INTERMEDIATE ACCOUNTING2 FINALS THEORIES

CH 12

Rent received in advance by the lessor in an operating lease should be recognized as revenue
When received
At the lease inception
At the lease expiration
In the period specified by lease

When should a lessor recognize in income a non-refundable lease bonus paid by a lessee?
When received
At the inception of the lease
At the lease expiration
Over the lease term

Lease payments under an operating lease shall be recognized as an income by the lessor on
Straight lines basis over the lease term
Diminishing balance basis
Sum of units basis
Cash basis

In an operating lease that is recorded by the lessor, the equal monthly rental payments should be
Recorded as reduction of depreciation
Allocated between reduction in lease receivable and interest expense
Recorded as reduction in the lease receivable
Recorded as rental income

Which statement characterizes an operating lease?

The lessee records depreciation and interest
The lessee records a lease obligation
The lessor transfers title of the underlying asset to the lessee for the duration of the lease term
The lessor records depreciation and lease revenue

The classification of the lease is normally carried out

At the end of the lease term
After a “cooling off” period of one year
At the inception of the lease
When the entity deems it to be necessary

The classification of a lease as either operating or finance lease is based on

The length of the lease
The transfer of risks and rewards of ownership
The lease payments being at least 50% of fair value
The economic life of the underlying asset

All of the following situations would prima facie leas to a lease being classified as a finance lease, except
Transfer of ownership to the lessee
Option to purchase at a value below the fair value of the underlying asset
The lease term is for a major part of the asset’s life
The present value of the lease payments is 50% of the fair value of the asset.

In the case of lease of land and building, the lease payments should be split
According to relative fair value of the two elements
Based on the useful life of the two elements
Using the sum of digits method
According to method devised by the entity
Where there is a lease of land and building and the title to the land is not transferred, generally the
lease is treated as if
The land is a finance lease
The land is finance and the building is operating
The land is operating and building is finance
The land and building are an operating lease

The accounting concept that is principally used to classify leases into operating and finance on the part
of the lessor is
Substance over form
Prudence
Neutrality
Completeness

Which statement is correct regarding the lease capitalization criteria?

The lease transfers ownership to the lessor
The lease contains a purchase option
The lease term is equal to at least 75% of the economic life of the underlying asset
The lease payments are at least 90% fair value of the asset

Which condition would require lease capitalization?

The lease does not transfer title to the lessee
There is an uncertain purchase option
The present value of the lease payments is significantly more than the fair value of the asset
The lease term is below the useful life of the asset

One of the four determinative criteria for a finance lease specifies that the lease term be equal to or
greater than
The economic life of the underlying asset
90% of the economic life of the asset
75% of the economic life of the asset
50% of the economic life of the asset

One of the four determinative criteria for a finance lease is that the present value at the beginning of
the lease term of the lease payments equal or exceeds
The fair value of the underlying asset
90% of the fair value of the underlying ass
75% of the fair value of the underlying ass
50% of the fair value of the underlying ass

CH 13
Gross investment in the lease is equal to
Sum of the lease payments receivable by a lessor under a finance lease and any unguaranteed residual
value accruing to the lessor.
The lease payments under the finance lease of the lessor
The present value of lease payments under a finance lease of the lessor and any unguaranteed residual
value
Present value of the lease payments under a finance lease of a lessor.
Net investment in a direct financing lease is equal to
Cost of the asset
Cost of the asset plus initial direct cost paid by the lessor
Cost of the asset minus guaranteed residual value
Cost of the asset plus unguaranteed residual value.
Which is the correct accounting treatment for a finance lease in the accounts of the lessor?
Treat as a noncurrent asset equal to net investment in lease and recognize all finance payments in
income statement.
Treat as a receivable equal to gross amount receivable on lease and recognize finance payments in cash
by reducing debt.
Treat as a receivable equal to net investment in the lease and recognize finance payments by reducing
debt and taking interest to income statement.
Treat as a receivable equal to net investment in the lease and recognize finance payments in cash by
reduction of debt.

