CH 14

Stockholders’ equity 2,500,000
Total liabilities and

Total assets $3,600,000 stockholders’ equity $3,600,000
It was determined at the date of the purchase that the fair value of the identifiable net assets of
Hall was $2,800,000. At December 31, 2013, Hall reports the following balance sheet information:
Current assets $ 800,000

Noncurrent assets (including goodwill recognized in purchase) 2,400,000
Current liabilities (700,000)
Long-term liabilities (500,000)
Net assets $2,000,000
It is determined that the fair value of the Hall division is $2,100,000. The recorded amount for
Hall’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and
equipment, which has a fair value of $200,000 above the carrying value.
Instructions
(a) Compute the amount of goodwill recognized, if any, on May 31, 2013.
(b) Determine the impairment loss, if any, to be recorded on December 31, 2013.
(c) Assume that the fair value of the Hall division is $1,950,000 instead of $2,100,000. Prepare
the journal entry to record the impairment loss, if any, on December 31, 2013.
Solution 12-145
(a) Goodwill = Fair value of the division less the fair value of the identifiable assets.
$3,300,000 – $2,800,000 = $500,000.
(b) No impairment loss is recorded, because the fair value of Hall ($2,100,000) is greater than
the carrying value ($2,000,000) of the new assets.
14 - 2 Test Bank for Intermediate Accounting, Fourteenth Edition
Solution 12-145 (Cont.)
(c) Computation of impairment loss:
Implied fair value of goodwill = Fair value of division less the carrying value of the division
(adjusted for fair value changes), net of goodwill:
Fair value of Hall division $1,950,000

Carrying value of division $2,000,000
Increase in fair value of PP&E 200,000
Less goodwill (500,000)
(1,700,000)
Implied value of goodwill 250,000
Carrying amount of goodwill (500,000)
Loss on impairment $ (250,000)
Loss on Impairment.................................................................. 250,000

Goodwill......................................................................... 250,000
Long-Term Liabilities 14 - 3
IFRS QUESTIONS
True/False Questions
1. As in U.S. GAAP, under IFRS the costs associated with research and development are
segregated into two components.
2. Costs in the research phase are expensed under U.S. GAAP, but capitalized under IFRS.
3. Costs in the research phase are always expensed under both IFRS and U.S. GAAP.
4. IFRS differs from U.S. GAAP in the development phase in that costs are capitalized once
technological feasibility is achieved.
5. The increased acceptance of IFRS has caused costs associated with internally generated
intangible assets to be capitalized under U.S. GAAP.
6. IFRS permits some capitalization of internally generated intangible assets, if it is probable
there will be a future benefit and the amount can be readily measured.
7. While IFRS requires an impairment test at each reporting date for long-lived assets, it
requires no such test for intangibles once a legal or useful life has been determined.
8. IFRS allows reversal of impairment losses when there has been a change in economic
conditions or in the expected use of the asset. Under U.S GAAP, impairment losses cannot
be reversed for assets to be held and used.
9. IFRS and U.S. GAAP are similar in the accounting for impairments of assets held for disposal.
10. Under U.S. GAAP, impairment loss is measured as the excess of the carrying amount over
the assets discounted cash flow.
Answers to True/False:
1. True
2. False
3. True
4. True
5. False
6. True
7. False
8. True
9. True
10. False
Multiple-Choice Questions
segregated into
a. two components, the research phase and the production phase.
b. two components, the research phase and the development phase.
c. three components, the planning phase, the research phase and the production phase.
d. three components, the analysis phase, the development phase and the production phase.
2. In accounting for internally generated intangible assets, U.S. GAAP requires that
a. all costs, no matter how immaterial, be capitalized.
b. only material costs be capitalized.
c. planned costs be capitalized, while costs in excess of plan be expensed.
d. all costs be expensed.
3. The following costs are incurred during the research and development phases of a laser bone
scanner
Laboratory research aimed at discovery of new knowledge $600,000

Search for application of new research findings 400,000
Salaries of research staff designing new laser bone scanner 1,200,000
Material, labor and overhead costs of prototype laser scanner 850,000
Costs of testing prototype and design modifications 450,000
Engineering costs incurred to advance the laser scanner to full production stage 700,000
(technological feasibility reached)
Identify which of these are research phase items and will be immediately expensed under
U.S. GAAP and IFRS.
U.S. GAAP IFRS
a. $1,000,000 $1,000,000
b. 2,200,000 1,200,000
c. 4,200,000 4,200,000
d. 4,200,000 3,500,000
scanner

Engineering costs incurred to advance the laser scanner to full 700,000
production stage (technological feasibility reached)
Identify which of these are development phase items and will be immediately expensed under
U.S. GAAP and IFRS.

U.S. GAAP IFRS
a. $1,000,000 $1,000,000
b. 2,200,000 1,200,000
c. 2,200,000 3,200,000
d. 3,200,000 3,200,000
5. The primary IFRS related to intangible assets and impairments is found in

a. IAS 38 and IAS 10.
b. IAS 16 and IAS 36.
c. IAS 1 and IAS 34.
d. IAS 38 and IAS 36.
6. IFRS allows reversal of impairment losses when

a. the reversal is greater than the amount of the original impairment.
b. the reversal falls in a subsequent fiscal year of the company's operations.
c. there has been a change in economic conditions or in the expected use of the asset.
d. reversal of impairment losses is never allowed.
7. Under U.S. GAAP, impairment losses

a. can be reversed a. Routine efforts to refine an existing product.
b. Periodic alterations to existing production lines.
c. Marketing research to promote a new product.
d. Construction of prototypes.
56. Which of the following costs should be capitalized in the year incurred?
a. Research and development costs.
b. Costs to internally generate goodwill.
c. Organizational costs.
d. Costs to successfully defend a patent.
57. Research and development costs

a. are intangible assets.
b. may result in the development of a patent.
c. are easily identified with specific projects.
d. all of the above.
58. Which of the following is considered research and development costs?

a. Planned search or critical investigation aimed at discovery of new knowledge.
b. Translation of research findings or other knowledge into a plan or design for a new
product or process.
c. Translation of research findings or other knowledge into a significant improvement of
an existing product.

product or process.
c. Neither a nor b.
d. Both a and b.
60. Which of the following costs should be excluded from research and development
expense?
a. Modification of the design of a product
b. Acquisition of R & D equipment for use on a current project only
c. Cost of marketing research for a new product
d. Engineering activity required to advance the design of a product to the manufacturing
stage
61. If a company constructs a laboratory building to be used as a research and development

facility, the cost of the laboratory building is matched against earnings as
a. research and development expense in the period(s) of construction.
b. depreciation deducted as part of research and development costs.
c. depreciation or immediate write-off depending on company policy.
d. an expense at such time as productive research and development has been obtained
from the facility.
62. Operating losses incurred during the start-up years of a new business should be
a. accounted for and reported like the operating losses of any other business.
b. written off directly against retained earnings.
c. capitalized as a deferred charge and amortized over five years.
d. capitalized as an intangible asset and amortized over a period not to exceed 20 years.
63. The costs of organizing a corporation include legal fees, fees paid to the state of
incorporation, fees paid to promoters, and the costs of meetings for organizing the
promoters. These costs are said to benefit the corporation for the entity's entire life. These
costs should be
a. capitalized and never amortized.
b. capitalized and amortized over 40 years.
c. capitalized and amortized over 5 years.
d. expensed as incurred.
64. Which of the following would not be considered an R & D activity?

a. Adaptation of an existing capability to a particular requirement or customer's need.
b. Searching for applications of new research findings.
c. Laboratory research aimed at discovery of new knowledge.
d. Conceptual formulation and design of possible product or process alternatives.
65. Which of the following intangible assets should be shown as a separate item on the
balance sheet?
a. Goodwill
b. Franchise
c. Patent
d. Trademark
66. The notes to the financial statements should include information about acquired intangible
assets, and aggregate amortization expense for how many succeeding years?
a. 6
b. 5
c. 4
d. 3
67. Which of the following should be reported under the “Other Expenses and Losses” section
of the income statement?
a. Goodwill impairment losses.
b. Trade name amortization expense.
c. Patent impairment losses
d. None of the above.
68. The total amount of patent cost amortized to date is usually

a. shown in a separate Accumulated Patent Amortization account which is shown contra
to the Patents account.
b. shown in the current income statement.
c. reflected as credits in the Patents account.
d. reflected as a contra property, plant and equipment item.
69. Intangible assets are reported on the balance sheet

a. with an accumulated depreciation account.
b. in the property, plant, and equipment section.
c. separately from other assets.
d. none of the above.
70. Which of the following is often reported as an extraordinary item?

a. Amortization expense.
b. Impairment losses for intangible assets other than goodwill.
c. Impairment losses on goodwill.

