LIABILITIES

QUESTION 43-12 Multiple choice (IAA) 7. Which does not meet the definition of a liability?
1. The most common type of liability is a. The signing of a an employment contract at
a. One that comes into existence due to a loss fixed salary
contingency. b. An obligation to provide goods or services in the
b. One that must be estimated. future
C. One that comes into existence due to a gain c. A note payable with no specified maturity date
contingency. d. An obligation that is estimated in amount
d. One to be paid in cash and for which the
amount and timing are known. 8. Which of the following is a characteristic of a
current liability but not a noncurrent liability?
2. Which is not a characteristic of a liability? a. Unavoidable obligation
a. It represents a transfer of an economic resource. . b. Present obligation to transfer an economic
B It must be payable in cash. resource
c. It arises from present obligation to other entity. c. Settlement is expected within the normal
d. It results from past event. operating cycle or within 12 months, whichever is
longer
3. Classifying liabilities as either current or noncurrent d. The obligating event has already occurred
helps creditors assess
a. Profitability 9. Which is not a characteristic of a liability?
b. The relative risk of an entity's liabilities a. Present obligation
c. The degree of an entity's liabilities b. Arises from past event
d. The amount of an entity's liabilities c. Results in a transfer of economic resource
d. Liquidation is reasonably expected to require
4. Short-term obligations are reported as noncurrent if use of current asset
a. The entity has a long-term line of credit.
b. The entity has tentative plan to issue long-term 10. Which of the following is not an acceptable
bonds payable. presentation of current liabilities?
C. The entity has the the right at the end of a. Listing current liabilities in the order of maturity
reporting period to defer settlement of liability for b. Listing current liabilities according to amount
at least twelve months after the end of reporting c. Offsetting current liabilities against current
period. assets
d. The entity has the ability to refinance on a d. Showing current liabilities in the order of liquidation
long-term basis.
QUESTION
5. Which situation would not require a noncurrent 43-13 Multiple choice (IAA)
liability 1. Among the short-term obligations at year-end are
to be reported as current? 90-day renewable for classification of the notes
a. The long-term debt is callable by the creditor. payable?
b. The creditor has the right to demand payment due a. Current liabilities
to b. Deferred credits
a contractual violation. c. Noncurrent liabilities
c. The long-term debt matures within the upcoming d. Intermediate debt
year.
d. All of these require the current classification. 2. At year-end, an entity has 120 day note payable
outstanding. The entity has followed the policy of
6. Which of the following represents a liability? replacing the note rather than repaying it over the last
a. The obligation to pay for goods that an entity three years. The entity's treasurer says that this policy
expects to order from suppliers next year is expected to continue indefinitely, and the
b. The obligation to provide goods that customers arrangement is acceptable to the bank to which the
have ordered and paid for during the current year note was issued. What is the proper classification of
c. The obligation to pay interest on a five-year note the note in the year-end statement of financial
d. The obligation to distribute an entity's own shares position?
payable that was issued the last day of the year a. Dependent on the intention of management
b. Dependent on the actual ability to refinance 2. Which statement best describes the term liability?
c. Current liability, unless specific refinancing a. An excess of equity over current assets
criteria are met b. Resources to meet financial commitments when
d. Noncurrent liability due
c. The residual interest in the assets of the entity
3. An entity had a note payable due next year. After d. A present obligation arising from past event
the end of reporting period and before the issuance of
the current year financial statements, the entity issued 3. What is the relationship between present value and
long-term bonds payable. Proceeds from the bonds liability?
were used to repay the note when due. How should a. Present value is used to measure certain
the entity classify the note payable at current liabilities.
year-end? b. Present value is not used to measure liabilities.
a. Current liability with separate disclosure of the c. Present value is used to measure all liabilities.
note refinancing d. Present value is used to measure current liabilities.
b. Current liability with no disclosure required
c. Noncurrent liability with separate disclosure of the 4. If a long-term debt becomes callable due to the
note refinancing violation of a loan covenant
d. Noncurrent liability with no separate disclosure a. The debt may continue to be classified as
required noncurrent.
b. The debt should be reclassified as current.
4. An entity had a loan due for repayment in six c. Cash must be reserved to pay the debt.
months time but the entity had the right to defer d. Retained earnings must be restricted.
settlement for two years later. In which section of the
statement of financial position should this loan be 5. What is the classification of debt callable by the
presented? creditor?
a. Current liability a. Noncurrent liability
b. Current asset b. Current liability
c. Noncurrent liability c. Current liability if the creditor intends to call the
d. Noncurrent asset debt
within one year