Lessor shall recognize asset held under finance lease receivable at an amount equal to the
Gross investment in the lease
Net investment in the lease
Gross rentals
Residual value, whether guaranteed or unguaranteed.

The lease receivable in a direct financing lease is

The gross amount of lease payment.
The difference between the gross rentals and the fair value of the leased asset.
The present value of lease payments.
The cost of the asset less any accumulated depreciation.

The primary difference between a direct financing lease and a sales type lease is the
Manner in which rental collections are recorded as rental income
Depreciation recorded each year by the lessor.
Recognition of the manufacturer or dealer profit at the inception of the lease.
Allocation of initial direct costs incurred by the lessor over lease term.

All the following would be included in the lease receivable, except

Guaranteed residual value
Unguaranteed residual value
A purchase option that is reasonably certain
All would be included.

Under a direct financing lease, the excess of aggregate rentals over the cost of the underlying asset
should be recognized as interest income of the lessor.
In increasing amounts during the term of the lease
In constant amounts during the term of the lease
In decreasing amounts during the term of the lease
After the cost of the underlying asset has been fully recovered through rentals.

CH 14
Under a sales type lease, what is the meaning of gross investment in the lease?
Present value of lease payments
Absolute amount of lease payments
Present value of lease payments plus present value of unguaranteed residual value
Sum of absolute amount of lease payments and unguaranteed residual value

Net investment in a sales type lease is equal to

Gross investment in the lease less unearned finance income
Cost of the underlying asset
The lease payments
The lease payments less unguaranteed residual value
Which statement characterized a sales type lease?
The lessor recognizes only interest revenue over the useful life of the asset.
The lessor recognizes only interest revenue over the lease term.’
The lessor recognizes a dealer profit at lease inception and interest revenue over the lease term.
The lessor recognizes a dealer profit at lease inception and interest revenue over the useful life of the
asset.

The profit on a finance lease transaction for lessors who are manufacturers or dealers should
Not be recognized separately from finance income
Be recognized in the normal way of transaction
Only be recognized at the end of the lease term
Be recognized on a straight line basis over the lease term

The sales revenue recognized at the commencement of the lease by a manufacturer or dealer lessor is
the
Fair value of the asset
Present value of the lease payments
Fair value of the asset or PV of the lease payments, whichever is lower.
Fair value of the asset of PV of the lease payments, whichever is higher.
What is treatment of an unguaranteed residual value in determining the cost of goods sold under a sales
type lease?
The unguaranteed residual value is ignored.
The unguaranteed residual value is added to the cost of the underlying asset.
The unguaranteed residual value is deducted from the cost of underlying asset at absolute amount.
The unguaranteed residual value is deducted from the cost of the underlying asset at present value.

The excess of the fair value of underlying asset at the inception of the lease over the carrying amount
shall be recognized by the dealer lessor as
Unearned income from a sales type lease
Unearned income from a direct financing lease
Manufacturer profit from a sales type lease
Manufacturer profit from a direct financing lease

In a lease that is recorded as a sales type lease by the lessor, interest revenue
Does not arise
Shall be recognized over the lease term using the interest method
Shall be recognized over the lease term using the straight line method
Shall be recognized in full as revenue at the inception of the lease

CH 17
Which statement characterizes defined contribution plan?
Defined contribution plans are more complex than defined benefit plans.
The employer’s obligation is satisfied by making the appropriate amount of periodic contribution.
The investment risk is borne by the employer.
Contributions are made in equal amounts by employer and employees.

Which is not a characteristics of defined contribution plan

The employer contribution each period is based on a formula
The benefits to be received are usually determined by an employee’s highest salary.
The accounting for a defined contribution plan is straightforward and uncomplicated.
The benefit of gain or the risk of loss from the assets contributed to the plan is borne by the employee.

A formula in a defined contribution plan

Defines the benefits that the employee will receive at the time of retirement.
Ensures that the defined benefit cost and funding are the same.
Requires an employer to contribute a certain sum each period based on the formula.
Ensures that enough funds would be available.
Which statement is true concerning the recognition and measurement of a defined contribution plan?
The contribution shall be recognized as expense in the period it is payable.
Any unpaid contribution at the end of the period shall be recognized as accrued liability.
Any excess contribution shall be recognized as prepaid expense but only to the extent that the
prepayment will lead to a reduction in future payments or cash refund.
All of these statements are true about a defined contribution plan.