b. Impairment losses for intangible assets.
c. Research and development costs.
*72. Which of the following costs incurred with developing computer software for internal use
should be capitalized?
a. Evaluation of alternatives.
b. Coding.
c. Training.
d. Maintenance.
*73. When developing computer software to be sold, which of the following costs should be
capitalized?
a. Designing.
b. Coding.
c. Testing.
*74. Capitalized costs incurred to develop internal use computer software should be amortized
using the:
a. percent-of-revenue approach.
b. percent-of-completion approach.
c. straight-line approach.
d. accelerated amortization approach.
*75. Capitalized costs incurred while developing computer software to be sold should be
amortized using the:
a. lower of the straight-line method or the percent-of-revenue method.
b. higher of the percent-of-revenue method or the percent-of-completion method.
c. lower of the percent-of-revenue method or the percent-of-completion method.
d. higher of the straight-line method or the percent-of-revenue method.
Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. b 29. b 37. c 45. a 53. d 61. b 69. c
22. c 30. c 38. a 46. d 54. d 62. a 70. d
23. a 31. a 39. c 47. a 55. d 63. d 71. d
24. c 32. b 40. c 48. b 56. d 64. a 72. b
25. a 33. d 41. b 49. d 57. b 65. a 73. d
26. b 34. c 42. d 50. c 58. d 66. b 74. c
27. d 35. d 43. c 51. b 59. d 67. d 75. d
28. d 36. b 44. b 52. a 60. c 68. c
MULTIPLE CHOICE—Computational
76. Lynne Corporation acquired a patent on May 1, 2012. Lynne paid cash of $40,000 to the
seller. Legal fees of $1,000 were paid related to the acquisition. What amount should be
debited to the patent account?
a. $1,000
b. $39,000
c. $40,000
d. $41,000
77. Contreras Corporation acquired a patent on May 1, 2012. Contreras paid cash of $35,000
to the seller. Legal fees of $900 were paid related to the acquisition. What amount should
be debited to the patent account?
a. $900
b. $34,100
c. $35,000
d. $35,900
78. Mini Corp. acquires a patent from Maxi Co. in exchange for 2,500 shares of Mini Corp.’s
$5 par value common stock and $90,000 cash. When the patent was initially issued to
Maxi Co., Mini Corp.’s stock was selling at $7.50 per share. When Mini Corp. acquired the
patent, its stock was selling for $9 a share. Mini Corp. should record the patent at what
amount?
a. $102,500
b. $108,750
c. $112,500
d. $90,000
79. Alonzo Co. acquires 3 patents from Shaq Corp. for a total of $300,000. The patents were
carried on Shaq’s books as follows: Patent AA: $5,000; Patent BB: $2,000; and Patent
CC: $3,000. When Alonzo acquired the patents their fair values were: Patent AA: $20,000;
Patent BB: $240,000; and Patent CC: $60,000. At what amount should Alonzo record
Patent BB?
a. $100,000
b. $200,000
c. $2,000
d. $225,000
80. Jeff Corporation purchased a limited-life intangible asset for $150,000 on May 1, 2010. It
has a useful life of 10 years. What total amount of amortization expense should have been
recorded on the intangible asset by December 31, 2012?
a. $ -0-
b. $30,000
c. $40,000
d. $45,000
Stockholders’ equity 2,500,000
Total liabilities and
Total assets $3,600,000 stockholders’ equity $3,600,000
It was determined at the date of the purchase that the fair value of the identifiable net assets of
Hall was $2,800,000. At December 31, 2013, Hall reports the following balance sheet information:
Current assets $ 800,000

Noncurrent assets (including goodwill recognized in purchase) 2,400,000
Current liabilities (700,000)
Long-term liabilities (500,000)
Net assets $2,000,000
It is determined that the fair value of the Hall division is $2,100,000. The recorded amount for
Hall’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and
equipment, which has a fair value of $200,000 above the carrying value.
Instructions
(a) Compute the amount of goodwill recognized, if any, on May 31, 2013.
(b) Determine the impairment loss, if any, to be recorded on December 31, 2013.
(c) Assume that the fair value of the Hall division is $1,950,000 instead of $2,100,000. Prepare
the journal entry to record the impairment loss, if any, on December 31, 2013.
Solution 12-145
(a) Goodwill = Fair value of the division less the fair value of the identifiable assets.
$3,300,000 – $2,800,000 = $500,000.
(b) No impairment loss is recorded, because the fair value of Hall ($2,100,000) is greater than
the carrying value ($2,000,000) of the new assets.
(c) Computation of impairment loss:
Implied fair value of goodwill = Fair value of division less the carrying value of the division
(adjusted for fair value changes), net of goodwill:
Fair value of Hall division $1,950,000

Carrying value of division $2,000,000
Increase in fair value of PP&E 200,000
Less goodwill (500,000)
(1,700,000)
Implied value of goodwill 250,000
Carrying amount of goodwill (500,000)
Loss on impairment $ (250,000)
Loss on Impairment.................................................................. 250,000

Goodwill......................................................................... 250,000
IFRS QUESTIONS
True/False Questions
segregated into two components.
2. Costs in the research phase are expensed under U.S. GAAP, but capitalized under IFRS.
3. Costs in the research phase are always expensed under both IFRS and U.S. GAAP.
4. IFRS differs from U.S. GAAP in the development phase in that costs are capitalized once
technological feasibility is achieved.
5. The increased acceptance of IFRS has caused costs associated with internally generated
intangible assets to be capitalized under U.S. GAAP.
6. IFRS permits some capitalization of internally generated intangible assets, if it is probable
there will be a future benefit and the amount can be readily measured.
7. While IFRS requires an impairment test at each reporting date for long-lived assets, it
requires no such test for intangibles once a legal or useful life has been determined.
8. IFRS allows reversal of impairment losses when there has been a change in economic
conditions or in the expected use of the asset. Under U.S GAAP, impairment losses cannot
be reversed for assets to be held and used.
9. IFRS and U.S. GAAP are similar in the accounting for impairments of assets held for disposal.
10. Under U.S. GAAP, impairment loss is measured as the excess of the carrying amount over
the assets discounted cash flow.
1. True
2. False
3. True
4. True
5. False
6. True
7. False
8. True
9. True
10. False
Multiple-Choice Questions
segregated into
a. two components, the research phase and the production phase.
b. two components, the research phase and the development phase.
c. three components, the planning phase, the research phase and the production phase.
d. three components, the analysis phase, the development phase and the production phase.
2. In accounting for internally generated intangible assets, U.S. GAAP requires that
a. all costs, no matter how immaterial, be capitalized.
b. only material costs be capitalized.
c. planned costs be capitalized, while costs in excess of plan be expensed.
d. all costs be expensed.
scanner

Engineering costs incurred to advance the laser scanner to full production stage 700,000
(technological feasibility reached)
Identify which of these are research phase items and will be immediately expensed under
U.S. GAAP and IFRS.
U.S. GAAP IFRS
a. $1,000,000 $1,000,000
b. 2,200,000 1,200,000
c. 4,200,000 4,200,000
d. 4,200,000 3,500,000
scanner

Engineering costs incurred to advance the laser scanner to full 700,000
production stage (technological feasibility reached)
Identify which of these are development phase items and will be immediately expensed under
U.S. GAAP and IFRS.

U.S. GAAP IFRS
a. $1,000,000 $1,000,000
b. 2,200,000 1,200,000
c. 2,200,000 3,200,000
d. 3,200,000 3,200,000
5. The primary IFRS related to intangible assets and impairments is found in

6. IFRS allows reversal of impairment losses when

a. the reversal is greater than the amount of the original impairment.
b. the reversal falls in a subsequent fiscal year of the company's operations.
c. there has been a change in economic conditions or in the expected use of the asset.
d. reversal of impairment losses is never allowed.
7. Under U.S. GAAP, impairment losses

a. can be reversed a. Routine efforts to refine an existing product.


product or process.

product or process.
c. Neither a nor b.
d. Both a and b.
expense?
stage

from the facility.
costs should be

balance sheet?
a. Goodwill
b. Franchise
c. Patent
d. Trademark
a. 6
b. 5
c. 4
d. 3




b. Coding.
c. Training.
d. Maintenance.
capitalized?
a. Designing.
b. Coding.
c. Testing.
using the:

21. b 29. b 37. c 45. a 53. d 61. b 69. c
22. c 30. c 38. a 46. d 54. d 62. a 70. d
23. a 31. a 39. c 47. a 55. d 63. d 71. d
24. c 32. b 40. c 48. b 56. d 64. a 72. b
25. a 33. d 41. b 49. d 57. b 65. a 73. d
26. b 34. c 42. d 50. c 58. d 66. b 74. c
27. d 35. d 43. c 51. b 59. d 67. d 75. d
28. d 36. b 44. b 52. a 60. c 68. c
a. $1,000
b. $39,000
c. $40,000
d. $41,000
a. $900
b. $34,100
c. $35,000
d. $35,900
amount?
a. $102,500
b. $108,750
c. $112,500
d. $90,000
Patent BB?
a. $100,000
b. $200,000
c. $2,000
d. $225,000
a. $ -0-
b. $30,000
c. $40,000
d. $45,000
83. b $180,000 – [($180,000 ÷ 10) × 1 1/3] = $156,000.

($156,000 + $44,000) ÷ 5 = $40,000.
84. b $900,000 – [($900,000 ÷ 10) × 1 1/3] = $780,000.

($780,000 + $220,000) ÷ 5 = $200,000.
85. c $30,000 + $440,000 + $90,000 = $560,000.
86. b ($960,000 ÷ 10) × 5 = $480,000.
87. b [($600,000 – $60,000) + $270,000] ÷ 12 = $67,500.

DERIVATIONS — Computational (cont.)

No. Answer Derivation
88. a $1,200,000 ÷ 10 = $120,000.
89. b $2,100,000 – [($2,100,000 ÷ 6) × 2] = $1,400,000.

$1,400,000 ÷ 20 = $70,000.
90. c ($7,500,000 + $450,000) – $3,000,000 = $4,950,000

$7,650,000 – $4,950,000 = $2,700,000.
91. c ($12,000,000 + $800,000) – $5,000 = $7,800,000.

