. b. +ishes to confine all information related to the debt to the income statement and the

statement of cash flo+.c. can enhance the $uality of its financial osition and erhas ermit credit to be

obtained more readily and at less cost.d. is in violation of generally acceted accounting rinciles.

12 - 81



Intangible Assets

#". &ong-term debt that matures +ithin one year and is to be converted into stoc should bereorteda. as a current liability. b. in a secial section bet+een liabilities and stocholders< e$uity.c. as noncurrent.

d. as noncurrent and accomanied +ith a note e!laining the method to be used in itsli$uidation.

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Intangible Assets

"1. hich of the follo+ing must be disclosed relative to long-term debt maturities and siningfund re$uirementsa. he resent value of future ayments for sining fund re$uirements and long-term debt

maturities during each of the ne!t five years. b. he resent value of scheduled interest ayments on long-term debt during each of the

ne!t five years.c. he amount of scheduled interest ayments on long-term debt during each of the ne!t

five years.d. he amount of future ayments for sining fund re$uirements and long-term debt

maturities during each of the ne!t five years.

"2. @ote disclosures for long-term debt generally include all of the follo+ing except

a. assets ledged as security. b. call rovisions and conversion rivileges.c. restrictions imosed by the creditor.d. names of secific creditors.

"3. he times interest earned ratio is comuted by dividinga. net income by interest e!ense. b. income before ta!es by interest e!ense.c. income before income ta!es and interest e!ense by interest e!ense.d. net income and interest e!ense by interest e!ense.

"4. he debt to total assets ratio is comuted by dividinga. current liabilities by total assets. b. long-term liabilities by total assets.c. total liabilities by total assets.

d. total assets by total liabilities.

"". In a troubled debt restructuring in +hich the debt is continued +ith modified terms and thecarrying amount of the debt is less than the total future cash flo+s,a. a loss should be recognized by the debtor. b. a gain should be recognized by the debtor.c. a ne+ effective-interest rate must be comuted.d. no interest e!ense or revenue should be recognized in the future.

"%. A troubled debt restructuring +ill generally result in aa. loss by the debtor and a gain by the creditor.

b. loss by both the debtor and the creditor.c. gain by both the debtor and the creditor.d. gain by the debtor and a loss by the creditor.

"'. In a troubled debt restructuring in +hich the debt is restructured by a transfer of assets +itha fair value less than the carrying amount of the debt, the debtor +ould recognizea. no gain or loss on the restructuring. b. a gain on the restructuring.c. a loss on the restructuring.

12 - 83



Intangible Assets

d. none of these.

12 - 84



Intangible Assets

". In a troubled debt restructuring in +hich the debt is continued +ith modified terms, a gainshould be recognized at the date of restructure, but no interest e!ense should berecognized over the remaining life of the debt, +henever thea. carrying amount of the re-restructure debt is less than the total future cash flo+s. b. carrying amount of the re-restructure debt is greater than the total future cash flo+s.

c. resent value of the re-restructure debt is less than the resent value of the future cashflo+s.

d. resent value of the re-restructure debt is greater than the resent value of the futurecash flo+s.

"*. In a troubled debt restructuring in +hich the debt is continued +ith modified terms and thecarrying amount of the debt is less than the total future cash flo+s, the creditor shoulda. comute a ne+ effective-interest rate. b. not recognize a loss.c. calculate its loss using the historical effective rate of the loan.d. calculate its loss using the current effective rate of the loan.


:se the follo+ing information for $uestions % through %2=

>n Banuary 1, 212, 6llison o. issued eight-year bonds +ith a face value of J2,, and astated interest rate of %P, ayable semiannually on Bune 3 and ;ecember 31. he bonds +eresold to yield P. able values are=

0resent value of 1 for eriods at %P............................................ .%2'0resent value of 1 for eriods at P............................................ ."40resent value of 1 for 1% eriods at 3P.......................................... .%230resent value of 1 for 1% eriods at 4P.......................................... ."340resent value of annuity for eriods at %P.................................. %.210resent value of annuity for eriods at P.................................. ".'4'0resent value of annuity for 1% eriods at 3P................................ 12."%10resent value of annuity for 1% eriods at 4P................................ 11.%"2

%. he resent value of the rincial is

a. J1,%,. b. J1,,.c. J1,24%,.d. J1,2"4,.

%1. he resent value of the interest isa. J%*,%4. b. J%**,12.c. J'4",2.

12 - 85



Intangible Assets

d. J'"3,%%.

%2. he issue rice of the bonds isa. J1,'%',12. b. J1,'%*,%4.

c. J1,''*,12.d. J1,***,2.

%3. ;o+ning omany issues J3,,, %P, "-year bonds dated Banuary 1, 212 on Banuary1, 212. he bonds ay interest semiannually on Bune 3 and ;ecember 31. he bonds areissued to yield "P. hat are the roceeds from the bond issue

2."P 3.P ".P %.P

0resent value of a single sum for " eriods .3" .%2%1 .'3"3 .'4'2%0resent value of a single sum for 1 eriods .'12 .'44* .%13*1 .""3*0resent value of an annuity for " eriods 4.%4"3 4."'*'1 4.32*4 4.2123%0resent value of an annuity for 1 eriods .'"2% ."32 '.'21'3 '.3%*

a. J3,, b. J3,12*,*%c. J3,131,2"d. J3,13,3"

%4. 8eller omany issues J1,, of 1-year, *P bonds on Earch 1, 212 at *' lusaccrued interest. he bonds are dated Banuary 1, 212, and ay interest on Bune 3 and;ecember 31. hat is the total cash received on the issue datea. J*,', b. J1,22",

c. J*,",d. J*,"",

12 - 86



Intangible Assets

%". 6verhart omany issues J1",,, %P, "-year bonds dated Banuary 1, 212 onBanuary 1, 212. he bonds ays interest semiannually on Bune 3 and ;ecember 31. he bonds are issued to yield "P. hat are the roceeds from the bond issue

2."P 3.P ".P %.P

0resent value of a single sum for " eriods .3" .%2%1 .'3"3 .'4'2%0resent value of a single sum for 1 eriods .'12 .'44* .%13*1 .""3*0resent value of an annuity for " eriods 4.%4"3 4."'*'1 4.32*4 4.2123%0resent value of an annuity for 1 eriods .'"2% ."32 '.'21'3 '.3%*

a. J1",, b. J1",%4*,42c. J1",%"%,42'd. J1",%"1,*24

%%. 8armer omany issues J2,, of 1-year, *P bonds on Earch 1, 212 at *' lus

accrued interest. he bonds are dated Banuary 1, 212, and ay interest on Bune 3 and;ecember 31. hat is the total cash received on the issue datea. J1*,4, b. J2,4",c. J1*,',d. J1*,1,

%'. A comany issues J1",,, '.P, 2-year bonds to yield P on Banuary 1, 212.Interest is aid on Bune 3 and ;ecember 31. he roceeds from the bonds areJ14,'3,1*. :sing effective-interest amortization, ho+ much interest e!ense +ill berecognized in 212

a. J"", b. J1,1',c. J1,1'%,3'4d. J1,1'%,24*

%. A comany issues J1",,, '.P, 2-year bonds to yield P on Banuary 1, 212.Interest is aid on Bune 3 and ;ecember 31. he roceeds from the bonds areJ14,'3,1*. :sing effective-interest amortization, +hat +ill the carrying value of the bonds be on the ;ecember 31, 212 balance sheeta. J14,'*,42 b. J1",,

c. J14,'1,44d. J14,'%,232

%*. A comany issues J1",,, '.P, 2-year bonds to yield P on Banuary 1, 211.Interest is aid on Bune 3 and ;ecember 31. he roceeds from the bonds areJ14,'3,1*. :sing straight-line amortization, +hat is the carrying value of the bonds on;ecember 31, 213a. J14,'"2,%'3 b. J14,*"",4%%

12 - 87



Intangible Assets

c. J14,'2",3'"d. J14,'4',%42

'. A comany issues J1",,, '.P, 2-year bonds to yield P on Banuary 1, 212.Interest is aid on Bune 3 and ;ecember 31. he roceeds from the bonds are

J14,'3,1*. hat is interest e!ense for 213, using straight-line amortizationa. J1,"4,2' b. J1,1',c. J1,1'%,*4d. J1,14,4"

'1. A comany issues J1,,, '.P, 2-year bonds to yield P on Banuary 1, 212.Interest is aid on Bune 3 and ;ecember 31. he roceeds from the bonds are J*,2,'2.:sing effective-interest amortization, ho+ much interest e!ense +ill be recognized in212a. J3*,

b. J',c. J'4,24d. J'4,1%%

'2. A comany issues J1,,, '.P, 2-year bonds to yield P on Banuary 1, 212.Interest is aid on Bune 3 and ;ecember 31. he roceeds from the bonds are J*,2,'2.:sing effective-interest amortization, +hat +ill the carrying value of the bonds be on the;ecember 31, 212 balance sheeta. J*,%,32 b. J1,,c. J*,12,"%2

d. J*,4,1"4

'3. A comany issues J1,,, '.P, 2-year bonds to yield P on Banuary 1, 211.Interest is aid on Bune 3 and ;ecember 31. he roceeds from the bonds are J*,2,'2.:sing straight-line amortization, +hat is the carrying value of the bonds on ;ecember 31,213a. J*,3",11% b. J*,*',312c. J*,1%,*1%d. J*,31,'%2

'4. A comany issues J1,,, '.P, 2-year bonds to yield P on Banuary 1, 212.Interest is aid on Bune 3 and ;ecember 31. he roceeds from the bonds are J*,2,'2.hat is interest e!ense for 213, using straight-line amortizationa. J'',14 b. J',c. J'4,"*%d. J'*,*%

12 - 88



Intangible Assets

'". >n Banuary 1, 212, 5uber o. sold 12P bonds +ith a face value of J,. he bondsmature in five years, and interest is aid semiannually on Bune 3 and ;ecember 31. he bonds +ere sold for J%1,% to yield 1P. :sing the effective-interest method of amortization, interest e!ense for 212 isa. J,.

b. J",*14.c. J%,1%.d. J*%,.

'%. >n Banuary 2, 212, a calendar-year cororation sold P bonds +ith a face value of J*,. hese bonds mature in five years, and interest is aid semiannually on Bune 3and ;ecember 31. he bonds +ere sold for J3,4 to yield 1P. :sing the effective-interest method of comuting interest, ho+ much should be charged to interest e!ense in 212a. J'2,. b. J3,4.c. J3,31%.

d. J*,.The *ollowin, in*ormation a$$lie" to oth 2!e"tion" << an( <=&

>n >ctober 1, 212 Eaclin ororation issued "P, 1-year bonds +ith a face value of J2,, at 14. Interest is aid on >ctober 1 and Aril 1, +ith any remiums or discountsamortized on a straight-line basis.

''. he entry to record the issuance of the bonds +ould include a credit of a. J", to Interest 0ayable. b. J, to ;iscount on onds 0ayable.c. J1,*2, to onds 0ayable.d. J, to 0remium on onds 0ayable.

'. ond interest e!ense reorted on the ;ecember 31, 212 income statement of Eaclinororation +ould bea. J23, b. J2",c. J2',d. J4%,

The *ollowin, in*ormation a$$lie" to oth 2!e"tion" <; an( =0&

>n >ctober 1, 212 artley ororation issued "P, 1-year bonds +ith a face value of J3,, at 14. Interest is aid on >ctober 1 and Aril 1, +ith any remiums or discounts

amortized on a straight-line basis.

'*. he entry to record the issuance of the bonds +ould include aa. credit of J'", to Interest 0ayable. b. credit of J12, to 0remium on onds 0ayable.c. credit of J2,, to onds 0ayable.d. debit of J12, to ;iscount on onds 0ayable.

12 - 89



Intangible Assets

. ond interest e!ense reorted on the ;ecember 31, 212 income statement of artleyororation +ould bea. J4," b. J%*,c. J34,"

d. J3',"

1. At the beginning of 212, allace ororation issued 1P bonds +ith a face value of J1,",. hese bonds mature in the five years, and interest is aid semiannually onBune 3 and ;ecember 31. he bonds +ere sold for J1,3*,% to yield 12P. allace usesa calendar-year reorting eriod. :sing the effective-interest method of amortization, +hatamount of interest e!ense should be reorted for 212 (ound your ans+er to the nearestdollar.)a. J1'2, b. J1%',2""c. J1%%,'"

d. J1%%,2"

2. >n Banuary 1, 0atterson Inc. issued J3,,, *P bonds for J2,1',. he maret rateof interest for these bonds is 1P. Interest is ayable annually on ;ecember 31. 0attersonuses the effective-interest method of amortizing bond discount. At the end of the first year,0atterson should reort unamortized bond discount of a. J1%4,'. b. J1'1,3.c. J1"4,3.d. J1"3,.

3. >n Banuary 1, Eartinez Inc. issued J4,,, 11P bonds for J4,2%,. he maretrate of interest for these bonds is 1P. Interest is ayable annually on ;ecember 31.Eartinez uses the effective-interest method of amortizing bond remium. At the end of thefirst year, Eartinez should reort unamortized bond remium of=a. J24%,4 b. J24%,c. J231,4d. J22,

4. At the beginning of 212, inston ororation issued 1P bonds +ith a face value of J1,2,. hese bonds mature in five years, and interest is aid semiannually on Bune 3

and ;ecember 31. he bonds +ere sold for J1,111,% to yield 12P. inston uses acalendar-year reorting eriod. :sing the effective-interest method of amortization, +hatamount of interest e!ense should be reorted for 212 (ound your ans+er to the nearestdollar.)a. J133, b. J133,4c. J133,4d. J13',%%4

12 - 90



Intangible Assets

". Lant ororation retires its J", face value bonds at 12 on Banuary 1, follo+ing the ayment of interest. he carrying value of the bonds at the redemtion date is J41,2".he entry to record the redemtion +ill include aa. credit of J1,'" to &oss on ond edemtion. b. credit of J1,'" to ;iscount on onds 0ayable.

c. debit of J2,'" to Cain on ond edemtion.d. debit of J1, to 0remium on onds 0ayable.

%. arr ororation retires its J", face value bonds at 1" on Banuary 1, follo+ing the ayment of interest. he carrying value of the bonds at the redemtion date is J"1,'2".he entry to record the redemtion +ill include aa. credit of J1,'2" to &oss on ond edemtion. b. debit of J1,'2" to 0remium on onds 0ayable.c. credit of J%,2'" to Cain on ond edemtion.d. debit of J2", to 0remium on onds 0ayable.

'. At ;ecember 31, 212 the follo+ing balances e!isted on the boos of 8o!+orthororation=

onds 0ayable J3,,;iscount on onds 0ayable 24,Interest 0ayable '",:namortized ond Issue osts 1,

If the bonds are retired on Banuary 1, 213, at 12, +hat +ill 8o!+orth reort as a loss onredemtiona. J""", b. J4,c. J4",

d. J3,

. At ;ecember 31, 212 the follo+ing balances e!isted on the boos of entro ororation=onds 0ayable J2,",;iscount on onds 0ayable 2,Interest 0ayable %,:namortized ond Issue osts 1",

If the bonds are retired on Banuary 1, 213, at 12, +hat +ill entro reort as a loss onredemtiona. J2",

b. J33',"c. J4,d. J4%,

*. he ;ecember 31, 212, balance sheet of 5ess ororation includes the follo+ing items=

*P bonds ayable due ;ecember 31, 221 J2,,:namortized remium on bonds ayable "4,

12 - 91



Intangible Assets

he bonds +ere issued on ;ecember 31, 211, at 13, +ith interest ayable on Buly 1 and;ecember 31 of each year. 5ess uses straight-line amortization. >n Earch 1, 213, 5essretired J, of these bonds at * lus accrued interest. hat should 5ess record as again on retirement of these bonds Ignore ta!es.a. J3',%.

b. J21,%.c. J3',2.d. J4,.

*. >n Banuary 1, 2%, 5ernandez ororation issued J3,%, of 1P ten-year bonds at13. he bonds are callable at the otion of 5ernandez at 1". 5ernandez has recordedamortization of the bond remium on the straight-line method (+hich +as not materiallydifferent from the effective-interest method).

>n ;ecember 31, 212, +hen the fair value of the bonds +as *%, 5ernandez reurchasedJ, of the bonds in the oen maret at *%. 5ernandez has recorded interest andamortization for 212. Ignoring income ta!es and assuming that the gain is material,

5ernandez should reort this reac$uisition asa. a loss of J3*,2. b. a gain of J3*,2.c. a loss of J4,.d. a gain of J4,.

12 - 92



Intangible Assets

*1. he 1P bonds ayable of @i!on omany had a net carrying amount of J'%, on;ecember 31, 212. he bonds, +hich had a face value of J,, +ere issued at adiscount to yield 12P. he amortization of the bond discount +as recorded under theeffective-interest method. Interest +as aid on Banuary 1 and Buly 1 of each year. >nBuly 2, 213, several years before their maturity, @i!on retired the bonds at 12. he

interest ayment on Buly 1, 213 +as made as scheduled. hat is the loss that @i!onshould record on the early retirement of the bonds on Buly 2, 213 Ignore ta!es.a. J1%,. b. J",4.c. J44,.d. J"%,.