5. At year-end, an entity classified a note payable as d. Current liability if it is probable that the creditor will
current liability. Under what condition could the entity call the debt within one year
reclassify the note payable from current to
noncurrent? QUESTION 43-15 Multiple choice (AICPA Adapted)
a. If the entity had the intent and ability to reclassify 1. A department store received cash and issued a gift
the note before the end of reporting period. certificate redeemable in merchandise. When the gift
b. If the entity had executed an agreement to certificate was issued
refinance the note before issuance of the financial a. Deferred revenue account should be decreased
statements. b. Deferred revenue account should be increased
c. If the entity had the intent and ability to reclassify c. Revenue account should be decreased
the note before the issuance of the financial d. Revenue account should be increased
statements.
d. If the entity had executed an agreement to 2. All else equal, a large increase in unearned
refinance the note before the end of reporting revenue in the current period would be expected to
period. produce what effect on revenue in a future period?
a. Large increase in future revenue because
QUESTION 43-14 Multiple choice (AICPA Adapted) unearned revenue becomes revenue when earned
1. The most relevant measurement of liabilities at b. Large decrease in future revenue because
initial recognition should always reflect unearned revenue implies that less revenue has been
a. The expectation of the management earned which reduces future revenue.
b. Historical cost c. No effect
c. The credit standing of the entity d Large decrease in future revenue because
d. The single most likely minimum possible amount unearned revenue indicates collection problems that
will reduce net revenue in future period
 b. Sales contracts receivable valuation account
3. An entity received an advance payment for special c. Shareholders' equity valuation account
order goods that are to be manufactured and d. Service revenue account
delivered within six months. How should the advance
payment be reported? 9. An entity sells machines that include a three-year
a. Deferred charge warranty. Service calls under the warranty are
b. Contra asset account performed by an independent mechanic under a
c. Current liability contract with the entity. Based on experience,
d. Noncurrent liability warranty costs are expected to be incurred for each
machine sold. When should the entity recognize the
4. At year-end, an entity sold refundable merchandise warranty costs?
coupons. The entity received a certain amount for a. Evenly over the life of the warranty
each coupon redeemable next year for merchandise b. When the service calls are performed
with a certain retail price. At year-end, how should the c. When payments are made to the mechanic
entity report these coupon transactions? d. When the machines are sold
a. Unearned revenue at the merchandise's retail price
b. Unearned revenue at the cash received 10. At the end of the current year, an entity received
c. Revenue at the merchandise's price an advance payment of 60% of the sales price for
d. Revenue at the cash received special order goods to be manufactured and delivered
within five months. At the same time, the entity
5. How would the proceeds received from the subcontracted for production of the special order
advance sale of nonrefundable tickets for a theatrical goods at a price equal to 40% of the main contract
performance be reported in the statement of financial price. What liabilities should be reported in the
position before the performance? year-end statement of financial position?
a. Revenue for the entire proceeds a. None
b. Revenue to the extent of related costs expanded b. Deferred revenue equal to 60% of the main
C. Unearned revenue to the extent of related costs contract price and payable to subcontractor equal to
expended 40% of the main contract price
d. Unearned revenue for the entire proceeds c. Deferred revenue equal to 60% of the main
contract price and no payable to subcontractor
6. Magazine subscriptions collected in advance d. No deferred revenue but payable to subcontractor
should be accounted for as is reported at 40% of the main contract price
a. A contra account to magazine subscriptions
receivable PREMIUM AND WARRANTY LIABILITY
b. Deferred revenue in the liability section 1. The cost of customer premium offer should be
c. Deferred revenue in the shareholders' equity charged to expense
section a. When the related product is sold.
d. Magazine subscription revenue in the income b. When the premium offer expires.
statement in the period collected c. Over the life cycle of the product.
d. When the premium is claimed.
7. Under a royalty agreement with another entity, an
entity will receive royalties from the assignment of a 2. The accounting concept that requires recognition of
patent for four years. The royalties received in a liability for customer premium offer is
advance should be reported as revenue a. Time period
a. In the period received b. Prudence
b. In the period earned c. Historical cost
c. Evenly over the life of the royalty agreement d. Matching principle
d. At the date of the royalty agreement
3. Accounting for cost of incentive program for
8. An entity is a retailer of home appliances and offers frequent customer purchases involves
a service contract on each appliance sold. Collections a. Recording an expense and a liability each
received for service contracts should be recorded as period.
an increase in a b. Recording a liability and a reduction of revenue.
a. Deferred revenue account c. Recording an expense and an asset reduction.
d. Recording an expense and revenue each period. QUESTION 43-18 Multiple choice (IFRS)