$12,200,000 – $7,800,000 = $4,400,000.
92. d $2,480,000 + $240,000 + $180,000 = $2,900,000.

$3,200,000 – $2,900,000 = $300,000.
93. a Since $4,000,000 > $3,400,000, $0 impairment.
94. b $3,000,000 – $2,000,000 = $1,000,000 gain.
95. b $1,290,000 – $975,000 = $315,000.
96. c $7,500,000 – [($7,500,000 ÷ 10) × 2] = $6,000,000.
97. d $6,250,000 – [($6,250,000 ÷ 10) × 2] = $5,000,000.

Since $5,000,000 > ($500,000 × 8), patent is reported at $3,000,000 (present
value of cash flows.
98. b $6,800,000 – $5,800,000 = $1,000,000

$1,500,000 – $1,000,000 = $500,000.
99. b $5,100,000 – $4,350,000 = $750,000

$1,125,000 – $ 750,000 = $375,000.
100. d Expense total of $370,000.
101. c $5,225,000 – $3,000,000 = $2,225,000.
102. c $230,000 + $45,000 + $360,000 = $635,000.
103. a ($600,000 ÷ 4) + $500,000 = $650,000.
104. a ($800,000 ÷ 4) + $750,000 = $950,000.
105. c $420,000 +$210,000 = $630,000.

*106. c ($2,000,000 – $600,000) × ($1,000,000 ÷ $4,000,000) = $350,000.

$350,000 + ($600,000 – $500,000) = $450,000.
*107. c ($4,000,000 – $1,200,000) × ($2,000,000 ÷ $8,000,000) = $700,000.

$700,000 + ($1,200,000 – $1,100,000) = $800,000.
*108. c $700,000 X ¼ = $175,000 (greater than $140,000).
*109. a $800,000 X $500,000 / $2,000,000 = $200,000 (greater than $160,000).
*110. b $900,000 X 1/5 = $180,000.
DERIVATIONS — CPA Adapted
111. a $240,000 + $450,000 = $690,000.
112. c 4,000 × $46 = $184,000.
113. d 6,000 × $34 = $204,000.
114. c $450,000 ÷ 15 = $30,000.
115. c $450,000 – [($450,000 ÷ 10) × 3] = $315,000.
116. d ($2,000,000 – [($2,000,000 ÷ 16) × 4] = $1,500,000

($1,500,000 + $300,000) ÷ 12 = $150,000.
117. c Conceptual.
118. a Conceptual.
119. c $350,000 + $560,000 + $425,000 = $1,335,000.
120. a $160,000 + $200,000 + $275,000 = $635,000.

EXERCISES
Ex. 12-121
Intangible assets have two main characteristics: (1) they lack physical existence, and (2)
they are not financial instruments.
Instructions
(a) Explain why intangibles are classified as assets if they have no physical existence.
(b) Explain why intangibles are not considered financial instruments.
Solution 12-121
(a) Intangible assets derive their value from the rights and privileges they grant to the
company that owns them.
(b) Intangibles are not considered financial instruments because they do not derive their
value from the right (claim) to receive cash or cash equivalents in the future.
Ex. 12-122
Intangible assets may be internally generated or purchased from another party. In either
case, what costs should be included in the initial valuation of the asset is an issue.
Instructions
(a) Identify the typical costs included in the cash purchase of an intangible asset.
(b) Discuss how to determine the cost of an intangible asset acquired in a non-cash
transaction.
(c) Describe how to determine the cost of several intangible assets acquired in a “basket
purchase.” Provide a numerical example involving intangibles being acquired for a
total price of $90,000.
Solution 12-122
(a) The typical costs included in the purchase of an intangible asset are: purchase price,
legal fees, and other incidental expenses.
(b) In a non-cash acquisition of an intangible asset, the initial cost of the intangible is
either the fair value of the consideration given or the fair value of the intangible
received, whichever is more clearly evident.
(c) When several intangible assets are acquired in a “basket purchase”, the cost of the
individual assets is based on their relative fair values. For example:
Asset FV % Allocation
Patent A $ 60,000 60 60% x $90,000 = $ 54,000
Patent B 40,000 40 40% x $90,000 = 36,000
Totals $100,000 100 $90,000
Ex. 12-123
Why does the accounting profession make a distinction between internally created intangible
assets and purchased intangible assets?
Solution 12-123
When intangible assets are created internally, it is often difficult to determine the validity of
any future service potential. To permit deferral of these types of costs would lead to a great
deal of subjectivity because management could argue that almost any expense could be
capitalized on the basis that it will increase future benefits. The cost of purchased intangible
assets, however, is capitalized because its cost can be objectively verified and reflects its fair
value at the date of acquisition.
Ex. 12-124—Short essay questions.

1. What are intangible assets?
2. How are limited-life intangibles accounted for subsequent to acquisition?
Solution 12-124
1. Intangible assets are assets that derive their value from the rights and privileges granted to
the company using them. They provide services over a period of years and are normally
classified as long-term assets. Examples are patents, copyrights, franchises, goodwill,
trademarks, and trade names.
2. Limited-life intangibles are amortized by systematic charges to expense over their useful life.
In addition, they are reviewed for impairment each year. Impairment occurs when the future
net cash flows are less than the carrying amount of the intangible asset. The intangible asset
is reduced for the amount by which its carrying value exceeds its fair value at year end.
Ex. 12-125
If intangible assets are acquired for stock, how is the cost of the intangible determined?
Solution 12-125
If intangible assets are acquired for stock, the cost of the intangible is the fair value of the
consideration given or the fair value of the consideration received, whichever is more clearly
evident.
Ex. 12-126
Redstone Company spent $190,000 developing a new process, $45,000 in legal fees to
obtain a patent, and $91,000 to market the process that was patented. How should these
costs be accounted for in the year they are incurred?
Solution 12-126
The $190,000 should be expensed when incurred as research and development expense.
The $91,000 is expensed as selling and promotion expense when incurred. The $45,000 of
costs to legally obtain the patent should be capitalized and amortized over the useful or legal
life of the patent, whichever is shorter.
Ex. 12-127—Intangible assets questions.

Indicate the best answer by circling the proper letter.
1. Copyrights should be amortized over

a. their legal life.
b. the life of the creator plus fifty years.
c. twenty years.
d. their useful life or legal life, whichever is shorter.
2. A patent should be amortized over

a. twenty years.
b. its useful life.
c. its useful life or twenty years, whichever is longer.
d. its useful life or twenty years, whichever is shorter.
3. The major problem of accounting for intangibles is determining

a. fair value.
b. separability.
c. salvage value.
d. useful life.
83. b $180,000 – [($180,000 ÷ 10) × 1 1/3] = $156,000.

($156,000 + $44,000) ÷ 5 = $40,000.
84. b $900,000 – [($900,000 ÷ 10) × 1 1/3] = $780,000.

($780,000 + $220,000) ÷ 5 = $200,000.
85. c $30,000 + $440,000 + $90,000 = $560,000.
86. b ($960,000 ÷ 10) × 5 = $480,000.
87. b [($600,000 – $60,000) + $270,000] ÷ 12 = $67,500.


88. a $1,200,000 ÷ 10 = $120,000.
89. b $2,100,000 – [($2,100,000 ÷ 6) × 2] = $1,400,000.

$1,400,000 ÷ 20 = $70,000.
90. c ($7,500,000 + $450,000) – $3,000,000 = $4,950,000

$7,650,000 – $4,950,000 = $2,700,000.
91. c ($12,000,000 + $800,000) – $5,000 = $7,800,000.

$12,200,000 – $7,800,000 = $4,400,000.
92. d $2,480,000 + $240,000 + $180,000 = $2,900,000.

$3,200,000 – $2,900,000 = $300,000.
94. b $3,000,000 – $2,000,000 = $1,000,000 gain.
95. b $1,290,000 – $975,000 = $315,000.
96. c $7,500,000 – [($7,500,000 ÷ 10) × 2] = $6,000,000.
97. d $6,250,000 – [($6,250,000 ÷ 10) × 2] = $5,000,000.

98. b $6,800,000 – $5,800,000 = $1,000,000

$1,500,000 – $1,000,000 = $500,000.
99. b $5,100,000 – $4,350,000 = $750,000

$1,125,000 – $ 750,000 = $375,000.
101. c $5,225,000 – $3,000,000 = $2,225,000.
102. c $230,000 + $45,000 + $360,000 = $635,000.
103. a ($600,000 ÷ 4) + $500,000 = $650,000.
104. a ($800,000 ÷ 4) + $750,000 = $950,000.
105. c $420,000 +$210,000 = $630,000.

*106. c ($2,000,000 – $600,000) × ($1,000,000 ÷ $4,000,000) = $350,000.

$350,000 + ($600,000 – $500,000) = $450,000.
*107. c ($4,000,000 – $1,200,000) × ($2,000,000 ÷ $8,000,000) = $700,000.