*2. A cororation called an outstanding bond obligation four years before maturity. At thattime there +as an unamortized discount of J%,. o e!tinguish this debt, the comanyhad to ay a call remium of J2,. Ignoring income tax considerations, ho+ shouldthese amounts be treated for accounting uroses

a. Amortize J, over four years. b. harge J, to a loss in the year of e!tinguishment.c. harge J2, to a loss in the year of e!tinguishment and amortize J%, over

four years.d. 6ither amortize J, over four years or charge J, to a loss immediately,

+hichever management selects.

*3. he 12P bonds ayable of @yman o. had a carrying amount of J2,, on;ecember 31, 212. he bonds, +hich had a face value of J2,,, +ere issued at a remium to yield 1P. @yman uses the effective-interest method of amortization. Interest is aid on Bune 3 and ;ecember 31. >n Bune 3, 213, several years before their maturity,

@yman retired the bonds at 14 lus accrued interest. he loss on retirement, ignoring ta!es,isa. J. b. J1%,.c. J24,.d. J,.

*4. ;idde omany issues J1",, face value of bonds at *% on Banuary 1, 211. he bonds are dated Banuary 1, 211, ay interest semiannually at P on Bune 3 and;ecember 31, and mature in 1 years. #traight-line amortization is used for discounts and remiums. >n #etember 1, 214, J*,, of the bonds are called at 12 lus accrued

interest. hat gain or loss +ould be recognized on the called bonds on #etember 1, 214a. J*, loss b. J4, lossc. J"4, lossd. J%, loss

12 - 93



Intangible Assets

*". ortez omany issues J3,, face value of bonds at *% on Banuary 1, 211. he bonds are dated Banuary 1, 211, ay interest semiannually at P on Bune 3 and;ecember 31, and mature in 1 years. #traight-line amortization is used for discounts and remiums. >n #etember 1, 214, J1,, of the bonds are called at 12 lus accruedinterest. hat gain or loss +ould be recognized on the called bonds on #etember 1, 214

a. J1, loss b. J1,% lossc. J1, lossd. J13%, loss

*%. >n Banuary 1, 212, Ann 0rice loaned J*,1"% to Boe Liger. A zero-interest-bearing note(face amount, J12,) +as e!changed solely for cashK no other rights or rivileges +eree!changed. he note is to be reaid on ;ecember 31, 214. he revailing rate of interestfor a loan of this tye is 1P. he resent value of J12, at 1P for three years isJ*,1"%. hat amount of interest income should Es. 0rice recognize in 212a. J*,1%.

b. J12,.c. J3%,.d. J2',4.

*'. >n Banuary 1, 212, Bacobs omany sold roerty to ;ains omany +hich originallycost Bacobs J*",. here +as no established e!change rice for this roerty. ;anisgave Bacobs a J1,", zero-interest-bearing note ayable in three e$ual annualinstallments of J", +ith the first ayment due ;ecember 31, 212. he note has no

ready maret. he revailing rate of interest for a note of this tye is 1P. he resentvalue of a J1,", note ayable in three e$ual annual installments of J", at a 1Prate of interest is J1,243,". hat is the amount of interest income that should be

recognized by Bacobs in 212, using the effective-interest methoda. J. b. J",.c. J124,3".d. J1",.

*. >n Banuary 1, 212, ro+n omany sold roerty to &eary omany. here +as noestablished e!change rice for the roerty, and &eary gave ro+n a J3,, zero-interest-bearing note ayable in " e$ual annual installments of J%,, +ith the first ayment due ;ecember 31, 212. he revailing rate of interest for a note of this tye is*P. he resent value of the note at *P +as J2,1%3, at Banuary 1, 212. hat should

be the balance of the ;iscount on @otes 0ayable account on the boos of &eary at;ecember 31, 212 after ad/usting entries are made, assuming that the effective-interestmethod is useda. J b. J%42,33c. J%%*,%d. J3',

12 - 94



Intangible Assets

**. 0utnam omany<s 212 financial statements contain the follo+ing selected data=

Income ta!es J4,Interest e!ense 2", @et income %,

0utnam<s times interest earned for 212 isa. 3. times b. 3.4 times.c. 4. times.d. ". times.

1. In the recent year 5ill ororation had net income of J2,, interest e!ense of J%,, and ta! e!ense of J,. hat +as 5ill ororation9s times interest earnedratio for the yeara. '. b. ".

c. 4.'d. 3.'

11. In recent year ey ororation had net income of J3",, interest e!ense of J',,and a times interest earned ratio of *. hat +as ey ororation9s income before ta!es for the yeara. J', b. J%3,c. J"%,d. @one of the above.

12. he ad/usted trial balance for &ifesaver or. at the end of the current year, 212,contained the follo+ing accounts."-year onds 0ayable P J2,,Interest 0ayable ",0remium on onds 0ayable 1, @otes 0ayable (3 mo.) 4, @otes 0ayable (" yr.) 1%",Eortgage 0ayable (J1", due currently) 2,#alaries and +ages 0ayable 1,

Income a!es 0ayable (due 371" of 213) 2",

he total long-term liabilities reorted on the balance sheet area. J2,3%",. b. J2,3",.c. J2,4%",.d. J2,4",.

:se the follo+ing information for $uestions 13 through 1"=

12 - 95



Intangible Assets

>n ;ecember 31, 21, @olte o. is in financial difficulty and cannot ay a note due that day. It isa J1,2, note +ith J12, accrued interest ayable to 0ier, Inc. 0ier agrees to accetfrom @olte e$uiment that has a fair value of J",, an original cost of J*%,, andaccumulated dereciation of J4%,. 0ier also forgives the accrued interest, e!tends thematurity date to ;ecember 31, 213, reduces the face amount of the note to J",, and reduces

the interest rate to %P, +ith interest ayable at the end of each year.13. @olte should recognize a gain or loss on the transfer of the e$uiment of

a. J. b. J, gain.c. J12, gain.d. J3, loss.

14. @olte should recognize a gain on the artial settlement and restructure of the debt of a. J. b. J3,.c. J11,.

d. J1",.

1". @olte should record interest e!ense for 213 ofa. J. b. J3,.c. J%,.d. J*,.



1%. >n Buly 1, 212, #ear o. issued 3, of its 1P, J1, bonds at ** lus accruedinterest. he bonds are dated Aril 1, 212 and mature on Aril 1, 222. Interest is ayablesemiannually on Aril 1 and >ctober 1. hat amount did #ear receive from the bondissuancea. J3,4", b. J3,,

c. J2,*',d. J2,*",

12 - 96



Intangible Assets

1'. >n Banuary 1, 212, #olis o. issued its 1P bonds in the face amount of J4,,,+hich mature on Banuary 1, 222. he bonds +ere issued for J4,"4, to yield P,resulting in bond remium of J"4,. #olis uses the effective-interest method of amortizing bond remium. Interest is ayable annually on ;ecember 31. At ;ecember 31,212, #olis9s ad/usted unamortized bond remium should be

a. J"4,. b. J"3,2.c. J4%,.d. J4%,.

1. >n Buly 1, 211, @oble, Inc. issued *P bonds in the face amount of J1,,, +hichmature on Buly 1, 21'. he bonds +ere issued for J*,3*, to yield 1P, resulting in a bond discount of J%1,. @oble uses the effective-interest method of amortizing bonddiscount. Interest is ayable annually on Bune 3. At Bune 3, 213, @oble9s unamortized bond discount should bea. J"2,1.

b. J"1,.c. J4,.d. J43,.

1*. >n Banuary 1, 212, 5uff o. sold J3,, of its 1P bonds for J2,%"", to yield12P. Interest is ayable semiannually on Banuary 1 and Buly 1. hat amount should 5uff reort as interest e!ense for the si! months ended Bune 3, 212a. J132,'* b. J1",c. J1"*,3"3d. J1,

11. >n Banuary 1, 213, ;oty o. redeemed its 1"-year bonds of J3,", ar value for 12.hey +ere originally issued on Banuary 1, 21 at * +ith a maturity date ofBanuary 1, 21%. he bond issue costs relating to this transaction +ere J21,. ;otyamortizes discounts, remiums, and bond issue costs using the straight-line method. hatamount of loss should ;oty recognize on the redemtion of these bonds (ignore ta!es)a. J12%, b. J4,c. J',d. J

111. >n its ;ecember 31, 212 balance sheet, 6mig or. reorted bonds ayable of J*,, and related unamortized bond issue costs of J4,. he bonds had beenissued at ar. >n Banuary 2, 213, 6mig retired J4,", of the outstanding bonds at ar lus a call remium of J1",. hat amount should 6mig reort in its 213 incomestatement as loss on e!tinguishment of debt (ignore ta!es)a. J b. J1",c. J24,d. J34",

12 - 97



Intangible Assets

112. >n Banuary 1, 2, Coll or. issued 4, of its 1P, J1, bonds for J4,1%,.hese bonds +ere to mature on Banuary 1, 21% but +ere callable at 11 any time after ;ecember 31, 211. Interest +as ayable semiannually on Buly 1 and Banuary 1. >nBuly 1, 213, Coll called all of the bonds and retired them. ond remium +as amortizedon a straight-line basis. efore income ta!es, Coll9s gain or loss in 213 on this early

e!tinguishment of debt +asa. J12, gain. b. J4, gain.c. J4, loss.d. J32, gain.

113. >n Bune 3, 213, >mara o. had outstanding P, J4,, face amount, 1"-year bondsmaturing on Bune 3, 223. Interest is ayable on Bune 3 and ;ecember 31. heunamortized balances in the bond discount and deferred bond issue costs accounts on Bune3, 213 +ere J14, and J4,, resectively. >n Bune 3, 213, >mara ac$uired allof these bonds at *4 and retired them. hat net carrying amount should be used in

comuting gain or loss on this early e!tinguishment of debta. J3,*%,. b. J3,%,.c. J3,2,.d. J3,'%,.

114. A ten-year bond +as issued in 211 at a discount +ith a call rovision to retire the bonds.hen the bond issuer e!ercised the call rovision on an interest date in 213, the carryingamount of the bond +as less than the call rice. he amount of bond liability removedfrom the accounts in 213 should have e$ualed thea. call rice.

b. call rice less unamortized discount.c. face amount less unamortized discount.d. face amount lus unamortized discount.

11". 0aige o. too advantage of maret conditions to refund debt. his +as the fourthrefunding oeration carried out by 0aige +ithin the last three years. he e!cess of thecarrying amount of the old debt over the amount aid to e!tinguish it should be reorted asaa. gain, net of income ta!es. b. loss, net of income ta!es.c. art of continuing oerations.

d. deferred credit to be amortized over the life of the ne+ debt.

11%. 6ddy o. is indebted to ole under a J%,, 12P, three-year note dated;ecember 31, 211. ecause of 6ddy9s financial difficulties develoing in 213, 6ddyo+ed accrued interest of J'2, on the note at ;ecember 31, 213. :nder a troubled debtrestructuring, on ;ecember 31, 213, ole agreed to settle the note and accrued interest for a tract of land having a fair value of J"4,. 6ddy9s ac$uisition cost of the land isJ43",. Ignoring income ta!es, on its 213 income statement 6ddy should reort as aresult of the troubled debt restructuring

12 - 99



Intangible Assets

Cain on ;isosal estructuring Caina. J23', J b. J1%", Jc. J1", J%,d. J1", J132,


.FS 95EST.O/S

Tr!e%Fal"e

1. #imilar to :.#. ractice, I8# re$uires that comanies resent current and noncurrentliabilities on the face of the balance sheet, +ith current liabilities generally resented in orderof li$uidity.

2. #imilar to :.#. ractice, I8# re$uires that comanies resent current and noncurrent

liabilities on the face of the balance sheet, +ith current liabilities generally resented in orderof magnitude.

3. oth I8# and :.#. CAA0 rohibit the recognition of liabilities for future losses.

4. I8# and :.#. CAA0 are similar in the treatment of asset retirement obligations.

". he recognition criteria for an asset retirement obligation (A>) are more stringent underI8#.

%. I8# and :.#. CAA0 are dissimilar in their treatment of contingencies.

'. he criteria for recognizing contingent assets are more stringent under :.#. CAA0.

. :nder I8#, the measurement of a rovision related to a contingency is based on an averageestimate of the e!enditure re$uired to settle the obligation.

*. :.#. CAA0 ermits recognition of a restructuring liability, once a comany has committed to arestructuring lan.

1. he recognition criteria for an A> are more stringent under :.#. CAA0= he A> is notrecognized unless there is a resent legal obligation and the fair value of the obligation can be

reasonably estimated.


7!lti$le Choice 9!e"tion"

1. he rimary I8# related to reorting and recognition of liabilities is found ina. IA# 1 and IA# 3*. b. IA# 1' and IA# 23.

12 - 100



Intangible Assets

c. IA# 1 and IA# 3'.d. IA# 2' and IA# 32.

2. #imilar to :.#. ractice, I8# re$uires that comanies resent current and noncurrentliabilities on the face of the balance sheet +ith current liabilitiesa. generally resented in order of magnitude.

b. resented in alhabetic order.c. resented in order of li$uidity.d. resented in the order in +hich they +ere incurred.

3. :nder I8#, the measurement of a rovision related to a contingency is based ona. the best estimate of the e!enditure re$uired to settle the obligation. b. the minimum amount from among a number of alternative estimates.c. an average from among a number of alternative estimates.d. +hatever management feels that shareholders +ould be +illing to accet because of the

imact on current earnings.

4. oth :.#. CAA0 and I8# rohibita. the recognition of a restructuring liability, once a comany has committed to a

restructuring lan. b. the recognition of liabilities for future losses.c. communicating information on a restructuring lan to emloyees, before a liability can be

established.d. all of the above.

". I8# and :.#. CAA0 area. similar in the treatment of asset retirement obligations (A>s). b. significantly different +hen it comes to the treatment of asset retirement obligations

(A>s).c. continuing to evolve in the area of asset retirement obligations (A>s).d. in conflict +ith resect to the accounting for and resentation of asset retirement

obligations (A>s).

%. oth I8# and :.#. CAA0 ermit valuation of long-term debt and other liabilities ata. resent value discounted at the firm9s cost of caital. b. current maret values of the obligations, based on changes in the discount rate +ith

unrealized gains and losses reflected in a searate account in stocholders9 e$uity.c. fair value +ith gains and losses on changes in fair value recorded in income in certain

situations.

d. historic costs +ithout reflecting changes in valuation as obligations +ill be retired at theirmaturity date.

'. As there is no comarable institution to the #6 in international securities marets, manyinternational comanies (those not registered +ith the #6)a. voluntarily adhere to #6 criteria in roviding information related to contractual

obligations. b. are not re$uired to rovide disclosures such as those related to contractual obligations.c. follo+ the re$uirements established for contractual obligations ut forth by the IA#.

12 - 101



Intangible Assets

d. follo+ the re$uirements established for contractual obligations ut forth by the 8A#.

12 - 102



Intangible Assets

. :nder :.#. CAA0, contingent assets for insurance recoveries are recognized if TTTTTTTTTTKI8# re$uires the recovery be STTTTTTTTTTTS before recognition of an asset is ermitted.a. robable and virtually certain b. ossible and very lielyc. ossible and definite

d. certain and robable

*. I8# rules for establishing restructuring liabilities could be used as an earnings managementtool because I8# rules area. more-stringent that :.#. CAA0. b. less-stringent that :.#. CAA0.c. virtually the same as :.#. CAA0.d. totally different than :.#. CAA0.

1. A concern +ith I8# is that its less-stringent rules for establishing restructuring liabilitiescould be used as

a. a more aroriate method than that emloyed under :.#. CAA0. b. an aroriate method, but comle! and difficult to e!lain to shareholders.c. a method readily emloyed to mae the understanding of financial information more

comrehensible to shareholders.d. an earinings management tool.

An"wer" to m!lti$le choice#

.FS Short An"wer#

1. riefly describe some of the similarities and differences bet+een :.#. CAA0 and I8# +ithresect to the accounting for liabilities.

1. Among the similarities are= (1) I8# re$uires that comanies resent current and non-current liabilities on the face of the balance sheet, +ith current liabilities generally resented inorder of li$uidity, (2) oth CAA0s rohibit the recognition of liabilities for future lossesK (3)I8# and :.#. CAA0 are similar in the treatment of asset retirement obligations (A>s), and(4) I8# and :.#. CAA0 are similar in their treatment of contingencies.

2. riefly discuss ho+ accounting convergence efforts addressing liabilities is related to theIA#78A# concetual frame+or ro/ect.

C8ATE 1>

STOC?8OL:ES@ E95.T

12 - 103



Intangible Assets



1. A cororation is incororated in only one state regardless of the number of states in +hichit oerates.

2. he reemtive right allo+s stocholders the right to vote for directors of the comany.

3. ommon stoc is the residual cororate interest that bears the ultimate riss of loss.

4. 6arned caital consists of additional aid-in caital and retained earnings.

". rue no-ar stoc should be carried in the accounts at issue rice +ithout any additional aid-in caital reorted.

%. omanies allocate the roceeds received from a lum-sum sale of securities based on thesecurities< ar values.

'. omanies should record stoc issued for services or noncash roerty at either the fair value of the stoc issued or the fair value of the consideration received.