4. Accounting for cost of customer incentive program 1. What is the accounting for the transaction price of a
a. Requires probability estimation. contract of sale with customer coupons for free
b. Follows the matching principle. product, discount or rebate?
c. Is a loss contingency situation. a. Entirely as product sales revenue
d. All of these are correct. b. Allocated to customer options equal to stand-alone
selling and the balance to product sales
5. Providing a monetary rebate program c.Allocated between product sales revenue and
a. Is accounted for similarly to a premium offer coupons based on stand-alone selling price
b. Creates an expense for the seller in the period of d. Entirely as coupon revenue
sale.
c. Creates a liability for the seller at the time of 2. What is the stand-alone selling price of free product
sale. coupons?
d. Is normally not recognized a. Nothing
b. Fair value less cost of disposal
QUESTION 43-17 Multiple choice (IAA) c. Selling price of free product
d. Selling price of free product adjusted for
1. The accrual approach in accounting for warranty expected redemption
a. Is required for income tax reporting.
b. Is frequently justified on the basis of expediency 3. What is the stand-alone selling price of discount
c. Finds the expense account being charged when the coupons?
seller performs in compliance with the warranty. a. Discount on customer purchases during the year
d. Should be used whenever the warranty is an b. Discount on customer future purchases
integral and inseparable part of the sale. c. Discount on customer purchases during the year
adjusted by expected redemption
2. Which of the following best describes the accrual d. Discount on customer future purchases
approach of accounting for warranty cost? adjusted by expected redemption
a. Expensed when paid
b. Expensed when warranty claims are certain 4. What is the stand-alone selling price of rebate
c. Expensed based on estimate in year of sale coupons?
d. Expensed when incurred a. Discount on products sold during the current year
b. Discount on products sold during the current
3. Which of the following best describes the expense year adjusted by expected redemption
as incurred approach of accounting for warranty cost? c. Cost of products sold
a. Expensed based on estimate in year of sale d. Fair value of rebate coupons
b. Expensed when liability is accrued
c. Expensed when warranty claims are certain 5. The nonredemption of gift certificates is called
d. Expensed when incurred a. Breakage
b. Forfeiture
4. What is the classification of the estimated warranty c. Rebate
liability in a three-year warranty? d. Waiver
a. Noncurrent
b. Current PROVISION
c. Partly current and partly noncurrent QUESTION 44-15 Multiple choice (IFRS)
d. No need for disclosure 1. Which is the correct definition of a provision?
a. A possible obligation arising from past event
5. Which of the following is a characteristic of the b.A liability of uncertain timing or amount
accrual of warranty but not the sale of warranty? c. A liability which cannot be easily measured
a. Warranty liability d. An obligation to transfer funds to an entity
b. Warranty expense
c. Unearned warranty revenue 2. A provision shall be recognized as liability when
d. Warranty revenue a. An entity has a present obligation as a result of a
past event
b. It is probable that an outflow of resources a. Reflects the weighting of all possible outcomes
embodying economic benefits will be required to the by their associated probabilities.
obligation b. Is determined as the individual most likely outcome.
c. The amount of the obligation can be measured c. May be the individual most likely outcome adjusted
reliably for the effect of other possible outcomes.
d.All of these are required for the recognition of d. Midpoint of the possible outcomes.
provision as liability.

