Student

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Student: _______________________________________________________________________________________
1. Which of the following is a characteristic of a liability?
A. It must require a sacrifice of future resources.

B. It may be the result of future transactions.
C. The exact amount due must be known.
D. It may be avoidable.
2. Which of the following liabilities would be valued at their present value?
A. Unearned revenue
B. Operating bank loan
C. Future taxes
D. 10-year mortgage
3. All of the following liabilities would be valued at their present value except?
A. Bonds payable
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B. Pension obligations
C. Unearned revenue
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D. 10-year mortgage
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4. Chi Consulting purchased a new computer system and in return signed a three-year $30,000 non-interest-bearing note payable. An
investigation by the company's accountant revealed that similar notes have market rates of interest around 8%. At what value should the
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note payable be initially recorded on Chi's financial statements?
A. $30,000 un
B. $10,000
C. $25,771
D. $23,815
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5. A company bought an asset and signed a four-year non-interest-bearing note for the full amount. If the note were recorded at its face
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value, which of the following statements would be true?
A. Only liabilities will be understated.

B. Only liabilities will be overstated
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C. Both assets and liabilities will be overstated.

D. Both assets and liabilities will be understated
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6. All of the following statements about current liabilities are true except?
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A. Current liabilities are valued at their present value.

B. Current liabilities are important for assessing short-term liquidity.
C. Current liabilities will be satisfied in a year or one operating cycle.
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D. The difference between the present value and the face value of a current liability is small.
7. All of the following are current liabilities except?

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A. Demand loan
B. Line of credit
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C. Mortgage
D. Income taxes payable
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8. All of the following are current liabilities except?

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A. Dividends payable
B. Term loan
C. GST payable
9. Pluto Roofing Limited reported the following items on its balance sheet at December 31, 2009:
Current liabilities at December 31, 2009, were:
A. $116,000
B. $187,000
C. $216,000
D. $296,000
10. When a company makes a sale and charges GST on the sale, the entry to record the sale will include which of the following?
A. A debit to GST payable

B. A debit to GST expense
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C. A credit to GST payable

D. A credit to GST expense
11. On January 15, 2009, Dartmouth Ltd declared its regular quarterly dividend. It will be paid on February 15, 2009. Which of the following
balance sheets would have a dividend payable account reported on it?
A. December 31, 2008

B. January 14, 2009
C. January 31, 2009
D. February 28, 2009
12. Which of the following best describes an accrued liability?
A. A liability whose amount can only be estimated.

B. A liability whose recording has not been triggered by an external event.
C. A liability whose related expense is not recognized until the next period.
D. A liability whose recording was triggered by an internal event.
13. All of the following are examples of an accrued liability except?
A. Wages payable
B. Interest payable
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C. Warranties payable
D. GST payable
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14. Grand Falls Inc has a term loan outstanding of $500,000 with an interest rate of 8%. They make interest payments quarterly, and the last
one was November 30, 2009. What amount would be reported as interest payable on their December 31, 2009, balance sheet?
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A. $0
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B. $3,333
C. $10,000
D. $40,000 un
15. Summerside Inc has a term loan outstanding of $500,000 with an interest rate of 8%. They make interest payments quarterly, and the last
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one was November 30, 2009. They will start making payments on the loan in 2010 and will repay it in 10 equal annual instalments. What
amounts would be reported on their December 31, 2009, balance sheet related to the loan?
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A.
B.
C.
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D.
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16. Gander Inc had a term loan outstanding throughout the year of $500,000 with an interest rate of 8%. They make interest payments
quarterly, and the last one was November 30, 2009. The next payment on the loan, $50,000, is due December 31, 2009. What amounts
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would be reported on Gander's income statement for the year ended December 31, 2009, related to the loan?
A. $3,333
B. $10,000
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C. $40,000
D. $53,333
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17. Wu Company estimates its annual warranty expenses at 2 percent of annual net sales.
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After recording the 2009 warranty expense, the warranty liability account would show a December 31, 2009, balance of.
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A. $70,000
B. $80,000
C. $90,000
D. $150,000
18. Klondike Company estimated its 2009 warranty expense to be $150,000. The balance in the warranty liability account on January 1, 2009,
was a $120,000 credit; on December 31, 2009, the balance was a $95,000 credit. What was the value of warranty claims paid out during
the 2009?
A. $35,000
B. $120,000
C. $150,000
D. $175,000
19. Klondike Company estimated its 2009 warranty expense to be $150,000. The balance in the warranty liability account on January 1, 2009,
was a $120,000 credit; on December 31, 2009, the balance was a $95,000 credit. Which of the following statements about Klondike's
warranty expense is true?
A. Warranty expense was overestimated for 2009.

B. Warranty expense was underestimated for 2009.
C. Warranty expense for 2009 was $185,000.
D. Warranty expense for 2009 was $95,000.
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20. During 2009 PAG Ltd, a clothing store, sold gift certificates totalling $42,500. By December 31, $18,250 of them had been redeemed for
merchandise. What would be reported on PAG's financial statements for 2009 related to the sale and redemption of the gift certificates?
A. Sales $42,500, Accounts receivable $24,250.

B. Sales $42,500, Unearned revenue $24,250.
C. Sales $18,250, Accounts receivable $24,250.
D. Sales $18,250, Unearned revenue $24,250.
21. What is a formal borrowing arrangement that includes collateral in which a borrower agrees to make periodic interest payments to lenders
as well as repay the principal at a specific time in the future called?
A. A bond
B. A debenture
C. A mortgage
D. A note payable
22. What is a loan that provides the borrower's property as collateral called?
A. A bond
B. A debenture
C. A mortgage
D. A note payable
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23. Ralston Company sold and issued a $100,000, 10%, bond at 99. Which of the following statements is true?
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A. The bond sold at a discount because the coupon interest rate was lower than the effective interest rate.
B. The bond sold at a premium because the coupon rate was higher than the effective interest rate.
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C. The bond sold at a discount because the $1,000 accrued interest is added to the $100,000 face amount.
D. The bond sold for $100,000 less $1,000 of accrued interest.
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24. When accounting for the interest on bonds payable, the cash interest paid in each period is:
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A. the same amount regardless of whether the bond was sold at par, a discount, or a premium.
B. different depending upon the date sale.
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C. higher when the effective rate of interest on the bond is greater than the coupon rate.
D. higher when the bond interest expense is calculated using the effective interest amortization.
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25. If a bond sells at a premium, the amortization of the premium will:
A. increase interest expense.

B. decrease interest expense.
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C. decrease the cash payment for interest.

D. have no effect on the interest expense.
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26. If a bond sells at a discount, the amortization of the discount will:

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C. increase the cash payment for interest.
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27. When will a bond sell at its face value?

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A. When the coupon rate is equal to the effective rate.

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B. When the coupon rate is greater than the effective rate.

C. When the coupon rate is less than the effective rate.
D. Only when it is only on the issue date.
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28. What is a bond that gives the issuer the option to repurchase the bond from investors at a time other than the maturity date called?
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A. Callable bond
B. Convertible bond
C. Retractable bond
D. Purchasable bond
29. Timmins Ltd is issuing bonds today to finance the expansion of their production facilities. If Timmins thinks that interest rates are going
to fall over the next few years, while the bond is outstanding, what feature might they want to add to the bond?
A. Make it callable.
B. Make it retractable.
C. Make it convertible .
D. Make the effective interest rate lower than the coupon rate.
30. Iqualuit Inc issued a 20-year $100,000 bond with a semi-annual coupon rate of 4% when market interest rates were 6%. What were the
proceeds of the bond at the time of issue?
A. $76,885
B. $77,060
C. $100,000
D. $127,355
31.
Prince Rupert Corporation issued a 15-year $200,000 bond with a semi-annual coupon rate of 6% when market rates were 4%. What were
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the proceeds of the bond at the time of issue?
A. $177,763
B. $200,000
C. $244,473
D. $244,792
32. Kinizi Incorporated sold a $10,000, 6%, 5-year bond for $9,189 to yield 8%. Interest is paid semi-annually. The company uses the
effective interest method to amortize all bond premiums and discounts. What will the interest expense on the first payment date be?
A. $300
B. $368
C. $400
D. $736
33. Kinizi Incorporated sold a $10,000, 6%, 5-year bond for $9,189 to yield 8%. Interest is paid semi-annually. The company uses the
effective interest method to amortize all bond premiums and discounts. How much of the discount is amortized at the first payment date?
A. $0
B. $68
C. $81
D. $152
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34. Inuvik Inc sold a 10-year, $100,000, 6% bond for $86,410 when the market rates were 8%. Interest is paid semi-annually. If Inuvik uses
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the effective interest rate method, which of the following is the correct entry to record the first interest payment?
A.
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B.
C.
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D.
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35. In 2006 Coopermine Ltd issued 10-year 5% coupon bonds at par. In 2009 interest rates on similar debt have increased to 6%. What is the
effect of the change in interest rates on Coopermine Ltd's 2009 financial statements?
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A. They would record a gain on the change in value of the bond.

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B. They would record a loss on the change in value of the bond

C. The interest expense they record will increase.
D. There is no effect.
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36. Johan Limited has a $100,000 bond outstanding with an unamortized discount of $5,679. The company has decided to retire the bonds for
a cost of $102,000. The journal entry to record the retirement of the banks will include which of the following?
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A. Loss on redemption of bonds, $5,679.

B. Gain on redemption of bonds, $5,679.
C. Loss on redemption of bonds, $7,679.
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D. Gain on redemption of bonds, $7,679.

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37. Kingston Corporation recently retired $1,000,000 worth of bonds early for $997,500. They reported a gain related to the retirement of the
bonds of $24,250. What was the unamortized bond discount or premium at the time of retirement?
A. $21,750 premium
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B. $24,250 premium
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C. $26,750 premium
D. $21,750 discount
38. Under IFRS, if an interest rate decreases after a bond is issued, the company should:
A. Recognize a unrealized gain in other comprehensive income

B. Recognize a gain in net income
C. Ignore the changes in the interest rates
D. Disclose the market value of debt in the notes to the financial statements
39. All of the following are criteria for capitalizing a lease except?
A. It is likely that the lessee will ultimately get ownership of the asset.
B. The lessor and the lessee are related companies.
C. The lease term is long enough that the lessee receives most of the economic benefits of the asset.
D. The present value of the lease payments is equal to most of the fair value of the asset.
40. Which of the following criteria would lead to a lease's being accounted for as a capital lease?
A. The lease is for real property.