. reasury stoc is a comany<s o+n stoc that has been reac$uired and retired.

*. he cost method records all transactions in treasury shares at their cost and reorts thetreasury stoc as a deduction from caital stoc.

1. hen a cororation sells treasury stoc belo+ its cost, it usually debits the difference bet+een cost and selling rice to 0aid-in aital from reasury #toc.

11. 0articiating referred stoc re$uires that if a comany fails to ay a dividend in any year,it must mae it u in a later year before aying any common dividends.

12. allable referred stoc ermits the cororation at its otion to redeem the outstanding referred shares at stiulated rices.

13. he la+s of some states re$uire that cororations restrict their legal caital from

distribution to stocholders.

14. he #6 re$uires comanies to disclose their dividend olicy in their annual reort.

1". All dividends, e!cet for li$uidating dividends, reduce the total stocholders< e$uity of acororation.

1%. ;ividends ayable in assets of the cororation other than cash are called roertydividends or dividends in ind.

12 - 104



Intangible Assets

1'. hen a stoc dividend is less than 2-2" ercent of the common stoc outstanding, acomany is re$uired to transfer the fair value of the stoc issued from retained earnings.

1. #toc slits and large stoc dividends have the same effect on a comany<s retained

earnings and total stocholders< e$uity.1*. he rate of return on common stoc e$uity is comuted by dividing net income by the

average common stocholders< e$uity.

2. he ayout ratio is determined by dividing cash dividends aid to common stocholders bynet income available to common stocholders.

Tr!e)Fal"e An"wer"6Conce$t!al


21. he residual interest in a cororation belongs to thea. management. b. creditors.c. common stocholders.d. referred stocholders.

22. he re-emtive right of a common stocholder is the right toa. share roortionately in cororate assets uon li$uidation.

b. share roortionately in any ne+ issues of stoc of the same class.c. receive cash dividends before they are distributed to referred stocholders.d. e!clude referred stocholders from voting rights.

23. he re-emtive right enables a stocholder toa. share roortionately in any ne+ issues of stoc of the same class. b. receive cash dividends before other classes of stoc +ithout the re-emtive right.c. sell caital stoc bac to the cororation at the otion of the stocholder.d. receive the same amount of dividends on a ercentage basis as the referred

stocholders.

#24. In a cororate form of business organization, legal caital is best defined asa. the amount of caital the state of incororation allo+s the comany to accumulate over

its e!istence. b. the ar value of all caital stoc issued.c. the amount of caital the federal government allo+s a cororation to generate.d. the total caital raised by a cororation +ithin the limits set by the #ecurities and

6!change ommission.

12 - 105



Intangible Assets

#2". #tocholders of a business enterrise are said to be the residual o+ners. he term residualo+ner means that shareholdersa. are entitled to a dividend every year in +hich the business earns a rofit. b. have the rights to secific assets of the business.c. bear the ultimate riss and uncertainties and receive the benefits of enterrise

o+nershi.d. can negotiate individual contracts on behalf of the enterrise.

2%. otal stocholders9 e$uity reresentsa. a claim to secific assets contributed by the o+ners. b. the ma!imum amount that can be borro+ed by the enterrise.c. a claim against a ortion of the total assets of an enterrise.d. only the amount of earnings that have been retained in the business.

2'. A rimary source of stocholders9 e$uity isa. income retained by the cororation.

b. aroriated retained earnings.c. contributions by stocholders.d. both income retained by the cororation and contributions by stocholders.

2. #tocholders9 e$uity is generally classified into t+o ma/or categories=a. contributed caital and aroriated caital. b. aroriated caital and retained earnings.c. retained earnings and unaroriated caital.d. earned caital and contributed caital.

2*. he accounting roblem in a lum sum issuance is the allocation of roceeds bet+een the

classes of securities. An accetable method of allocation is thea. ro forma method. b. roortional method.c. incremental method.d. either the roortional method or the incremental method.

3. hen a cororation issues its caital stoc in ayment for services, the least aroriate basis for recording the transaction is thea. maret value of the services received. b. ar value of the shares issued.c. maret value of the shares issued.

d. Any of these rovides an aroriate basis for recording the transaction.

31. ;irect costs incurred to sell stoc such as under+riting costs should be accounted for as

1. a reduction of additional aid-in caital.2. an e!ense of the eriod in +hich the stoc is issued.3. an intangible asset.

a. 1 b. 2c. 3

12 - 106



Intangible Assets

d. 1 or 3

12 - 107



Intangible Assets

32. A Ssecret reserveS +ill be created if a. inade$uate dereciation is charged to income. b. a caital e!enditure is charged to e!ense.c. liabilities are understated.d. stocholders9 e$uity is overstated.

033. hich of the follo+ing reresents the total number of shares that a cororation may issueunder the terms of its chartera. authorized shares b. issued sharesc. unissued sharesd. outstanding shares

#34. #toc that has a fi!ed er-share amount rinted on each stoc certificate is calleda. stated value stoc. b. fi!ed value stoc.

c. uniform value stoc.d. ar value stoc.

#3". hich of the follo+ing is not a legal restriction related to rofit distributions by acororationa. he amount distributed to o+ners must be in comliance +ith the state la+s governing

cororations. b. he amount distributed in any one year can never e!ceed the net income reorted for

that year.c. 0rofit distributions must be formally aroved by the board of directors.d. ;ividends must be in full agreement +ith the caital stoc contracts as to references

and articiation.

#3%. In Banuary 212, 8inley ororation, a ne+ly formed comany, issued 1, shares of itsJ1 ar common stoc for J1" er share. >n Buly 1, 212, 8inley ororation reac$uired1, shares of its outstanding stoc for J12 er share. he ac$uisition of these treasurysharesa. decreased total stocholders9 e$uity. b. increased total stocholders9 e$uity.c. did not change total stocholders9 e$uity.d. decreased the number of issued shares.

0

3'. reasury shares area. shares held as an investment by the treasurer of the cororation. b. shares held as an investment of the cororation.c. issued and outstanding shares.d. issued but not outstanding shares.

3. hen treasury stoc is urchased for more than the ar value of the stoc and the costmethod is used to account for treasury stoc, +hat account(s) should be debited

12 - 108



Intangible Assets

a. reasury stoc for the ar value and aid-in caital in e!cess of ar for the e!cess of the urchase rice over the ar value.

b. 0aid-in caital in e!cess of ar for the urchase rice.c. reasury stoc for the urchase rice.d. reasury stoc for the ar value and retained earnings for the e!cess of the urchase

rice over the ar value.3*. GCainsS on sales of treasury stoc (using the cost method) should be credited to

a. aid-in caital from treasury stoc. b. caital stoc.c. retained earnings.d. other income.

4. 0orter or. urchased its o+n ar value stoc on Banuary 1, 212 for J2, and debitedthe treasury stoc account for the urchase rice. he stoc +as subse$uently sold for J12,. he J, difference bet+een the cost and sales rice should be recorded as adeduction from

a. additional aid-in caital to the e!tent that revious net SgainsS from sales of the sameclass of stoc are included thereinK other+ise, from retained earnings.

b. additional aid-in caital +ithout regard as to +hether or not there have been reviousnet SgainsS from sales of the same class of stoc included therein.

c. retained earnings.d. net income.

41. 5o+ should a SgainS from the sale of treasury stoc be reflected +hen using the costmethod of recording treasury stoc transactionsa. As ordinary earnings sho+n on the income statement. b. As aid-in caital from treasury stoc transactions.

c. As an increase in the amount sho+n for common stoc.d. As an e!traordinary item sho+n on the income statement.

42. hich of the follo+ing best describes a ossible result of treasury stoc transactions by acororationa. Eay increase but not decrease retained earnings. b. Eay increase net income if the cost method is used.c. Eay decrease but not increase retained earnings.d. Eay decrease but not increase net income.

43. hich of the follo+ing features of referred stoc maes the security more lie debt than

an e$uity instrumenta. 0articiating b. Dotingc. edeemabled. @oncumulative

44. he cumulative feature of referred stoc a. limits the amount of cumulative dividends to the ar value of the referred stoc.

12 - 109



Intangible Assets

b. re$uires that dividends not aid in any year must be made u in a later year beforedividends are distributed to common shareholders.

c. means that the shareholder can accumulate referred stoc until it is e$ual to the ar value of common stoc at +hich time it can be converted into common stoc.

d. enables a referred stocholder to accumulate dividends until they e$ual the ar value

of the stoc and receive the stoc in lace of the cash dividends.

04". According to the 8A#, redeemable referred stoc should bea. included +ith common stoc. b. included as a liability.c. e!cluded from the stocholders< e$uity heading.d. included as a contra item in stocholders9 e$uity.

#4%. umulative referred dividends in arrears should be sho+n in a cororation9s balance sheetasa. an increase in current liabilities. b. an increase in stocholders9 e$uity.

c. a footnote.d. an increase in current liabilities for the current ortion and long-term liabilities for the

long-term ortion.

4'. At the date of the financial statements, common stoc shares issued +ould e!ceed commonstoc shares outstanding as a result of thea. declaration of a stoc slit. b. declaration of a stoc dividend.c. urchase of treasury stoc.d. ayment in full of subscribed stoc.

4. An entry is not made on thea. date of declaration. b. date of record.c. date of ayment.d. An entry is made on all of these dates.

4*. ash dividends are aid on the basis of the number of sharesa. authorized. b. issued.c. outstanding.d. outstanding less the number of treasury shares.

". hich of the follo+ing statements about roerty dividends is not truea. A roerty dividend is usually in the form of securities of other comanies. b. A roerty dividend is also called a dividend in ind.c. he accounting for a roerty dividend should be based on the carrying value (boo

value) of the nonmonetary assets transferred.d. All of these statements are true.

12 - 110



Intangible Assets

"1. 5ouser ororation o+ns 4,, shares of stoc in aha ororation. >n ;ecember31, 212, 5ouser distributed these shares of stoc as a dividend to its stocholders. his isan e!amle of aa. roerty dividend. b. stoc dividend.

c. li$uidating dividend.d. cash dividend.

"2. A dividend +hich is a return to stocholders of a ortion of their original investments is aa. li$uidating dividend. b. roerty dividend.c. liability dividend.d. articiating dividend.

12 - 111



Intangible Assets

"3. A mining comany declared a li$uidating dividend. he /ournal entry to record thedeclaration must include a debit toa. etained 6arnings. b. a aid-in caital account.c. Accumulated ;eletion.

d. Accumulated ;ereciation.

"4. If management +ishes to ScaitalizeS art of the earnings, it may issue aa. cash dividend. b. stoc dividend.c. roerty dividend.d. li$uidating dividend.

"". hich dividends do not reduce stocholders9 e$uitya. ash dividends b. #toc dividends

c. 0roerty dividendsd. &i$uidating dividends

"%. he declaration and issuance of a stoc dividend larger than 2"P of the shares reviouslyoutstandinga. increases common stoc outstanding and increases total stocholders9 e$uity. b. decreases retained earnings but does not change total stocholders9 e$uity.c. may increase or decrease aid-in caital in e!cess of ar but does not change total

stocholders9 e$uity.d. increases retained earnings and increases total stocholders9 e$uity.

"'. Muir ororation issued a 1P stoc dividend of its common stoc +hich had a ar value of J1 before and after the dividend. At +hat amount should retained earnings becaitalized for the additional shares issueda. here should be no caitalization of retained earnings. b. 0ar valuec. 8air value on the declaration dated. 8air value on the ayment date

". he issuer of a "P common stoc dividend to common stocholders referably shouldtransfer from retained earnings to contributed caital an amount e$ual to thea. fair value of the shares issued.

b. boo value of the shares issued.c. minimum legal re$uirements.d. ar or stated value of the shares issued.

"*. At the date of declaration of a small common stoc dividend, the entry should not includea. a credit to ommon #toc ;ividend 0ayable. b. a credit to 0aid-in aital in 6!cess of 0ar.c. a debit to etained 6arnings.d. All of these are accetable.

12 - 112



Intangible Assets

%. he balance in ommon #toc ;ividend ;istributable should be reorted as a(n)a. deduction from common stoc issued. b. addition to caital stoc.c. current liability.d. contra current asset.

%1. A feature common to both stoc slits and stoc dividends isa. a transfer to earned caital of a cororation. b. that there is no effect on total stocholders9 e$uity.c. an increase in total liabilities of a cororation.d. a reduction in the contributed caital of a cororation.

%2. hat effect does the issuance of a 2-for-1 stoc slit have on each of the follo+ing

0ar Dalue er #hare etained 6arningsa. @o effect @o effect b. Increase @o effect

c. ;ecrease @o effectd. ;ecrease ;ecrease

%3. hich one of the follo+ing disclosures should be made in the e$uity section of the balancesheet, rather than in the notes to the financial statementsa. ;ividend references b. &i$uidation referencesc. all ricesd. onversion or e!ercise rices

%4. he rate of return on common stoc e$uity is calculated by dividing

a. net income less referred dividends by average common stocholders< e$uity. b. net income by average common stocholders< e$uity.c. net income less referred dividends by ending common stocholders< e$uity.d. net income by ending common stocholders< e$uity.

%". he ayout ratio can be calculated by dividinga. dividends er share by earnings er share. b. cash dividends by net income less referred dividends.c. cash dividends by maret rice er share.d. dividends er share by earnings er share and dividing cash dividends by net income

less referred dividends.

%%. ?ounger omany has outstanding both common stoc and nonarticiating, non-cumulative referred stoc. he li$uidation value of the referred is e$ual to its ar value.he boo value er share of the common stoc is unaffected bya. the declaration of a stoc dividend on referred ayable in referred stoc +hen the

maret rice of the referred is e$ual to its ar value. b. the declaration of a stoc dividend on common stoc ayable in common stoc +hen

the maret rice of the common is e$ual to its ar value.c. the ayment of a reviously declared cash dividend on the common stoc.

12 - 114



Intangible Assets

d. a 2-for-1 slit of the common stoc.

0%'. Assume common stoc is the only class of stoc outstanding in the Eanley ororation.otal stocholders9 e$uity divided by the number of common stoc shares outstanding iscalled

a. boo value er share. b. ar value er share.c. stated value er share.d. fair value er share.

%. ;ividends are not aid ona. noncumulative referred stoc. b. nonarticiating referred stoc.c. treasury common stoc.d. ;ividends are aid on all of these.

%*. @oncumulative referred dividends in arrearsa. are not aid or disclosed. b. must be aid before any other cash dividends can be distributed.c. are disclosed as a liability until aid.d. are aid to referred stocholders if sufficient funds remain after ayment of the

current referred dividend.

'. 5o+ should cumulative referred dividends in arrears be sho+n in a cororation9sstatement of financial ositiona. @ote disclosure b. Increase in stocholders9 e$uity

c. Increase in current liabilitiesd. Increase in current liabilities for the amount e!ected to be declared +ithin the year or

oerating cycle, and increase in long-term liabilities for the balance


12 - 115



Intangible Assets


:se the follo+ing information for $uestions '1 and '2.

0resented belo+ is information related to 5ale ororation=

ommon #toc, J1 ar J4,,0aid-in aital in 6!cess of 0arOommon #toc "",0referred 172P #toc, J" ar 2,,0aid-in aital in 6!cess of 0arO0referred #toc 4,etained 6arnings 1,",reasury ommon #toc (at cost) 1",

'1. he total stocholders9 e$uity of 5ale ororation isa. J*,1,. b. J*,2",.c. J',%,.

d. J','",.

'2. he total aid-in caital (cash collected) related to the common stoc isa. J4,,. b. J",3",.c. J",'",.d. J",2,.

'3. Eanning omany issued 1, shares of its J" ar value common stoc having a fair value of J2" er share and 1", shares of its J1" ar value referred stoc having a fair value of J2 er share for a lum sum of J"2,. 5o+ much of the roceeds +ould be

allocated to the common stoca. J"4,1%' b. J23%,3%4c. J2',33d. J2'%,2"

'4. @orton omany issues 4, shares of its J" ar value common stoc having a fair valueof J2" er share and %, shares of its J1" ar value referred stoc having a fair value of J2 er share for a lum sum of J24,. hat amount of the roceeds should beallocated to the referred stoca. J12,'"

b. J12',"c. J111,2'3d. J*",%2"

'". erry ororation has ", shares of J1 ar common stoc authorized. he follo+ingtransactions too lace during 212, the first year of the cororation<s e!istence=

#old 1, shares of common stoc for J1 er share.Issued 1, shares of common stoc in e!change for a atent valued at J2,.

At the end of the erry<s first year, total aid-in caital amounted to

12 - 116



Intangible Assets

a. J,. b. J1,.c. J2,.d. J3,.

'%. Clavine omany issues %, shares of its J" ar value common stoc having a fair value

of J2" er share and *, shares of its J1" ar value referred stoc having a fair value of J2 er share for a lum sum of J312,. he roceeds allocated to the common stoc isa. J32," b. J141,1c. J1%2,"d. J1',12

''. heeler omany issued ", shares of its J" ar value common stoc having a fair value of J2" er share and '," shares of its J1" ar value referred stoc having a fair value of J2 er share for a lum sum of J2%,. he roceeds allocated to the referredstoc is

a. J232,*1' b. J1%2,"c. J141,1d. J11,12

'. 0ember ororation started business in 2' by issuing 2, shares of J2 ar common stoc for J3% each. In 212, 3, of these shares +ere urchased for J"2 er share by 0ember ororation and held as treasury stoc. >n Bune 1", 213, these 3,shares +ere e!changed for a iece of roerty that had an assessed value of J1,.0erber<s stoc is actively traded and had a maret rice of J% on Bune 1", 213. he costmethod is used to account for treasury stoc. he amount of aid-in caital from treasury

stoc transactions resulting from the above events +ould bea. J1,2,. b. J'2,.c. J"",.d. J24,.

