Exam 10: Liabilities

Accounting terminology Listed below are nine technical accounting terms introduced in this chapter: Postretirement benefits expense Deferred income taxes Interest coverage ratio Operating lease Maturity value Loss contingency Capital lease Applying leverage Estimated liability Each of the following statements may (or may not) describe one of these technical terms. In the space provided beside each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. ____ (a) Operating income divided by annual interest expense. ____ (b) The amount paid during the current period to retired employees. ____ c) A lease agreement that is viewed as equivalent to the lessee purchasing the leased asset. ____ (d) Using borrowed money to finance business operations. ____ (e) The risk of a loss occurring in a future period. ____ (f) A permanent reduction in the amount of income taxes owed which results from the tax deductions for depreciation. ____ (g) The amount that must be paid to settle a liability at the date it becomes due.

Which one of the following is not considered a criteria to capitalize a lease?

Deferred income taxes At the end of its first year of operations, Harding Construction, Inc., included in its balance sheet a long-term liability entitled "Deferred Income Taxes." (a) Briefly explain what deferred income taxes represents, including how this liability came into existence and whether such an item is generally perceived as favorable or unfavorable from company management's point of view. (b) If Harding Construction, Inc., is a successful, growing business, would you expect the liability for deferred income taxes to increase or decrease over the next few years? Explain.

On October 1, Dalton Corp. borrows $100,000 from National Bank, signing a six-month note payable for that amount, plus interest to be computed at a rate of 9% per annum. Indicate all correct answers.

A capital lease is recorded in the accounting records of the lessee by an entry:

The current portion of long-term debt should be reported separately in the current liabilities section of the balance sheet.

The total liability related to this mortgage reported in Bradley's balance sheet at December 31, Year 1, is:

Identify all statements that are consistent with the concept of present value. (More than one answer may be correct.)

Pension expense is:

The interest coverage ratio:

Suppose investors decided to sell their holdings of capital stock in order to purchase outstanding bonds payable and as a result, the prices of bonds payable increased. What would be the likely impact on market interest rates?

A basic difference between loss contingencies and "real" liabilities is:

Elm Corporation plans to invest $300 million to earn about 15% before income taxes. The company is considering whether it should raise the $300 million by issuing 10% bonds payable or capital stock. If the company issues the bonds, it will probably report:

When bonds are sold by one investor to another, they sell at market price plus accrued interest since the last payment date.

Compute the total amount to be paid by Bradley over the 15-year life of the mortgage.

Bonds payable issued between interest dates-early retirement Deegan Imports received authorization on December 31, Year 1, to issue $4,500,000 face value of 8%, 20-year bonds. The interest payment dates are June 30 and December 31. All the bonds were issued at par, plus accrued interest on February 1, Year 2. The bonds are callable by Deegan at any time at 105. (a) Prepare the journal entry to record the issuance of the bonds on February 1, Year 2. (b) Prepare the journal to record the first interest payment on the bonds at June 30, Year 2. (c) What is the amount of bond interest expense reported in Deegan Imports' Year 2 income statement relating to these bonds? $__________ (d) What is the amount of bond interest payable appearing in Deegan Imports' balance sheet at December 31, Year 2, with respect to these bonds? $____________ (e) Deegan exercises the call provision and retires one-third of the bond issue on July 1, Year 3. Prepare the journal entry to record this transaction on July 1, Year 3.

The liability for this loan as of December 31, 2010:

Which of the following is not an accurate statement regarding the distinction between debt and equity?

At December 31, Year 1, the adjusting entry with respect to this note includes a:

Which of the following is an example of a contingent liability?