B. The lease term is for four years, while the asset's useful life is ten years.
C. The present value of the minimum lease payments is $92,000, while the fair market value of the leased asset is $100,000.
D. The lease asset is guaranteed to revert to the lessor at the end of the lease term.
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41. If a company had capitalized a lease on an asset, which of the following entries for the lease payment would be correct?
A.
B.
C.
D.
42. If a company has an operating lease for an asset, which of the following entries for the lease payment is correct?
A.
B.
C.
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D.
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43. Which of the following would most likely be recorded as a capital lease for accounting purposes?
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A. The 15-year lease on the company's head office space.
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B. The 3-year leases on the salesmen's cars.
C. The 25-year lease on a piece of manufacturing equipment.
D. The 48-month lease on the office photocopier. un
44. When compared with a company recording an asset as a capital lease, the return-on-assets (ROA) and debt-to-equity for a company using
an operating lease are:
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A.
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B.
C.
D.
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45. Brandon Corporation has leased an asset that they are correctly recording as a capital lease. When they signed the lease the asset was
recorded at $39,925. The interest rate used in the calculations is 8%, the asset has an expected useful life to Brandon of 8 years, and the
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annual lease payment is $10,000. The total expense related to the lease reported on Brandon's income statement in the first year of the
lease is closest to?
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A. $3,194
B. $4,990
C. $8,184
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D. $10,000
46. On January 1, 2009, O'Connor Construction signed a lease for a machine for $15,000 per year for 8 years. The first payment is due
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December 31, 2009. The lease covers 80 per cent of the asset's useful life, and O'Connor expects to keep the asset at the end of the lease.
If O'Connor had borrowed money to buy the machine, they estimate the interest rate would have been 8%. The expense that would be
recorded for the lease on the income statement in 2009 is closest to?
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A. $6,896
B. $8,620
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C. $15,000
D. $15,516
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47. On January 1, 2009, Alert Construction signed a lease for a machine for $15,000 per year for 7 years. The first payment is due December
31, 2009. The lease covers 70 per cent of the asset's useful life, and Alert expects to return the asset at the end of the lease. If Alert had
borrowed money to buy the machine, they estimate the interest rate would have been 8%. The expense that would be recorded for the
lease on the income statement in 2009 is closest to?
A. $6,247
B. $7,809
C. $14,056
D. $15,000
48. How is the pension expense calculated for a defined-contribution pension plan?
A. Based on the required contributions made by the employer.

B. Based on the required contributions made by the employer and employee.
C. Based on the expected portion of the future benefits that were earned that period.
D. Based on the actual contributions made by the employer and employee.
49. An analyst is reviewing the financial statements of a company and notices that the company reports a pension liability on its balance
sheet. What does the pension liability represent?
A. The present value of all future pension obligations.

B. The amount of this year's pension expense that has not been paid yet.
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C. The increase in the pension obligation that was earned this year.
D. The difference between the pension plan obligations and the pension plan assets.
50. An analyst is reviewing the financial statements of a company and notices that the company reports a pension asset on its balance sheet.
What does the pension asset represent?
A. The market value of all pension assets.

B. The amount of next year's pension expense that has been prepaid.
C. The current year's contributions to the pension.
51. How is the pension expense calculated for a defined benefit plan?
A. Based on the contributions made by the employer that year.

B. Based on the expected portion of future benefits that were earned that period.
C. Based on the expected portion of current benefits that were earned that period
D. Based on the amount that the employer should contribute this year to meet the future expected benefit earned this year.
52. How is the pension expense calculated for a defined contribution plan?

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53. Contingent liabilities will become actual liabilities depending on:
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A. The outcome of a future event.
B. The degree of uncertainty surrounding the outcome of a future event.
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C. A decision by the board of directors to record the liability.
D. Whether they are probable and estimable.
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54. Gain contingencies, which are significant and likely and can be reasonably estimated:
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A. Should be disclosed in a note to the financial statements.
B. Should be reported in the body of the financial statements.
C. May be reported in the body of the financial statements.
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D. Should not be reported or disclosed until the gain is realized.
55. Loss contingencies, which are significant and likely and can be reasonably estimated:
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D. Should not be reported or disclosed.
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56. All of the following are examples of contingent losses except?
A. Lawsuits
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B. Income tax reassessments

C. Guarantees of others' debt
D. Warranties
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57. Portage La Prairie Company is currently being audited by the tax authorities with respect to a deduction they claimed two years ago. If
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they are reassessed, the amount they will owe will be $2,000,000. Neither their accountant nor their attorney has been able to tell them
how likely it will be that they will owe the additional taxes. How should Portage La Prairie Company report the situation?
A. They should go back and restate the income statement from two years ago.
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B. They should accrue a liability this period.

C. They should disclose the potential liability this period.
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D. They should do nothing.
58. Portage La Prairie Company is currently being audited by the tax authorities with respect to a deduction they claimed two years ago. If
they are reassessed, the amount they will owe will be $2,000,000. Their accountant has been unable to tell them how likely it is that they
will owe the additional taxes. This is an example of which of the following?
A. An accrued liability
B. A contingent loss
C. A contingent gain
D. A future income tax liability
59. A former employee was fired last year for stealing $500 from the company's petty cash drawer. The former employee is now suing the
company for wrongful dismissal on the grounds that they should never have been put in charge of the petty cash drawer. The company's
lawyer does not think there is any chance the employee could win their suit. How should the company report the situation?
A. They should go back and restate the income statement from last year.
60. Which of the following is an example of an executory contract?
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A. A warranty obligation on a product sold.

B. Interest accrued on an outstanding loan.
C. An agreement to purchase inventory next month.
D. The purchase of goods from a supplier.
61. A company should disclose a commitment made to purchase something in the future in all of the following situations except?
A. If it involves an unusual degree of risk.

B. If it is in the normal course of business.
C. If it involves a significant expenditure.
D. If it commits the entity to issue shares.
62. Just before the end of the year, Matawan Inc entered into a contract with a supplier to purchase $100,000 of product per year over the next
5 years. The amount is a significant amount of their annual purchases. How should the contract be reflected in the current financial
statements?
A. Accrued as a contingent liability.

B. Accrued as an accrued liability.
C. Disclosed as a contingent liability in the notes to the financial statements.
D. Disclosed as a commitment in the notes to the financial statements.
63. In January 2010, one of Whale Cove Company's major customers went bankrupt. The customer owed Whale Cove a large account
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receivable at the year-end, and estimates now indicate that they will likely only collect about one-quarter of the amount owed. How
should this event be reflected in Whale Cove's December 31, 2009, financial statements?
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A. Accrued as a contingent loss.
B. Disclosed as a contingent loss.
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C. Accrued in the allowance for doubtful accounts.
D. Disclosed as a subsequent event.
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64. On February 1, 2010, White Rock Company retired some bonds it had outstanding. How should this event be reflected in White Rock's
December 31, 2009, financial statements? un
A. Disclosed as a contingent gain.
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B. Disclosed as a subsequent event.
C. Accrued as a gain on bond retirement.
D. It is not reflected in White Rock's financial statement.
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65. On February 1, 2010, Burnaby Company renewed its banking arrangements with its principle bank. None of the terms of their loans
changed. How should this event be reflected in Burnaby's December 31, 2009, financial statements?
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A. Disclosed as a purchase commitment.

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C. Accrued as a current liability.

D. It is not reflected in Burnaby's financial statement.
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66. A company borrows money at the rate of 10% and has a tax rate of 25%. What is their after-tax cost of borrowing?
A. 2.5%
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B. 7.5%
C. 10%
D. 12.5%
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67. A company paid total interest on its debt last year of $400,000 and also paid out $250,000 in dividends. If their tax rate is 40%, what was
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the after-tax cost to the company of each of those sources of financing?
A.
B.
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C.
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D.
68. Which of the following ratios can be used to evaluate an entity's capital structure?
A. Current ratio
B. Debt-to-equity
C. Interest-coverage ratio
D. Return-on-assets
69. What is the term used to describe how an entity is financed?
A. Capital structure
B. Leverage
C. Shareholders' equity
D. Financial leverage
70. Z-Mart is a large retailer. Its debt-to-equity ratio last year was 0.82 and its interest-coverage ratio was 20.5. The industry averages for
these two ratios are 0.68 and 24.59, respectively. Based on that information, which of the following statements is true?
A. Z-Mart has more debt in its capital structure than the average for the industry.
B. Z-Mart has less debt in its capital structure than the average for the industry.
C. Z-Mart is less risky than the average for the industry.
D. Z-Mart is can pay its interest expense more easily than the average in the industry.
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71. If a company made extensive use of operating leases to finance assets, what would be the effect on the debt-to-equity ratio?
A. The debt-to-equity ratio would be understated.

B. The debt-to-equity ratio would be overstated.
C. The debt-to-equity ratio would be not be affected.
D. The effect depends on whether the ratio is above 1 or not.
72. Dryden Inc has a debt-to-equity ratio of 0.80. It has total shareholders' equity of $2.5 million and current liabilities of $750,000. How
much long-term debt is outstanding?
A. $1,250,000
B. $2,000,000
C. $2,375,000
D. $3,125,000
73. Etobicoke Enterprises had a debt-to-equity ratio of 0.60. They have total shareholders' equity of $5 million. They also have operating
leases that require annual payments at the end of the next 5 years of $285,000. If the discount rate that applies to the leases were 6%, what
would their debt-to-equity ratio be if the leases were capitalized?
A. 0.60
B. 0.67
C. 0.84
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D. 0.885
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74. Arnot Corporation reported $25,000 in interest expense on loans of $312,500, $120,000 in net income and $40,000 in income tax expense
last year. What was their after-tax cost of borrowing and their interest coverage ratio for the year?
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A.
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B.
C.
D.
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75. Which of the following statements is true concerning the evaluation of solvency ratios for a company?
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A. A lower debt-to-equity ratio means the company is more risky.

B. A lower interest-coverage ratio means that the company is more risky.
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C. A higher interest coverage ratio means that the company is more risky.
D. A higher interest coverage ratio and a higher debt-to-equity ratio mean that a company is more risky.
76. An increase in a company's debt-to-equity ratio from 1.20 to 1.87 means:

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A. The company's liabilities have decreased during the year.