'*. >n #etember 1, 212, Daldez omany reac$uired 1%, shares of its J1 ar valuecommon stoc for J1" er share. Daldez uses the cost method to account for treasury stoc.he /ournal entry to record the reac$uisition of the stoc should debita. reasury #toc for J1%,. b. ommon #toc for J1%,.

c. ommon #toc for J1%, and 0aid-in aital in 6!cess of 0ar for J%,.d. reasury #toc for J24,.

. Cannon omany ac$uired , shares of its o+n common stoc at J2 er share on8ebruary ", 212, and sold 4, of these shares at J2' er share on August *, 213. hefair value of Cannon9s common stoc +as J24 er share at ;ecember 31, 212, and J2" er share at ;ecember 31, 213. he cost method is used to record treasury stoc transactions. hat account(s) should Cannon credit in 213 to record the sale of 4,shares

12 - 117



Intangible Assets

a. reasury #toc for J1,. b. reasury #toc for J, and 0aid-in aital from reasury #toc for J2,.c. reasury #toc for J, and etained 6arnings for J2,.d. reasury #toc for J*%, and etained 6arnings for J12,.

12 - 118



Intangible Assets

1. &ong o. issued 1, shares of J1 ar common stoc for J1,2,. &ong ac$uired1, shares of its o+n common stoc at J1" er share. hree months later &ong sold", of these shares at J1* er share. If the cost method is used to record treasury stoc transactions, to record the sale of the ", treasury shares, &ong should credita. reasury #toc for J*",.

b. reasury #toc for J", and 0aid-in aital from reasury #toc for J4",.c. reasury #toc for J'", and 0aid-in aital from reasury #toc for J2,.d. reasury #toc for J'", and 0aid-in aital in 6!cess of 0ar for J2,.

2. An analysis of stocholders9 e$uity of 5ahn ororation as of Banuary 1, 212, is asfollo+s=

ommon stoc, ar value J2K authorized 1, sharesKissued and outstanding *, shares J1,,

0aid-in caital in e!cess of ar ',etained earnings '%,otal J3,2%,

5ahn uses the cost method of accounting for treasury stoc and during 212 entered intothe follo+ing transactions=

Ac$uired 2," shares of its stoc for J'",.#old 2, treasury shares at J3" er share.#old the remaining treasury shares at J2 er share.

Assuming no other e$uity transactions occurred during 212, +hat should 5ahn reort at;ecember 31, 212, as total additional aid-in caitala. J%*", b. J',c. J'",

d. J'1",

3. 0ercy ororation +as organized on Banuary 1, 212, +ith an authorization of 1,2,shares of common stoc +ith a ar value of J% er share. ;uring 212, the cororation hadthe follo+ing caital transactions=

Banuary " issued *, shares U J1 er shareBuly 2 urchased 12, shares U J11 er share;ecember 31 sold the 12, shares held in treasury U J1 er share

0ercy used the cost method to record the urchase and reissuance of the treasury shares.hat is the total amount of additional aid-in caital as of ;ecember 31, 212

a. J--. b. J2,'%,.c. J3,%,.d. J4,44,.

12 - 119



Intangible Assets

4. #osa o.9s stocholders9 e$uity at Banuary 1, 212 is as follo+s=

ommon stoc, J1 ar valueK authorized 3, sharesK>utstanding 22", shares J2,2",

0aid-in caital in e!cess of ar ',etained earnings 2,1*,

otal J",14,

;uring 212, #osa had the follo+ing stoc transactions=

Ac$uired %, shares of its stoc for J2',.#old 3,% treasury shares at J" a share.#old the remaining treasury shares at J41 er share.

@o other stoc transactions occurred during 212. Assuming #osa uses the cost method torecord treasury stoc transactions, the total amount of all additional aid-in caitalaccounts at ;ecember 31, 212 isa. J%*1,%. b. J%',.

c. J',4.d. J'2',%.

". 0resented belo+ is the stocholders9 e$uity section of >as ororation at ;ecember 31,212=

ommon stoc, ar value J2K authorized '", sharesKissued and outstanding 4", shares J *,

0aid-in caital in e!cess of ar value 2",etained earnings 3,

J1,4",

;uring 213, the follo+ing transactions occurred relating to stocholders9 e$uity=

3, shares +ere reac$uired at J2 er share.3, shares +ere reac$uired at J3" er share.1, shares of treasury stoc +ere sold at J3 er share.

8or the year ended ;ecember 31, 213, >as reorted net income of J4",. Assuming>as accounts for treasury stoc under the cost method, +hat should it reort as totalstocholders9 e$uity on its ;ecember 31, 213, balance sheeta. J1,'%",. b. J1,'%1,4.c. J1,'"',.d. J1,31",.

%. >n ;ecember 1, 212, Abel ororation e!changed 3, shares of its J1 ar valuecommon stoc held in treasury for a used machine. he treasury shares +ere ac$uired byAbel at a cost of J4 er share, and are accounted for under the cost method. >n the dateof the e!change, the common stoc had a fair value of J"" er share (the shares +ereoriginally issued at J3 er share). As a result of this e!change, Abel9s total stocholders9e$uity +ill increase bya. J3,. b. J1,2,.

12 - 120



Intangible Assets

c. J1,%",.d. J1,3",.

12 - 121



Intangible Assets

'. &uther Inc., has 3, shares of %P, J" ar value, cumulative referred stoc and 1,shares of J1 ar value common stoc outstanding at ;ecember 31, 213, and ;ecember 31, 212. he board of directors declared and aid a J'," dividend in 212. In 213,J3%, of dividends are declared and aid. hat are the dividends received by the referred stocholders in 213

a. J2"," b. J1,c. J 1,"d. J *,

. Anders, Inc., has 1, shares of "P, J1 ar value, cumulative referred stoc and4, shares of J1 ar value common stoc outstanding at ;ecember 31, 213. here+ere no dividends declared in 211. he board of directors declares and ays a J*,dividend in 212 and in 213. hat is the amount of dividends received by the commonstocholders in 213a. J3,

b. J",c. J*,d. J

*. olson Inc. declared a J24, cash dividend. It currently has *, shares of 'P, J1 ar value cumulative referred stoc outstanding. It is one year in arrears on its referredstoc. 5o+ much cash +ill olson distribute to the common stocholdersa. J114,. b. J12%,.c. J1'',.d. @one.

*. 0ierson ororation o+ned 1, shares of 5unter ororation. hese shares +ere urchased in 2* for J*,. >n @ovember 1", 213, 0ierson declared a roertydividend of one share of 5unter for every ten shares of 0ierson held by a stocholder. >nthat date, +hen the maret rice of 5unter +as J21 er share, there +ere *, shares of0ierson outstanding. hat gain and net reduction in retained earnings +ould result fromthis roerty dividend

Cain @et eduction inetained 6arnings

a. J J1*, b. J J 1,

c. J1, J 1,d. J1, J 2',

12 - 122



Intangible Assets

*1. #tinson ororation o+ned 3, shares of Eatile ororation. hese shares +ere urchased in 2* for J2',. >n @ovember 1", 213, #tinson declared a roertydividend of one share of Eatile for every ten shares of #tinson held by a stocholder. >nthat date, +hen the maret rice of Eatile +as J21 er share, there +ere 2', shares of#tinson outstanding. hat gain and net reduction in retained earnings +ould result from

this roerty dividendCain @et eduction in

etained 6arningsa. J J243, b. J J"%',c. J324, J1,d. J324, J243,

*2. inger ororation o+ned 3, shares of 8egan ororation stoc. >n ;ecember 31,212, +hen inger9s account S6$uity Investment (8egan ororationS) had a carrying

value of J" er share, inger distributed these shares to its stocholders as a dividend.inger originally aid J for each share. 8egan has 1,, shares issued andoutstanding, +hich are traded on a national stoc e!change. he $uoted maret rice for a8egan share +as J' on the declaration date and J* on the distribution date.

hat +ould be the reduction in inger9s stocholders9 e$uity as a result of the abovetransactionsa. J1,2,. b. J1,",.c. J2,4,.d. J2,',.

*3. Cibbs ororation o+ned 2, shares of >liver ororation<s J" ar value commonstoc. hese shares +ere urchased in 2* for J1,. >n #etember 1", 213, Cibbsdeclared a roerty dividend of one share of >liver for every ten shares of Cibbs held by astocholder. >n that date, +hen the maret rice of >liver +as J21 er share, there +ere1, shares of Cibbs outstanding. hat @6 reduction in retained earnings +ouldresult from this roerty dividenda. J1%2, b. J3',c. J1,d. J21%,

*4. Eelvern<s ororation has an investment in 1, shares of allace omany commonstoc +ith a cost of J43%,. hese shares are used in a roerty dividend to stocholdersof Eelvern<s. he roerty dividend is declared on Eay 2" and scheduled to be distributedon Buly 31 to stocholders of record on Bune 1". he fair value er share of allace stoc is J%3 on Eay 2", J%% on Bune 1", and J% on Buly 31. he net effect of this roertydividend on retained earnings is a reduction of a. J%,. b. J%%,.c. J%3,.

12 - 123



Intangible Assets

d. J43%,.

*". 5ernandez omany has 4*, shares of J1 ar value common stoc outstanding.;uring the year, 5ernandez declared a 1P stoc dividend +hen the maret rice of thestoc +as J3 er share. 8our months later 5ernandez declared a J." er share cash

dividend. As a result of the dividends declared during the year, retained earnings decreased bya. J1,'3*,". b. J'3",.c. J2%*,".d. J24",.

*%. >n Bune 3, 212, +hen 6rmler o.9s stoc +as selling at J%" er share, its caitalaccounts +ere as follo+s=

aital stoc (ar value J"K , shares issued) J4,,0remium on caital stoc %,

etained earnings 4,2,

If a 1P stoc dividend +ere declared and distributed, caital stoc +ould bea. J4,,. b. J4,%,.c. J,,.d. J,,.

*'. he stocholders9 e$uity section of Cunel ororation as of ;ecember 31, 212, +as asfollo+s=

ommon stoc, ar value J2K authorized 2, sharesK

issued and outstanding 1, shares J 2,0aid-in caital in e!cess of ar 3,etained earnings *",

J14",

>n Earch 1, 213, the board of directors declared a 1"P stoc dividend, and accordingly1," additional shares +ere issued. >n Earch 1, 211, the fair value of the stoc +as J% er share. 8or the t+o months ended 8ebruary 2, 213, Cunel sustained a net loss of J1,.

hat amount should Cunel reort as retained earnings as of Earch 1, 213a. J'%,. b. J2,.c. J%,.d. J*2,.

12 - 124



Intangible Assets

*. he stocholders9 e$uity of 5o+ell omany at Buly 31, 212 is resented belo+=

ommon stoc, ar value J2, authorized 4, sharesKissued and outstanding 1%, shares J3,2,

0aid-in caital in e!cess of ar 1%,etained earnings %",

J4,1,

>n August 1, 212, the board of directors of 5o+ell declared a 1P stoc dividend oncommon stoc, to be distributed on #etember 1"th. he maret rice of 5o+ell9s commonstoc +as J3" on August 1, 212, and J3 on #etember 1", 212. hat is the amount of the debit to retained earnings as a result of the declaration and distribution of this stoc dividenda. J32,. b. J"%,.c. J%,.d. J4,.

**. >n Banuary 1, 212, ;odd, Inc., declared a 1"P stoc dividend on its common stoc +henthe fair value of the common stoc +as J2 er share. #tocholders9 e$uity before thestoc dividend +as declared consisted of=

ommon stoc, J1 ar value, authorized 2, sharesKissued and outstanding 12, shares J1,2,

Additional aid-in caital on common stoc 1",etained earnings ',otal stocholders9 e$uity J2,",

hat +as the effect on ;odd<s retained earnings as a result of the above transaction

a. J1, decrease b. J3%, decreasec. J%, decreased. J3, decrease

1. >n Banuary 1, 212, ulver ororation had 11, shares of its J" ar value commonstoc outstanding. >n Bune 1, the cororation ac$uired 1, shares of stoc to be held inthe treasury. >n ;ecember 1, +hen the maret rice of the stoc +as J, the cororationdeclared a 1"P stoc dividend to be issued to stocholders of record on ;ecember 1%,212. hat +as the imact of the 1"P stoc dividend on the balance of the retainedearnings accounta. J'", decrease b. J12, decreasec. J132, decreased. @o effect

12 - 125



Intangible Assets

11. At the beginning of 213, 8laherty omany had retained earnings of J2",. ;uringthe year 8laherty reorted net income of J1,, sold treasury stoc at a GgainH ofJ3%,, declared a cash dividend of J%,, and declared and issued a small stocdividend of 3, shares (J1 ar value) +hen the fair value of the stoc +as J2 ershare. he amount of retained earnings available for dividends at the end of 213 +as

a. J23,. b. J2%,.c. J2%%,.d. J2*%,.

12. Easterson omany has 42, shares of J1 ar value common stoc outstanding.;uring the year Easterson declared a 1P stoc dividend +hen the maret rice of thestoc +as J3% er share. hree months later Easterson declared a J.% er share cashdividend. As a result of the dividends declared during the year, retained earnings decreased bya. J1,'*,2

b. J1,"12,c. J2'',2d. J2%4,

Muestions 13 and 14 are based on the follo+ing information.

&ayne ororation had the follo+ing information in its financial statements for the years ended212 and 213=

ash dividends for the year 213 J , @et income for the year ended 213 3,Earet rice of stoc, 12731712 1

Earet rice of stoc, 12731713 12ommon stocholders< e$uity, 12731712 1,%,ommon stocholders< e$uity, 12731713 1,,>utstanding shares, 12731713 1,0referred dividends for the year ended 213 1",

13. hat is the ayout ratio for &ayne ororation for the year ended 213a. 2'.'P b. 1.1Pc. 11.P

d. *.%P

14. hat is the boo value er share for &ayne ororation for the year ended 213a. J1. b. J*.*2c. J*.44d. J.*

12 - 126



Intangible Assets

1". At the beginning of 213, 5amilton omany had retained earnings of J1,. ;uringthe year 5amilton reorted net income of J'",, sold treasury stoc at a GgainH ofJ2',, declared a cash dividend of J4",, and declared and issued a small stocdividend of 1," shares (J1 ar value) +hen the fair value of the stoc +as J3 ershare. he amount of retained earnings available for dividends at the end of 213 +as=

a. J214,". b. J1*2,.c. J1',".d. J1%",.

1%. Eingenbac omany has "%, shares of J1 ar value common stoc outstanding.;uring the year Eingenbac declared a 1P stoc dividend +hen the maret rice of thestoc +as J4 er share. +o months later Eingenbac declared a J.% er share cashdividend. As a result of the dividends declared during the year, retained earnings decreased by=a. J3"2,.

b. J3%*,%.c. J2,%,.d. J3,"',%.

Muestions 1' and 1 are based on the follo+ing information.

#ealy ororation had the follo+ing information in its financial statements for the years ended212 and 213=

ash dividends for the year 213 J ", @et income for the year ended 213 ',Earet rice of stoc, 12731712 1

Earet rice of stoc, 12731713 12ommon stocholders< e$uity, 12731712 1,,ommon stocholders< e$uity, 12731713 1,2,>utstanding shares, 12731713 1,0referred dividends for the year ended 213 1,

1'. hat is the rate of return on common stoc e$uity for #ealy ororation for the year ended213a. '.1P b. %."Pc. %.2P

d. ".'P

1. hat is the rice-earnings ratio for #ealy ororation for the year ended 213a. 14.' b. 1".4c. 1'.%d. 1*.

12 - 127



Intangible Assets

1*. Eays, Inc. had net income for 212 of J3,1, and earnings er share on commonstoc of J". Included in the net income +as J4", of bond interest e!ense related to itslong-term debt. he income ta! rate for 212 +as 3P. ;ividends on referred stoc +ereJ%,. he ayout ratio on common stoc +as 2"P. hat +ere the dividends oncommon stoc in 212

a. J%4",. b. J'*",.c. J'23,'".d. J*%',".

11. 0resented belo+ is information related to >render, Inc.= ;ecember 31,

213 212ommon stoc J '", J %,4P 0referred stoc 3", 3",etained earnings (includes net income for current year) *, '",

@et income for year 4, 32,hat is >render<s rate of return on common stoc e$uity for 213a. 2%.'P b. 1'.3Pc. 1".Pd. 24.2P

:se the follo+ing information for $uestions 111 and 112.

he follo+ing data are rovided= ;ecember 31,

213 2121P umulative referred stoc, J" ar J1, J1,ommon stoc, J1 ar 1%, *,Additional aid-in caital , %",etained earnings (includes current year net income) 24, 21", @et income ',

Additional information=>n Eay 1, 213, ', shares of common stoc +ere issued. he referred dividends +ere not declared during 213. he maret rice of the common stoc +as J" at ;ecember 31, 213.

