Question

Multiple Choices

1. Interest expense in GAAP financial statements is computed based on:
   1. The coupon rate times the carrying value of the debt
   2. The coupon rate times the face value of the debt
   3. The effective rate times the carrying value of the debt
   4. The effective rate times the face value of the debt

2. Coopers Inc. issued $10,000,000 of 10-year bonds on 1/1/2016 for $10,858,432. The bonds pay interest semi-annually. A journal entry was recorded for the first interest payment on June 30^th, which included a debit to interest expense of $162,876.48 and a credit to cash of $200,000. What was the annual coupon rate on these bonds?
   1. 3%
   2. 5%
   3. 4%
   4. 6%

3. When a bond is sold at a discount…
   1. Interest expense will be more than interest paid each period
   2. Interest expense will be less than interest paid each period
   3. Interest expense will be the same as interest paid each period
   4. Interest expense can be either more or less than interest paid each period

4. Which of the following describes the impact on the balance sheet of a Lessee that results from capitalizing (recording) a Finance or Operating lease?
   1. Assets and Liabilities both increase
   2. Assets and Liabilities both decrease
   3. Assets increase and Liabilities decrease
   4. Assets decrease and Liabilities increase

5. One of the largest current liabilities on an airline’s balance sheet is unearned revenue typically called “air traffic liability”; i.e. the amount collected for tickets that have been sold, but not yet flown. Which of the following accounting principles is most closely associated with the recognition of this liability?
   1. Conservatism
   2. Revenue Recognition
   3. Matching
   4. Materiality

6. In a typical home mortgage, the portion of the loan payment in the fifth month that is recorded as interest expense....
   1. Is the same as the fourth month
   2. Is less than the fourth month
   3. Is more than the fourth month
   4. Is the same as the amount of principal amortization

7. Which of the following is typically true from the standpoint of the Lessee?
   1. A Lessee will record more expense over the life of a Finance lease than an Operating lease.
   2. The Lessee will record less expense over the life a Finance lease than an Operating lease.
   3. The lessee will record the same expense over the life of the lease whether it is treated as a Finance lease or an Operating lease
   4. Over the life of a lease, total expenses for an Operating lease will equal the manufacturer’s profit for a Sales-Type lease.

8. How are payments made by a Lessee under a Finance lease reported on a Statement of Cash Flows?
   1. They are reported as Cash Flows from Operations
   2. They are reported as Cash Flows from Financing Activities
   3. The interest component is treated as a Cash Flow from Operations and the principal component as treated as a Financing Activity
   4. The interest component is treated as an Investing Activity and the principal component is treated as a Financing Activity

Answer 1

1. OPTION (a) THE COUPON RATE TIMES THE CARRYING VALUE OF THE DEBT

2. OPTION (c) 4%

3. OPTION (a) INTEREST EXPENSE WILL BE MORE THAN INTEREST PAID EACH MONTH

4. OPTION (a) ASSETS AND LIABILITIES BOTH INCREASE

5. OPTION (b) REVENUE RECOGNITION

6. OPTION (b) IS LESS THAN THE FOURTH MONTH

7. OPTION (d) OVER THE LIFE OF A LEASE TOTAL EXPENSES FOR AN OPERATING LEASE WILL EQUAL THE MANUFACTURER'S PROFIT FOR A SALES-TYPE LEASE

8. OPTION (c) THE INTEREST COMPONENT IS TREATED AS A CASH FLOW FROM OPERATIONS AND THE PRINCIPAL COMPONENT IS TREATED AS A FINANCING ACTIVITY.