B. The company is less solvent than it was during the year.
C. The company's solvency has improved.
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D. The company must have issued additional common shares.
77. In the following journal entry to record income tax expense, which amount would represent the amount that the entity has to pay to the
federal and provincial governments in taxes?
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A. $10,000
B. $30,000
C. $40,000
D. $40,000 multiplied by the tax rate
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78. Which of the following creates a permanent difference between income for financial reporting purposes and income for tax purposes?
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A. Amortization of asset
B. Warranty costs
C. Pension costs
D. Capital gains
79. Which of the following creates a temporary difference between income for financial reporting purposes and income for tax purposes?
A. Meals and entertainment expenses

B. Warranty costs
C. Penalties on the late payment of taxes
D. Capital gains
80. A company is using the straight-line method for amortizing its capital assets for financial accounting purposes and CCA for tax purposes.
If the net book value of the asset were greater than the undepreciated capital cost, what would the company report on their balance sheet?
A. A current future tax asset.

B. A current future tax liability.
C. A non-current future tax asset.
D. A non-current future tax liability.
81. Which of the following best describes a future tax liability (FTL)?
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A. A FTL arises when the company does not pay all of its taxes due in the current year.
B. A FTL arises when there are temporary differences between the income as calculated on the financial statements and on the tax return.
C. A FTL arises when there are permanent differences between the income as calculated on the financial statements and on the tax return.
D. A FTL arises when the company has paid tax in advance of when it is due.
82. What is the method called when a company calculates their income tax expense on the cash basis?
A. Taxes payable method

B. Temporary taxes method
C. Tax allocation method
D. Cash payable method
83. If a company uses the taxes payable method of calculating income tax expense, which of the following statements would be true?
A. The income tax expense would be equal to the income taxes payable.
B. The income tax expense would be greater than the income taxes payable.
C. The income tax expense would be less than the income taxes payable.
D. The current income tax expense would be equal to the future income tax expense.
84. During its first year of operations, Choy Limited had sales of $765,000. The company offers a 2-year limited warranty on all sales and
expects that warranty costs for the first year will average 0.5% of sales with an additional 1.5% in the second year. During the current
year the company spent $12,000 on warranty repairs.
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Required:
A) Prepare all journal entries related to the warranty for the current year.
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B) How would the warranty liability be reported on the company's year-end balance sheet?
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85. For each of the following independent situations prepare the adjusting entry that would be required at year-end. Assume a December 31
year-end for all cases.
A) On September 1 a company issued at par a $500,000 8% semi-annual coupon bond, interest payable on February 28 and August 31.
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B) A company leases retail space in a mall. The lease calls for monthly payments to be made on the first of the month of $5,000, plus 1%
of sales to be paid quarterly 15 days after the end of the quarter. The sales for the last quarter of the year were $375,400.
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C) A company sells a product with a six-month warranty. Warranty costs are estimated to be 1.5% of sales. The company has not
recorded their estimate for the expense on the current year's sales of $2,500,000 but has paid $27,000 in warranty claims during the year.
D) A company estimated its income tax expense to be $525,000 for the year. To date they have made instalment payments of $400,000.
E) A company has a 5-year term loan of $250,000 outstanding with a bank. Interest is charged at 5% and paid on the first day of each
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quarter. The annual payment of $50,000 is due January 1.

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86. Panorama Properties reported the following account balances and events at their September
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Required:
Prepare the liability section of their balance sheet as at September 30, 2009 including the effects of any required adjustments.
87. On January 1, 2009, Rio Chaise Limited sold $100,000 8% 10-year bonds to yield 10%. The bonds pay interest semi-annually each July 1
and January1. The accounting period ends December 31. Rio Chaise amortizes any bond discount or premium using the effective interest
method.
A) What was the selling price of the bond?
B) What was the amount of interest expense recorded on July 1, 2009?
C) What was the amount of the cash payment for interest on July 1, 2009?
Page 10 of 32
88. On January 1, 2009, Glen Wild sold a $1,000,000 bond issue to finance the construction of a new 18-hole golf course and clubhouse. The
bond has a coupon rate of 10% interest (payable annually each December 31) and matures in ten years.
Required:
A) Indicate the selling price and show the calculations to support issuing the bond under each of the following three market conditions.
Bond A; Bond B; and Bond C:
B) Using the effective interest method, calculate the interest expense and the cash payment for interest on December 31, 2009 for each
scenario.
89. Pembrooke Corporation issued 15-year $500,000 6% semi-annual bonds five years ago at an effective interest rate of 8%. Coupon
payment dates are April 1, and October 1. Interest rates have fallen, so Pembrooke can retire the bonds on October 1, 2010, for $500,000.
The last coupon was paid on April 1, 2010, and after that the balance in the bond discount account was $67,952.
Required:
A) Calculate the gain or loss on retirement for Pembrooke.
m
B) Prepare the journal entry to record the retirement.
C) What is the current market rate on the bonds as at October 1, 2010?
co
rr.
90. Discuss whether debt or equity is riskier from the point of view of:
blu
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A) The investor
B) The issuing corporation
art
Sm
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91. A) Briefly explain what the term "off-balance-sheet financing" means.

B) Give an example of an off-balance-sheet financing arrangement.
dv
C) From the user's perspective, what is wrong with off-balance-sheet financing?

are
Sh
92. Dake Limited has just leased two new pieces of manufacturing equipment. Machine #1 had a purchase price of $26,000; the annual lease
payment is $6,500 at the end of each of the next five years. The machine is expected to have a useful life of six years. The machine will
is
be returned to the manufacturer at the end of the 5-year lease. Machine #2 can be purchased for $18,000. The lease requires annual
payments of $3,000 at the end of the next three years. Dake has the option of purchasing the lease at the end of the lease term for its fair
market value at that time. Machine # 2 is expected to have a useful life of 10 years. Dake's incremental borrowing rate is 8%.
file
Required:
A) Determine the type of lease for each machine.
B) Prepare the journal entries for the first year of each lease.
is
Th
93. Banff Corporation is a new graphic design business. It requires computers to do the graphic design work and is trying to decide how to
acquire them. One option is to buy the computers from a store and borrow the money they need from the bank. A second option is to lease
the computers from another company that specializes in the leasing of office equipment. The leasing company is offering a two-year lease
that they could renew or change when it expired. The computers they are interested in have a physical life of five years, but Banff wants
to make sure that it always has current equipment to remain competitive. The two owners have approached you to help them decided.
They want to consider the impact on their financial statements as well as the technical requirements of the computers when they decide.
Required:
A) Evaluate, from Banff's perspective, the two options that are available.
B) Which would you recommend? Why?
94. Athabasca Inc leased a new piece of equipment during the past year. The lease was signed on January 1, 2009, and the first payment is
due January 1, 2010. The lease payments are $825 per year, and the lease term is 15 years (of its 20 year useful life), after which they will
return the equipment to the lessor, and the interest rate is 6%. The company is in the process of preparing their 2009 financial statements
Page 11 of 32
and has come to you for advice on how to record the lease. It is not recorded in the draft financial statements below.
m
Required:
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A) Identify the changes in the financial statements of accounting for the lease as a capital lease. Do not prepare revised financial
statements. What would be the ROA, D/E and Net profit margin? You may round all amounts to the nearest dollar. You may ignore
rr.
income taxes.
B) Identify the changes on the financial statements of accounting for the lease as an operating lease. Do not prepare revised financial
blu
statements. What would be the ROA, D/E and Net profit margin?
C) Which method do you think the management of Athabasca would prefer? Why?
D) Recommend how the lease should be accounted for. Is there any other information you need?
un
art
Sm
95. In December 2009, Sydney Inc (Sydney) had the following transactions and events related to their employees. Record the journal entries
for each event.
A) The total payroll for the month, $175,000, was paid on the last working day of the year, December 30. The company withheld the
ia
following amounts from the employee paycheques: $5,250 for Canada Pension Plan (CPP), $2,600 for Employment Insurance (EI),
$35,000 for income taxes. Sydney remits the withholdings on the tenth day of the following month.
dv
B) Sydney has a defined benefit pension plan for its senior executives. The estimated pension expense for the year was calculated in
December at $32,000. The company made their required contribution of $12,500 on December 12.
C) Sydney has a defined contribution pension plan for all other full-time employees. Sydney contributes three percent of an employee's
are
gross salary into the plan every month. Employees can make additional voluntary contributions. The portion of December's payroll
applicable to full-time employees was $122,500. Contributions are made the last day of the month.
D) Salesmen are paid a bonus commission of five percent of sales above their annual sales targets. Sales above target for 2009 were
Sh
estimated to be $1,600,000. The payments are made January 31 after the year-end sales numbers have been confirmed.
is
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96. Classify each of the following events as a commitment, a subsequent event or a contingency. Support your decisions. Some may fit more
is
than one classification. For each one, indicate how it would be reflected in the company's financial statements. Assume a December 31
year-end for all companies; assume all amounts are material unless otherwise noted.
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A) On November 15, a customer became ill after eating in one of the restaurants operated by the company. The customer is suing the
company for lost wages and damages totalling $50,000. No other customers have complained to the company about similar problems, so
the company's lawyers believe the claims are without merit. The amount of the claim is very small relative to the company's overall
business.
B) A company guarantees the $2,000,000 loan of another company that they own. They have been the guarantor for five years and have
never had to act on their guarantee.
C) On September 30, the company renewed the lease on their office space for 5 years at a monthly payment of $20,000.
D) On July 1, the company entered into an agreement with its supplier to buy $500,000 worth of goods, based on prices in effect on that
date, per year for the next 5 years. The company is pleased to have the supply assured over the next 5 years, although to date purchases
from that supplier have never exceeded $400,000.
E) On January 31, the company issued $5,000,000 in bonds.
97.
The president of Lake Louise Ltd wants to know the effect that the following events would have on users' perceptions of the company.
Complete the following list by indicating whether the event listed would increase, decrease or have no effect on the financial measures
listed. State any assumptions you make. Lake Louise Ltd has a December 31 year-end.
Page 12 of 32
A) Received cash for services to be provided next year.

B) Paid the balance outstanding on their line of credit.
C) Issued a bond with an effective interest rate of 6%. Coupon dates April 30 and October 31.
D) Arranged a new capital lease on December 31.
E) Purchased inventory on account.
98. Beta Corporation owns one asset, a truck. They bought it this year. It cost $75,000, and they are amortizing it straight-line over its
estimated useful life of 10 years and at a 30% declining rate for tax purposes. Earnings before amortization and taxes were $200,000. The
company's tax rate is 40%, and they deduct a full year's amortization in the year of purchase for accounting purposes; for taxes, the half-
rate rule applies in the first year.
Required:
m
A) What is the tax basis, undepreciated capital cost of the truck at the end of the first year?
B) What is the accounting basis net book value at the end of the first year?
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C) What is the balance in the future income tax asset (liability) at the end of the first year?
D) What are taxes payable for the year?
rr.
E) What is the journal entry to record tax expense for the year?
F) What is the total income tax expense for the year?
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G) What is net income for the year?
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art
99. The following information relates to a building owned by a company.