111. he rate of return on common stoc e$uity for 213 isa. ' V 42. b. ' V 4.c. % V 42.d. % V 4.

12 - 128



Intangible Assets

112. he boo value er share of common stoc at 12731713 isa. 4' V 1%. b. 24 V 1%.c. 3' V 1%.d. 4 V 1".

:se the follo+ing information for $uestions 113 and 114.

urner ororation had the follo+ing information in its financial statements for the year ended212 and 213=

ash dividends for the year 213 J 1", @et income for the year ended 213 1"",Earet rice of stoc, 12731713 24ommon stocholders< e$uity, 12731712 2,2,ommon stocholders< e$uity, 12731713 2,4,>utstanding shares, 12731713 1%,

0referred dividends for the year ended 213 3,

113. hat is the ayout ratio for urner ororation for the year ended 213a. *.'P b. 12.Pc. 1*.4Pd. 2*.P

114. hat is the boo value er share for urner ororation for the year ended 213a. J14.1 b. J1".

c. J13.'"d. J14.3

:se the follo+ing information for $uestions 11" through 11'.

ritten, Inc. has outstanding ", shares of J2 ar common stoc and 1, shares of no- ar P referred stoc +ith a stated value of J". he referred stoc is cumulative andnonarticiating. ;ividends have been aid in every year e!cet the ast t+o years and the currentyear.

11". Assuming that J2", +ill be distributed as a dividend in the current year, ho+ much

+ill the common stocholders receivea. Qero. b. J13,.c. J1',.d. J21,.

11%. Assuming that J1", +ill be distributed as a dividend in the current year, ho+ much+ill the referred stocholders receivea. J3",.

12 - 129



Intangible Assets

b. J4,.c. J,.d. J1",.

11'. Assuming that J3", +ill be distributed, and the referred stoc is also articiating,

ho+ much +ill the common stocholders receivea. J1",. b. J1",.c. J1"",.d. J,.

11. ?oder, Inc. has 1, shares of J1 ar value common stoc and ", shares of J1 ar value, %P, cumulative, articiating referred stoc outstanding. ;ividends on the referred stoc are one year in arrears. Assuming that ?oder +ishes to distribute J2',as dividends, the common stocholders +ill receivea. J%,.

b. J11,.c. J1%,.d. J21,.

11*. Eann o. has outstanding %, shares of P referred stoc +ith a J1 ar value and1", shares of J3 ar value common stoc. ;ividends have been aid every year e!cetlast year and the current year. If the referred stoc is cumulative and nonarticiating andJ3, is distributed, the common stocholders +ill receivea. J. b. J24,.c. J2"2,.

d. J3,.



12. A cororation +as organized in Banuary 2* +ith authorized caital of J1 ar valuecommon stoc. >n 8ebruary 1, 212, shares +ere issued at ar for cash. >n Earch 1,212, the cororation9s attorney acceted ', shares of common stoc in settlement for

legal services +ith a fair value of J*,. Additional aid-in caital +ould increase on8ebruary 1, 212 Earch 1, 212

a. ?es @o b. ?es ?esc. @o @od. @o ?es

12 - 130



Intangible Assets

121. >n Buly 1, 212, @all o. issued 2," shares of its J1 ar common stoc and ",shares of its J1 ar convertible referred stoc for a lum sum of J14,. At this date @all9s common stoc +as selling for J24 er share and the convertible referred stoc for J1 er share. he amount of the roceeds allocated to @all9s referred stoc should bea. J',.

b. J4,.c. J*,.d. J'',.

122. 5orton o. +as organized on Banuary 2, 212, +ith ", authorized shares of J1 ar value common stoc. ;uring 212, 5orton had the follo+ing caital transactions=

Banuary "Oissued 3'", shares at J14 er share.Buly 2'Ourchased 2", shares at J11 er share. @ovember 2"Osold 2, shares of treasury stoc at J13 er share.

5orton used the cost method to record the urchase of the treasury shares. hat +ould be

the balance in the 0aid-in aital from reasury #toc account at ;ecember 31, 212a. J. b. J2,.c. J4,.d. J%,.

123. In 212, 5obbs or. ac$uired *, shares of its o+n J1 ar value common stoc at J1 er share. In 213, 5obbs issued %, of these shares at J2" er share. 5obbs uses thecost method to account for its treasury stoc transactions. hat accounts and +hatamounts should 5obbs credit in 213 to record the issuance of the %, shares

reasury Additional etained ommon

#toc 0aid-in aital 6arnings #toca. J1, J1", b. J1, J42,c. J144, J%,d. J12, J42, J%,

124. At its date of incororation, #auder, Inc. issued 1, shares of its J1 ar commonstoc at J11 er share. ;uring the current year, #auder ac$uired 2, shares of itscommon stoc at a rice of J1% er share and accounted for them by the cost method.#ubse$uently, these shares +ere reissued at a rice of J12 er share. here have been noother issuances or ac$uisitions of its o+n common stoc. hat effect does the reissuance

of the stoc have on the follo+ing accounts

etained 6arnings Additional 0aid-in aitala. ;ecrease ;ecrease b. @o effect ;ecreasec. ;ecrease @o effectd. @o effect @o effect

12 - 131



Intangible Assets

12". 8armer or. o+ned 2, shares of 6aton or. urchased in 2* for J3,. >n;ecember 1", 212, 8armer declared a roerty dividend of all of its 6aton or. shareson the basis of one share of 6aton for every 1 shares of 8armer common stoc held by itsstocholders. he roerty dividend +as distributed on Banuary 1", 213. >n thedeclaration date, the aggregate maret rice of the 6aton shares held by 8armer +as

J",. he entry to record the declaration of the dividend +ould include a debit toetained 6arnings of a. J. b. J2,.c. J3,.d. J",.

12%. A cororation declared a dividend, a ortion of +hich +as li$uidating. 5o+ +ould thisdistribution affect each of the follo+ing

Additional0aid-in aital etained 6arnings

a. ;ecrease @o effect b. ;ecrease ;ecreasec. @o effect ;ecreased. @o effect @o effect

12'. >n Eay 1, 212, Qie or. declared and issued a 1P common stoc dividend. 0rior tothis dividend, Qie had 1, shares of J1 ar value common stoc issued andoutstanding. he fair value of Qie 9s common stoc +as J2 er share on Eay 1, 212. Asa result of this stoc dividend, Qie9s total stocholders9 e$uitya. increased by J2,. b. decreased by J2,.

c. decreased by J1,.d. did not change.

12. 5o+ +ould the declaration and subse$uent issuance of a 1P stoc dividend by the issuer affect each of the follo+ing +hen the fair value of the shares e!ceeds the ar value of thestoc

Additionalommon #toc 0aid-in aital

a. @o effect @o effect b. @o effect Increasec. Increase @o effect

d. Increase Increase

12 - 132



Intangible Assets

12*. >n ;ecember 31, 212, the stocholders9 e$uity section of Arndt, Inc., +as as follo+s=

ommon stoc, ar value J1K authorized 3, sharesKissued and outstanding *, shares J *,

Additional aid-in caital 11%,etained earnings 1"4,otal stocholders9 e$uity J3%,

>n Earch 31, 213, Arndt declared a 1P stoc dividend, and accordingly * additionalshares +ere issued, +hen the fair value of the stoc +as J1 er share. 8or the threemonths ended Earch 31, 213, Arndt sustained a net loss of J32,. he balance of Arndt<s retained earnings as of Earch 31, 213, should bea. J1",. b. J113,.c. J114,.d. J122,.

13. At ;ecember 31, 212 and 213, 0lan or. had outstanding 3, shares of J1 ar value P cumulative referred stoc and 1", shares of J1 ar value common stoc. At;ecember 31, 212, dividends in arrears on the referred stoc +ere J12,. ashdividends declared in 213 totaled J4",. hat amounts +ere ayable on each class of stoc

0referred #toc ommon #toc a. J24, J21, b. J33, J12,c. J3%, J*,d. J4", J


.FS 95EST.O/S

Tr!e%Fal"e

1. In the :nited #tates, lie many other countries, bans are ma/or creditors as +ell as the largestinvestors.

2. he I8# statement of recognized income and e!enses is identical to the :.#. CAA0statement of retained earnings N beginning balance retained earnings, lus net income, less

dividends, e$uals ending balance retained earnings.

3. hen the statement of recognized income and e!enses is utilized the re$uirement foradditional note disclosure is reduced.

4. :nder I8# comliance re$uirements the :.#. CAA0 formatted income statement need not berelaced +ith the iCAA0 statement of recognized income and e!enses.

12 - 133



Intangible Assets

". :nder I8# comliance re$uirements the revaluation surlus is not considered contributedcaital.


7!lti$le Choice

1. he accounting for treasury stoc retirements under I8#a. is to charge the entire amount to aid-in caital. b. may have the e!cess charged to aid-in caital, deending on the original transaction

related to the issuance of the stoc.c. is to charge the e!cess of the cost of treasury stoc over ar value to retained earnings.d. is to allocate the difference bet+een aid-in caital and retained earnings.

2. he evaluation #urlus of I8# is

a. similar to :.#. CAA0 in that it allo+s both increases and decreases in valuation. b. similar to :.#. CAA0 in that it only allo+s for the decrease in valuation.c. similar to :.#. CAA0 in that it only allo+s for the increase in valuation.d. different than :.#. CAA0 in that it allo+s the increase in valuation.

3. he I8# statement of recognized income and e!ensesa. does not recognize charges to e$uity such as revaluation surlus values. b. is a re$uired reort under I8# reorting re$uirements.c. reorts the items that +ere charged directly to e$uity such as revaluation surlus.d. is similar to the :.#. CAA0 income statement in that it only reorts revenues and e!enses

of the eriod.

12 - 134



Intangible Assets

4. :nder I8# comliance re$uirements the evaluation #urlus isa. only utilized to record the changes in dereciable items N lant and e$uiment. b. considered as revenue +hen utilizing the :.#. CAA0 formatted income statement.c. utilized to record the changes in roerty, lant, and e$uiment.d. reorted as contributed caital.

". he current ro/ect of the IA# and the 8A# related to financial statement resentationindicatesa. that the I8# statement of recognized income and e!enses +ill most liely be adoted by

the 8A# as a :.#. re$uirement in the near future. b. that the I8# statement of recognized income and e!enses +ill robably be eliminated.c. that the :.#. CAA0 standard for reorting comrehensive income +ill most liely be

adoted by the IA# for I8#.d. that hybrid financial instruments are unaccetable.


Short An"wer

1. riefly describe some of the similarities and differences bet+een :.#. CAA0 and I8# +ithresect to the accounting for stocholders< e$uity.

2. riefly discuss the imlications of the financial statement resentation ro/ect for the reortingof stocholders< e$uity.

C8ATE 1-

:.L5T.E SEC5.T.ES A/: EA/./S E S8AE



1. he recording of convertible bonds at the date of issue is the same as the recording of straight debt issues.

2. omanies recognize the gain or loss on retiring convertible debt as an e!traordinary item.

12 - 135



Intangible Assets

3. he 8A# states that +hen an issuer maes an additional ayment to encourageconversion, the ayment should be reorted as an e!ense.

4. he maret value method is used to account for the e!ercise of convertible referred stoc.

". omanies recognize a gain or loss +hen stocholders e!ercise convertible referredstoc.

%. A comany should allocate the roceeds from the sale of debt +ith detachable stoc +arrants bet+een the t+o securities based on their maret values.

'. @ondetachable +arrants, as +ith detachable +arrants, re$uire an allocation of the roceeds bet+een the bonds and the +arrants.

. he intrinsic value of a stoc otion is the difference bet+een the maret rice of the stoc and the e!ercise rice of the otions at the grant date.

*. :nder the fair value method, comanies comute total comensation e!ense based on thefair value of otions on the date of e!ercise.

1. he service eriod in stoc otion lans is the time bet+een the grant date and the vestingdate.

11. If an emloyee fails to e!ercise a stoc otion before its e!iration date, the comanyshould decrease comensation e!ense.

12. If an emloyee forfeits a stoc otion because of failure to satisfy a service re$uirement,

the comany should record aid-in caital from e!ired otions.

13. If referred stoc is cumulative and no dividends are declared, the comany subtracts thecurrent year referred dividend in comuting earnings er share.

14. hen stoc dividends or stoc slits occur, comanies must restate the shares outstand-ingafter the stoc dividend or slit, in order to comute the +eighted-average number of shares.

1". If a stoc dividend occurs after year-end, but before issuing the financial statements, acomany must restate the +eighted-average number of shares outstanding for the year.

1%. 0referred dividends are subtracted from net income but not income before e!traordinaryitems in comuting earnings er share.

1'. hen a comany has a comle! caital structure, it must reort both basic and dilutedearnings er share.

1. In comuting diluted earnings er share, stoc otions are considered dilutive +hen their otion rice is greater than the maret rice.

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Intangible Assets

1*. In a contingent issue agreement, the contingent shares are considered outstanding for comuting diluted 60# +hen the earnings or maret rice level is met by the end of theyear.

2. A comany should reort er share amounts for income before e!traordinary items, but notfor income from continuing oerations.

Tr!e)Fal"e An"wer"6Conce$t!al

75LT.LE C8O.CE6:il!tie Sec!ritie" Conce$t!al

21. onvertible bondsa. have riority over other indebtedness. b. are usually secured by a first or second mortgage.

c. ay interest only in the event earnings are sufficient to cover the interest.d. may be e!changed for e$uity securities.

22. he conversion of bonds is most commonly recorded by thea. incremental method. b. roortional method.c. maret value method.d. boo value method.

23. hen a bond issuer offers some form of additional consideration (a Gs+eetenerH) to induceconversion, the s+eetener is accounted for as a(n)

a. e!traordinary item. b. e!ense.c. loss.d. none of these.

#24. ororations issue convertible debt for t+o main reasons. >ne is the desire to raise e$uitycaital that, assuming conversion, +ill arise +hen the original debt is converted. he other isa. the ease +ith +hich convertible debt is sold even if the comany has a oor credit

rating. b. the fact that e$uity caital has issue costs that convertible debt does not.

c. that many cororations can obtain financing at lo+er rates.d. that convertible bonds +ill al+ays sell at a remium.#2". hen convertible debt is retired by the issuer, any material difference bet+een the cash

ac$uisition rice and the carrying amount of the debt should bea. reflected currently in income, but not as an e!traordinary item. b. reflected currently in income as an e!traordinary item.c. treated as a rior eriod ad/ustment.d. treated as an ad/ustment of additional aid-in caital.

12 - 137



Intangible Assets

#2%. he conversion of referred stoc into common re$uires that any e!cess of the ar value of the common shares issued over the carrying amount of the referred being convertedshould bea. reflected currently in income, but not as an e!traordinary item. b. reflected currently in income as an e!traordinary item.

c. treated as a rior eriod ad/ustment.d. treated as a direct reduction of retained earnings.

2'. he conversion of referred stoc may be recorded by thea. incremental method. b. boo value method.c. maret value method.d. ar value method.

2. hen the cash roceeds from a bond issued +ith detachable stoc +arrants e!ceed the sumof the ar value of the bonds and the fair maret value of the +arrants, the e!cess should

be credited toa. additional aid-in caital from stoc +arrants. b. retained earnings.c. a liability account.d. remium on bonds ayable.

2*. 0roceeds from an issue of debt securities having stoc +arrants should not be allocated bet+een debt and e$uity features +hena. the maret value of the +arrants is not readily available. b. e!ercise of the +arrants +ithin the ne!t fe+ fiscal eriods seems remote.c. the allocation +ould result in a discount on the debt security.

d. the +arrants issued +ith the debt securities are nondetachable.

3. #toc +arrants outstanding should be classified asa. liabilities. b. reductions of caital contributed in e!cess of ar value.c. assets.d. none of these.

031. A cororation issues bonds +ith detachable +arrants. he amount to be recorded as aid-incaital is referablya. zero.

b. calculated by the e!cess of the roceeds over the face amount of the bonds.c. e$ual to the maret value of the +arrants.d. based on the relative maret values of the t+o securities involved.

12 - 138



Intangible Assets

032. he distribution of stoc rights to e!isting common stocholders +ill increase aid-incaital at the

;ate of Issuance ;ate of 6!erciseof the ights of the ights

a. ?es ?es b. ?es @oc. @o ?esd. @o @o

#33. he ma/or difference bet+een convertible debt and stoc +arrants is that uon e!ercise of the +arrantsa. the stoc is held by the comany for a defined eriod of time before they are issued to

the +arrant holder. b. the holder has to ay a certain amount of cash to obtain the shares.c. the stoc involved is restricted and can only be sold by the reciient after a set eriod

of time.

d. no aid-in caital in e!cess of ar can be a art of the transaction.

#34. hich of the follo+ing is not a characteristic of a noncomensatory stoc otion lana. #ubstantially all full-time emloyees may articiate on an e$uitable basis. b. he lan offers no substantive otion feature.c. :nlimited time eriod ermitted for e!ercise of an otion as long as the holder is still

emloyed by the comany.d. ;iscount from the maret rice of the stoc no greater than +ould be reasonable in an

offer of stoc to stocholders or others.