$700,000 + ($1,200,000 – $1,100,000) = $800,000.
*108. c $700,000 X ¼ = $175,000 (greater than $140,000).
*109. a $800,000 X $500,000 / $2,000,000 = $200,000 (greater than $160,000).
*110. b $900,000 X 1/5 = $180,000.
111. a $240,000 + $450,000 = $690,000.
112. c 4,000 × $46 = $184,000.
113. d 6,000 × $34 = $204,000.
114. c $450,000 ÷ 15 = $30,000.
115. c $450,000 – [($450,000 ÷ 10) × 3] = $315,000.
116. d ($2,000,000 – [($2,000,000 ÷ 16) × 4] = $1,500,000

($1,500,000 + $300,000) ÷ 12 = $150,000.
117. c Conceptual.
118. a Conceptual.
119. c $350,000 + $560,000 + $425,000 = $1,335,000.
120. a $160,000 + $200,000 + $275,000 = $635,000.

EXERCISES
Ex. 12-121
Instructions
Solution 12-121
Ex. 12-122
Instructions
transaction.
Solution 12-122
Patent A $ 60,000 60 60% x $90,000 = $ 54,000
Patent B 40,000 40 40% x $90,000 = 36,000
Totals $100,000 100 $90,000
Ex. 12-123
Solution 12-123

Solution 12-124
Ex. 12-125
Solution 12-125
evident.
Ex. 12-126
Solution 12-126


c. twenty years.

a. twenty years.
b. its useful life.

a. fair value.
b. separability.
c. salvage value.
d. useful life.
83. b $180,000 – [($180,000 ÷ 10) × 1 1/3] = $156,000.

($156,000 + $44,000) ÷ 5 = $40,000.
84. b $900,000 – [($900,000 ÷ 10) × 1 1/3] = $780,000.

($780,000 + $220,000) ÷ 5 = $200,000.
85. c $30,000 + $440,000 + $90,000 = $560,000.
86. b ($960,000 ÷ 10) × 5 = $480,000.
87. b [($600,000 – $60,000) + $270,000] ÷ 12 = $67,500.


88. a $1,200,000 ÷ 10 = $120,000.
89. b $2,100,000 – [($2,100,000 ÷ 6) × 2] = $1,400,000.

$1,400,000 ÷ 20 = $70,000.
90. c ($7,500,000 + $450,000) – $3,000,000 = $4,950,000

$7,650,000 – $4,950,000 = $2,700,000.
91. c ($12,000,000 + $800,000) – $5,000 = $7,800,000.

$12,200,000 – $7,800,000 = $4,400,000.
92. d $2,480,000 + $240,000 + $180,000 = $2,900,000.

$3,200,000 – $2,900,000 = $300,000.
94. b $3,000,000 – $2,000,000 = $1,000,000 gain.
95. b $1,290,000 – $975,000 = $315,000.
96. c $7,500,000 – [($7,500,000 ÷ 10) × 2] = $6,000,000.
97. d $6,250,000 – [($6,250,000 ÷ 10) × 2] = $5,000,000.

98. b $6,800,000 – $5,800,000 = $1,000,000

$1,500,000 – $1,000,000 = $500,000.
99. b $5,100,000 – $4,350,000 = $750,000

$1,125,000 – $ 750,000 = $375,000.
101. c $5,225,000 – $3,000,000 = $2,225,000.
102. c $230,000 + $45,000 + $360,000 = $635,000.
103. a ($600,000 ÷ 4) + $500,000 = $650,000.
104. a ($800,000 ÷ 4) + $750,000 = $950,000.
105. c $420,000 +$210,000 = $630,000.

*106. c ($2,000,000 – $600,000) × ($1,000,000 ÷ $4,000,000) = $350,000.

$350,000 + ($600,000 – $500,000) = $450,000.
*107. c ($4,000,000 – $1,200,000) × ($2,000,000 ÷ $8,000,000) = $700,000.

$700,000 + ($1,200,000 – $1,100,000) = $800,000.
*108. c $700,000 X ¼ = $175,000 (greater than $140,000).
*109. a $800,000 X $500,000 / $2,000,000 = $200,000 (greater than $160,000).
*110. b $900,000 X 1/5 = $180,000.
111. a $240,000 + $450,000 = $690,000.
112. c 4,000 × $46 = $184,000.
113. d 6,000 × $34 = $204,000.
114. c $450,000 ÷ 15 = $30,000.
115. c $450,000 – [($450,000 ÷ 10) × 3] = $315,000.
116. d ($2,000,000 – [($2,000,000 ÷ 16) × 4] = $1,500,000

($1,500,000 + $300,000) ÷ 12 = $150,000.
117. c Conceptual.
118. a Conceptual.
119. c $350,000 + $560,000 + $425,000 = $1,335,000.
120. a $160,000 + $200,000 + $275,000 = $635,000.

EXERCISES
Ex. 12-121
Instructions
Solution 12-121
Ex. 12-122
Instructions
transaction.
Solution 12-122
Patent A $ 60,000 60 60% x $90,000 = $ 54,000
Patent B 40,000 40 40% x $90,000 = 36,000
Totals $100,000 100 $90,000
Ex. 12-123
Solution 12-123

Solution 12-124
Ex. 12-125
Solution 12-125
evident.
Ex. 12-126
Solution 12-126


c. twenty years.

a. twenty years.
b. its useful life.

a. fair value.
b. separability.
c. salvage value.
d. useful life.
83. b $180,000 – [($180,000 ÷ 10) × 1 1/3] = $156,000.

($156,000 + $44,000) ÷ 5 = $40,000.
84. b $900,000 – [($900,000 ÷ 10) × 1 1/3] = $780,000.

($780,000 + $220,000) ÷ 5 = $200,000.
85. c $30,000 + $440,000 + $90,000 = $560,000.
86. b ($960,000 ÷ 10) × 5 = $480,000.
87. b [($600,000 – $60,000) + $270,000] ÷ 12 = $67,500.


88. a $1,200,000 ÷ 10 = $120,000.
89. b $2,100,000 – [($2,100,000 ÷ 6) × 2] = $1,400,000.

$1,400,000 ÷ 20 = $70,000.
90. c ($7,500,000 + $450,000) – $3,000,000 = $4,950,000

$7,650,000 – $4,950,000 = $2,700,000.
91. c ($12,000,000 + $800,000) – $5,000 = $7,800,000.

$12,200,000 – $7,800,000 = $4,400,000.
92. d $2,480,000 + $240,000 + $180,000 = $2,900,000.

$3,200,000 – $2,900,000 = $300,000.
94. b $3,000,000 – $2,000,000 = $1,000,000 gain.
95. b $1,290,000 – $975,000 = $315,000.
96. c $7,500,000 – [($7,500,000 ÷ 10) × 2] = $6,000,000.
97. d $6,250,000 – [($6,250,000 ÷ 10) × 2] = $5,000,000.

98. b $6,800,000 – $5,800,000 = $1,000,000

$1,500,000 – $1,000,000 = $500,000.
99. b $5,100,000 – $4,350,000 = $750,000

$1,125,000 – $ 750,000 = $375,000.
101. c $5,225,000 – $3,000,000 = $2,225,000.
102. c $230,000 + $45,000 + $360,000 = $635,000.
103. a ($600,000 ÷ 4) + $500,000 = $650,000.
104. a ($800,000 ÷ 4) + $750,000 = $950,000.
105. c $420,000 +$210,000 = $630,000.

*106. c ($2,000,000 – $600,000) × ($1,000,000 ÷ $4,000,000) = $350,000.

$350,000 + ($600,000 – $500,000) = $450,000.
*107. c ($4,000,000 – $1,200,000) × ($2,000,000 ÷ $8,000,000) = $700,000.

$700,000 + ($1,200,000 – $1,100,000) = $800,000.
*108. c $700,000 X ¼ = $175,000 (greater than $140,000).
*109. a $800,000 X $500,000 / $2,000,000 = $200,000 (greater than $160,000).
*110. b $900,000 X 1/5 = $180,000.
111. a $240,000 + $450,000 = $690,000.
112. c 4,000 × $46 = $184,000.
113. d 6,000 × $34 = $204,000.
114. c $450,000 ÷ 15 = $30,000.
115. c $450,000 – [($450,000 ÷ 10) × 3] = $315,000.
116. d ($2,000,000 – [($2,000,000 ÷ 16) × 4] = $1,500,000

($1,500,000 + $300,000) ÷ 12 = $150,000.
117. c Conceptual.
118. a Conceptual.
119. c $350,000 + $560,000 + $425,000 = $1,335,000.
120. a $160,000 + $200,000 + $275,000 = $635,000.