Sm
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A) Calculate the balance in the future income tax account.

dv
B) Indicate where on the financial statement the account would be found.

C) Explain when this amount is due to be received or paid by the company.
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Sh
is
file
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Th
Page 13 of 32
9 KEY
1. (p. 478) Which of the following is a characteristic of a liability?
A. It must require a sacrifice of future resources.

B. It may be the result of future transactions.
C. The exact amount due must be known.
D. It may be avoidable.
Difficulty: Moderate
Friedlan - Chapter 09 #1
Level of Learning: Knowledge
Topic: LO 1
2. (p. 479) Which of the following liabilities would be valued at their present value?
A. Unearned revenue
B. Operating bank loan
C. Future taxes
D. 10-year mortgage
Topic: LO 1
m
3. (p. 479) All of the following liabilities would be valued at their present value except?
co
A. Bonds payable
B. Pension obligations
rr.
C. Unearned revenue
D. 10-year mortgage
blu
Topic: LO 1
un
4. (p. 484 Chi Consulting purchased a new computer system and in return signed a three-year $30,000 non-interest-bearing note payable. An
- investigation by the company's accountant revealed that similar notes have market rates of interest around 8%. At what value should
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486)
the note payable be initially recorded on Chi's financial statements?
Sm
A. $30,000
B. $10,000
C. $25,771
D. $23,815
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30,000/(1.08)3 = 23,815
dv
Level of Learning: Application
are
Topic: LO 1
5. (p. 479) A company bought an asset and signed a four-year non-interest-bearing note for the full amount. If the note were recorded at its face
value, which of the following statements would be true?
Sh
A. Only liabilities will be understated.

B. Only liabilities will be overstated
is
C. Both assets and liabilities will be overstated.

D. Both assets and liabilities will be understated
file
Difficulty: Difficult
Level of Learning: Comprehension
Topic: LO 1
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6. (p. 479) All of the following statements about current liabilities are true except?
Th
A. Current liabilities are valued at their present value.

B. Current liabilities are important for assessing short-term liquidity.
C. Current liabilities will be satisfied in a year or one operating cycle.
D. The difference between the present value and the face value of a current liability is small.
Difficulty: Easy
Topic: LO 1, 2
7. (p. 479) All of the following are current liabilities except?
A. Demand loan
B. Line of credit
C. Mortgage
Difficulty: Easy
Topic: LO 2
8. (p. 479) All of the following are current liabilities except?
A. Dividends payable
Page 14 of 32
B. Term loan
C. GST payable
Difficulty: Easy
Topic: LO 2
9. (p. 478 Pluto Roofing Limited reported the following items on its balance sheet at December 31, 2009:
-
481)
Current liabilities at December 31, 2009, were:
A. $116,000
B. $187,000
C. $216,000
D. $296,000
(100,000 + 30,000 + 57,000 + 29,000) = 216,000
m
Difficulty: Easy
co
Topic: LO 2
rr.
10. (p. 480) When a company makes a sale and charges GST on the sale, the entry to record the sale will include which of the following?
blu
A. A debit to GST payable
B. A debit to GST expense
C. A credit to GST payable un
D. A credit to GST expense
art
Topic: LO 2
Sm
11. (p. 481) On January 15, 2009, Dartmouth Ltd declared its regular quarterly dividend. It will be paid on February 15, 2009. Which of the
following balance sheets would have a dividend payable account reported on it?
A. December 31, 2008

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B. January 14, 2009

dv
C. January 31, 2009

D. February 28, 2009
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Topic: LO 2
Sh
12. (p. 481) Which of the following best describes an accrued liability?
A. A liability whose amount can only be estimated.

B. A liability whose recording has not been triggered by an external event.
is
C. A liability whose related expense is not recognized until the next period.
D. A liability whose recording was triggered by an internal event.
file
is
Topic: LO 2
13. (p. 481) All of the following are examples of an accrued liability except?
Th
A. Wages payable
B. Interest payable
C. Warranties payable
D. GST payable
Topic: LO 2
14. (p. 481) Grand Falls Inc has a term loan outstanding of $500,000 with an interest rate of 8%. They make interest payments quarterly, and the
last one was November 30, 2009. What amount would be reported as interest payable on their December 31, 2009, balance sheet?
A. $0
B. $3,333
C. $10,000
D. $40,000
500,000 × .08 × (1/12) = $3,333

Topic: LO 2
Page 15 of 32
15. (p. 481) Summerside Inc has a term loan outstanding of $500,000 with an interest rate of 8%. They make interest payments quarterly, and
the last one was November 30, 2009. They will start making payments on the loan in 2010 and will repay it in 10 equal annual
instalments. What amounts would be reported on their December 31, 2009, balance sheet related to the loan?
A.
B.
C.
D.
Interest payable .08 (500,000) × (1/12) plus current portion 500,000/10 = $50,000
Topic: LO 2, 3
16. (p. 481) Gander Inc had a term loan outstanding throughout the year of $500,000 with an interest rate of 8%. They make interest payments
quarterly, and the last one was November 30, 2009. The next payment on the loan, $50,000, is due December 31, 2009. What
amounts would be reported on Gander's income statement for the year ended December 31, 2009, related to the loan?
A. $3,333
B. $10,000
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C. $40,000
D. $53,333
co
Interest expense .08 × 500,000 = $40,000
rr.
blu
Topic: LO 2, 3
17. (p. 481) Wu Company estimates its annual warranty expenses at 2 percent of annual net sales.
un
art
After recording the 2009 warranty expense, the warranty liability account would show a December 31, 2009, balance of.
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A. $70,000
B. $80,000
C. $90,000
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D. $150,000
dv
(.02 × 4,000,000 = 80,000 accrual), 70,000 + 80,000 - 60,000 = $90,000

are

Topic: LO 2
18. (p. 481) Klondike Company estimated its 2009 warranty expense to be $150,000. The balance in the warranty liability account on January 1,
Sh
2009, was a $120,000 credit; on December 31, 2009, the balance was a $95,000 credit. What was the value of warranty claims paid
out during the 2009?
is
A. $35,000
B. $120,000
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C. $150,000
D. $175,000
120,000 + 150,000 - 95,000 = $175,000

is
Th
Topic: LO 2
19. (p. 481) Klondike Company estimated its 2009 warranty expense to be $150,000. The balance in the warranty liability account on January 1,
2009, was a $120,000 credit; on December 31, 2009, the balance was a $95,000 credit. Which of the following statements about
Klondike's warranty expense is true?
A. Warranty expense was overestimated for 2009.

B. Warranty expense was underestimated for 2009.
C. Warranty expense for 2009 was $185,000.
D. Warranty expense for 2009 was $95,000.
Topic: LO 2
20. (p. 483 During 2009 PAG Ltd, a clothing store, sold gift certificates totalling $42,500. By December 31, $18,250 of them had been
- redeemed for merchandise. What would be reported on PAG's financial statements for 2009 related to the sale and redemption of the
484)
gift certificates?
A. Sales $42,500, Accounts receivable $24,250.

B. Sales $42,500, Unearned revenue $24,250.
C. Sales $18,250, Accounts receivable $24,250.
D. Sales $18,250, Unearned revenue $24,250.
Page 16 of 32
Unearned revenue = 42,500 - 18,250 = $24,250
Topic: LO 2
21. (p. 485) What is a formal borrowing arrangement that includes collateral in which a borrower agrees to make periodic interest payments to
lenders as well as repay the principal at a specific time in the future called?
A. A bond
B. A debenture
C. A mortgage
D. A note payable
Topic: LO 3
22. (p. 485) What is a loan that provides the borrower's property as collateral called?
A. A bond
B. A debenture
C. A mortgage
D. A note payable
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Difficulty: Easy
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Topic: LO 3
rr.
23. (p. 487) Ralston Company sold and issued a $100,000, 10%, bond at 99. Which of the following statements is true?
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A. The bond sold at a discount because the coupon interest rate was lower than the effective interest rate.
B. The bond sold at a premium because the coupon rate was higher than the effective interest rate.
C. The bond sold at a discount because the $1,000 accrued interest is added to the $100,000 face amount.
un
D. The bond sold for $100,000 less $1,000 of accrued interest.
art
Topic: LO 3
Sm
24. (p. 487) When accounting for the interest on bonds payable, the cash interest paid in each period is:
A. the same amount regardless of whether the bond was sold at par, a discount, or a premium.
B. different depending upon the date sale.
ia
C. higher when the effective rate of interest on the bond is greater than the coupon rate.
dv
D. higher when the bond interest expense is calculated using the effective interest amortization.
are

Topic: LO 3
25. (p. 493) If a bond sells at a premium, the amortization of the premium will:
Sh

C. decrease the cash payment for interest.
is

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Topic: LO 3
is
26. (p. 490) If a bond sells at a discount, the amortization of the discount will:
Th

C. increase the cash payment for interest.
Topic: LO 3
27. (p. 490) When will a bond sell at its face value?
A. When the coupon rate is equal to the effective rate.