Which statement characterizes defined benefit plan?

Defined benefit plans are comparatively simple.
Retirement benefits are based on the plan’s benefit formula
Retirement benefits depend on how well pension fund assets have been managed.
The investment risk is borne by the employee.

Which statement is incorrect concerning the recognition and measurements of a defined benefit plan?
Actuarial assumptions are required to measure the obligation and expense and there is a possibility of
actuarial gain or losses.
The obligation is measured on a discounted basis
The defined benefit plan must be fully funded.
The expense recognized for a defined benefit plan is not necessarily the amount of contribution due for
the period.

In a benefit plan, the process of funding refers to

Determining the defined benefit obligation.
Determining the accumulated benefit obligation.
Making the periodic contributions to a funding agency
Determining the amount reported for pension expense.

In accounting for a defined benefit plan

An appropriate funding must be established to ensure that enough fund would be available at
retirement
The employer responsibility is simply to make a contribution each year
The expense recognized each period is equal to the cash contribution to the plan.
The liability is determined based upon variables that reflect current salary levels.

The formula in a defined benefit plan

Requires that a benefit of gain or the risk of loss from the assets contributed to the plan should be borne
by the employee.
Defines the benefits that the employee will receive at the time of retirement.
Requires that the defined benefit cost and funding must the same
Defines the contribution to be made by the employer and no promise is made concerning the ultimate
benefits to be paid out to the employees.

In rare circumstances, when a retirement benefit plan has attributes of both defined contribution and
defined benefit plan, the plan is deemed
Defined benefit plan
Defined contribution plan
Neither defined benefit plan nor defined contribution plan
Both defined benefit plan and defined contribution plan

The components of defined benefit cost include all, except

Service cost
Net interest
Remeasurements
Contribution to the plan
The service cost of a defined benefit plan comprises all, except
Current service cost
Past service cost
Gain or loss on plan settlement
Net interest

Which of the following components of defined benefit cost shall be recognized through other
comprehensive income?
Current service cost
Past service cost
Net interest
Remeasurements

Remeasurements of defined benefit plan included

The difference between actual return and interest income on plan assets.
Actuarial gain or loss on projected benefit obligation
Change in the effect of asset ceiling minus interest expense on the beginning effect of asset ceiling.
All of these are included in the Remeasurements of defined benefit plan.

When the entity amends a pension plan, past service cost should be
Treated as a prior period adjustment because no future periods are benefited.
Amortized over the remaining service periods of employees
Recorded in other comprehensive income
Reported as an expense in the period the plan has amended.

What is the meaning of net interest in relation to a defined benefit cost?

Interest expense on defined benefit liability
Interest income on the fair value of plan assets
The difference between interest expense on defined benefit liability, interest expense on effect of asset
ceiling and interest income on plan assets.
Interest expense on defined benefit liability less applicable income tax

Which of the following should be included in plan assets?

Assets held by a long-term employee benefit fund
Qualifying insurance policy
Both assets held by a long-term employee benefit fund and qualifying insurance policy
Neither assets held by a long-term employee benefit fund nor qualifying insurance policy

The return on plan assets

Is equal to the change in the fair value of the plan assets during the year
Includes interest, dividends and change in the fair value of the plan assets during the year.
Is equal to the discount rate times the fair value of the plan assets at the beginning of the period.
Is equal to the expected rate of return times the fair value of plan assets at the beginning of the period.

Plan assets are assets held by a long-term benefit and must satisfy all the following conditions, except
The assets are held by an entity, the fund itself that is legally separate from the reporting entity
The assets in the fund are available to pay only employee benefits
The assets in the fund are not available to the reporting entity’s own creditors
The assets in the fund can be returned to the entity even if the remaining assets are insufficient to meet
all employee benefit obligations.

