1.

  On January 1, Princeton, Inc. issued $2 million of 8% bonds at 93.5% of par, based on an

effective rate of 9%.  The bonds pay interest on June 30 and December 31.  Using the effective
interest rate method, Princeton’s bond liability immediately after the first coupon payment is
made is closest to:
$1,870,000.
$1,874,150.
$2,000,000.
 
2.  On January 1, Princeton, Inc. issued $2 million of 8% bonds at 93.5% of par, based on an
effective rate of 9%.  The bonds pay interest on June 30 and December 31.  Princeton’s total
interest expense over the 10 year term of the bonds is closest to:
$1,600,000.
$1,683,000.
$1,730,000.
 
3. On January 1, Princeton, Inc. issued $2 million of 8% bonds at 93.5% of par, based on an
effective rate of 9%.  The bonds pay interest on June 30 and December 31. According to U.S.
GAAP, what amount should Princeton report in cash flow from operating activities for the first
year ended December 31, if the coupon payments are made on time? 
($90,000)
($160,000)
($168,300)
 
4. On January 1, Princeton, Inc. issued $2 million of 8% bonds at 93.5% of par, based on an
effective rate of 9%.  The bonds pay interest on June 30 and December 31. According to U.S.
GAAP, what amount should Princeton report in cash flow from financing activities at maturity? 
($1,800,000)
($2,000,000)
($2,080,000)
 
5. If a firm reacquires its outstanding debt for an amount that is less than the book value of the
debt, the resultant:
gain is recognized in shareholders’ equity as “other comprehensive income.”
loss is recognized as a component of earnings.
gain is recognized as a component of earnings.
 
6. Muleshoe Corporation issues a 5-year, $200,000 zero-coupon bond at an effective interest rate
of 8%.  Assuming semi-annual compounding, how much will Muleshoe report in the liability
section of its balance sheet immediately after issuance?
$135,113
$136,117
$200,000
 
7. According to U.S. GAAP, how should a lessee report operating lease payments in the cash
flow statement?  
Cash flow from operating activities.
Cash flow from investing activities.
Cash flow from operating and financing activities.
 
8. Gross profit is reported by the lessor from a:   
sales-type lease, but not a direct financing lease.
direct financing lease, but not a sales-type lease.
sales-type lease and a direct-financing lease.
 
9. Which of the following is most correct if a lessee capitalizes a lease?
Current assets increase.
Current liabilities increase.
Current liabilities decrease.
 
10. According to U.S. GAAP, all of the following would require finance lease treatment by the
lessee except:
the lease contains a purchase option.
ownership of the leased asset transfers to the lessee at the end of the lease.
the lease term covers a major portion of the asset’s useful life.
 

Use the following information to answer the next 5 questions. 

At the beginning of 20x1, Togo, Inc. entered into a finance lease to acquire equipment.  The
lease requires four annual payments of $25,663 beginning on December 31, 20x1.  The present
value of the lease payments, discounted at 8%, is $85,000.  The leased asset is expected to be
worthless at the end of the lease and Togo uses the straight-line depreciation method. 
To answer the questions, it will be helpful to complete the following tables: 

Togo, Inc.
Lease Amortization Schedule
Ordinary Annuity 
  Lease Interest Reduction of Ending
Date Payment Expense Lease Liability Lease Liability
        $85,000
12/31/x1 $25,663
12/31/x2
12/31/x3
12/31/x4
Total

Togo, Inc.
Lease Expense Schedule 
Depreciation Interest Total
Date Expense Expense Expense
12/31/x1
12/31/x2
12/31/x3
12/31/x4
Total

Togo, Inc.
Finance Lease / Operating Lease Comparison

In column 1 assume this is a finance lease.  In column 2 assume Togo instead considered
this to be an operating lease.
Date Finance Lease Expense Operating Lease Expense
12/31/x1
12/31/x2
12/31/x3
12/31/x4
Total
 
11. Based on the information above, Togo’s interest expense for the year ended 20x1 is closest
to:
0
4,900
6,800
 
12. Based on the information above, Togo’s lease liability at the end of 20x2 is closest to:
0
45,000
66,000
 
13. Based on the information above, Togo’s depreciation expense for the year ended 20x1 is
closest to:
0
21,000
28,000

14. Based on the information above, had Togo considered this instead to be an operating lease,
depreciation expense for the year ended 20x3 would be closest to:
0
21,000
28,000

15. Based on the information above, suppose Togo is considering whether to treat this as an
operating lease instead.  For the year ended 20x2, which would be higher?
The expense related to the finance lease
The expense related to the operating lease
Neither. The expenses on the two would be identical