B. When the coupon rate is greater than the effective rate.
C. When the coupon rate is less than the effective rate.
D. Only when it is only on the issue date.
Difficulty: Easy
Topic: LO 3
28. (p. 487) What is a bond that gives the issuer the option to repurchase the bond from investors at a time other than the maturity date called?
A. Callable bond
B. Convertible bond
Page 17 of 32
C. Retractable bond
D. Purchasable bond
Difficulty: Easy
Topic: LO 3
29. (p. 490) Timmins Ltd is issuing bonds today to finance the expansion of their production facilities. If Timmins thinks that interest rates are
going to fall over the next few years, while the bond is outstanding, what feature might they want to add to the bond?
A. Make it callable.
B. Make it retractable.
C. Make it convertible .
D. Make the effective interest rate lower than the coupon rate.
Topic: LO 3
30. (p. 490) Iqualuit Inc issued a 20-year $100,000 bond with a semi-annual coupon rate of 4% when market interest rates were 6%. What were
the proceeds of the bond at the time of issue?
A. $76,885
B. $77,060
m
C. $100,000
D. $127,355
co
2,000 PVA 40 periods @ 3% + 100,000 PV 40 periods @ 3% = $76,885
rr.
blu
Topic: LO 3
31. (p. 493) Prince Rupert Corporation issued a 15-year $200,000 bond with a semi-annual coupon rate of 6% when market rates were 4%.
un
What were the proceeds of the bond at the time of issue?
art
A. $177,763
B. $200,000
C. $244,473
Sm
D. $244,792
6,000 PVA @2% for 30 periods + 200,000(1/1.02)30 = $244,792

ia
dv

Topic: LO 3
32. (p. 491) Kinizi Incorporated sold a $10,000, 6%, 5-year bond for $9,189 to yield 8%. Interest is paid semi-annually. The company uses the
are
effective interest method to amortize all bond premiums and discounts. What will the interest expense on the first payment date be?
A. $300
Sh
B. $368
C. $400
D. $736
is
04 × 9,189 = 367.58
file
Topic: LO 3
is
33. (p. 491) Kinizi Incorporated sold a $10,000, 6%, 5-year bond for $9,189 to yield 8%. Interest is paid semi-annually. The company uses the
effective interest method to amortize all bond premiums and discounts. How much of the discount is amortized at the first payment
Th
date?
A. $0
B. $68
C. $81
D. $152
.04 × 9,189 = $368, coupon payment: .03 × 10,000 = $300, amortization: 368-300 = 68
Topic: LO 3
34. (p. 491) Inuvik Inc sold a 10-year, $100,000, 6% bond for $86,410 when the market rates were 8%. Interest is paid semi-annually. If Inuvik
uses the effective interest rate method, which of the following is the correct entry to record the first interest payment?
A.
B.
C.
Page 18 of 32
D.
Interest expense .04 × 86,410 = $3,456, coupon .03 × 10,000 = $3,000
Topic: LO 3
35. (p. 494) In 2006 Coopermine Ltd issued 10-year 5% coupon bonds at par. In 2009 interest rates on similar debt have increased to 6%. What
is the effect of the change in interest rates on Coopermine Ltd's 2009 financial statements?
A. They would record a gain on the change in value of the bond.

B. They would record a loss on the change in value of the bond
C. The interest expense they record will increase.
D. There is no effect.
m
Topic: LO 3
36. (p. 495) Johan Limited has a $100,000 bond outstanding with an unamortized discount of $5,679. The company has decided to retire the
co
bonds for a cost of $102,000. The journal entry to record the retirement of the banks will include which of the following?
rr.
A. Loss on redemption of bonds, $5,679.
B. Gain on redemption of bonds, $5,679.
blu
C. Loss on redemption of bonds, $7,679.
D. Gain on redemption of bonds, $7,679.
102,000 - (100,000 - 5,769) = 7,679

un
art
Topic: LO 3
Sm
37. (p. 495) Kingston Corporation recently retired $1,000,000 worth of bonds early for $997,500. They reported a gain related to the retirement
of the bonds of $24,250. What was the unamortized bond discount or premium at the time of retirement?
A. $21,750 premium
ia
B. $24,250 premium
C. $26,750 premium
dv
D. $21,750 discount
Proceeds + gain = book value of the debt. BV - face value = premium or discount. 997,500 + 24,250 = 1,021,750; 1,021,750 - 1,000,000 =
are
$21,750 premium
Sh

Topic: LO 3
38. (p. 496) Under IFRS, if an interest rate decreases after a bond is issued, the company should:
is
A. Recognize a unrealized gain in other comprehensive income

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B. Recognize a gain in net income

C. Ignore the changes in the interest rates
D. Disclose the market value of debt in the notes to the financial statements
is
Difficulty: E
Th

Topic: LO 3
39. (p. 498) All of the following are criteria for capitalizing a lease except?
A. It is likely that the lessee will ultimately get ownership of the asset.
B. The lessor and the lessee are related companies.
C. The lease term is long enough that the lessee receives most of the economic benefits of the asset.
D. The present value of the lease payments is equal to most of the fair value of the asset.
Topic: LO 4
40. (p. 498) Which of the following criteria would lead to a lease's being accounted for as a capital lease?
A. The lease is for real property.

B. The lease term is for four years, while the asset's useful life is ten years.
C. The present value of the minimum lease payments is $92,000, while the fair market value of the leased asset is $100,000.
D. The lease asset is guaranteed to revert to the lessor at the end of the lease term.
Topic: LO 4
41. (p. 500) If a company had capitalized a lease on an asset, which of the following entries for the lease payment would be correct?
Page 19 of 32
A.
B.
C.
D.
Topic: LO 4
42. (p. 500) If a company has an operating lease for an asset, which of the following entries for the lease payment is correct?
A.
B.
C.
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D.
rr.
Difficulty: Easy
blu
Topic: LO 4
43. (p. 498

- Which of the following would most likely be recorded as a capital lease for accounting purposes?
un
499)
A. The 15-year lease on the company's head office space.

art
B. The 3-year leases on the salesmen's cars.

C. The 25-year lease on a piece of manufacturing equipment.
Sm
D. The 48-month lease on the office photocopier.
ia
Topic: LO 4
44. (p. 501) When compared with a company recording an asset as a capital lease, the return-on-assets (ROA) and debt-to-equity for a company
dv
using an operating lease are:
A.
are
B.
C.
D.
Sh
The operating lease company has lower assets and lower expense, therefore higher ROA; lower liabilities, therefore lower D/E.
is
file
Topic: LO 4
45. (p. 499 Brandon Corporation has leased an asset that they are correctly recording as a capital lease. When they signed the lease the asset was
- recorded at $39,925. The interest rate used in the calculations is 8%, the asset has an expected useful life to Brandon of 8 years, and
500)
the annual lease payment is $10,000. The total expense related to the lease reported on Brandon's income statement in the first year
is
of the lease is closest to?

Th
A. $3,194
B. $4,990
C. $8,184
D. $10,000
Interest expense: .08 × 39,325 = 3,194. Amortization expense: 39,925/8 = 4,990. Total expenses = 3,194 + 4,990 = $8,184
Topic: LO 4
46. (p. 499 On January 1, 2009, O'Connor Construction signed a lease for a machine for $15,000 per year for 8 years. The first payment is due
- December 31, 2009. The lease covers 80 per cent of the asset's useful life, and O'Connor expects to keep the asset at the end of the
500)
lease. If O'Connor had borrowed money to buy the machine, they estimate the interest rate would have been 8%. The expense that
would be recorded for the lease on the income statement in 2009 is closest to?
A. $6,896
B. $8,620
C. $15,000
D. $15,516
Lease value: 15,000 PVA @8% 8 years = $86,200. Interest expense for first year: .08 * 86,200 = 6,896. If 8 years is 80% of the life, 10 years
is its useful life. Amortization expense: 86,200/10 = 8,620. Total expense 8,620 + 6,896 = $15,516
Page 20 of 32
Topic: LO 4
47. (p. 500) On January 1, 2009, Alert Construction signed a lease for a machine for $15,000 per year for 7 years. The first payment is due
December 31, 2009. The lease covers 70 per cent of the asset's useful life, and Alert expects to return the asset at the end of the
lease. If Alert had borrowed money to buy the machine, they estimate the interest rate would have been 8%. The expense that would
be recorded for the lease on the income statement in 2009 is closest to?
A. $6,247
B. $7,809
C. $14,056
D. $15,000
Operating lease, expense = payment
Topic: LO 4
48. (p. 504) How is the pension expense calculated for a defined-contribution pension plan?
A. Based on the required contributions made by the employer.

B. Based on the required contributions made by the employer and employee.
m
C. Based on the expected portion of the future benefits that were earned that period.
D. Based on the actual contributions made by the employer and employee.
co
rr.
Topic: LO 5
blu
49. (p. 505) An analyst is reviewing the financial statements of a company and notices that the company reports a pension liability on its balance
sheet. What does the pension liability represent?
A. The present value of all future pension obligations.

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B. The amount of this year's pension expense that has not been paid yet.
art
C. The increase in the pension obligation that was earned this year.
Sm
Topic: LO 5
50. (p. 500) An analyst is reviewing the financial statements of a company and notices that the company reports a pension asset on its balance
ia
sheet. What does the pension asset represent?

dv
A. The market value of all pension assets.

B. The amount of next year's pension expense that has been prepaid.
are
C. The current year's contributions to the pension.

Sh

Topic: LO 5
51. (p. 505) How is the pension expense calculated for a defined benefit plan?
is

file
is
Th

Topic: LO 4
52. (p. 504) How is the pension expense calculated for a defined contribution plan?

Topic: LO 4
53. (p. 508) Contingent liabilities will become actual liabilities depending on:
A. The outcome of a future event.

B. The degree of uncertainty surrounding the outcome of a future event.
C. A decision by the board of directors to record the liability.
D. Whether they are probable and estimable.
Topic: LO 6
Page 21 of 32
54. (p. 509) Gain contingencies, which are significant and likely and can be reasonably estimated:

D. Should not be reported or disclosed until the gain is realized.
Topic: LO 6
55. (p. 508) Loss contingencies, which are significant and likely and can be reasonably estimated:

D. Should not be reported or disclosed.
Difficulty: Easy
Topic: LO 6
56. (p. 508

- All of the following are examples of contingent losses except?
m
509)
co
A. Lawsuits
B. Income tax reassessments
C. Guarantees of others' debt
rr.
D. Warranties
blu
un Topic: LO 2, 6
57. (p. 508) Portage La Prairie Company is currently being audited by the tax authorities with respect to a deduction they claimed two years ago.
If they are reassessed, the amount they will owe will be $2,000,000. Neither their accountant nor their attorney has been able to tell
art
them how likely it will be that they will owe the additional taxes. How should Portage La Prairie Company report the situation?
A. They should go back and restate the income statement from two years ago.
Sm

ia
dv

Topic: LO 6
58. (p. 508) Portage La Prairie Company is currently being audited by the tax authorities with respect to a deduction they claimed two years ago.
are
If they are reassessed, the amount they will owe will be $2,000,000. Their accountant has been unable to tell them how likely it is
that they will owe the additional taxes. This is an example of which of the following?
Sh
A. An accrued liability
B. A contingent loss
C. A contingent gain
D. A future income tax liability
is
file

Topic: LO 6
59. (p. 508) A former employee was fired last year for stealing $500 from the company's petty cash drawer. The former employee is now suing
is
the company for wrongful dismissal on the grounds that they should never have been put in charge of the petty cash drawer. The
company's lawyer does not think there is any chance the employee could win their suit. How should the company report the
Th
situation?
A. They should go back and restate the income statement from last year.
Difficulty: Medium
Topic: LO 6
60. (p. 509) Which of the following is an example of an executory contract?
A. A warranty obligation on a product sold.