It is an insurance policy issued by an insurer that is not a related party of the reporting entity and the
proceeds of the policy can be used only to pay employee benefits under defined benefit plan.
Qualifying insurance policy
Aggregate policy
Annuity
Unconditional insurance policy
CH 18
A pension liability is reported when
The projected benefit obligation exceeds the fair value of plan assets
The accumulated benefit obligation is less than the fair value of plan assets
The pension expense reported for the period is greater than the funding amount for the same period
Cumulative other comprehensive income exceeds the fair value of plan assets

A pension asset is reported when

The accumulated benefit obligation exceeds the fair value of plan assets
The accumulate benefit obligation exceeds the fair value of plan assets but a past service cost exists
Plan assets at fair value exceed the accumulated benefit obligation
Plan assets at fair value exceed the projected benefit obligation

Which measure requires the use of future salaries in the computation of benefit obligation?
Vested benefit obligation
Accumulated benefit obligation
Projected benefit obligation
Current benefit obligation

What is the discount rate for pension plans?

The market yield at the end of the reporting period for high quality corporate bonds
The expected rate of return on plan assets
The weighted average interest rate
The bank prime interest rate

The interest on the projected benefit obligation

Reflects the incremental borrowing rate
Reflects the rate at which retirement benefits could be effectively settled
Is the same as the actual return on plan assets
May be stated implicitly

Interest cost included in the net pension cost recognized under a defined benefit plan represents the
Shortage between the expected and actual returns on plan assets
Change in the nature of benefits
Increase in the projected benefit obligation due to the passage of time
Increase in the fair value of plan assets due to the passage of time

Vested benefits
Usually require as certain minimum number of years of service
Are those that the employees is entitled to receive even if fired
Are not contingents upon additional service under the plan
Are defined by all of these

What is relationship between the amount funded and the amount reported for defined benefit cost?
Defined benefit cost must equal the amount funded
Defined benefit cost is less than the amount funded
Defined benefit cost is more than the amount funded
Defined benefit cost may be more than, equal to, or less than the amount funded

The defined benefit obligation in the measure of pension obligation that

Is required to be used for reporting the current service cost component of pension expense
Requires pension expense to be determined solely on the basis of the plan formula applied to years of
service to date and based on existing salary level.
Requires the longest possible period for funding to maximize the tax deduction
Is not sanctioned under international financial reporting standards for reporting the current service cost
component of pension expense
In computing the current service cost component of pension expense
The accumulated benefit obligation provides a more realistic measure of the pension obligation on a
going concern basis
An entity should employ an actuarial funding method to report pension expense that best reflects the
cost of benefits of employees
The defined benefit obligation using future compensation level provides a realistic measure of present
pension obligation and expense
The actual and estimated return on plan assets should be recognized

The present value of pension benefits accrued to date using assumptions as to future compensation
level is
Accrued pension cost
Projected benefit obligation
Past service cost
Accumulated benefit obligation

The vested benefits in a pension plan represent

Benefits to be paid to the retired employees
Benefits accumulated in the hands of trustee
Benefits to be paid to the retired employee in the current year
Benefits that are not contingent on the employee’s continuing in the service of the employer

In the calculation of pension expense under a defined benefit plan, which component will not be
included?
Actuarial present value of benefits attributed by the pension benefit formula to employee service during
the current period
Interest cost on the projected benefit obligation
Actual return on plan assets
Gain of loss on plan settlement

When may the entity net assets and liabilities of the various retirement plans?
When the estimated cash inflows and outflows are similar in pattern
When the assets and liabilities are both financial
Assets and liabilities are always netted
Assets and liabilities may be netted when there is a legally enforceable right ot used the assets of one
plan to settle obligations of another plan.

Retirement benefit plan investments shall be carried at

Fair value
Historical cost
Amortized cost
Value in use

CH 19
Short-term employee benefits include all, except
Wages, salaries and social security contributions.
Short –term compensated absences.
Profit-sharing bonus payable in more than twelve months after the end of reporting period
Nonmonetary benefits, such as medical care, housing, car and free and subsidized goods.

