Republic of Philippines

DEPARTMENT OF EDUCATION
Region 1
Alaminos City, Pangasinan
MARY the QUEEN EDUCATIONAL FOUNDATION

TRUE-FALSE—Conceptual
1. A zero-interest-bearing note payable that is issued at a discount will not result in any interest
expense being recognized.
2. Dividends in arrears on cumulative preferred stock should be recorded as a current liability.
3. Magazine subscriptions and airline ticket sales both result in unearned revenues.
4. Discount on Notes Payable is a contra account to Notes Payable on the balance sheet.
5. All long-term debt maturing within the next year must be classified as a current liability on the
balance sheet.
6. A short-term obligation can be excluded from current liabilities if the company intends to
refinance it on a long-term basis.
7. Many companies do not segregate the sales tax collected and the amount of the sale at the
time of the sale.
8. A bond may only be issued on an interest payment date.
9. The cash paid for interest will always be greater than interest expense when using effective-
interest amortization for a bond.
10. Bond issue costs are capitalized as a deferred charge and amortized to expense over the life
of the bond issue.
11. The replacement of an existing bond issue with a new one is called refunding.
12. If a long-term note payable has a stated interest rate, that rate should be considered to be the
effective rate.
13. The implicit interest rate is the rate that equates the cash received with the amounts received
in the future.
14. An unrealized holding gain or loss is the net change in the fair value of the liability from one
period to another, exclusive of interest expense recognized but not recorded.
15. All dividends, except for liquidating dividends, reduce the total stockholders’ equity of a
corporation.
16. Dividends payable in assets of the corporation other than cash are called property dividends or
dividends in kind.
17. When a stock dividend is less than 20-25 percent of the common stock outstanding, a
company is required to transfer the fair value of the stock issued from retained earnings.
18. Stock splits and large stock dividends have the same effect on a company’s retained earnings
and total stockholders’ equity.
19. The rate of return on common stock equity is computed by dividing net income by the average
common stockholders’ equity.
20. The payout ratio is determined by dividing cash dividends paid to common stockholders by net
income available to common stockholders.
 MULTIPLE CHOICE—Conceptual

21. Liabilities are

a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally accepted
accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the future.

22. Which of the following is a current liability?

a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund
b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt
issue
c. A long-term debt maturing currently, which is to be converted into common stock
d. None of these

23. Which of the following is true about accounts payable?

1. Accounts payable should not be reported at their present value.
2. When accounts payable are recorded at the net amount, a Purchase Discounts account
will be used.
3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost
account will be used.
a. 1 b. 2 c. 3 d. Both 2 and 3 are true.

24. Among the short-term obligations of Lance Company as of December 31, the balance sheet
date, are notes payable totaling $250,000 with the Madison National Bank. These are 90-day
notes, renewable for another 90-day period. These notes should be classified on the balance
sheet of Lance Company as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.

25. Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the balance
sheet.
c. When there is a discount on a note payable, the effective interest rate is higher than the
stated discount rate.
d. All of these are true.

26. Which of the following may be a current liability?

a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these

27. Which of the following items is a current liability?

a. Bonds (for which there is an adequate sinking fund properly classified as a long-term
investment) due in three months.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven
months.
d. Bonds to be refunded when due in eight months, there being no doubt about the
marketability of the refunding issue.
28. Which of the following should not be included in the current liabilities section of the balance
sheet?
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
c. The discount on short-term notes payable
d. All of these are included

29. Which of the following is a current liability?

a. Preferred dividends in arrears
b. A dividend payable in the form of additional shares of stock
c. A cash dividend payable to preferred stockholders
d. All of these

30. Stock dividends distributable should be classified on the

a. income statement as an expense.
b. balance sheet as an asset.
c. balance sheet as a liability.
d. balance sheet as an item of stockholders' equity.

31. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from
date of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.

32. If bonds are initially sold at a discount and the straight-line method of amortization is used,
interest expense in the earlier years will
a. exceed what it would have been had the effective-interest method of amortization been
used.
b. be less than what it would have been had the effective-interest method of amortization
been used.
c. be the same as what it would have been had the effective-interest method of amortiza-tion
been used.
d. be less than the stated (nominal) rate of interest.

33. Under the effective-interest method of bond discount or premium amortization, the periodic
interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.

34. When the effective-interest method is used to amortize bond premium or discount, the periodic
amortization will
a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
c. increase if the bonds were issued at a premium.
d. increase if the bonds were issued at either a discount or a premium.

35. If bonds are issued between interest dates, the entry on the books of the issuing corporation
could include a
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.

36. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is
sold on June 1, the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
 d. increased by accrued interest from May 1 to June 1.

37. Theoretically, the costs of issuing bonds could be

a. expensed when incurred.
b. reported as a reduction of the bond liability.
c. debited to a deferred charge account and amortized over the life of the bonds.
d. any of these.