3. A legal obligation is an obligation that is derived 4. When the provision arises from a single obligation,
from all of the following, except the estimate of the amount
a. Legislation a. Reflects the weighting of all possible outcomes.
b. A contract b. Is determined as the individual most likely outcome.
c. Other operation of law c. Is the individual most likely outcome adjusted
d. An established pattern of past practice for the effect of other possible outcomes.
d. Midpoint of the possible outcomes.
4. An entity has an established pattern of practice or
stated policy that has created valid expectation that it 5. The present value in a range of possible outcomes
will accept certain responsibilities. all discounted using the same rate would be
a. Constructive obligation a. The most likely outcome
b. Legal obligation b. The maximum outcome
c. Unerous obligation C. The minimum outcome
d. Present obligation d. The sum of probability-weighted present value

5. It is an event that creates a legal or constructive 1. For which of the following should a provision be
obligation because the entity has no other realistic recognized?
alternative but to settle the obligation. a. Future operating losses
a. Obligating event b. Obligations under insurance contracts
b. Past event c. Reductions in fair value of financial instruments
c. Subsequent event d. Obligations for plant decommissioning costs
d. Current event
2. Provisions shall be recognized for all of the
QUESTION 44-16 Multiple choice (IFRS) following, except
1. An outflows of resources embodying economic a. Cleaning-up costs of contaminated land when an
benefits is regarded as "probable" when oil entity has a published policy that it will undertake
a. The probability that the event will occur is to clean up all contamination that it causes.
greater than the probability that the event will not b. Restructuring costs after a binding sale agreement
occur. has been signed.
b.The probability that the event will not occur is c. Rectification costs relating to defective products
greater than the probability that the event will occur. sold.
c. The probability that the event will occur is the same d. Future refurbishment costs due to introduction
as the probability that the event will not occur. of a new computer system.
d. The probability that the event will occur is 90%
likely. 3. An entity is closing one of its operating divisions,
and the conditions for making restructuring provision
2. Where range of possible outcomes, and each point have been met. The closure will happen in the first
in that range is as likely as any other, the range to be quarter of the next financial year.
used is At the current year-end, the entity has announced the
a. Minimum formal plan publicly and is calculating the
b. Maximum restructuring provision.
c. Midpoint Which of the following costs should be included in the
d. Sum of the minimum and maximum restructuring provision?
a. Retraining staff continuing to be employed
3. When the provision involves a large population of b. Relocation costs relating to staff moving to other
items, the estimate of the amount divisions
c. Contractually required costs of retiring staff d. The amount of the loss can be reliably
being made redundant from the division being measured and it is probable prior to issuance of
closed financial statements that a liability has been
d. Future operating losses of the division being closed incurred.
up to the date of closure
3. How should a contingent liability be reported in the
4. An entity operates chemical plants. The published financial statements when it is reasonably possible?
policies include a commitment to making good any a. As a deferred liability
damage caused to the environment by the operations. b. As an accrued liability
The entity has always honored this commitment. c. As a disclosure only
Which of the following scenarios would give rise to an d. As an account payable
environmental provision?
a. On past experience it is likely that a chemical spill 4. Disclosure usually is not required for
which would result in having to pay fines and a. Contingent gain that is probable and measurable.
penalties will occur in the next year. b. Contingent loss that is possible and measurable.
b. Recent research suggests there is a possibility that c. Contingent loss that is probable and cannot be
the entity's actions may damage surrounding wildlife. reliably measured
c. The government has outlined plans for a new law d. Contingent loss that is remote and measurable
requiring all environmental damage to be rectified.
d. A chemical spill from one of the entity's plants 5. Reporting in the financial statements is required for
has caused harm to the surrounding area and a. Loss contingency that is probable and
wildlife. measurable
b. Gain contingency that is probable and measurable
5. An entity has been served a legal notice at c. Loss contingency that is possible and measurable
year-end by the Department of Environment and d. All loss contingency
Natural Resources to fit smoke detectors in its factory
on or before middle of next year. The cost of fitting 6. A contingent liability
smoke detector can be measured reliably. How should a. Definitely exists as a liability but the amount and
the entity treat this in the financial statements at due date are indeterminable.
year-end? b. Is accrued even though not reasonably estimated.
a. Recognize a provision for the current year equal to C. Is the result of a loss contingency.
the estimated amount. d. Is not recognized in the financial statements.
b. Recognize a provision for the current year equal to
one-half only of the estimated amount. 7. A contingent liability is
c. No provision is recognized at year-end because a. An estimated liability.
there is no present obligation for the future b. An event which is not recognized because it is
expenditure since the entity can avoid the future not probable that an outflow will be required or
expenditure by changing the method of the amount cannot be reliably estimated.
operations but disclosure is required. c. A potential large liability.
d. Ignore the event. d. A potential small liability.