Short-term employee benefits are described by all, except

No actuarial assumptions are required
There is no possibility of any actuarial gain or loss
Short-term employee benefits by definition are payable no later than twelve months after year-end
Short-term employee benefit obligations are measured on a discounted basis
These are compensated or paid absences that are carried forward and can be used in future periods and
the employees are entitled to a cash payment for unused entitlement on leaving the entity.
Accumulating and vesting
Accumulating and nonvesting
Nonaccumulating and vesting
Nonaccumulating and nonvesting

Which of the following criteria is not required for the recognition of a liability for compensated
absences?
The amount of the obligation must be estimable.
Payment of the obligation must be probable.
Payment of the obligation will require the use of current assets.
The compensation either vests with the employee or can be carried forward to subsequent years.

These are employee benefits that are payable as a result of an employee’s decision to accept an offer of
benefits in exchange for termination of employment.
Termination benefits
Short-term employee benefits
Other long-term employee benefits
Postemployment employee benefits

Employees are each entitled to 20 days of paid holiday leave per year. Unused holiday leave cannot be
carried forward and does not vest. What is the holiday leave?
Short-term employee benefit
Postemployment benefit
Other long-term employee benefit
Termination benefit

Employees are entitled to 10 days holiday leave per year. Unused holiday leave may be carried forward
until the employee leaves the employment of the entity, at which time the entity will pay the employee
for all unused holiday leave. What is the holiday leave?
Short-term employee benefit
Postemployment benefit
Other long-term employee benefit
Termination benefit

An entity made a public announcement of a commitment to a voluntary redundancy plan. The entity has
an obligation to pay employees that choose voluntary redundancy a lump sum equal to twice their gross
annual salary. What is the obligation to pay employees that choose voluntary redundancy?

A profit-sharing plan requires an entity to pay a specified proportion of the cumulative profit for a five-
year period to employees who serve throughout the five-year period. What is the profit-sharing plan?
Short-term employee benefit
Postemployment benefit
Other long-term employee benefit
Termination benefit

What are compensated absences?

Unpaid time off
A form of healthcare
Payroll deductions
Paid time off

A liability for paid absences should

Be accrued during the period when the compensated time is expected to be used by employees
Be accrued during the period following vesting
Be accrued during the period when earned
Not be accrued unless a written contractual obligation exists
The amount of the liability for paid absences should be based on
The current rate of pay in effect when employees earn the right to compensated absences.
The expected rate of pay expected to be paid when employees use compensated time.
The present value of the amount expected to be paid in future periods.
Either the current rate of pay in effect when the employees earn the right to compensated absences or
the expected rate of pay expected to be paid when employee use compensated time

If the payment of employees’ compensation for future absences is probable, the amount can be
reasonably estimated and the obligation relates to rights that accumulate, the compensation should be
Accrued if attributable to employees’ services not yet rendered.
Accrued if attributable to employees’ services already rendered.
Accrued if attributable to employees’ services whether already rendered or not.
Recognized when paid.

In determining whether to accrue employees’ compensation for future absences, one of the conditions
that must be met is that employer has an obligation to make payment even if the employee terminates.
This is an example of what?
Accumulated right
Estimable right
Contingent right
Vested right

In accounting for paid absences, the difference between vested rights and accumulated rights is
Vested rights are normally for a longer period of employment than accumulated rights
Vested rights are not contingent upon an employee’s future service
Vested rights are a legal and binding obligation whereas accumulated rights expire at year-end
Vested rights carry a stipulated amount whereas accumulated rights are nonmonetary

An employer offered special termination benefits. The employees accepted the offer which provided for
immediate lump sum payments and future payments at the end of the next two years. The amount of
expense recognized in the current year should include
The total of the lump sum and future payments
One third of the lump sum payments and one third of the present value of the future payments
Only the lump sum payments
The lump sum payments and the present value of the future payments.

What is the requirement for the accrual of a sick pay?

Sick pay benefits can be reliably estimated
Sick pay benefits vest
Sick pay benefits do not vest
Sick pay benefits accumulate.