3". he date on +hich to measure the comensation element in a stoc otion granted to a

cororate emloyee ordinarily is the date on +hich the emloyeea. is granted the otion. b. has erformed all conditions recedent to e!ercising the otion.c. may first e!ercise the otion.d. e!ercises the otion.

3%. omensation e!ense resulting from a comensatory stoc otion lan is generallya. recognized in the eriod of e!ercise. b. recognized in the eriod of the grant.c. allocated to the eriods benefited by the emloyee9s re$uired service.d. allocated over the eriods of the emloyee9s service life to retirement.

3'. he date on +hich total comensation e!ense is comuted in a stoc otion lan is the datea. of grant. b. of e!ercise.c. that the maret rice coincides +ith the otion rice.c. that the maret rice e!ceeds the otion rice.

3. hich of the follo+ing is not a characteristic of a noncomensatory stoc urchase lana. It is oen to almost all full-time emloyees.

12 - 139



Intangible Assets

b. he discount from maret rice is small.c. he lan offers no substantive otion feature.d. All of these are characteristics.

3*. :nder the intrinsic value method, comensation e!ense resulting from an incentive stoc

otion is generallya. not recognized because no e!cess of maret rice over the otion rice e!ists at the

date of grant. b. recognized in the eriod of the grant.c. allocated to the eriods benefited by the emloyee9s re$uired service.d. recognized in the eriod of e!ercise.

4. 8or stoc areciation rights, the measurement date for comuting comensation is thedatea. the rights mature. b. the stoc<s rice reaches a redetermined amount.

c. of grant.d. of e!ercise.

41. An e!ecutive ays no ta!es at time of e!ercise in a(an)a. stoc areciation rights lan. b. incentive stoc otion lan.c. non$ualified stoc otion lan.d. a!es +ould be aid in all of these.

42. A comany estimates the fair value of #As, using an otion-ricing model, for a. share-based e$uity a+ards.

b. share-based liability a+ards.c. both e$uity a+ards and liability a+ards.d. neither e$uity a+ards or liability a+ards.

7!lti$le Choice An"wer"6:il!tie Sec!ritie" Conce$t!al

#olutions to those Eultile hoice $uestions for +hich the ans+er is Gnone of these.H

3. additions to contributed caital.

75LT.LE C8O.CE6:il!tie Sec!ritie" Com$!tational

43. 8ogel o. has J",, of P convertible bonds outstanding. 6ach J1, bond isconvertible into 3 shares of J3 ar value common stoc. he bonds ay interest onBanuary 31 and Buly 31. >n Buly 31, 212, the holders of J1,%, bonds e!ercised theconversion rivilege. >n that date the maret rice of the bonds +as 1" and the maret rice of the common stoc +as J3%. he total unamortized bond remium at the date of conversion +as J3",. 8ogel should record, as a result of this conversion, aa. credit of J2'2, to 0aid-in aital in 6!cess of 0ar. b. credit of J24, to 0aid-in aital in 6!cess of 0ar.c. credit of J112, to 0remium on onds 0ayable.

12 - 140



Intangible Assets

d. loss of J1%,.44. >n Buly 1, 212, an interest ayment date, J, of 0ars o. bonds +ere converted into

1,% shares of 0ars o. common stoc each having a ar value of J4" and a maretvalue of J"4. here is J3,2 unamortized discount on the bonds. :sing the boo valuemethod, 0ars +ould record

a. no change in aid-in caital in e!cess of ar. b. a J4, increase in aid-in caital in e!cess of ar.c. a J*,% increase in aid-in caital in e!cess of ar.d. a J%,4 increase in aid-in caital in e!cess of ar.

4". Eorgan ororation had t+o issues of securities outstanding= common stoc and an Pconvertible bond issue in the face amount of J2,,. Interest ayment dates of the bond issue are Bune 3th and ;ecember 31st. he conversion clause in the bond indentureentitles the bondholders to receive forty shares of J2 ar value common stoc in e!changefor each J1, bond. >n Bune 3, 212, the holders of J3,, face value bondse!ercised the conversion rivilege. he maret rice of the bonds on that date +as J1,1

er bond and the maret rice of the common stoc +as J3". he total unamortized bonddiscount at the date of conversion +as J1,2",. In alying the boo value method,+hat amount should Eorgan credit to the account Said-in caital in e!cess of ar,S as aresult of this conversiona. J412,". b. J2,.c. J1,,.d. J*,.

:se the follo+ing information for $uestions 4% through 4.

hang ororation issued J%,, of *P, ten-year convertible bonds on Buly 1, 212 at *%.1 lus accrued interest. he bonds +ere dated Aril 1, 21 +ith interest ayable Aril 1 and>ctober 1. ond discount is amortized semiannually on a straight-line basis. >n Aril 1, 213,J1,2, of these bonds +ere converted into " shares of J2 ar value common stoc.Accrued interest +as aid in cash at the time of conversion.

4%. If Sinterest ayableS +ere credited +hen the bonds +ere issued, +hat should be the amountof the debit to Sinterest e!enseS on >ctober 1, 212a. J12*,. b. J13",2.c. J141,.

d. J2',.

4'. hat should be the amount of the unamortized bond discount on Aril 1, 213 relating tothe bonds converteda. J4%,. b. J43,2.c. J23,4.d. J44,4.

12 - 141



Intangible Assets

4. hat +as the effective interest rate on the bonds +hen they +ere issueda. *P b. Above *Pc. elo+ *Pd. annot determine from the information given.

4*. &ite ororation issued at a remium of J", a J1, bond issue convertible into2, shares of common stoc (ar value J2"). At the time of the conversion, theunamortized remium is J2,, the maret value of the bonds is J11,, and the stoc is $uoted on the maret at J% er share. If the bonds are converted into common, +hat isthe amount of aid-in caital in e!cess of ar to be recorded on the conversion of the bondsa. J"", b. J"2,c. J%2,d. J',

". In 212, 6lund, Inc., issued for J13 er share, , shares of J1 ar valueconvertible referred stoc. >ne share of referred stoc can be converted into three sharesof 6lund9s J2" ar value common stoc at the otion of the referred stocholder. InAugust 213, all of the referred stoc +as converted into common stoc. he maretvalue of the common stoc at the date of the conversion +as J3 er share. hat totalamount should be credited to additional aid-in caital from common stoc as a result of the conversion of the referred stoc into common stoca. J1,3%,. b. J1,4,.c. J2,,.

d. J2,24,.

"1. >n ;ecember 1, 212, &ester omany issued at 13, four hundred of its *P, J1, bonds. Attached to each bond +as one detachable stoc +arrant entitling the holder to urchase 1 shares of &ester9s common stoc. >n ;ecember 1, 212, the maret value of the bonds, +ithout the stoc +arrants, +as *", and the maret value of each stoc urchase+arrant +as J". he amount of the roceeds from the issuance that should be accountedfor as the initial carrying value of the bonds ayable +ould bea. J3',2. b. J3*1,4.c. J4,.

d. J412,.

"2. >n Earch 1, 212, uiz ororation issued J1,, of P nonconvertible bonds at14, +hich are due on 8ebruary 2, 232. In addition, each J1, bond +as issued +ith2" detachable stoc +arrants, each of +hich entitled the bondholder to urchase for J"one share of uiz common stoc, ar value J2". he bonds +ithout the +arrants +ouldnormally sell at *". >n Earch 1, 212, the fair value of uiz<s common stoc +as J4 er share and the fair value of the +arrants +as J2.. hat amount should uiz record onEarch 1, 21 as aid-in caital from stoc +arrants

12 - 142



Intangible Assets

a. J3%, b. J42,%c. J"2,%d. J",

12 - 143



Intangible Assets

"3. ;uring 212, Cordon omany issued at 14 five hundred, J1, bonds due in ten years.>ne detachable stoc +arrant entitling the holder to urchase 1" shares of Cordon<scommon stoc +as attached to each bond. At the date of issuance, the maret value of the bonds, +ithout the stoc +arrants, +as $uoted at *%. he maret value of each detachable+arrant +as $uoted at J4. hat amount, if any, of the roceeds from the issuance should

be accounted for as art of Cordon<s stocholders9 e$uitya. J b. J2,c. J2,d. J1*,'%

"4. >n Aril ', 212, Legin ororation sold a J3,,, t+enty-year, ercent bond issuefor J3,1,. 6ach J1, bond has t+o detachable +arrants, each of +hich ermits the urchase of one share of the cororation9s common stoc for J3. he stoc has a ar valueof J2" er share. Immediately after the sale of the bonds, the cororation9s securities hadthe follo+ing maret values=

P bond +ithout +arrants J1,arrants 21ommon stoc 2

hat accounts should Legin credit to record the sale of the bondsa. onds 0ayable J3,,

0remium on onds 0ayable 11%,40aid-in aitalO#toc arrants %3,%

b. onds 0ayable J3,,0remium on onds 0ayable 24,0aid-in aitalO#toc arrants 12%,

c. onds 0ayable J3,,0remium on onds 0ayable "2,0aid-in aitalO#toc arrants 12',2

d. onds 0ayable J3,,0remiums on onds 0ayable 1,

:se the follo+ing information for $uestions "" and "%.

>n Eay 1, 212, 0ayne o. issued J", of 'P bonds at 13, +hich are due on Aril 3,222. +enty detachable stoc +arrants entitling the holder to urchase for J4 one share of 0ayne<s common stoc, J1" ar value, +ere attached to each J1, bond. he bonds +ithout the

+arrants +ould sell at *%. >n Eay 1, 212, the fair value of 0ayne<s common stoc +as J3" er share and of the +arrants +as J2.

"". >n Eay 1, 212, 0ayne should credit 0aid-in aital from #toc arrants for a. J1*,2. b. J2,.c. J2,%.d. J3",.

12 - 144



Intangible Assets

"%. >n Eay 1, 212, 0ayne should record the bonds +ith aa. discount of J2,. b. discount of J",%.c. discount of J",.d. remium of J1",.

12 - 145



Intangible Assets

"'. >n Buly 4, 212, hen omany issued for J%,3, a total of %, shares of J1 ar value, 'P noncumulative referred stoc along +ith one detachable +arrant for each shareissued. 6ach +arrant contains a right to urchase one share of hen J1 ar value commonstoc for J1" er share. he stoc +ithout the +arrants +ould normally sell for J%,1",. he maret rice of the rights on Buly 1, 212, +as J2." er right. >n

>ctober 31, 212, +hen the maret rice of the common stoc +as J1* er share and themaret value of the rights +as J3. er right, 24, rights +ere e!ercised. As a result of the e!ercise of the 24, rights and the issuance of the related common stoc, +hat /ournal entry +ould hen maea. ash........................................................................................ 3%,

ommon #toc .......................................................... 24,0aid-in aital in 6!cess of 0ar ................................ 12,

b. ash........................................................................................ 3%,0aid-in aitalO#toc arrants .......................................... %,


c. ash........................................................................................ 3%,0aid-in aitalO#toc arrants .......................................... 1",

ommon #toc .......................................................... 24,0aid-in aital in 6!cess of 0ar ................................ 2',

d. ash........................................................................................ 3%,0aid-in aitalO#toc arrants .......................................... *,


". Dernon ororation offered detachable "-year +arrants to buy one share of common stoc (ar value J") at J2 (at a time +hen the stoc +as selling for J32). he rice aid for

4,, J1, bonds +ith the +arrants attached +as J41,. he maret rice of theDernon bonds +ithout the +arrants +as J3%,, and the maret rice of the +arrants+ithout the bonds +as J4,. hat amount should be allocated to the +arrantsa. J4, b. J41,c. J4,d. J",

:se the follo+ing information for $uestions "* and %.

>n Eay 1, 212, Early o. issued J1,, of 'P bonds at 13, +hich are due on Aril 3,

222. +enty detachable stoc +arrants entitling the holder to urchase for J4 one share ofEarly<s common stoc, J1" ar value, +ere attached to each J1, bond. he bonds +ithout the+arrants +ould sell at *%. >n Eay 1, 212, the fair value of Early<s common stoc +as J3" ershare and of the +arrants +as J2.

"*. >n Eay 1, 212, Early should record the bonds +ith aa. discount of J4,. b. discount of J1,.c. discount of J11,2.

12 - 146



Intangible Assets

d. remium of J3,.

12 - 147



Intangible Assets

%. >n Eay 1, 212, Early should credit 0aid-in aital from #toc arrants for a. J', b. J41,2c. J4,d. J3,4

%1. >n Buly 1, 212, 6llison omany granted #am ine, an emloyee, an otion to buy %shares of 6llison o. stoc for J3 er share, the otion e!ercisable for " years from dateof grant. :sing a fair value otion ricing model, total comensation e!ense isdetermined to be J2,'. ine e!ercised his otion on >ctober 1, 212 and sold his %shares on ;ecember 1, 212. Muoted maret rices of 6llison o. stoc in 212 +ere=

Buly 1 J3 er share>ctober 1 J3% er share;ecember 1 J4 er share

he service eriod is for three years beginning Banuary 1, 212. As a result of the otiongranted to ine, using the fair value method, 6llison should recognize comensation

e!ense on its boos in the amount of a. J2,'. b. J*.c. J%'".d. J.

%2. >n Banuary 1, 212, rent omany granted ;ic illiams, an emloyee, an otion to buy3 shares of rent o. stoc for J3 er share, the otion e!ercisable for " years fromdate of grant. :sing a fair value otion ricing model, total comensation e!ense isdetermined to be J2,'. illiams e!ercised his otion on #etember 1, 212, and sold his3 shares on ;ecember 1, 212. Muoted maret rices of rent o. stoc during 212

+ere=Banuary 1 J3 er share#etember 1 J3% er share;ecember 1 J4 er share

he service eriod is for t+o years beginning Banuary 1,212. As a result of the otiongranted to illiams, using the fair value method, rent should recognize comensatione!ense for 212 on its boos in the amount of a. J3,. b. J2,'.c. J1,3".

d. J.

%3. >n ;ecember 31, 212, Conzalez omany granted some of its e!ecutives otions to urchase 12, shares of the comany<s J1 ar common stoc at an otion rice of J" er share. he lac-#choles otion ricing model determines total comensation e!enseto be J*,. he otions become e!ercisable on Banuary 1, 213, and reresentcomensation for e!ecutives< services over a three-year eriod beginning Banuary 1, 213.At ;ecember 31, 213 none of the e!ecutives had e!ercised their otions. hat is the

12 - 148



Intangible Assets

imact on Conzalez<s net income for the year ended ;ecember 31, 213 as a result of thistransaction under the fair value methoda. J3, increase. b. J*, decrease.c. J3, decrease.

d. J.%4. >n Banuary 1, 213 eese omany granted Bac uchanan, an emloyee, an otion to

buy 2 shares of eese o. stoc for J4 er share, the otion e!ercisable for " yearsfrom date of grant. :sing a fair value otion ricing model, total comensation e!ense isdetermined to be J2,4. uchanan e!ercised his otion on #etember 1, 213, and soldhis 1 shares on ;ecember 1, 213. Muoted maret rices of eese o. stoc during 213+ere=

Banuary 1 J4 er share#etember 1 J4 er share;ecember 1 J"4 er share

he service eriod is for t+o years beginning Banuary 1, 213. As a result of the otion

granted to uchanan, using the fair value method, eese should recognize comensatione!ense for 213 on its boos in the amount of a. J. b. J1,2.c. J2,4d. J2,

%". >n Bune 3, 212, ?ang ororation granted comensatory stoc otions for 3, sharesof its J24 ar value common stoc to certain of its ey emloyees. he maret rice of thecommon stoc on that date +as J31 er share and the otion rice +as J2. :sing a fairvalue otion ricing model, total comensation e!ense is determined to be J*%,. he

otions are e!ercisable beginning Banuary 1, 214, roviding those ey emloyees are stillin the emloy of the comany at the time the otions are e!ercised. he otions e!ire onBune 3, 21".

>n Banuary 4, 214, +hen the maret rice of the stoc +as J3% er share, all otions forthe 3, shares +ere e!ercised. he service eriod is for t+o years beginning Banuary 1,212. :sing the fair value method, +hat should be the amount of comensation e!enserecorded by ?ang ororation for these otions on ;ecember 31, 212a. J*%, b. J4,c. J22,"d. J

%%. In order to retain certain ey e!ecutives, #miley ororation granted them incentive stocotions on ;ecember 31, 211. 1, otions +ere granted at an otion rice of J3" er share. Earet rices of the stoc +ere as follo+s=

;ecember 31, 212 J4% er share;ecember 31, 213 "1 er share

he otions +ere granted as comensation for e!ecutives< services to be rendered over at+o-year eriod beginning Banuary 1, 212. he lac-#choles otion ricing model

12 - 149



Intangible Assets

determines total comensation e!ense to be J1,,. hat amount of comensatione!ense should #miley recognize as a result of this lan for the year ended ;ecember 31,212 under the fair value methoda. J1,'",. b. J1,1,.

c. J1,,.d. J",.