1. Contingent liabilities will liabilities depending on or 8. An entity received notification of legal action. How
will not become actual should the probable and measurable loss be
a. Whether probable and measurable. reported?
b. The degree of uncertainty. a. As a loss recorded in other comprehensive income
c.The present condition suggesting a liability. b. As a loss in the income statement and a contingent
d. The outcome of a future event. liability
c. As a loss in the income statement and a
2. A contingent liability shall be recognized when provision
a. Any lawsuit is actually filed against an entity. d. In the notes to financial statements
B. It is certain that funds are available to pay the
amount of the claim. 9. A contingent liability
c. It is probable that a liability has been incurred but a. Has a most probable value of zero but may
the amount cannot be reliably measured. require a payment if a given future event occurs.
b. Definitely exists as a liability. c. Probable
c. Is reported as current liability. d. Certain
d. Is not disclosed in the financial statements.
2. The likelihood that the future event will or will not
10. Which of the following is not considered when occur can be expressed by a range of outcome.
evaluating whether or not to record a liability for Which range means that the future event occurring is
pending litigation? very slight?
a. Time period of the underlying cause of action a. Probable
b. The type of litigation involved b. Reasonably possible
c. The probability of an unfavorable outcome c. Certain
d. The ability to make a reliable estimate of the loss d. Remote

QUESTION 44-19 Multiple choice (IAA) 3. An expropriation of asset which is imminent and for
1. Contingent asset is usually recognized when which the loss can be reasonably estimated should be
a. Realized a. Accrued
b. Occurrence is reasonably possible and the amount b. Disclosed
can be reliably measured c. Accrued and disclosed
c. Occurrence is probable and measurable d. Ignored
d. The amount can be reliably measured
4. A present obligation that is probable and for which
2. Which is the proper treatment of contingent asset? the amount can be reliably estimated should
a. An accrued account a. Not be accrued but disclosed.
b. Deferred income b. Be accrued by debiting retained earnings and
c. An account receivable crediting a liability.
d. A disclosure only c. Be accrued by debiting an expense and crediting
retained earnings.
3. Gain contingency that is remote and measurable d. Be accrued by debiting an expense and
a. Must be disclosed in a note to financial statements. crediting a liability.
b. May be disclosed in a note to financial statements.
c. Must be reported in the body of the financial 5. General or unspecified contingencies should
statements a. Be accrued in the financial statements and
d. Should not be reported or disclosed. disclosed.
b. Not be accrued and need not be disclosed.
4. Which is the proper way to report a contingent c. Not be accrued but should be disclosed.
asset receipt of which is virtually certain? d. Be accrued but need not be disclosed.
a. As an asset
b. As unearned evenue 1. Most corporate bonds are
c. As a disclosure only a. Mortgage bonds
d. No disclosure and no accrual b. Debenture bonds
c. Secured bonds
5. What is the proper treatment of a patent d. Collateral bonds
infringement case of the plaintiff with probable
favorable outcome and a measurable settlement? 2. The method used to pay interest depends on
a. No reporting is required at this time whether the bonds are
b. Disclosure a. Registered or coupon
c . A gain for the minimum settlement b. Mortgaged or unmortgaged
d. A gain for the probable settlement c. Indebentured or debenture
d. Callable or redeemable
QUESTION 44-20 Multiple choice (AICPA Adapted)
1. An entity did not record an accrual for a present 3. Zero-coupon bonds
obligation but disclose the nature of the obligation and a. Offer a return in the form of a deep discount off
the range of the loss. How likely is the loss? the face amount
a. Remote b. Result in zero interest expense for the issuer
b. Reasonably possible c. Result in zero interest revenue for the investor
d. Are reported as shareholders' equity by the issuer d. A loss and no interest expense