38. The printing costs and legal fees associated with the issuance of bonds should
a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
c. be accumulated in a deferred charge account and amortized over the life of the bonds.
d. not be reported as an expense until the period the bonds mature or are retired.

39. Treasury bonds should be shown on the balance sheet as

a. an asset.
b. a deduction from bonds payable issued to arrive at net bonds payable and outstanding.
c. a reduction of stockholders' equity.
d. both an asset and a liability.

40. An early extinguishment of bonds payable, which were originally issued at a premium, is made
by purchase of the bonds between interest dates. At the time of reacquisition
a. any costs of issuing the bonds must be amortized up to the purchase date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase date.
d. all of these.

41. How should a "gain" from the sale of treasury stock be reflected when using the cost method of
recording treasury stock transactions?
a. As ordinary earnings shown on the income statement.
b. As paid-in capital from treasury stock transactions.
c. As an increase in the amount shown for common stock.
d. As an extraordinary item shown on the income statement.

42. Which of the following best describes a possible result of treasury stock transactions by a
corporation?
a. May increase but not decrease retained earnings.
b. May increase net income if the cost method is used.
c. May decrease but not increase retained earnings.
d. May decrease but not increase net income.

43. Which of the following features of preferred stock makes the security more like debt than an
equity instrument?
a. Participating
b. Voting
c. Redeemable
d. Noncumulative

44. The cumulative feature of preferred stock

a. limits the amount of cumulative dividends to the par value of the preferred stock.
b. requires that dividends not paid in any year must be made up in a later year before
dividends are distributed to common shareholders.
c. means that the shareholder can accumulate preferred stock until it is equal to the par value
of common stock at which time it can be converted into common stock.
d. enables a preferred stockholder to accumulate dividends until they equal the par value of
the stock and receive the stock in place of the cash dividends.
P
45. According to the FASB, redeemable preferred stock should be
a. included with common stock.
b. included as a liability.
c. excluded from the stockholders’ equity heading.
d. included as a contra item in stockholders' equity.
S
46. Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as
a. an increase in current liabilities.
b. an increase in stockholders' equity.
c. a footnote.
d. an increase in current liabilities for the current portion and long-term liabilities for the long-
term portion.

47. At the date of the financial statements, common stock shares issued would exceed common
stock shares outstanding as a result of the
a. declaration of a stock split.
b. declaration of a stock dividend.
c. purchase of treasury stock.
d. payment in full of subscribed stock.

48. An entry is not made on the

a. date of declaration.
b. date of record.
c. date of payment.
d. An entry is made on all of these dates.

49. Cash dividends are paid on the basis of the number of shares
a. authorized.
b. issued.
c. outstanding.
d. outstanding less the number of treasury shares.

50. Which of the following statements about property dividends is not true?
a. A property dividend is usually in the form of securities of other companies.
b. A property dividend is also called a dividend in kind.
c. The accounting for a property dividend should be based on the carrying value (book value)
of the nonmonetary assets transferred.
d. All of these statements are true.

BONUS QUESTIONS

1. Nance Company estimates its annual warranty expense as 2% of annual net sales. The
following data relate to the calendar year 2012:
Net sales $1,500,000
Warranty liability account
Balance, Dec. 31, 2012 $10,000 debit before adjustment
Balance, Dec. 31, 2012 50,000 credit after adjustment
Which one of the following entries was made to record the 2012 estimated warranty expense?
a. Warranty Expense ........................................................ 30,000
Retained Earnings (prior-period adjustment) ..... 5,000
Warranty Liability ................................................ 25,000
b. Warranty Expense ........................................................ 25,000
Retained Earnings (prior-period adjustment) ............... 5,000
Warranty Liability ................................................ 30,000
c. Warranty Expense ........................................................ 20,000
Warranty Liability ................................................ 20,000
d. Warranty Expense ........................................................ 30,000
Warranty Liability ………………………………………. 30,000
2. The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2012, contained
the following accounts.
5-year Bonds Payable 8% $2,000,000
Interest Payable 50,000
Premium on Bonds Payable 100,000
Notes Payable (3 mo.) 40,000
Notes Payable (5 yr.) 165,000
Mortgage Payable ($15,000 due currently) 200,000
Salaries and wages Payable 18,000
Income Taxes Payable (due 3/15 of 2013) 25,000

The total long-term liabilities reported on the balance sheet are

a. $2,365,000.
b. $2,350,000.
c. $2,465,000.
d. $2,450,000.

3. Percy Corporation was organized on January 1, 2012, with an authorization of 1,200,000

shares of common stock with a par value of $6 per share. During 2012, the corporation had the
following capital transactions:
January 5 issued 900,000 shares @ $10 per share
July 28 purchased 120,000 shares @ $11 per share
December 31 sold the 120,000 shares held in treasury @ $18 per share
Percy used the cost method to record the purchase and reissuance of the treasury shares.
What is the total amount of additional paid-in capital as of December 31, 2012?
a. $-0-.
b. $2,760,000.
c. $3,600,000.
d. $4,440,000.