B. Interest accrued on an outstanding loan.
C. An agreement to purchase inventory next month.
D. The purchase of goods from a supplier.
Topic: LO 1
61. (p. 509) A company should disclose a commitment made to purchase something in the future in all of the following situations except?
Page 22 of 32
A. If it involves an unusual degree of risk.

B. If it is in the normal course of business.
C. If it involves a significant expenditure.
D. If it commits the entity to issue shares.
Difficulty: Easy
Topic: LO 6
62. (p. 509) Just before the end of the year, Matawan Inc entered into a contract with a supplier to purchase $100,000 of product per year over
the next 5 years. The amount is a significant amount of their annual purchases. How should the contract be reflected in the current
financial statements?
A. Accrued as a contingent liability.

B. Accrued as an accrued liability.
C. Disclosed as a contingent liability in the notes to the financial statements.
D. Disclosed as a commitment in the notes to the financial statements.
Topic: LO 6
63. (p. 510) In January 2010, one of Whale Cove Company's major customers went bankrupt. The customer owed Whale Cove a large account
receivable at the year-end, and estimates now indicate that they will likely only collect about one-quarter of the amount owed. How
m
should this event be reflected in Whale Cove's December 31, 2009, financial statements?
co
A. Accrued as a contingent loss.
B. Disclosed as a contingent loss.
rr.
C. Accrued in the allowance for doubtful accounts.
D. Disclosed as a subsequent event.
blu
un Level of Learning: Knowledge
Topic: LO 6
64. (p. 510) On February 1, 2010, White Rock Company retired some bonds it had outstanding. How should this event be reflected in White
art
Rock's December 31, 2009, financial statements?
A. Disclosed as a contingent gain.

Sm

C. Accrued as a gain on bond retirement.
D. It is not reflected in White Rock's financial statement.
ia
dv
Topic: LO 6
65. (p. 509) On February 1, 2010, Burnaby Company renewed its banking arrangements with its principle bank. None of the terms of their loans
are
changed. How should this event be reflected in Burnaby's December 31, 2009, financial statements?
A. Disclosed as a purchase commitment.

Sh
C. Accrued as a current liability.

D. It is not reflected in Burnaby's financial statement.
is
file
Topic: LO 6
66. (p. 511) A company borrows money at the rate of 10% and has a tax rate of 25%. What is their after-tax cost of borrowing?
A. 2.5%
is
B. 7.5%
Th
C. 10%
D. 12.5%
10(1-.25) = 7.5%
Difficulty: Easy
Topic: LO 7
67. (p. 511) A company paid total interest on its debt last year of $400,000 and also paid out $250,000 in dividends. If their tax rate is 40%, what
was the after-tax cost to the company of each of those sources of financing?
A.
B.
C.
D.
400,000(1-.40) = $240,000, Dividends not tax deductible
Topic: LO 7
68. (p. 511) Which of the following ratios can be used to evaluate an entity's capital structure?
Page 23 of 32
A. Current ratio
B. Debt-to-equity
C. Interest-coverage ratio
D. Return-on-assets
Topic: LO 7
69. (p. 511) What is the term used to describe how an entity is financed?
A. Capital structure
B. Leverage
C. Shareholders' equity
D. Financial leverage
Topic: LO 7
70. (p. 511) Z-Mart is a large retailer. Its debt-to-equity ratio last year was 0.82 and its interest-coverage ratio was 20.5. The industry averages
for these two ratios are 0.68 and 24.59, respectively. Based on that information, which of the following statements is true?
A. Z-Mart has more debt in its capital structure than the average for the industry.
m
B. Z-Mart has less debt in its capital structure than the average for the industry.
C. Z-Mart is less risky than the average for the industry.
co
D. Z-Mart is can pay its interest expense more easily than the average in the industry.
rr.
blu
Topic: LO 7
71. (p. 513) If a company made extensive use of operating leases to finance assets, what would be the effect on the debt-to-equity ratio?
A. The debt-to-equity ratio would be understated.

un
B. The debt-to-equity ratio would be overstated.
art
C. The debt-to-equity ratio would be not be affected.
D. The effect depends on whether the ratio is above 1 or not.
Sm
Topic: LO 7
72. (p. 512) Dryden Inc has a debt-to-equity ratio of 0.80. It has total shareholders' equity of $2.5 million and current liabilities of $750,000.
ia
How much long-term debt is outstanding?

dv
A. $1,250,000
B. $2,000,000
are
C. $2,375,000
D. $3,125,000
0.80 × 2,500,000 = 2,000,000 total debt less CL 750,000 = $1,250,000

Sh
is
Topic: LO 7
73. (p. 512) Etobicoke Enterprises had a debt-to-equity ratio of 0.60. They have total shareholders' equity of $5 million. They also have
file
operating leases that require annual payments at the end of the next 5 years of $285,000. If the discount rate that applies to the
leases were 6%, what would their debt-to-equity ratio be if the leases were capitalized?
is
A. 0.60
B. 0.67
Th
C. 0.84
D. 0.885
Total liabilities without leases: .60 × 5 = 3 million. PV of leases: .285PVA 5 yrs @ 6% = $1.2 million. New D/E ratio = (3 + 1.2)/5 = .84
Topic: LO 4, 7
74. (p. 511 Arnot Corporation reported $25,000 in interest expense on loans of $312,500, $120,000 in net income and $40,000 in income tax
- expense last year. What was their after-tax cost of borrowing and their interest coverage ratio for the year?
512)
A.
B.
C.
D.
Interest coverage: (120,000 + 40,000 + 25,000) /25,000 = 7.4, tax rate 40,000/(120,000 + 40000) = 25%. Cost of borrowing: 25,000/312,500
= 8%. After tax cost 8% × (1-.25) = 6%
Page 24 of 32

Topic: LO 7
75. (p. 511

- Which of the following statements is true concerning the evaluation of solvency ratios for a company?
512)
A. A lower debt-to-equity ratio means the company is more risky.

B. A lower interest-coverage ratio means that the company is more risky.
C. A higher interest coverage ratio means that the company is more risky.
D. A higher interest coverage ratio and a higher debt-to-equity ratio mean that a company is more risky.
Topic: LO 7
76. (p. 511

- An increase in a company's debt-to-equity ratio from 1.20 to 1.87 means:
512)
A. The company's liabilities have decreased during the year.

B. The company is less solvent than it was during the year.
C. The company's solvency has improved.
D. The company must have issued additional common shares.
m
co
Topic: LO 7
77. (p. 521 In the following journal entry to record income tax expense, which amount would represent the amount that the entity has to pay to
rr.
- the federal and provincial governments in taxes?
522)
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A. $10,000
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B. $30,000
art
C. $40,000
D. $40,000 multiplied by the tax rate
Sm
Topic: LO 8
78. (p. 520) Which of the following creates a permanent difference between income for financial reporting purposes and income for tax
ia
purposes?
dv
A. Amortization of asset
B. Warranty costs
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C. Pension costs
D. Capital gains
Sh

Topic: LO 8
79. (p. 520) Which of the following creates a temporary difference between income for financial reporting purposes and income for tax
is
purposes?
file
A. Meals and entertainment expenses

B. Warranty costs
C. Penalties on the late payment of taxes
D. Capital gains
is
Th
Topic: LO 8
80. (p. 521) A company is using the straight-line method for amortizing its capital assets for financial accounting purposes and CCA for tax
purposes. If the net book value of the asset were greater than the undepreciated capital cost, what would the company report on their
balance sheet?
A. A current future tax asset.

B. A current future tax liability.
C. A non-current future tax asset.
D. A non-current future tax liability.
Topic: LO 8
81. (p. 520) Which of the following best describes a future tax liability (FTL)?
A. A FTL arises when the company does not pay all of its taxes due in the current year.
B. A FTL arises when there are temporary differences between the income as calculated on the financial statements and on the tax return.
C. A FTL arises when there are permanent differences between the income as calculated on the financial statements and on the tax return.
D. A FTL arises when the company has paid tax in advance of when it is due.
Page 25 of 32

Topic: LO 8
82. (p. 522) What is the method called when a company calculates their income tax expense on the cash basis?
A. Taxes payable method

B. Temporary taxes method
C. Tax allocation method
D. Cash payable method
Topic: LO 8
83. (p. 522) If a company uses the taxes payable method of calculating income tax expense, which of the following statements would be true?
A. The income tax expense would be equal to the income taxes payable.
B. The income tax expense would be greater than the income taxes payable.
C. The income tax expense would be less than the income taxes payable.
D. The current income tax expense would be equal to the future income tax expense.
Topic: LO 8
m
84. (p. 481) During its first year of operations, Choy Limited had sales of $765,000. The company offers a 2-year limited warranty on all sales
co
and expects that warranty costs for the first year will average 0.5% of sales with an additional 1.5% in the second year. During the
current year the company spent $12,000 on warranty repairs.
rr.
Required:
A) Prepare all journal entries related to the warranty for the current year.
B) How would the warranty liability be reported on the company's year-end balance sheet?
A)
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un
765,000 × (.05 + 1.5) = $15,300 total expense
When initially recorded $3,825 is a current liability, $11,475 is long-term
art
Sm
B) At year-end all outstanding warranties that are expected to be paid in the upcoming year would be classified as current. The amounts
expected to be paid in the year after, from sales later in the year, would be classified as long-term.
ia

Topic: LO 2
dv
85. (p. 481) For each of the following independent situations prepare the adjusting entry that would be required at year-end. Assume a
December 31 year-end for all cases.
A) On September 1 a company issued at par a $500,000 8% semi-annual coupon bond, interest payable on February 28 and August
are
31.
B) A company leases retail space in a mall. The lease calls for monthly payments to be made on the first of the month of $5,000,
plus 1% of sales to be paid quarterly 15 days after the end of the quarter. The sales for the last quarter of the year were $375,400.
Sh
C) A company sells a product with a six-month warranty. Warranty costs are estimated to be 1.5% of sales. The company has not
recorded their estimate for the expense on the current year's sales of $2,500,000 but has paid $27,000 in warranty claims during the
year.
is
D) A company estimated its income tax expense to be $525,000 for the year. To date they have made instalment payments of
$400,000.
E) A company has a 5-year term loan of $250,000 outstanding with a bank. Interest is charged at 5% and paid on the first day of
file
each quarter. The annual payment of $50,000 is due January 1.