4. Bonds payable should be reported as noncurrent at 10. To evaluate the risk and quality of an individual
a. Face amount less any unamortized discount or bond issue, investors rely heavily on
plus any unamortized premium a. Bond ratings provided by investment houses
b. Current market price b. Newspaper articles
c. Face amount less any unamortized premium or c. Bond interest payments
plus any unamortized discount d. The audit report
d. Face amount less accrued interest since the last
interest payment date QUESTION 45-7 Multiple choice (AICPA Adapted)
1. Bonds that mature on a single date are called
5. In the amortization of discount on bonds payable a. Term bonds
a. The interest expense is less with each successive b. Serial bonds
interest payment c. Callable bonds
b. The total effective interest is equal to the d. Convertible bonds
amount of the discount plus the total cash 2. Bonds issued with scheduled maturities at various
interest paid dates are called
c. The carrying amount of the bonds payable declines a. Convertible bonds
eventually to face amount with each b. Terms bonds
d. The reduction in the discount is less successive c. Serial bonds
interest payment d. Callable bonds

6 .Bonds payable designated at fair value through 3. Debentures are

profit loss shall measured initially at a. Unsecured bonds
a. Fair value b. Secured bonds
b. Fair value plus bond issue cost c. Ordinary bonds
C. Fair value minus bond issue cost d. Serial bonds
d. Face amount
4. How would the amortization of premium on bonds
7. The amortized cost of bonds payable means payable affect the carrying amount of bonds payable
a. Face amount plus premium on bonds payable and net income, respectively?
B.Face amount minus discount on bonds payable a. Increase and Decrease
C. Face amount minus bond issue cost . b. Increase and Increase
D. Face amount plus premium on bonds payable c. Decrease and Decrease
or minus discount on bonds payable d. Decrease and Increase

8. Which statement is true about the fair value option 5. How would the amortization of discount on bonds
for measuring bonds payable? payable affect the carrying amount of bonds payable
a. The effective interest method of amortization must and net income, respectively?
be used to calculate interest expense. a. Increase and Decrease
b. Discount or premium is disclosed in the notes to b. Increase and Increase
the financial statements. c. Decrease and Decrease
c.The fair value of the bond and the principal d. Decrease and Increase
obligation value must be disclosed.
d. If the fair value option is elected, it must be applied 6. Unamortized bond discount should be reported as
to all bonds. a.Direct deduction from the face amount of the
bond
9. An entity has bonds outstanding in which the b.Direct deduction from the present value of the bond
market rate of interest has risen. The entity elected c. Deferred charge
the fair value option. What will the entity report for the d. Part of the bond issue cost
year?
a. Interest expense and a gain 7. When the interest payment of a bond are May 1
b. Interest expense and a loss and November 1, and a bond issue is sold June 1, the
c. A gain and no interest expense amount of cash received by the issuer will be
a. Decreased by accrued interest from June 1 to a. The premium or bonds payable is a contra
November 1 shareholders' equity account.
b. Decreased by accrued interest from May 1 to June b. The premium on bonds payable is an account that
1 appears only on the books of the investor. c. The
c.Increased by accrued interest from June 1 to premium on bonds payable increases when
November 1 amortization entries are made until maturity date.
d. Increased by accrued interest from May 1 to d. The premium on bonds payable decreases
June 1 when amortization entries are made until the
balance reaches zero at maturity date.
8. The issuer of a bond sold at face amount with
interest payable February 1 and August 1 should 4. The amortization of discount on bonds payable
report a. Decreases the face amount of bonds payable.
a. Liability for accrued interest b. Decreases the amount of interest expense.
b. An addition to bonds payable c. Decreases the carrying amount of bonds payable.
c. Increase in deferred charge d. Increases the carrying amount of bonds
d. Contingent liability payable.