EXERCISES
Ex. 12-121
Instructions
Solution 12-121
Ex. 12-122
Instructions
transaction.
Solution 12-122
Patent A $ 60,000 60 60% x $90,000 = $ 54,000
Patent B 40,000 40 40% x $90,000 = 36,000
Totals $100,000 100 $90,000
Ex. 12-123
Solution 12-123

Solution 12-124
Ex. 12-125
Solution 12-125
evident.
Ex. 12-126
Solution 12-126


c. twenty years.

a. twenty years.
b. its useful life.

a. fair value.
b. separability.
c. salvage value.
d. useful life.
b.When the future events are probable to occur and the amount can be reasonably independent
research company estimated that the remaining useful life of the trademark was 10 years.
Its unamortized cost on Royce’s books was $900,000. In Klein’s 2012 income statement,
what amount should be reported as amortization expense?
a. $120,000.
b. $ 90,000.
c. $ 60,000.
d. $ 45,000.
89. A company acquires a patent for a drug with a remaining legal and useful life of six years
on January 1, 2011 for $2,100,000. The company uses straight-line amortization for
patents. On January 2, 2013, a new patent is received for a timed-release version of the
same drug. The new patent has a legal and useful life of twenty years. The least amount
of amortization that could be recorded in 2013 is
a. $350,000.
b. $ 70,000.
c. $ 95,454.
d. $ 80,500.
90. Blue Sky Company’s 12/31/12 balance sheet reports assets of $7,500,000 and liabilities
of $3,000,000. All of Blue Sky’s assets’ book values approximate their fair value, except
for land, which has a fair value that is $450,000 greater than its book value. On 12/31/12,
Horace Wimp Corporation paid $7,650,000 to acquire Blue Sky. What amount of goodwill
should Horace Wimp record as a result of this purchase?
a. $ -0-
b. $150,000
c. $2,700,000
d. $3,150,000
91. Dotel Company’s 12/31/12 balance sheet reports assets of $12,000,000 and liabilities of
$5,000,000. All of Dotel’s assets’ book values approximate their fair value, except for land,
which has a fair value that is $800,000 greater than its book value. On 12/31/12, Egbert
Corporation paid $12,200,000 to acquire Dotel. What amount of goodwill should Egbert
record as a result of this purchase?
a. $ -0-
b. $ 200,000
c. $4,400,000
d. $5,200,000
92. Floyd Company purchases Haeger Company for $3,200,000 cash on January 1, 2013.
The book value of Haeger Company’s net assets, as reflected on its December 31, 2012
balance sheet is $2,480,000. An analysis by Floyd on December 31, 2012 indicates that
the fair value of Haeger’s tangible assets exceeded the book value by $240,000, and the
fair value of identifiable intangible assets exceeded book value by $180,000. How much
goodwill should be recognized by Floyd Company when recording the purchase of Haeger
Company?
a. $ -0-
b. $720,000
c. $480,000
d. $300,000
93. General Products Company bought Special Products Division in 2012 and appropriately
recorded $500,000 of goodwill related to the purchase. On December 31, 2013, the fair
value of Special Products Division is $4,000,000 and it is carried on General Product’s
books for a total of $3,400,000, including the goodwill. An analysis of Special Products
Division’s assets indicates that goodwill of $400,000 exists on December 31, 2013. What
goodwill impairment should be recognized by General Products in 2013?
a. $0.
b. $200,000.
c. $50,000.
d. $300,000.
94. During 2012, Bond Company purchased the net assets of May Corporation for
$2,000,000. On the date of the transaction, May had $600,000 of liabilities. The fair value
of May's assets when acquired were as follows:
Current assets $ 1,080,000
Noncurrent assets 2,520,000
$3,600,000
How should the $1,000,000 difference between the fair value of the net assets acquired
($3,000,000) and the cost ($2,000,000) be accounted for by Bond?
a. The $1,000,000 difference should be credited to retained earnings.
b. The $1,000,000 difference should be recognized as a gain.
c. The current assets should be recorded at $1,080,000 and the noncurrent assets
should be recorded at $1,520,000.
d. A deferred credit of $1,000,000 should be set up and then amortized to income over a
period not to exceed forty years.
95. The following information is available for Barkley Company’s patents:

Cost $2,580,000
Carrying amount 1,290,000
Expected future net cash flows 1,200,000
Fair value 975,000
Barkley would record a loss on impairment of
a. $ 90,000.
b. $ 315,000.
c. $1,290,000.
d. $1,380,000.
Which of the following would be considered research and development?

a. Routine efforts to refine an existing product.


product or process.

product or process.
c. Neither a nor b.
d. Both a and b.
expense?
stage

from the facility.
costs should be

balance sheet?
a. Goodwill
b. Franchise
c. Patent
d. Trademark
a. 6
b. 5
c. 4
d. 3




b. Coding.
c. Training.
d. Maintenance.
capitalized?
a. Designing.
b. Coding.
c. Testing.
using the:

21. b 29. b 37. c 45. a 53. d 61. b 69. c
22. c 30. c 38. a 46. d 54. d 62. a 70. d
23. a 31. a 39. c 47. a 55. d 63. d 71. d
24. c 32. b 40. c 48. b 56. d 64. a 72. b
25. a 33. d 41. b 49. d 57. b 65. a 73. d
26. b 34. c 42. d 50. c 58. d 66. b 74. c
27. d 35. d 43. c 51. b 59. d 67. d 75. d
28. d 36. b 44. b 52. a 60. c 68. c
a. $1,000
b. $39,000
c. $40,000
d. $41,000
a. $900
b. $34,100
c. $35,000
d. $35,900
amount?
a. $102,500
b. $108,750
c. $112,500
d. $90,000
d 128. Calculate estimated liability for premiums.

b 130. Determine amount to accrue as a loss contingency.
d 131. Accrue warranty expense for the year.
a 132. Calculate warranty liability.
d 133. Determine amount to accrue as a gain contingency.
b 134. Calculate liability for unredeemed coupons.
c 135. Calculate the quick (acid-test) ratio.
MULTIPLE CHOICE—CPA Adapted

Answer No. Description

a 136. Knowledge of accounts payable.
b 137. Determine current and long-term portions of debt.
c 138. Determine accrued interest payable.
d 139. Determine amount of short-term debt to be reported.
a 140. Calculate accrued salaries payable.
d 141. Accrual of payroll taxes.
b 142. Calculate unearned service contract revenue.
c 143. Determine liability from unredeemed trading stamps.
d 144. Determine range of loss accrual.
d 145. Calculate the estimated warranty liability.
c 146. Disclosure of a casualty claim.
EXERCISES
Item Description
E13-147 Notes payable.
E13-148 Payroll entries.
E13-149 Compensated absences.
E13-150 Contingent liabilities.
E13-151 Premiums.
E13-152 Premiums.
PROBLEMS
Item Description
P13-153 Accounts and notes payable.
P13-154 Refinancing of short-term debt.
P13-155 Premiums.
P13-156 Warranties.
CHAPTER LEARNING OBJECTIVES
1. Describe the nature, type, and valuation of current liabilities.
2. Explain the classification issues of short-term debt expected to be refinanced.
3. Identify types of employee-related liabilities.
4. Identify the criteria used to account for and disclose gain and loss contingencies.
5. Explain the accounting for different types of loss contingencies.
6. Indicate how to present and analyze liabilities and contingencies.

SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
1. TF 22. MC 27. MC 32. MC 37. MC 92. MC 138. MC
2. TF 23. MC 28. MC 33. MC 38. MC 93. MC 147. E
3. TF 24. MC 29. MC 34. MC 39. MC 94. MC 153. P
4. TF 25. MC 30. MC 35. MC 90. MC 136. MC
21. MC 26. MC 31. MC 36. MC 91. MC 137. MC
5. TF 41. MC 45. MC 95. MC 99. MC 103. MC
6. TF 42. MC 46. MC 96. MC 100. MC 104. MC
7. TF 43. MC 47. MC 97. MC 101. MC 139. MC
40. MC 44. MC S
48. MC 98. MC 102. MC 154. P
8. TF 46. MC 52. MC 56. MC 106. MC 110. MC 140. MC
S
9. TF 49. MC 53. MC 57. MC 107. MC 111. MC 141. MC
10. TF P
50. MC 54. MC 58. MC 108. MC 112. MC 148. E
11. TF 51. MC 55. MC 105. MC 109. MC 113. MC 149. E
12. TF 46. MC 60. MC 62. MC 64. MC 66. MC 68. MC
13. TF 59. MC 61. MC 63. MC 65. MC 67. MC 150. E
14. TF 72. MC 79. MC 117. MC 124. MC 131. MC 145. MC
15. TF 73. MC 80. MC 118. MC 125. MC 132. MC 146. MC
16. TF P
74. MC 81. MC 119. MC 126. MC 133. MC 151. E
S
17. TF 75. MC 82. MC 120. MC 127. MC 134. MC 152. E
69. MC S
76. MC 114. MC 121. MC 128. MC 142. MC 155. P
70. MC 77. MC 115. MC 122. MC 129. MC 143. MC 156. P
71. MC 78. MC 116. MC 123. MC 130. MC 144. MC
18. TF 20. TF 84. MC P
86. MC 88. MC 135. MC 154. P
S
19. TF 83. MC 85. MC 87. MC 89. MC 153. P 155. P
Note: TF = True-False E = Exercise

MC = Multiple Choice P = Problem
TRUE-FALSE—Conceptual
independent research company estimated that the remaining useful life of the trademark was 10
years. Its unamortized cost on Royce’s books was $900,000. In Klein’s 2012 income
statement, what amount should be reported as amortization expense?
a. $120,000.
b. $ 90,000.
c. $ 60,000.
d. $ 45,000.
a. $350,000.
b. $ 70,000.
c. $ 95,454.
d. $ 80,500.
a. $ -0-
b. $150,000
c. $2,700,000
d. $3,150,000
a. $ -0-
b. $ 200,000
c. $4,400,000
d. $5,200,000
Company?
a. $ -0-
b. $720,000
c. $480,000
d. $300,000
a. $0.
b. $200,000.
c. $50,000.
d. $300,000.
$3,600,000

Cost $2,580,000
Fair value 975,000
a. $ 90,000.
b. $ 315,000.
c. $1,290,000.
d. $1,380,000.



product or process.

product or process.
c. Neither a nor b.
d. Both a and b.
expense?
stage

from the facility.
costs should be

balance sheet?
a. Goodwill
b. Franchise
c. Patent
d. Trademark
a. 6
b. 5
c. 4
d. 3




b. Coding.
c. Training.
d. Maintenance.
capitalized?
a. Designing.
b. Coding.
c. Testing.
using the:

21. b 29. b 37. c 45. a 53. d 61. b 69. c
22. c 30. c 38. a 46. d 54. d 62. a 70. d
23. a 31. a 39. c 47. a 55. d 63. d 71. d
24. c 32. b 40. c 48. b 56. d 64. a 72. b
25. a 33. d 41. b 49. d 57. b 65. a 73. d
26. b 34. c 42. d 50. c 58. d 66. b 74. c
27. d 35. d 43. c 51. b 59. d 67. d 75. d
28. d 36. b 44. b 52. a 60. c 68. c
a. $1,000
b. $39,000
c. $40,000
d. $41,000
a. $900
b. $34,100
c. $35,000
d. $35,900
amount?
a. $102,500
b. $108,750
c. $112,500
d. $90,000
Patent BB?
a. $100,000
b. $200,000
c. $2,000
d. $225,000
a. $ -0-
b. $30,000
c. $40,000
d. $45,000
81. Rich Corporation purchased a limited-life intangible asset for $270,000 on May 1, 2010. It
a. $ -0-.
b. $54,000
c. $72,000
d. $81,000
82. Thompson Company incurred research and development costs of $100,000 and legal
fees of $20,000 to acquire a patent. The patent has a legal life of 20 years and a useful
life of 10 years. What amount should Thompson record as Patent Amortization Expense in
the first year?
a. $ -0-.
b. $ 2,000.
c. $ 6,000.
d. $12,000.
83. ELO Corporation purchased a patent for $180,000 on September 1, 2010. It had a useful
life of 10 years. On January 1, 2012, ELO spent $44,000 to successfully defend the patent
in a lawsuit. ELO feels that as of that date, the remaining useful life is 5 years. What
amount should be reported for patent amortization expense for 2012?
a. $41,200.
b. $40,000.
c. $37,600.
d. $31,200.
84. Danks Corporation purchased a patent for $900,000 on September 1, 2010. It had a
useful life of 10 years. On January 1, 2012, Danks spent $220,000 to successfully defend
the patent in a lawsuit. Danks feels that as of that date, the remaining useful life is 5
years. What amount should be reported for patent amortization expense for 2012?
a. $206,000.
b. $200,000.
c. $188,000.
d. $156,000.
85. The general ledger of Vance Corporation as of December 31, 2012, includes the following
accounts:
Copyrights $ 30,000
Deposits with advertising agency (will be used to promote goodwill) 27,000
Discount on bonds payable 70,000
Excess of cost over fair value of identifiable net assets of
Acquired subsidiary 440,000
Trademarks 90,000
In the preparation of Vance's balance sheet as of December 31, 2012, what should be
reported as total intangible assets?
a. $530,000.
b. $557,000.
c. $560,000.
d. $587,000.
86. In January, 2008, Findley Corporation purchased a patent for a new consumer product for
$960,000. At the time of purchase, the patent was valid for fifteen years. Due to the
competitive nature of the product, however, the patent was estimated to have a useful life
of only ten years. During 2013 the product was permanently removed from the market
under governmental order because of a potential health hazard present in the product.
What amount should Findley charge to expense during 2013, assuming amortization is
recorded at the end of each year?
a. $640,000.
b. $480,000.
c. $96,000.
d. $64,000.
87. Day Company purchased a patent on January 1, 2012 for $600,000. The patent had a
remaining useful life of 10 years at that date. In January of 2013, Day successfully
defends the patent at a cost of $270,000, extending the patent’s life to 12/31/24. What
amount of amortization expense would Kerr record in 2013?
a. $60,000
b. $67,500
c. $72,500
d. $90,000
88. On January 2, 2012, Klein Co. bought a trademark from Royce, Inc. for $1,200,000. An
independent research company estimated that the remaining useful life of the trademark
was 10 years. Its unamortized cost on Royce’s books was $900,000. In Klein’s 2012
income statement, what amount should be reported as amortization expense?
a. $120,000.
b. $ 90,000.
c. $ 60,000.
d. $ 45,000.
a. $350,000.
b. $ 70,000.
c. $ 95,454.
d. $ 80,500.
a. $ -0-
b. $150,000
c. $2,700,000
d. $3,150,000
a. $ -0-
b. $ 200,000
c. $4,400,000
d. $5,200,000
Company?
a. $ -0-
b. $720,000
c. $480,000
d. $300,000
a. $0.
b. $200,000.
c. $50,000.
d. $300,000.
$3,600,000

Cost $2,580,000
Fair value 975,000
a. $ 90,000.
b. $ 315,000.
c. $1,290,000.
d. $1,380,000.
CHAPTER 13
CURRENT LIABILITIES AND CONTINGENCIES
IFRS questions are available at the end of this chapter.
F 1. Zero-interest-bearing note payable.
F 2. Dividends in arrears.
T 3. Examples of unearned revenues.
T 4. Reporting discount on Notes Payable.
F 5. Currently maturing long-term debt.
F 6. Excluding short-term debt refinanced.
T 7. Accounting for sales tax collected.
F 8. Accounting for sick pay.
T 9. Social security taxes as liabilities.
F 10. Definition of accumulation rights.
T 11. Recognizing compensated absences expense.
F 12. Accruing estimated loss contingency.
T 13. Disclosing gain contingencies.
F 14. Sales-type warranty profit.
T 15. Fair value of asset retirement obligation.
T 16. Reporting a litigation liability.
F 17. Expense warranty approach.
F 18. Acid-test ratio components.
F 19. Affect on current ratio.
T 20. Reporting current liabilities.
MULTIPLE CHOICE—Conceptual
d 21. Definition of a liability.
d 22. Nature of current liabilities.
a 23. Recording of accounts payable.
a 24. Classification of notes payable.

b 25. Classification of discounts on notes payable.
d 26. Identify current liability.
c 27. Bonds reported as current liability.
d 28. Identify item which is not a current liability.
c 29. Dividends reported as current liability.
d 30. Classification of stock dividends distributable.
c 31. Identify item which is not a current liability.
c 33. Characteristic of current liability.
b 35. Importance of liability section of balance sheet.
a 36. Current liabilities and operating cycle.
MULTIPLE CHOICE—Conceptual (cont.)
a 37. Present value and concept of a liability.

c 38. Zero-interest-bearing notes payable.
d 39. Callable debt reporting.
d 40. Condition to exclude short-term obligation.
a 41. Ability to consummate refinancing of short-term debt.
b 42. Disclosure of preferred dividends not declared.
c 43. Example of unearned revenue.
d 44. Short-term obligations expected to be refinanced.
d 45. Ability to consummate refinancing of short-term obligations.
d 46. Determine what is a liability.
a 47. Classification of sales taxes.
d S
48. Disclosure for short-term debt refinanced.
S
b 49. Vested rights vs. accumulated rights.
d P
50. Deductions in computing net pay.
d 51. Employer's payroll tax expense.
d 52. Accrual of a liability for compensated absences.
c 53. Accrual of a liability for compensated absences.
d 55. Compensated absences.
d 56. Requirements for compensated absences accrual.
b 57. Condition for sick pay accrual.
c 58. Payroll tax deduction.
d 59. Definition of a contingency.
b 60. Recording contingent liability.
a 61. Example of contingent liability.
d 62. Recording contingent liability.
d 63. Disclosure of a gain contingency.
d 64. Disclosure of contingencies.
b 65. Accrual of loss contingency.
a 66. Litigation and loss contingencies.
c 67. Accrual of a contingent liability.
d 68. Source of a contingent liability.
b 69. Asset retirement obligation.
c 70. Asset retirement obligation.
c 71. Classification of warranty liability.
c 72. Liability accrual due to governmental action.

a 73. Accrual of product warranties.
b P
74. Determining loss amount to report.
S
d 75. Reporting lawsuit loss and liability.
d S
76. Accrual method for warranty costs.
c 77. Accrual warranty method.
d 78. Cash-basis warranty method.
a 79. Characteristic of expense warranty approach.
b 80. Accounting for discount coupon.
a 81. Condition to recognize asset retirement obligation.
b 82. Recording liability for pending litigation.
d 83. Computation of acid-test ratio.
c 84. Current ratio information.
S
c 85. Presentation of current liabilities.
a P
86. Current ratio formula.
d 87. Disclosure of accrued liabilities.
d 88. Acid-test ratio elements.
d 89. Items included in current ratio and acid-test ratio.
P
These questions also appear in the Problem-Solving Survival Guide.
S
These questions also appear in the Study Guide.
b 90. Adjusting entry involving discount on short-term note payable.
d 91. Calculate effective interest on discounted note.
a 92. Calculate cost of inventory purchase.
d 93. Calculate interest expense.
b 94. Calculate interest expense.
c 95. Reporting 5-year note in financial statements.
b 96. Calculate unearned revenue.
d 97. Calculate amount of sales tax payable.
b 98. Determine amount of short-term debt to be reported.
b 100. Calculate sales taxes for the month.
b 101. Calculate amount of sales taxes payable.
c 102. Determine amount of sales subject to sales tax.
a 103. Short-term debt to be excluded.
d 105. Federal/state unemployment taxes.
c 107. Vacation liability accrual.
c 109. Calculate payroll tax expense.
d 110. Calculation of vacation expense to be recognized.
a 111. Calculation of accrued liability to be recognized for compensated balances.
d 112. Effect of payroll taxes on assets / liabilities.

a 113. Record vacation liability accrual.
b 114. Record loss contingency amount.
d 115. Record asset retirement obligation.
d 116. Calculate extended warranty contract profit.
c 117. Calculate warranty liability.
b 118. Calculate rebate expense and liability.
d 119. Asset retirement obligation.
a 120. Calculate insurance expense and loss.
d 123. Calculate warranty liability.
MULTIPLE CHOICE—Computational (cont.)
b 124. Calculate liability for premiums.
d 127. Determine premiums expense for the year.