is
A)
Th
B)
C)
D)
E)
For reporting purposes the $50,000 up-coming payment would be reclassified as current, although that probably would not be done with an
adjusting entry.
Topic: LO 1, 2, 3,
86. (p. 479

-
Panorama Properties reported the following account balances and events at their September
Page 26 of 32
486)
Required:
Prepare the liability section of their balance sheet as at September 30, 2009 including the effects of any required adjustments.
m
co
rr.
blu
un
art
Topic: LO 2, 3, 4, 5
87. (p. 488 On January 1, 2009, Rio Chaise Limited sold $100,000 8% 10-year bonds to yield 10%. The bonds pay interest semi-annually each
Sm
- July 1 and January1. The accounting period ends December 31. Rio Chaise amortizes any bond discount or premium using the
489)
effective interest method.
A) What was the selling price of the bond?
B) What was the amount of interest expense recorded on July 1, 2009?
ia
C) What was the amount of the cash payment for interest on July 1, 2009?
dv
A) 4,000 PVA @5% for 20 periods + 100,000(1/(1.05) 20 = $87,537

B) .05 × 87,537 = $4,377
C) .04 × 100,000 = $4,000
are
Sh
Topic: LO 3
88. (p. 490 On January 1, 2009, Glen Wild sold a $1,000,000 bond issue to finance the construction of a new 18-hole golf course and clubhouse.
- The bond has a coupon rate of 10% interest (payable annually each December 31) and matures in ten years.
493)
is
Required:
A) Indicate the selling price and show the calculations to support issuing the bond under each of the following three market
file
conditions. Bond A; Bond B; and Bond C:

is
B) Using the effective interest method, calculate the interest expense and the cash payment for interest on December 31, 2009 for
Th
each scenario.
A)
B)
Topic: LO 3
89. (p. 495)

Pembrooke Corporation issued 15-year $500,000 6% semi-annual bonds five years ago at an effective interest rate of 8%. Coupon
payment dates are April 1, and October 1. Interest rates have fallen, so Pembrooke can retire the bonds on October 1, 2010, for
Page 27 of 32
$500,000. The last coupon was paid on April 1, 2010, and after that the balance in the bond discount account was $67,952.
Required:
A) Calculate the gain or loss on retirement for Pembrooke.
B) Prepare the journal entry to record the retirement.
C) What is the current market rate on the bonds as at October 1, 2010?
A) Need to calculate the interest for April to October.

.04 × (500,000 - 67,952) = $17,282
Coupon = .03 × 500,000 = 15,000
Amortization of bond discount (17,282 - 15,000 = 2,282)
New balance of bond discount = 67,952 - 2,282 = 65,670
Book value of the bond = 500,000 - 65,670 = 434,330
Loss on bond retirement = 500,000 - 434,330 = 65,670
Because they are being retired at par, the loss is equal to the unamortized bond discount.
B)
C) The bonds can be retired at par, so the effective interest rate must be equal to the coupon, 6%.
m
Topic: LO 3
90. (p. 511) Discuss whether debt or equity is riskier from the point of view of:
co
A) The investor
B) The issuing corporation
rr.
A) From the investor's, or lender's, point of view equity is riskier. It does not provide any guaranteed payments, and the company is not
blu
required to pay dividends. There is no minimum guaranteed rate of return on equity. If the company skips a dividend payment, the investor's
only recourse is to complain at the annual meeting, and the company does not have to make up the missed payment (except for cumulative
preferred dividends). In the event of bankruptcy the investor will only get the residual amount left after all the other claims have been paid.
un
B) From the issuer's point of view debt is riskier. Debt has interest payments and usually a fixed repayment schedule and it must be paid
regardless of how well the company is doing. If the company defaults on any of the payments, interest or principle, it can have significant
consequences for an entity.
art
Sm

Topic: LO 3, 7
91. (p. 513) A) Briefly explain what the term "off-balance-sheet financing" means.
B) Give an example of an off-balance-sheet financing arrangement.
ia
C) From the user's perspective, what is wrong with off-balance-sheet financing?

dv
A) Off-balance-sheet financing is when an entity incurs an obligation but the transaction is structured in such a way that the liability is not
recorded on the balance sheet.
B) An example could be an operating lease. The entity gets the use and benefit of the asset over a long period, just as if they had bought it, but
are
instead of recording a liability for the loan, which they would have taken out if they were require to buy it, they do not record the future lease
payments that are required. The lease has a required series of cash outflows just like the loan, but these are not recorded on the balance sheet.
C) From the user's point of view if the liability is not reported it makes the company look less risky than it really is. It does have future
Sh
obligations, but they are not recorded on the balance sheet. It is difficult for the user to correctly assess the company's solvency.
is

Topic: LO 4
file
92. (p. 499 Dake Limited has just leased two new pieces of manufacturing equipment. Machine #1 had a purchase price of $26,000; the annual
- lease payment is $6,500 at the end of each of the next five years. The machine is expected to have a useful life of six years. The
500)
machine will be returned to the manufacturer at the end of the 5-year lease. Machine #2 can be purchased for $18,000. The lease
requires annual payments of $3,000 at the end of the next three years. Dake has the option of purchasing the lease at the end of the
is
lease term for its fair market value at that time. Machine # 2 is expected to have a useful life of 10 years. Dake's incremental
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borrowing rate is 8%.

Required:
A) Determine the type of lease for each machine.
B) Prepare the journal entries for the first year of each lease.
A) Machine #1: lease term 5 years, life of asset 6 years. Lease is for most of economic life = > capital lease
Machine #2: lease term 3 years, life of asset 10 years, not majority of economic life, no bargain purchase option, lease costs do not represent
the majority of FMV of the asset, = > operating lease.
B) Machine #1: Value: 6,500 PVA 5 years @ 8% = $25,952
Interest expense .08 × 25,952 = 2,076, Amortization 25,952/5 = $5,190.40
Entry at the signing of the lease. Lease obligation would be split between current and long-term for presentation.
Page 28 of 32
Topic: LO 4
93. (p. 497 Banff Corporation is a new graphic design business. It requires computers to do the graphic design work and is trying to decide how
- to acquire them. One option is to buy the computers from a store and borrow the money they need from the bank. A second option is
498)
to lease the computers from another company that specializes in the leasing of office equipment. The leasing company is offering a
two-year lease that they could renew or change when it expired. The computers they are interested in have a physical life of five
years, but Banff wants to make sure that it always has current equipment to remain competitive. The two owners have approached
you to help them decided. They want to consider the impact on their financial statements as well as the technical requirements of the
computers when they decide.
Required:
A) Evaluate, from Banff's perspective, the two options that are available.
B) Which would you recommend? Why?
A) If Banff buys the computers they will own them for as long as they want. If they want to upgrade the technology they will have to sell
them and buy new ones. The bank will probably not lend them the full amount of the purchase price but will require that they put down a
down payment. Once purchased, the computers will be recorded as an asset on their balance sheet and they will record a liability for the bank
loan.
If they lease the computers they will have more flexibility. The lease is only for two years and when they renew they could upgrade the
machines to more current models if they wanted to. If they lease they will not have to put down a down payment so can effectively finance the
entire price.
How the lease is reflected on their financial statements will depend on whether it is considered a capital lease or an operating lease. A capital
m
lease will result in an asset and a liability being recorded just like the loan. If it qualifies as an operating lease only an annual lease expense is
recorded on the income statement. Without all of the facts it is difficult to know conclusively but as the lease is only for 2 years of the
co
computers' 5-year life, and Banff will not own the computers at the end of the lease, it does not appear to be a capital lease for accounting
purposes.
B) I recommend the leasing option. It does not require any money down, which is important for a new company and gives them the greatest
rr.
flexibility both in terms of being able to upgrade the machines and not having to record the liability. If the business is unsuccessful, it may be
easier for them to return the machines and get out of their obligations.
blu
un Friedlan - Chapter 09 #93
Level of Learning: Analysis
Topic: LO 4
94. (p. 497 Athabasca Inc leased a new piece of equipment during the past year. The lease was signed on January 1, 2009, and the first payment
art
-501, is due January 1, 2010. The lease payments are $825 per year, and the lease term is 15 years (of its 20 year useful life), after which
511)
they will return the equipment to the lessor, and the interest rate is 6%. The company is in the process of preparing their 2009
financial statements and has come to you for advice on how to record the lease. It is not recorded in the draft financial statements
Sm
below.
ia
dv
are
Sh
is
file
is
Th
Required:
A) Identify the changes in the financial statements of accounting for the lease as a capital lease. Do not prepare revised financial
statements. What would be the ROA, D/E and Net profit margin? You may round all amounts to the nearest dollar. You may ignore
income taxes.
B) Identify the changes on the financial statements of accounting for the lease as an operating lease. Do not prepare revised financial
statements. What would be the ROA, D/E and Net profit margin?
C) Which method do you think the management of Athabasca would prefer? Why?
D) Recommend how the lease should be accounted for. Is there any other information you need?
A) Capital lease: 825 PVA 15 years @ 6% = $8,012.