9. A bond issued on June 1 has interest payment

dates of April 1 and October 1. Bond interest expense 5. The carrying amount of a bond liability is
for the current year ended December 31 is for a a. Call price of the bond plus bond discount or minus
period of bond premium.
a. Three months b. Face amount of the bond plus related premium
b. Four months or minus related discount.
c. Six months C. Face amount of the bond plus related discount or
d. Seven months minus related premium.
10. A bond was issued at a discount with a call d. Maturity value of the bond plus related discount or
provision. When the bond issuer exercised the call minus related premium.
provision on an interest date, the amount of bond
liability derecognized should have equaled the 6. The proceeds from the issue of the bonds payable
a. Call price a. Will always be equal to the face amount.
b. Call price less unamortized discount b. Will always be less than the face amount.
c. Face amount less unamortized discount c. Will always be more than the face amount.
d. Face amount plus unamortized discount d. May be equal, more or less than the face
amount depending on market interest rate.
QUESTION 45-8 Multiple choice (IAA)
1. When bonds are sold between interest dates, any 7. An extinguishment of bonds payable originally
accrued interest is credited to issued at a premium is made by purchase of the
a. Interest payable bonds between interest dates. Which statement is
b. Interest revenue true at the time of extinguishment?
c. Interest receivable a. Any costs of issuing the bonds payable must be
d. Bonds payable amortized up to the purchase date.
b. The premium on bonds payable must be amortized
2. Which statement is true about accrued interest on up to the purchase date.
bonds sold between interest dates? c. Interest must be accrued from the last interest date
a. The accrued interest is computed at the effective to the purchase date.
rate d. All of these statements are true.
b . The accrued interest will be paid to the seller when
the bonds mature. 8. When bonds are retired prior to maturity with
c. The accrued interest is extra income to the buyer. proceeds from a new bond issue, any gain or loss
d. All of the statements are not true. from the early extinguishment should be
a. Amortized over the remaining original life of the
3. Which statement is true about a premium on bonds retired bond issue.
payable? b. Amortized over the life of the new bond issue.
C. Recognized in retained earnings
d. Recognized in income from continuing a. The stated rate of interest multiplied by the face
operations. amount of the bonds.
b. The market rate of interest multiplied by the face
9. An entity neglected to amortize the discount on amount of the bonds.
outstanding bonds payable. What is the effect of the c. The stated rate of interest multiplied by the
failure to record discount amortization on interest beginning carrying amount of the bonds.
expense and bond carrying amount, respectively? d. The market rate of interest multiplied by the
a. Understated and understated beginning carrying amount of the bonds.
b. Understated and overstated
c. Overstated and overstated 6. When interest expense for the current year is more
d. Overstated and understated than interest paid, the bonds were issued
a. A discount
10. An entity neglected to amortize the premium on b. A premium
outstanding bonds payable. What is the effect of the c. Face amount
failure to record premium amortization on interest d. An indeterminable amount
expense and bond carrying amount, respectively?
a. Understated and understated 7. When interest expense for the current year is less
b. Understated and overstated than interest paid, the bonds were issued at
c. Overstated and overstated a. A discount
d. Overstated and understated b. A premium
c. Face amount
EFFECTIVE INTEREST RATE d. An indeterminable amount
QUESTION 46-6 Multiple choice (IAA)
1. What is the interest rate written on the face of the 8. Bond issue cost
bond? a. Is included in the measurement of the bonds
a. Coupon rate payable measured at amortized cost.
b. Nominal rate b. Is amortized using the interest method over the life
c. Stated rate of the bonds payable.
d. Coupon rate, nominal rate or stated rate c. Will effectively increase the market rate of interest.
d. All of these relate to bond issue cost.
2. What is the rate of interest actually incurred?
a. Market rate 9. Bonds usually sell at
b. Yield rate a. Maturity amount
c. Effective rate b. Face amount
d. Market, yield or effective rate c. Present value
d. Statistical expected value
3. When the effective interest method is used, the
periodic amortization would 10. Which statement is true about bonds payable?
a. Increase if the bonds were issued at a discount. a. The specific provisions of a bond issue are
b. Decrease if the bonds were issued at a premium. described in a document called bond indenture.
c. Increase if the bonds were issued at a premium. b. Periodic interest expense is the stated interest rate
d. Increase if the bonds were issued at either a times the amount of bond outstanding.
discount or a premium. c. Bonds will sell for a premium when the market rate
of interest exceeds stated rate.
4. A discount on bond payable is charged to interest d. The initial sale price of bond represents the sum of