EXERCISES
Item Description
E13-151 Premiums.
E13-152 Premiums.
PROBLEMS
Item Description
P13-155 Premiums.
P13-156 Warranties.

1. TF 22. MC 27. MC 32. MC 37. MC 92. MC 138. MC
2. TF 23. MC 28. MC 33. MC 38. MC 93. MC 147. E
3. TF 24. MC 29. MC 34. MC 39. MC 94. MC 153. P
4. TF 25. MC 30. MC 35. MC 90. MC 136. MC
21. MC 26. MC 31. MC 36. MC 91. MC 137. MC
5. TF 41. MC 45. MC 95. MC 99. MC 103. MC
6. TF 42. MC 46. MC 96. MC 100. MC 104. MC
7. TF 43. MC 47. MC 97. MC 101. MC 139. MC
40. MC 44. MC S
48. MC 98. MC 102. MC 154. P
8. TF 46. MC 52. MC 56. MC 106. MC 110. MC 140. MC
S
9. TF 49. MC 53. MC 57. MC 107. MC 111. MC 141. MC
10. TF P
50. MC 54. MC 58. MC 108. MC 112. MC 148. E
11. TF 51. MC 55. MC 105. MC 109. MC 113. MC 149. E
12. TF 46. MC 60. MC 62. MC 64. MC 66. MC 68. MC
13. TF 59. MC 61. MC 63. MC 65. MC 67. MC 150. E
14. TF 72. MC 79. MC 117. MC 124. MC 131. MC 145. MC
15. TF 73. MC 80. MC 118. MC 125. MC 132. MC 146. MC
16. TF P
74. MC 81. MC 119. MC 126. MC 133. MC 151. E
S
17. TF 75. MC 82. MC 120. MC 127. MC 134. MC 152. E
69. MC S
76. MC 114. MC 121. MC 128. MC 142. MC 155. P
70. MC 77. MC 115. MC 122. MC 129. MC 143. MC 156. P
71. MC 78. MC 116. MC 123. MC 130. MC 144. MC
18. TF 20. TF 84. MC P
86. MC 88. MC 135. MC 154. P
S
19. TF 83. MC 85. MC 87. MC 89. MC 153. P 155. P

independent research company estimated that the remaining useful life of the trademark was 10
years. Its unamortized cost on Royce’s books was $900,000. In Klein’s 2012 income
statement, what amount should be reported as amortization expense?
a. $120,000.
b. $ 90,000.
c. $ 60,000.
d. $ 45,000.
a. $350,000.
b. $ 70,000.
c. $ 95,454.
d. $ 80,500.
a. $ -0-
b. $150,000
c. $2,700,000
d. $3,150,000
a. $ -0-
b. $ 200,000
c. $4,400,000
d. $5,200,000
Company?
a. $ -0-
b. $720,000
c. $480,000
d. $300,000
a. $0.
b. $200,000.
c. $50,000.
d. $300,000.
$3,600,000

Cost $2,580,000
Fair value 975,000
a. $ 90,000.
b. $ 315,000.
c. $1,290,000.
d. $1,380,000.



product or process.

product or process.
c. Neither a nor b.
d. Both a and b.
expense?
stage

from the facility.
costs should be

balance sheet?
a. Goodwill
b. Franchise
c. Patent
d. Trademark
a. 6
b. 5
c. 4
d. 3




b. Coding.
c. Training.
d. Maintenance.
capitalized?
a. Designing.
b. Coding.
c. Testing.
using the:

21. b 29. b 37. c 45. a 53. d 61. b 69. c
22. c 30. c 38. a 46. d 54. d 62. a 70. d
23. a 31. a 39. c 47. a 55. d 63. d 71. d
24. c 32. b 40. c 48. b 56. d 64. a 72. b
25. a 33. d 41. b 49. d 57. b 65. a 73. d
26. b 34. c 42. d 50. c 58. d 66. b 74. c
27. d 35. d 43. c 51. b 59. d 67. d 75. d
28. d 36. b 44. b 52. a 60. c 68. c
a. $1,000
b. $39,000
c. $40,000
d. $41,000
a. $900
b. $34,100
c. $35,000
d. $35,900
amount?
a. $102,500
b. $108,750
c. $112,500
d. $90,000
Patent BB?
a. $100,000
b. $200,000
c. $2,000
d. $225,000
a. $ -0-
b. $30,000
c. $40,000
d. $45,000
81. Rich Corporation purchased a limited-life intangible asset for $270,000 on May 1, 2010. It
a. $ -0-.
b. $54,000
c. $72,000
d. $81,000
82. Thompson Company incurred research and development costs of $100,000 and legal
fees of $20,000 to acquire a patent. The patent has a legal life of 20 years and a useful
life of 10 years. What amount should Thompson record as Patent Amortization Expense in
the first year?
a. $ -0-.
b. $ 2,000.
c. $ 6,000.
d. $12,000.
83. ELO Corporation purchased a patent for $180,000 on September 1, 2010. It had a useful
life of 10 years. On January 1, 2012, ELO spent $44,000 to successfully defend the patent
in a lawsuit. ELO feels that as of that date, the remaining useful life is 5 years. What
amount should be reported for patent amortization expense for 2012?
a. $41,200.
b. $40,000.
c. $37,600.
d. $31,200.
84. Danks Corporation purchased a patent for $900,000 on September 1, 2010. It had a
useful life of 10 years. On January 1, 2012, Danks spent $220,000 to successfully defend
the patent in a lawsuit. Danks feels that as of that date, the remaining useful life is 5
years. What amount should be reported for patent amortization expense for 2012?
a. $206,000.
b. $200,000.
c. $188,000.
d. $156,000.
85. The general ledger of Vance Corporation as of December 31, 2012, includes the following
accounts:
Copyrights $ 30,000
Deposits with advertising agency (will be used to promote goodwill) 27,000
Discount on bonds payable 70,000
Excess of cost over fair value of identifiable net assets of
Acquired subsidiary 440,000
Trademarks 90,000
In the preparation of Vance's balance sheet as of December 31, 2012, what should be
reported as total intangible assets?
a. $530,000.
b. $557,000.
c. $560,000.
d. $587,000.
86. In January, 2008, Findley Corporation purchased a patent for a new consumer product for
$960,000. At the time of purchase, the patent was valid for fifteen years. Due to the
competitive nature of the product, however, the patent was estimated to have a useful life
of only ten years. During 2013 the product was permanently removed from the market
under governmental order because of a potential health hazard present in the product.
What amount should Findley charge to expense during 2013, assuming amortization is
recorded at the end of each year?
a. $640,000.
b. $480,000.
c. $96,000.
d. $64,000.
87. Day Company purchased a patent on January 1, 2012 for $600,000. The patent had a
remaining useful life of 10 years at that date. In January of 2013, Day successfully
defends the patent at a cost of $270,000, extending the patent’s life to 12/31/24. What
amount of amortization expense would Kerr record in 2013?
a. $60,000
b. $67,500
c. $72,500
d. $90,000
88. On January 2, 2012, Klein Co. bought a trademark from Royce, Inc. for $1,200,000. An
independent research company estimated that the remaining useful life of the trademark
was 10 years. Its unamortized cost on Royce’s books was $900,000. In Klein’s 2012
income statement, what amount should be reported as amortization expense?
a. $120,000.
b. $ 90,000.
c. $ 60,000.
d. $ 45,000.
a. $350,000.
b. $ 70,000.
c. $ 95,454.
d. $ 80,500.
a. $ -0-
b. $150,000
c. $2,700,000
d. $3,150,000
a. $ -0-
b. $ 200,000
c. $4,400,000
d. $5,200,000
Company?
a. $ -0-
b. $720,000
c. $480,000
d. $300,000
a. $0.
b. $200,000.
c. $50,000.
d. $300,000.
$3,600,000

Cost $2,580,000
Fair value 975,000
a. $ 90,000.
b. $ 315,000.
c. $1,290,000.
d. $1,380,000.
CHAPTER 13
CURRENT LIABILITIES AND CONTINGENCIES
F 1. Zero-interest-bearing note payable.
F 2. Dividends in arrears.
T 3. Examples of unearned revenues.
T 4. Reporting discount on Notes Payable.
F 5. Currently maturing long-term debt.
F 6. Excluding short-term debt refinanced.
T 7. Accounting for sales tax collected.
F 8. Accounting for sick pay.
T 9. Social security taxes as liabilities.
F 10. Definition of accumulation rights.
T 11. Recognizing compensated absences expense.
F 12. Accruing estimated loss contingency.
T 13. Disclosing gain contingencies.
F 14. Sales-type warranty profit.
T 15. Fair value of asset retirement obligation.
T 16. Reporting a litigation liability.
F 17. Expense warranty approach.
F 18. Acid-test ratio components.
F 19. Affect on current ratio.
T 20. Reporting current liabilities.
d 22. Nature of current liabilities.
a 23. Recording of accounts payable.
a 24. Classification of notes payable.