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Intangible Assets

%'. >n Banuary 1, 213, itter omany granted stoc otions to officers and ey emloyeesfor the urchase of 2, shares of the comany9s J1 ar common stoc at J2 er shareas additional comensation for services to be rendered over the ne!t three years. heotions are e!ercisable during a five-year eriod beginning Banuary 1, 21% by granteesstill emloyed by itter. he lac-#choles otion ricing model determines total

comensation e!ense to be J1,. he maret rice of common stoc +as J2% er share at the date of grant. he /ournal entry to record the comensation e!ense related tothese otions for 213 +ould include a credit to the 0aid-in aitalO#toc >tionsaccount for a. J. b. J3%,.c. J4,.d. J%,.

%. >n Banuary 1, 213, 6vans omany granted im elfer, an emloyee, an otion to buy2, shares of 6vans o. stoc for J2" er share, the otion e!ercisable for " years from

date of grant. :sing a fair value otion ricing model, total comensation e!ense isdetermined to be J1",. elfer e!ercised his otion on #etember 1, 213, and sold his1, shares on ;ecember 1, 213. Muoted maret rices of 6vans o. stoc during 213+ere

Banuary 1 J2" er share#etember 1 J3 er share;ecember 1 J34 er share

he service eriod is for three years beginning Banuary 1, 213. As a result of the otiongranted to elfer, using the fair value method, 6vans should recognize comensatione!ense for 213 on its boos in the amount of a. J1,.

b. J1",.c. J",.d. J3,.

%*. >n ;ecember 31, 212, Lessler omany granted some of its e!ecutives otions to urchase '", shares of the comany9s J1 ar common stoc at an otion rice of J" er share. he otions become e!ercisable on Banuary 1, 213, and reresent comensationfor e!ecutives9 services over a three-year eriod beginning Banuary 1, 213. he lac-#choles otion ricing model determines total comensation e!ense to be J4",. At;ecember 31, 213, none of the e!ecutives had e!ercised their otions. hat is the imacton Lessler9s net income for the year ended ;ecember 31, 213 as a result of this

transaction under the fair value methoda. J1", increase b. Jc. J1", decreased. J4", decrease

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Intangible Assets

'. eiser or. on Banuary 1, 2*, granted stoc otions for 4, shares of its J1 ar valuecommon stoc to its ey emloyees. he maret rice of the common stoc on that date +asJ23 er share and the otion rice +as J2. he lac-#choles otion ricing modeldetermines total comensation e!ense to be J3%,. he otions are e!ercisable beginning Banuary 1, 212, rovided those ey emloyees are still in eiser<s emloy at the

time the otions are e!ercised. he otions e!ire on Banuary 1, 213.

>n Banuary 1, 212, +hen the maret rice of the stoc +as J2* er share, all 4,otions +ere e!ercised. he amount of comensation e!ense eiser should record for 2* under the fair value method isa. J. b. J%,.c. J12,.d. J1,.

'1. >n ;ecember 31, 212, 5ouser omany granted some of its e!ecutives otions to urchase'", shares of the comany9s J" ar common stoc at an otion rice of J% er share.

he lac-#choles otion ricing model determines total comensation e!ense to beJ1,",. he otions become e!ercisable on Banuary 1, 213, and reresentcomensation for e!ecutives9 ast and future services over a three-year eriod beginningBanuary 1, 213. hat is the imact on 5ouser9s total stocholders9 e$uity for the year ended;ecember 31, 212, as a result of this transaction under the fair value methoda. J1,", decrease b. J", decreasec. Jd. J", increase

'2. >n Bune 3, 212, @orman ororation granted comensatory stoc otions for 4,

shares of its J2 ar value common stoc to certain of its ey emloyees. he maret riceof the common stoc on that date +as J3% er share and the otion rice +as J3. helac-#choles otion ricing model determines total comensation e!ense to beJ4,. he otions are e!ercisable beginning Banuary 1, 213, rovided those eyemloyees are still in @orman<s emloy at the time the otions are e!ercised. he otionse!ire on Bune 3, 214.

>n Banuary 4, 213, +hen the maret rice of the stoc +as J42 er share, all 4,otions +ere e!ercised. hat should be the amount of comensation e!ense recorded by @orman ororation for the calendar year 212 using the fair value methoda. J.

b. J1*2,.c. J24,.d. J4,.

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Intangible Assets

'3. In order to retain certain ey e!ecutives, Bensen ororation granted them incentive stoc otions on ;ecember 31, 211. ', otions +ere granted at an otion rice of J3" er share. Earet rices of the stoc +ere as follo+s=

;ecember 31, 212 J4% er share;ecember 31, 213 "1 er share

he otions +ere granted as comensation for e!ecutives9 services to be rendered over at+o-year eriod beginning Banuary 1, 212. he lac-#choles otion ricing modeldetermines total comensation e!ense to be J',. hat amount of comensatione!ense should Bensen recognize as a result of this lan for the year ended;ecember 31, 212 under the fair value methoda. J3",. b. J',.c. J"",.d. J1,'",.

'4. Crant, Inc. had ", shares of treasury stoc (J1 ar value) at ;ecember 31, 212,+hich it ac$uired at J11 er share. >n Bune 4, 213, Crant issued 2", treasury shares toemloyees +ho e!ercised otions under Crant9s emloyee stoc otion lan. he maretvalue er share +as J13 at ;ecember 31, 212, J1" at Bune 4, 213, and J1 at ;ecember 31, 213. he stoc otions had been granted for J12 er share. he cost method is used.hat is the balance of the treasury stoc on Crant9s balance sheet at ;ecember 31, 213a. J1'",. b. J22",.c. J2'",.d. J3,.

:se the follo+ing information for $uestions '" through ''.

>n Banuary 1, 212, Lorsa, Inc. established a stoc areciation rights lan for its e!ecutives. Itentitled them to receive cash at any time during the ne!t four years for the difference bet+een themaret rice of its common stoc and a re-established rice of J2 on , #As. urrentmaret rices of the stoc are as follo+s=

Banuary 1, 212 J3" er share;ecember 31, 212 3 er share;ecember 31, 213 3 er share;ecember 31, 214 33 er share

omensation e!ense relating to the lan is to be recorded over a four-year eriod beginningBanuary 1, 212.

'". hat amount of comensation e!ense should Lorsa recognize for the year ended;ecember 31, 212a. J24, b. J3%,c. J3,d. J1,44,

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Intangible Assets

'%. hat amount of comensation e!ense should Lorsa recognize for the year ended;ecember 31, 213a. J b. J4,c. J4,

d. J2,

''. >n ;ecember 31, 214, 1%, #As are e!ercised by e!ecutives. hat amount of comensation e!ense should Lorsa recognize for the year ended ;ecember 31, 214a. J3, b. J2%,c. J',d. J14,

7!lti$le Choice An"wer"6:il!tie Sec!ritie" Com$!tational

75LT.LE C8O.CE6:il!tie Sec!ritie" CA A(a$te(

'. >n Banuary 2, 212, 8arr o. issued 1-year convertible bonds at 1". ;uring 212, these bonds +ere converted into common stoc having an aggregate ar value e$ual to the totalface amount of the bonds. At conversion, the maret rice of 8arr<s common stoc +as " ercent above its ar value. >n Banuary 2, 212, cash roceeds from the issuance of theconvertible bonds should be reorted asa. aid-in caital for the entire roceeds.

b. aid-in caital for the ortion of the roceeds attributable to the conversion feature andas a liability for the balance.

c. a liability for the face amount of the bonds and aid-in caital for the remium over theface amount.

d. a liability for the entire roceeds.

'*. &ang o. issued bonds +ith detachable common stoc +arrants. >nly the +arrants had ano+n maret value. he sum of the fair value of the +arrants and the face amount of the bonds e!ceeds the cash roceeds. his e!cess is reorted asa. ;iscount on onds 0ayable. b. 0remium on onds 0ayable.

c. ommon #toc #ubscribed.d. 0aid-in aital in 6!cess of 0arO#toc arrants.

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Intangible Assets

. >n Banuary 1, 212, #har or. granted an emloyee an otion to urchase *, sharesof #har9s J" ar value common stoc at J2 er share. he lac-#choles otion ricingmodel determines total comensation e!ense to be J21,. he otion becamee!ercisable on ;ecember 31, 213, after the emloyee comleted t+o years of service. hemaret rices of #har9s stoc +ere as follo+s=

Banuary 1, 212 J3;ecember 31, 213 "

8or 211, should recognize comensation e!ense under the fair value method of a. J13",. b. J4",.c. J1",.d. J.

1. >n Banuary 2, 212, for ast services, osen or. granted @enn 0ine, its resident,2, stoc areciation rights that are e!ercisable immediately and e!ire on

Banuary 2, 213. >n e!ercise, @enn is entitled to receive cash for the e!cess of the maret rice of the stoc on the e!ercise date over the maret rice on the grant date. @enn did note!ercise any of the rights during 212. he maret rice of osen9s stoc +as J3 onBanuary 2, 212, and J4" on ;ecember 31, 212. As a result of the stoc areciationrights, osen should recognize comensation e!ense for 212 of a. J. b. J12,.c. J3,.d. J%,.

7!lti$le Choice An"wer"6:il!tie Sec!ritie" CA A(a$te(

75LT.LE C8O.CE6Earnin," er Share6Conce$t!al

2. ith resect to the comutation of earnings er share, +hich of the follo+ing +ould bemost indicative of a simle caital structurea. ommon stoc, referred stoc, and convertible securities outstanding in lots of even

thousands b. 6arnings derived from one rimary line of businessc. >+nershi interest consisting solely of common stoc

d. @one of these

3. In comuting earnings er share for a simle caital structure, if the referred stoc iscumulative, the amount that should be deducted as an ad/ustment to the numerator (earnings) is thea. referred dividends in arrears. b. referred dividends in arrears times (one minus the income ta! rate).c. annual referred dividend times (one minus the income ta! rate).d. none of these.

12 - 156



Intangible Assets

4. In comutations of +eighted average of shares outstanding, +hen a stoc dividend or stoc slit occurs, the additional shares area. +eighted by the number of days outstanding. b. +eighted by the number of months outstanding.

c. considered outstanding at the beginning of the year.d. considered outstanding at the beginning of the earliest year reorted.

". hat effect +ill the ac$uisition of treasury stoc have on stocholders9 e$uity and earnings er share, resectivelya. ;ecrease and no effect b. Increase and no effectc. ;ecrease and increased. Increase and decrease

#%. ;ue to the imortance of earnings er share information, it is re$uired to be reorted by all

0ublic omanies @onublic omaniesa. ?es ?es b. ?es @oc. @o @od. @o ?es

0'. A convertible bond issue should be included in the diluted earnings er share comutationas if the bonds had been converted into common stoc, if the effect of its inclusion is

;ilutive Antidilutivea. ?es ?es b. ?es @o

c. @o ?esd. @o @o

. hen comuting diluted earnings er share, convertible bonds area. ignored. b. assumed converted +hether they are dilutive or antidilutive.c. assumed converted only if they are antidilutive.d. assumed converted only if they are dilutive.

*. ;ilutive convertible securities must be used in the comutation of a. basic earnings er share only.

b. diluted earnings er share only.c. diluted and basic earnings er share.d. none of these.

*. In comuting earnings er share, the e$uivalent number of shares of convertible referredstoc are added as an ad/ustment to the denominator (number of shares outstanding). If the referred stoc is cumulative, +hich amount should then be added as an ad/ustment to thenumerator (net earnings)a. Annual referred dividend

12 - 157



Intangible Assets

b. Annual referred dividend times (one minus the income ta! rate)c. Annual referred dividend times the income ta! rated. Annual referred dividend divided by the income ta! rate

*1. In the diluted earnings er share comutation, the treasury stoc method is used for otions

and +arrants to reflect assumed reac$uisition of common stoc at the average maret riceduring the eriod. If the e!ercise rice of the otions or +arrants e!ceeds the averagemaret rice, the comutation +oulda. fairly resent diluted earnings er share on a rosective basis. b. fairly resent the ma!imum otential dilution of diluted earnings er share on a

rosective basis.c. reflect the e!cess of the number of shares assumed issued over the number of shares

assumed reac$uired as the otential dilution of earnings er share.d. be antidilutive.

*2. In alying the treasury stoc method to determine the dilutive effect of stoc otions and

+arrants, the roceeds assumed to be received uon e!ercise of the otions and +arrantsa. are used to calculate the number of common shares reurchased at the average maret

rice, +hen comuting diluted earnings er share. b. are added, net of ta!, to the numerator of the calculation for diluted earnings er share.c. are disregarded in the comutation of earnings er share if the e!ercise rice of the

otions and +arrants is less than the ending maret rice of common stoc.d. none of these.

*3. hen alying the treasury stoc method for diluted earnings er share, the maret riceof the common stoc used for the reurchase is thea. rice at the end of the year.

b. average maret rice.c. rice at the beginning of the year.d. none of these.

*4. Antidilutive securitiesa. should be included in the comutation of diluted earnings er share but not basic

earnings er share. b. are those +hose inclusion in earnings er share comutations +ould cause basic

earnings er share to e!ceed diluted earnings er share.c. include stoc otions and +arrants +hose e!ercise rice is less than the average maret

rice of common stoc.

d. should be ignored in all earnings er share calculations.

*". Assume there are t+o dilutive convertible securities. he one that should be used first torecalculate earnings er share is the security +ith thea. greater earnings ad/ustment. b. greater earnings er share ad/ustment.c. smaller earnings ad/ustment.d. smaller earnings er share ad/ustment.

12 - 158



Intangible Assets

75LT.LE C8O.CE6Earnin," er Share6Com$!tational

*%. 5ill or. had %, shares of common stoc outstanding on Banuary 1, issued *,shares on Buly 1, and had income alicable to common stoc of J1,%, for the year ending ;ecember 31, 212. 6arnings er share of common stoc for 212 +ould be

a. J2.. b. J1.33.c. J1.%.d. J1.'.

*'. At ;ecember 31, 212, 5ancoc omany had ", shares of common stoc issuedand outstanding, 4, of +hich had been issued and outstanding throughout the year and 1, of +hich +ere issued on >ctober 1, 212. @et income for the year ended;ecember 31, 212, +as J1,"3,. hat should be 5ancoc9s 212 earnings er common share, rounded to the nearest ennya. J3.3

b. J3.2c. J3.%d. J3.4

*. Eilo o. had , shares of common stoc outstanding on Banuary 1, issued 12%,shares on Eay 1, urchased %3, shares of treasury stoc on #etember 1, and issued"4, shares on @ovember 1. he +eighted average shares outstanding for the year isa. "1,. b. '2,.c. *3,.d. *14,.

**. >n Banuary 1, 213, Cridley ororation had 1'," shares of its J2 ar value commonstoc outstanding. >n Earch 1, Cridley sold an additional 3'", shares on the oenmaret at J2 er share. Cridley issued a 2P stoc dividend on Eay 1. >n August 1,Cridley urchased 21, shares and immediately retired the stoc. >n @ovember 1,3, shares +ere sold for J2" er share. hat is the +eighted-average number of shares outstanding for 213a. '%", b. "%2,"c. 3",333d. 2",333

1. he follo+ing information is available for arone ororation=

Banuary 1, 213 #hares outstanding 1,",Aril 1, 213 #hares issued 24,Buly 1, 213 reasury shares urchased *,>ctober 1, 213 #hares issued in a 1P stoc dividend 1,%",

he number of shares to be used in comuting earnings er common share for 213 isa. 3,3*,%.

12 - 159



Intangible Assets

b. 3,2",.c. 3,2',.d. 2,4',".

11. At ;ecember 31, 212 ice omany had 3, shares of common stoc and 1,

shares of %P, J1 ar value cumulative referred stoc outstanding. @o dividends +eredeclared on either the referred or common stoc in 212 or 213. >n Banuary 3, 214, rior to the issuance of its financial statements for the year ended ;ecember 31, 213, icedeclared a 1P stoc dividend on its common stoc. @et income for 213 +asJ1,14,. In its 213 financial statements, ice9s 213 earnings er common shareshould bea. J1.. b. J1.*.c. J3.%.d. J3..

12. 8ultz omany had 3, shares of common stoc issued and outstanding at ;ecember 31, 212. ;uring 213, no additional common stoc +as issued. >n Banuary 1, 213, 8ultzissued 4, shares of nonconvertible referred stoc. ;uring 213, 8ultz declared and aid J21, cash dividends on the common stoc and J1'", on the nonconvertible referred stoc. @et income for the year ended ;ecember 31, 213, +as J1,12,. hatshould be 8ultz9s 213 earnings er common share, rounded to the nearest ennya. J1.3" b. J2.4"c. J3.1"d. J3.'3

13. At ;ecember 31, 212 0ine omany had 2, shares of common stoc and 1,shares of "P, J1 ar value cumulative referred stoc outstanding. @o dividends +eredeclared on either the referred or common stoc in 212 or 213. >n 8ebruary 1, 214, rior to the issuance of its financial statements for the year ended ;ecember 31, 213, 0inedeclared a 1P stoc slit on its common stoc. @et income for 213 +as J*,. Inits 213 financial statements, 0ine<s 213 earnings er common share should bea. J4.2". b. J4..c. J2.13.d. J1.2".