expense all future cash outflows.
a. Equally over the life of the bond
b. Only in the year the bond is issued QUESTION 46-7 Multiple choice (IAA)
c. Using the effective interest method 1. When bonds are sold at a premium, at each
d. Only in the year the bond matures subsequent interest payment date, the cash paid is
a. Less than the effective interest
5. Under the effective interest method of amortization, b. Equal to the effective interest
the interest expense is equal to c. Greater than the effective interest
d. More than if the bonds had been sold at a discount
 a. Less than rate stated on the bond
2. When bonds are sold at a discount, at each b. Equal to rate stated on the bond
subsequent interest payment date, the cash paid is c. Higher than rate stated on the bond
a. More than the effective interest d. Independent of rate stated on the bond
b. Less than the effective interest
c. Equal to the effective interest 4. If bonds are issued at a premium, this indicates that
d. More than if the bonds had been sold at a premium a. The yield rate of interest exceeds the nominal rate
b. The nominal rate of interest exceeds the yield
3. When bonds are sold at a discount, at each interest rate
payment date, the interest expense c. The yield and nominal rates coincide
a. Increases d. No necessary relationship exists between the two
b. Decreases rates
c. Remains the same
d. Is equal to the change in carrying amount 5. Which statement is true for a bond maturing on a
single date when the effective interest method of
amortizing discount on bonds payable is used?
4. When bonds are sold at a premium, at each a. Interest expense as a percentage of the bond
interest payment date, the interest expense carrying amount varies from period to period
a. Remains constant b. Interest expense increases each six-month
b. Is equal to the change in carrying amount period
c. Increases c. Interest expense remains constant each six-month
d. Decreases period
d. Nominal interest rate exceeds effective interest rate
5. Interest expense is 6. The market price of a bond issued at a discount is
a. The effective rate times the carrying amount of the present value of the principal amount at the
the bond during the interest period. market rate of interest
b. The stated rate times the face amount of the bond a. Less the present value of all future interest
c. The effective rate times the face amount of the payments
bond. at the market rate of interest. b. Less the present
d. The stated interest rate times the carrying amount. value of all future interest payments at the rate of
interest stated on the bond.
QUESTION 46-8 Multiple choice (AICPA Adapted) c. Plus the present value of all future interest
1. What is the effective interest rate of a bond payments at the market rate of interest.
measured at amortized cost? d. Plus the present value of all future interest
a. The stated rate of the bond. payments at the rate of interest stated on the bond.
b. The interest rate currently charged by the entity or
by others for similar bond. 7. In theory, the proceeds from the sale of a bond
c. The interest rate that exactly discounts would be equal to
estimated future cash payments through the a. The face amount of the bond
expected life of the bond or when appropriate, a b. The present value of the principal amount due
shorter period to the net carrying amount of the at the end of the life of the bond plus the present
bond. value of the interest payments made during the
d. The basic risk-free interest rate that is derived from life of the bond
observable government bond prices. c. The face amount of the bond plus the present value
of the interest payments made during the life of the
2. For a bond issue which sells for less than face bond
amount, the market rate of interest is d. The sum of the face amount of the bond and the
a. Dependent on rate stated on the bond periodic interest payments.
b. Equal to rate stated on the bond c. Less than rate
stated on the bond 8. Under international accounting standard, the
d. Higher than rate stated on the bond valuation method used for bonds payable is
a. Historical cost
3. What is the market rate of interest for a bond issue b. Discounted cash flow valuation at current yield rate
which sells for more than face amount? c. Maturity amount
d. Discounted cash flow valuation at yield rate at
issuance

9. How should an entity calculate the net proceeds to

be received from bond issuance?
a. Discount the bonds at the stated rate of interest.
b. Discount the bonds at the market rate of interest.
c. Discount the bonds at the stated rate of interest
and
deduct bond issuance cost.
d. Discount the bonds at the market rate of
interest and deduct bond issuance cost.

10. An entity issued a bond with a stated rate of

interest that is less than the effective interest rate on
the date of issuance. The bond was issued on one of
the interest payment dates. What should the entity
report on the first interest payment date?
a. An interest expense that is less than the cash
payment made to bondholders.
b. An interest expense that is greater than the
cash payment made to bondholders.
c. A debit to discount on bond payable.
d. A debit to premium on bond payable.