Interest expense in 2009: 0.06 × 8,012 = $481
Principal portion of the first payment: 825-481 = $344
Amortization expense: 8,012/15 = $534.
Changes in I/S: increased expenses 534 + 481 = $1,015
Revised net income: 3,200 - 1,015 = $2,185
Changes in B/S: Asset would increase 8,012 - 534 = $7,478.
Liabilities would increase by the lease: $8,012 as at December 31 plus the accrual for the interest expense: $481.
Retained earnings would decrease by the amount of the interest and amortization expense $1,015
ROA: 2,185/(37,100 + 7,478) = 4.9%
D/E: (19,400 + 8,012 + 481)/(17,700 - 1,105) = 1.68
Net profit margin: 2,185/45,000 = 4.85%
B) Operating lease
Page 29 of 32
Change on I/S: Lease expense: $825

Revised net income: 3,200 - 825 = $2,375
Change in B/S: Lease payment payable (current liability) $825
Retained earnings would decrease by $825
ROA: 2,375/37,100 = 6.4%
D/E: (19,400 + 825)/(17,700 - 825) = 1.2
Net profit margin: 2,735/45,000 = 6.1%
C) Management would prefer the operating lease-it has a lower D/E so the company looks more solvent and less risky and higher ROA and
net profit margin so they look more profitable.
D) It is difficult to say with the information available. The lease covers exactly 75% of the asset's life (15/20 = 75%). The asset reverts to the
lessor at the end and the fair market value of the asset is not known, so whether the lease represents the majority of the asset's FMV cannot be
determined. Other information that would be useful is the FMV, what management's objectives are and if there are any debt covenants or
other restrictions on the financial structure that might influence the preferred treatment. If management has bonuses based on net income, that
could be an important factor as well. Student could recommend either approach depending on if they felt that objectives dominated (favours
operating) or that the 75% economic value was enough to trigger the classification as a capital lease.
Level of Learning: Analysis
Topic: LO 1,4,7
95. (p. 480 In December 2009, Sydney Inc (Sydney) had the following transactions and events related to their employees. Record the journal
- entries for each event.
482)
A) The total payroll for the month, $175,000, was paid on the last working day of the year, December 30. The company withheld the
m
following amounts from the employee paycheques: $5,250 for Canada Pension Plan (CPP), $2,600 for Employment Insurance (EI),
$35,000 for income taxes. Sydney remits the withholdings on the tenth day of the following month.
co
B) Sydney has a defined benefit pension plan for its senior executives. The estimated pension expense for the year was calculated in
December at $32,000. The company made their required contribution of $12,500 on December 12.
C) Sydney has a defined contribution pension plan for all other full-time employees. Sydney contributes three percent of an
rr.
employee's gross salary into the plan every month. Employees can make additional voluntary contributions. The portion of
December's payroll applicable to full-time employees was $122,500. Contributions are made the last day of the month.
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D) Salesmen are paid a bonus commission of five percent of sales above their annual sales targets. Sales above target for 2009 were
estimated to be $1,600,000. The payments are made January 31 after the year-end sales numbers have been confirmed.
un
A)
art
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B)
C)
ia
dv
D)
are
Sh
Topic: LO 1, 2, 5
96. (p. 507 Classify each of the following events as a commitment, a subsequent event or a contingency. Support your decisions. Some may fit
- more than one classification. For each one, indicate how it would be reflected in the company's financial statements. Assume a
510)
is
December 31 year-end for all companies; assume all amounts are material unless otherwise noted.
A) On November 15, a customer became ill after eating in one of the restaurants operated by the company. The customer is suing the
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company for lost wages and damages totalling $50,000. No other customers have complained to the company about similar
problems, so the company's lawyers believe the claims are without merit. The amount of the claim is very small relative to the
company's overall business.
B) A company guarantees the $2,000,000 loan of another company that they own. They have been the guarantor for five years and
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have never had to act on their guarantee.

C) On September 30, the company renewed the lease on their office space for 5 years at a monthly payment of $20,000.
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D) On July 1, the company entered into an agreement with its supplier to buy $500,000 worth of goods, based on prices in effect on
that date, per year for the next 5 years. The company is pleased to have the supply assured over the next 5 years, although to date
purchases from that supplier have never exceeded $400,000.
E) On January 31, the company issued $5,000,000 in bonds.
A) This lawsuit appears unlikely to be successful so should not be accrued. Because the amount is immaterial, it does not have to be
disclosed.
B) Because the amount is material, it should be disclosed as a commitment in the notes to the company's financial statements.
C) Although this is a commitment, it is in the normal course of business. It would be disclosed in the note about lease commitments, and
included in the amount disclosed for future lease payments.
D) This is a major commitment and is a new type of risk for the company. As a result it needs to be disclosed in the financial statements. If
the company fails to purchase the $500,000 of goods, an accrual would be necessary for the difference. If the market price of the item falls,
the loss that is then implied in purchasing above the market cost should be recognized in the financial statements.
E) This would be a subsequent event to the previous year's financial statements and would be disclosed in the notes.
Topic: LO 6
97. (p. all)
The president of Lake Louise Ltd wants to know the effect that the following events would have on users' perceptions of the
company. Complete the following list by indicating whether the event listed would increase, decrease or have no effect on the
financial measures listed. State any assumptions you make. Lake Louise Ltd has a December 31 year-end.
Page 30 of 32


Debt-to-equity: Decrease
Current ratio: No effect
Interest coverage: Increase
Cash from operations: $850,000: No effect
Return on assets: No effect
Debt-to-equity: Decrease
Current ratio: Increase
Interest coverage: Increase
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Cash from operations: No effect
Return on assets: Increase
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Assume line of credit is included in cash equivalent in the cash flow statement.
Assume company was paying interest on the line of credit.
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Debt-to-equity: Increase
Current ratio: Decrease
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Interest coverage: Decrease
Cash from operations: Decrease
Return on assets: Decrease un
Assume interest payable at year-end decreases current ratio, interest expense decreases CFO and net income for ROA and additional cash
from proceeds increases the assets.
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Current ratio: No effect
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Interest coverage: No effect

Return on assets: Decrease
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Current ratio: Decrease
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Interest coverage: No effect

Return on assets: No effect
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Topic: LO 2, 3, 4, 6, 7
98. (p. 518 Beta Corporation owns one asset, a truck. They bought it this year. It cost $75,000, and they are amortizing it straight-line over its
- estimated useful life of 10 years and at a 30% declining rate for tax purposes. Earnings before amortization and taxes were
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$200,000. The company's tax rate is 40%, and they deduct a full year's amortization in the year of purchase for accounting purposes;
for taxes, the half-rate rule applies in the first year.
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Required:
A) What is the tax basis, undepreciated capital cost of the truck at the end of the first year?
B) What is the accounting basis net book value at the end of the first year?
C) What is the balance in the future income tax asset (liability) at the end of the first year?
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D) What are taxes payable for the year?

E) What is the journal entry to record tax expense for the year?
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F) What is the total income tax expense for the year?

G) What is net income for the year?
A) CCA: 0.30 × 75,000 × ½ = $11,250

UCC = 75,000 - 11,250 = $63,750
B) Amortization expense: 75,000/10 = $7,500

NBV = 75,000 - 7,500 = $67,500
C) Tax basis-accounting basis = difference × tax rate = FTA/L

63,750 - 67,500 = (3,750) × .40 = $1,500 FTL
D)
E)
F) Net income:
Page 31 of 32
Topic: LO 8
99. (p. 518 The following information relates to a building owned by a company.
-
521)
A) Calculate the balance in the future income tax account.

B) Indicate where on the financial statement the account would be found.
C) Explain when this amount is due to be received or paid by the company.
A)
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B) Because the building is a long-term asset, the liability would be reported as a long-term liability.
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C) It is not a legal obligation, so may never be payable. It indicates that the CCA claimed on the asset throughout its life has been greater than
the amortization taken to date. Therefore, the taxable income and taxes payable during this period have been lower than net income reported
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on the financial statements in the same period. If the asset is not replaced, sold or other new assets added to the group then at some point in
the future the reverse will happen and the taxes payable by the company will be greater than the income tax expense on the income statement.
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When that occurs, the amount in the liability account will be drawn down.
un Friedlan - Chapter 09 #99
Topic: LO 8
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Page 32 of 32
9 Summary
Category # of Questions
Difficulty: Difficult 28
Difficulty: E 1
Difficulty: Easy 11
Difficulty: Medium 1
Difficulty: Moderate 58
Friedlan - Chapter 09 99
Level of Learning: Analysis 2
Level of Learning: Application 36
Level of Learning: Comprehension 17
Level of Learning: Knowledge 44
Topic: LO 1 6
Topic: LO 1, 2 1
Topic: LO 1, 2, 3, 1
Topic: LO 1, 2, 5 1
Topic: LO 1,4,7 1
Topic: LO 2 13
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Topic: LO 2, 3 2
Topic: LO 2, 3, 4, 5 1
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Topic: LO 2, 3, 4, 6, 7 1
Topic: LO 2, 6 1
rr.
Topic: LO 3 21
Topic: LO 3, 7 1
blu
Topic: LO 4 14
Topic: LO 4, 7 1 un
Topic: LO 5 3
Topic: LO 6 12
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Topic: LO 7 10
Topic: LO 8 9
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Page 1 of 32

1. Which of the following is a characteristic of a liability?

A. It must require a sacrifice of future resources.

2. Which of the following liabilities would be valued at their present value?

value, which of the following statements would be true?

A. Only liabilities will be understated.

C. Both assets and liabilities will be overstated.

A. Current liabilities are valued at their present value.

7. All of the following are current liabilities except?

8. All of the following are current liabilities except?

Current liabilities at December 31, 2009, were:

A. A debit to GST payable

C. A credit to GST payable

A. December 31, 2008

12. Which of the following best describes an accrued liability?

A. A liability whose amount can only be estimated.

13. All of the following are examples of an accrued liability except?

A. Warranty expense was overestimated for 2009.

A. Sales $42,500, Accounts receivable $24,250.

25. If a bond sells at a premium, the amortization of the premium will:

A. increase interest expense.

C. decrease the cash payment for interest.

26. If a bond sells at a discount, the amortization of the discount will:

A. increase interest expense.

D. have no effect on the interest expense.

27. When will a bond sell at its face value?

A. When the coupon rate is equal to the effective rate.

B. When the coupon rate is greater than the effective rate.

the proceeds of the bond at the time of issue?

A. They would record a gain on the change in value of the bond.

B. They would record a loss on the change in value of the bond

A. Loss on redemption of bonds, $5,679.

D. Gain on redemption of bonds, $7,679.

A. Recognize a unrealized gain in other comprehensive income

A. The lease is for real property.

A. Based on the required contributions made by the employer.

A. The present value of all future pension obligations.

A. The market value of all pension assets.

A. Based on the contributions made by the employer that year.

A. Based on the contributions made by the employer that year.

D. Should not be reported or disclosed until the gain is realized.

A. Should be disclosed in a note to the financial statements.

B. Should be reported in the body of the financial statements.

56. All of the following are examples of contingent losses except?

B. Income tax reassessments

B. They should accrue a liability this period.

D. They should do nothing.

60. Which of the following is an example of an executory contract?

A. A warranty obligation on a product sold.

A. If it involves an unusual degree of risk.

A. Accrued as a contingent liability.

A. Disclosed as a purchase commitment.

C. Accrued as a current liability.

the after-tax cost to the company of each of those sources of financing?

69. What is the term used to describe how an entity is financed?

A. The debt-to-equity ratio would be understated.

A. A lower debt-to-equity ratio means the company is more risky.

76. An increase in a company's debt-to-equity ratio from 1.20 to 1.87 means:

A. The company's liabilities have decreased during the year.

D. The company must have issued additional common shares.

A. Meals and entertainment expenses

A. A current future tax asset.

A. Taxes payable method