14. #tine Inc. had 4, shares of common stoc issued and outstanding at ;ecember 31,212. >n Buly 1, 213 an additional 4, shares +ere issued for cash. #tine also hadstoc otions outstanding at the beginning and end of 213 +hich allo+ the holders to urchase 12, shares of common stoc at J2 er share. he average maret rice of#tine<s common stoc +as J3" during 213. he number of shares to be used in comutingdiluted earnings er share for 213 isa. *%, b. 24,c. %*%,

12 - 160



Intangible Assets

d. %24,

12 - 161



Intangible Assets

1". Lasravi o. had net income for 213 of J4,. he average number of sharesoutstanding for the eriod +as 2, shares. he average number of shares underoutstanding otions, at an otion rice of J3 er share is 12, shares. he averagemaret rice of the common stoc during the year +as J3%. hat should Lasravi o.reort for diluted earnings er share for the year ended 213

a. J2. b. J1.*c. J1.*d. J1.*

1%. >n Banuary 2, 213, orth o. issued at ar J1,, of 'P convertible bonds. 6achJ1, bond is convertible into 2 shares of common stoc. @o bonds +ere convertedduring 213. orth had 2, shares of common stoc outstanding during 213.orth<s 213 net income +as J3, and the income ta! rate +as 3P. orth<s dilutedearnings er share for 213 +ould be (rounded to the nearest enny)=a. J1.'4.

b. J1."*.c. J1.".d. J1.%.

1'. eaty Inc. urchased ;unbar o. and agreed to give stocholders of ;unbar o. 1,additional shares in 214 if ;unbar o.<s net income in 213 is J",K in 212 ;unbaro.<s net income is J"2,. eaty Inc. has net income for 212 of J3, and has anaverage number of common shares outstanding for 212 of 1, shares. hat shouldeaty reort as diluted earnings er share for 212a. J3.33 b. J3.

c. J2.'3d. J2."1

:se the follo+ing information for $uestions 1 and 1*.

5anson o. had 2, shares of common stoc, 2, shares of convertible referred stoc,and J1,, of '."P convertible bonds outstanding during 213. he referred stoc isconvertible into 4, shares of common stoc. ;uring 213, 5anson aid dividends of J.* ershare on the common stoc and J3 er share on the referred stoc. 6ach J1, bond isconvertible into 4" shares of common stoc. he net income for 213 +as J%, and theincome ta! rate +as 3P.

1. asic earnings er share for 213 is (rounded to the nearest enny)a. J2.2. b. J2.42.c. J2."1.d. J2.'.

1*. ;iluted earnings er share for 213 is (rounded to the nearest enny)a. J2..

12 - 162



Intangible Assets

b. J2.11.c. J2.2*.d. J2.".

12 - 163



Intangible Assets

11. 8ugate omany had '", shares of common stoc issued and outstanding at;ecember 31, 212. >n Buly 1, 213 an additional '", shares +ere issued for cash.8ugate also had stoc otions outstanding at the beginning and end of 213 +hich allo+the holders to urchase 22", shares of common stoc at J2 er share. he averagemaret rice of 8ugate9s common stoc +as J2" during 213. hat is the number of shares

that should be used in comuting diluted earnings er share for the year ended ;ecember 31, 213a. 1,"4", b. 1,3",c. 1,11,2"d. 1,1',

111. #hiley ororation had net income for the year of J%, and a +eighted averagenumber of common shares outstanding during the eriod of 2, shares. he comanyhas a convertible bond issue outstanding. he bonds +ere issued four years ago at ar (J2,",), carry a 'P interest rate, and are convertible into 4, shares of common

stoc. he comany has a 4P ta! rate. ;iluted earnings er share area. J2.% b. J2.'*.c. J2.*4.d. J3.22.

112. olt ororation urchased Eassey Inc. and agreed to give stocholders of Eassey Inc.", additional shares in 214 if Eassey Inc.<s net income in 213 is J%, or moreKin 212 Eassey Inc.<s net income is J%1",. olt has net income for 21 of J1,2,and has an average number of common shares outstanding for 212 of ", shares.hat should olt reort as earnings er share for 212

asic 6arnings ;iluted 6arnings0er #hare 0er #hare

a. J2.4 J2.4 b. J2.1 J2.4c. J2.4 J2.1d. J2.1 J2.1

113. >n Banuary 2, 212, 0erez o. issued at ar J1, of P bonds convertible in total into1, shares of 0erez9s common stoc. @o bonds +ere converted during 212. hroughout212, 0erez had 1, shares of common stoc outstanding. 0erez9s 212 net income +asJ4,, and its income ta! rate is 3P. @o otentially dilutive securities other than the

convertible bonds +ere outstanding during 212. 0erez9s diluted earnings er share for 212 +ould be (rounded to the nearest enny)a. J2.. b. J2.2.c. J2.4.d. J4."%.

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Intangible Assets

114. At ;ecember 31, 212, Lifer omany had %, shares of common stoc outstanding.>n >ctober 1, 213, an additional 12, shares of common stoc +ere issued. Inaddition, Lifer had J1,, of %P convertible bonds outstanding at ;ecember 31,212, +hich are convertible into 2', shares of common stoc. @o bonds +ereconverted into common stoc in 213. he net income for the year ended ;ecember 31,

213, +as J3,,. Assuming the income ta! rate +as 3P, the diluted earnings er share for the year ended ;ecember 31, 213, should be (rounded to the nearest enny)a. J".43. b. J4..c. J3..d. J3.33.

11". >n Banuary 2, 213, Eize o. issued at ar J3, of *P convertible bonds. 6achJ1, bond is convertible into % shares. @o bonds +ere converted during 213. Eize had1, shares of common stoc outstanding during 213. Eize 9s 213 net income +asJ1%, and the income ta! rate +as 3P. Eize9s diluted earnings er share for 213

+ould be (rounded to the nearest enny)a. J1.3%. b. J1."2.c. J1.%.d. J1.'*.

11%. At ;ecember 31, 212, #ager o. had 1,2, shares of common stoc outstanding. Inaddition, #ager had 4", shares of referred stoc +hich +ere convertible into '",shares of common stoc. ;uring 213, #ager aid J'", cash dividends on thecommon stoc and J", cash dividends on the referred stoc. @et income for 213+as J4,2", and the income ta! rate +as 4P. he diluted earnings er share for 213

is (rounded to the nearest enny)a. J1."". b. J2.1.c. J3.14.d. J3."".

:se the follo+ing information for $uestions 11' and 11.

&erner o. had 2, shares of common stoc, 2, shares of convertible referred stoc, and

J1,", of 1P convertible bonds outstanding during 213. he referred stoc is convertible

into 4, shares of common stoc. ;uring 213, &erner aid dividends of J1.3" er share on the

common stoc and J4." er share on the referred stoc. 6ach J1, bond is convertible into 4"shares of common stoc. he net income for 213 +as J*, and the income ta! rate +as 3P.

11'. asic earnings er share for 213 is (rounded to the nearest enny)a. J3.32. b. J3.%3.c. J3.'%.d. J4.".

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Intangible Assets

11. ;iluted earnings er share for 213 is (rounded to the nearest enny)a. J3.21. b. J3.3'.c. J3."3.d. J3.%*.

11*. ?oder, Incororated, has 4,2, shares of common stoc outstanding on;ecember 31, 212. An additional , shares of common stoc +ere issued onAril 1, 213, and 4, more on Buly 1, 213. >n >ctober 1, 213, ?oder issued2,, J1, face value, P convertible bonds. 6ach bond is convertible into 2 sharesof common stoc. @o bonds +ere converted into common stoc in 213. hat is thenumber of shares to be used in comuting basic earnings er share and diluted earnings er share, resectivelya. ",, and ",, b. ",, and ",1,c. ",, and ",4,d. ",4, and %,2,

12. @olte o. has 4,, shares of common stoc outstanding on ;ecember 31, 212. Anadditional 2, shares are issued on Aril 1, 213, and 4, more on #etember 1.>n >ctober 1, @olte issued J%,, of *P convertible bonds. 6ach J1, bond isconvertible into 4 shares of common stoc. @o bonds have been converted. he number of shares to be used in comuting basic earnings er share and diluted earnings er shareon ;ecember 31, 213 isa. ",11, and ",11,. b. ",11, and ",1',.c. ",11, and ",3",.d. ",, and ",32,.

121. At ;ecember 31, 212, atum omany had 2,, shares of common stoc outstanding. >n Banuary 1, 213, atum issued ", shares of referred stoc +hich+ere convertible into 1,, shares of common stoc. ;uring 213, atum declaredand aid J1,, cash dividends on the common stoc and J%, cash dividends onthe referred stoc. @et income for the year ended ;ecember 31, 213, +as J%,,.Assuming an income ta! rate of 3P, +hat should be diluted earnings er share for theyear ended ;ecember 31, 213 (ound to the nearest enny.)a. J1. b. J2.c. J3.

d. J2."

122. At ;ecember 31, 212, 6mley omany had 1,2, shares of common stoc outstanding. >n #etember 1, 213, an additional 4, shares of common stoc +ereissued. In addition, 6mley had J,, of %P convertible bonds outstanding at;ecember 31, 212, +hich are convertible into , shares of common stoc. @o bonds +ere converted into common stoc in 213. he net income for the year ended;ecember 31, 213, +as J3,,. Assuming the income ta! rate +as 3P, +hat should

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Intangible Assets

be the diluted earnings er share for the year ended ;ecember 31, 213, rounded to thenearest ennya. J1.41 b. J2.2"c. J1."%

d. J1.%3

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Intangible Assets

123. Crimm omany has 2,, shares of common stoc outstanding on ;ecember 31,212. An additional 1", shares of common stoc +ere issued on Buly 1, 213, and3, more on >ctober 1, 213. >n Aril 1, 213, Crimm issued %,, J1, facevalue, P convertible bonds. 6ach bond is convertible into 4 shares of common stoc. @o bonds +ere converted into common stoc in 213. hat is the number of shares to be used

in comuting basic earnings er share and diluted earnings er share, resectively, for theyear ended ;ecember 31, 213a. 2,1", and 2,33, b. 2,1", and 2,1",c. 2,1", and 2,3*,d. 2,4", and 2,%3,

:se the follo+ing information for $uestions 124 and 12".

Information concerning the caital structure of 0ier ororation is as follo+s=

;ecember 31, 213 212

ommon stoc 1", shares 1", sharesonvertible referred stoc 1", shares 1", shares%P convertible bonds J2,4, J2,4,

;uring 213, 0ier aid dividends of J. er share on its common stoc and J2. er share onits referred stoc. he referred stoc is convertible into 3, shares of common stoc. he %Pconvertible bonds are convertible into '", shares of common stoc. he net income for theyear ended ;ecember 31, 213, +as J4,. Assume that the income ta! rate +as 3P.

124. hat should be the basic earnings er share for the year ended ;ecember 31, 213,rounded to the nearest enny

a. J1.'' b. J1.*"c. J2.4'd. J2.%'

12". hat should be the diluted earnings er share for the year ended ;ecember 31, 213,rounded to the nearest ennya. J2.13 b. J1.*%c. J1.*d. J1."'

12%. arrants e!ercisable at J2 each to obtain ", shares of common stoc +ereoutstanding during a eriod +hen the average maret rice of the common stoc +as J2".Alication of the treasury stoc method for the assumed e!ercise of these +arrants incomuting diluted earnings er share +ill increase the +eighted average number of outstanding shares bya. ",. b. 4,.c. 1,.

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Intangible Assets

d. 12,".

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Intangible Assets

12'. erry ororation had 4, shares of common stoc outstanding at ;ecember 31,212. In addition, it had *, stoc otions outstanding, +hich had been granted tocertain e!ecutives, and +hich gave them the right to urchase shares of erry9s stoc at anotion rice of J3' er share. he average maret rice of erry9s common stoc for 212+as J". hat is the number of shares that should be used in comuting diluted earnings

er share for the year ended ;ecember 31, 212a. 4, b. 431,%22c. 4%%,%d. 423,4

7!lti$le Choice An"wer"6Earnin," er Share6Com$!tational

75LT.LE C8O.CE6Earnin," er Share6CA A(a$te(

12. ;idde o. had 3, shares of common stoc issued and outstanding at ;ecember 31,212. @o common stoc +as issued during 213. >n Banuary 1, 213, ;idde issued2, shares of nonconvertible referred stoc. ;uring 213, ;idde declared and aidJ1", cash dividends on the common stoc and J12, on the referred stoc. @etincome for the year ended ;ecember 31, 213 +as J*3,. hat should be ;idde9s213 earnings er common sharea. J3.1 b. J2.'c. J2.%d. J2.2

12*. At ;ecember 31, 213 and 212, Eiley or. had 1, shares of common stoc and1, shares of %P, J1 ar value cumulative referred stoc outstanding. @o dividends+ere declared on either the referred or common stoc in 213 or 212. @et income for 213 +as J4,. 8or 213, earnings er common share amounted toa. J2.%'. b. J2.33.c. J2.11.d. J2..

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Intangible Assets

13. Earsh o. had 2,4, shares of common stoc outstanding on Banuary 1 and ;ecember 31, 213. In connection +ith the ac$uisition of a subsidiary comany in Bune 212, Earshis re$uired to issue 1, additional shares of its common stoc on Buly 1, 214, to theformer o+ners of the subsidiary. Earsh aid J3, in referred stoc dividends in213, and reorted net income of J",1, for the year. Earsh9s diluted earnings er

share for 213 should bea. J2.13. b. J2.4.c. J2..d. J1.*2.

131. 8oyle, Inc., had %1, shares of common stoc issued and outstanding at ;ecember 31,212. >n Buly 1, 213, an additional 4, shares of common stoc +ere issued for cash.8oyle also had une!ercised stoc otions to urchase 32, shares of common stoc atJ1" er share outstanding at the beginning and end of 213. he average maret rice of 8oyle9s common stoc +as J2 during 213. hat is the number of shares that should be

used in comuting diluted earnings er share for the year ended;ecember 31, 213a. %3, b. %3,c. %",d. %%2,

132. hen comuting diluted earnings er share, convertible securities area. ignored. b. recognized only if they are dilutive.c. recognized only if they are antidilutive.

d. recognized +hether they are dilutive or antidilutive.

133. In determining diluted earnings er share, dividends on nonconvertible cumulative referred stoc should bea. disregarded. b. added bac to net income +hether declared or not.c. deducted from net income only if declared.d. deducted from net income +hether declared or not.

134. he if-converted method of comuting earnings er share data assumes conversion of convertible securities as of the

a. beginning of the earliest eriod reorted (or at time of issuance, if later). b. beginning of the earliest eriod reorted (regardless of time of issuance).c. middle of the earliest eriod reorted (regardless of time of issuance).d. ending of the earliest eriod reorted (regardless of time of issuance).

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Intangible Assets

.FS 95EST.O/S

Tr!e%Fal"e

1. I8# and :.#. CAA0 have significant differences in the reorting of securities +ith

characteristics of debt and e$uity, such as convertible debt.

2. :nder I8#, all of the roceeds of convertible debt are recorded as long-term debt.

3. :nder I8#, convertible bonds are GbifurcatedH Osearated into the e$uity comonent (thevalue of the conversion otion) of the bond issue and the debt comonent.

4. :nder both :.#. CAA0 and I8#, the calculation of basic and diluted earnings er share isidentical.

". :nder I8# recording for the issuance of onds 0ayable, the ;iscount on onds 0ayable and

the 0aid-in aital-onvertible onds could be utilized.


7!lti$le Choice#

1. ith regard to recognizing stoc-based comensationa. I8# and :.#. CAA0 follo+ the same model. b. I8# and :.#. CAA0 standards are undergoing ma/or reform on valuation issues.c. it has been agreed that these standards +ill not be merged due to the differences in

currencies.d. the reform of :.#. CAA0 standards +ill not be addressed until I8# standards have been

finalized.

2. he rimary I8# reorting standards related to financial instruments, including dilutivesecurities, isa. IA# 33. b. IA# 3*.c. I8# 2.d. IA# 2.

3. hen J",, in convertible bonds are issued at ar +ith J, in value of the e$uityotion embedded in the bond, the I8# /ournal entry +ill include a debit of a. J, to 0aid-in aital O onvertible onds and a credit to onds 0ayable. b. J, to 0remium on onds 0ayable and a credit to 0aid-in aital O onvertible

onds.c. J, to onds 0ayable and a credit to 0aid-in aital O onvertible onds.d. J4,2, to ash along +ith a debit of J, to ;iscount on onds 0ayable and a

credit to onds 0ayable and a credit to 0aid-in aital O onvertible onds.

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Intangible Assets

4. ith regard to contracts that can be settled in either cash or sharesa. I8# re$uires that share settlement must be used. b. I8# gives comanies a choice of either cash or shares.c. :.#. CAA0 re$uires that share settlement must be used.d. the 8A# ro/ect rooses that the IA# adot the :.#. CAA0 aroach, re$uiring that

share settlement must be used.

". ith regard to recognizing stoc-based comensation under I8# the fair value of shares andotions a+arded to emloyees is recognized

a. in the first fiscal eriod of the emloyees< service. b. over the fiscal eriods to +hich the emloyees< services relate.c. in the last fiscal eriod of the emloyees< service +hen the total value can be calculated.d. after last fiscal eriod of the emloyees< service +hen the total value can be calculated.


#hort Ans+er

1. riefly describe some of the similarities and differences bet+een :.#. CAA0 and I8#+ith resect to the accounting for dilutive securities, stoc-based comensation, and

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acc/304 week 11 final exam quiz

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