b 25. Classification of discounts on notes payable.
c 27. Bonds reported as current liability.
d 28. Identify item which is not a current liability.
c 29. Dividends reported as current liability.
d 30. Classification of stock dividends distributable.
c 31. Identify item which is not a current liability.
c 33. Characteristic of current liability.
b 35. Importance of liability section of balance sheet.
a 36. Current liabilities and operating cycle.
a 37. Present value and concept of a liability.

c 38. Zero-interest-bearing notes payable.
d 39. Callable debt reporting.
d 40. Condition to exclude short-term obligation.
a 41. Ability to consummate refinancing of short-term debt.
b 42. Disclosure of preferred dividends not declared.
c 43. Example of unearned revenue.
d 44. Short-term obligations expected to be refinanced.
d 45. Ability to consummate refinancing of short-term obligations.
d 46. Determine what is a liability.
a 47. Classification of sales taxes.
d S
48. Disclosure for short-term debt refinanced.
S
b 49. Vested rights vs. accumulated rights.
d P
50. Deductions in computing net pay.
d 51. Employer's payroll tax expense.
c 53. Accrual of a liability for compensated absences.
d 55. Compensated absences.
d 56. Requirements for compensated absences accrual.
b 57. Condition for sick pay accrual.
c 58. Payroll tax deduction.
d 59. Definition of a contingency.
b 60. Recording contingent liability.
a 61. Example of contingent liability.
d 62. Recording contingent liability.
d 63. Disclosure of a gain contingency.
d 64. Disclosure of contingencies.
b 65. Accrual of loss contingency.
a 66. Litigation and loss contingencies.
c 67. Accrual of a contingent liability.
d 68. Source of a contingent liability.
b 69. Asset retirement obligation.
c 70. Asset retirement obligation.
c 71. Classification of warranty liability.
c 72. Liability accrual due to governmental action.

a 73. Accrual of product warranties.
b P
74. Determining loss amount to report.
S
d 75. Reporting lawsuit loss and liability.
d S
76. Accrual method for warranty costs.
c 77. Accrual warranty method.
d 78. Cash-basis warranty method.
a 79. Characteristic of expense warranty approach.
b 80. Accounting for discount coupon.
a 81. Condition to recognize asset retirement obligation.
b 82. Recording liability for pending litigation.
d 83. Computation of acid-test ratio.
c 84. Current ratio information.
S
c 85. Presentation of current liabilities.
a P
86. Current ratio formula.
d 87. Disclosure of accrued liabilities.
d 88. Acid-test ratio elements.
d 89. Items included in current ratio and acid-test ratio.
P
S
b 90. Adjusting entry involving discount on short-term note payable.
d 91. Calculate effective interest on discounted note.
a 92. Calculate cost of inventory purchase.
d 93. Calculate interest expense.
b 94. Calculate interest expense.
c 95. Reporting 5-year note in financial statements.
b 96. Calculate unearned revenue.
d 97. Calculate amount of sales tax payable.
b 98. Determine amount of short-term debt to be reported.
b 100. Calculate sales taxes for the month.
b 101. Calculate amount of sales taxes payable.
c 102. Determine amount of sales subject to sales tax.
c 109. Calculate payroll tax expense.
d 110. Calculation of vacation expense to be recognized.
a 111. Calculation of accrued liability to be recognized for compensated balances.
d 112. Effect of payroll taxes on assets / liabilities.

a 113. Record vacation liability accrual.
b 114. Record loss contingency amount.
d 115. Record asset retirement obligation.
d 116. Calculate extended warranty contract profit.
c 117. Calculate warranty liability.
a 120. Calculate insurance expense and loss.
d 127. Determine premiums expense for the year.

EXERCISES
Item Description
E13-151 Premiums.
E13-152 Premiums.
PROBLEMS
Item Description
P13-155 Premiums.
P13-156 Warranties.

1. TF 22. MC 27. MC 32. MC 37. MC 92. MC 138. MC
2. TF 23. MC 28. MC 33. MC 38. MC 93. MC 147. E
3. TF 24. MC 29. MC 34. MC 39. MC 94. MC 153. P
4. TF 25. MC 30. MC 35. MC 90. MC 136. MC
21. MC 26. MC 31. MC 36. MC 91. MC 137. MC
5. TF 41. MC 45. MC 95. MC 99. MC 103. MC
6. TF 42. MC 46. MC 96. MC 100. MC 104. MC
7. TF 43. MC 47. MC 97. MC 101. MC 139. MC
40. MC 44. MC S
48. MC 98. MC 102. MC 154. P
8. TF 46. MC 52. MC 56. MC 106. MC 110. MC 140. MC
S
9. TF 49. MC 53. MC 57. MC 107. MC 111. MC 141. MC
10. TF P
50. MC 54. MC 58. MC 108. MC 112. MC 148. E
11. TF 51. MC 55. MC 105. MC 109. MC 113. MC 149. E
12. TF 46. MC 60. MC 62. MC 64. MC 66. MC 68. MC
13. TF 59. MC 61. MC 63. MC 65. MC 67. MC 150. E
14. TF 72. MC 79. MC 117. MC 124. MC 131. MC 145. MC
15. TF 73. MC 80. MC 118. MC 125. MC 132. MC 146. MC
16. TF P
74. MC 81. MC 119. MC 126. MC 133. MC 151. E
S
17. TF 75. MC 82. MC 120. MC 127. MC 134. MC 152. E
69. MC S
76. MC 114. MC 121. MC 128. MC 142. MC 155. P
70. MC 77. MC 115. MC 122. MC 129. MC 143. MC 156. P
71. MC 78. MC 116. MC 123. MC 130. MC 144. MC
18. TF 20. TF 84. MC P
86. MC 88. MC 135. MC 154. P
S
19. TF 83. MC 85. MC 87. MC 89. MC 153. P 155. P

estimate of the amount of the loss.
83. How do you determine the acid-test ratio?

a. The sum of cash and short-term investments divided by short-term debt.
b. Current assets divided by current liabilities.
c. Current assets divided by short-term debt.
d. The sum of cash, short-term investments and net receivables divided by current
liabilities.
84. What does the current ratio inform you about a company?
a. The extent of slow-moving inventories.
b. The efficient use of assets.
c. The company's liquidity.
d. The company's profitability.
S
85. Which of the following is not acceptable treatment for the presentation of current
liabilities?
a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities immediately below current assets to obtain a presentation of
working capital
P
86. The ratio of current assets to current liabilities is called the
a. current ratio.
b. acid-test ratio.
c. current asset turnover ratio.
d. current liability turnover ratio.
87. Accrued liabilities are disclosed in financial statements by

a. a footnote to the statements.
b. showing the amount among the liabilities but not extending it to the liability total.
c. an appropriation of retained earnings.
d. appropriately classifying them as regular liabilities in the balance sheet.
88. The numerator of the acid-test ratio consists of

a. total current assets.
b. cash and marketable securities.
c. cash and net receivables.
d. cash, marketable securities, and net receivables.
89. Each of the following are included in both the current ratio and the acid-test ratio except
a. cash.
b. short-term investments.
c. net receivables.
d. inventory.

21. d 31. c 41. a 51. d 61. a 71. c 81. a
22. d 32. d 42. b 52. d 62. d 72. c 82. b
23. a 33. c 43. c 53. c 63. d 73. a 83. d
24. a 34. d 44. d 54. d 64. d 74. b 84. c
25. b 35. b 45. d 55. d 65. b 75. d 85. c
26. d 36. a 46. d 56. d 66. a 76. d 86. a
27. c 37. a 47. a 57. b 67. c 77. c 87. d
28. d 38. c 48. d 58. c 68. d 78. d 88. d
29. c 39. d 49. b 59. d 69. b 79. a *89. d
30. d 40. d 50. d 60. b 70. c 80. b
Solutions to those Multiple Choice questions for which the answer is “none of these.”
22. A long-term debt maturing currently to be paid with current assets is a current liability.
32. Accounts Payable, Wages Payable, etc., would be examples of current liabilities.
44. The company must both intend to refinance the obligation on a long-term basis and
demonstrate the ability to consummate the refinancing to exclude a short-term obligation
from current liabilities.
90. Glaus Corp. signed a three-month, zero-interest-bearing note on November 1, 2012 for
the purchase of $250,000 of inventory. The face value of the note was $253,675.
Assuming Glaus used a “Discount on Note Payable” account to initially record the note
and that the discount will be amortized equally over the 3-month period, the adjusting
entry made at December 31, 2012 will include a
a. debit to Discount on Note Payable for $1,225.
b. debit to Interest Expense for $2,450.
c. credit to Discount on Note Payable for $1,255.
d. credit to Interest Expense for $2,450.
91. The effective interest on a 12-month, zero-interest-bearing note payable of $300,000,

discounted at the bank at 8% is
a. 8.51%.
b. 8%.
c. 11.49%.
d. 8.70%.
92. On September 1, Hydra purchased $13,300 of inventory items on credit with the terms
1/15, net 30, FOB destination. Freight charges were $280. Payment for the purchase was
made on September 18. Assuming Hydra uses the perpetual inventory system and the net
method of accounting for purchase discounts, what amount is recorded as inventory from
this purchase?
a. $13,167.
b. $13,447.
c. $13,580.
d. $13,300.
93. Sodium Inc. borrowed $280,000 on April 1. The note requires interest at 12% and
principal to be paid in one year. How much interest is recognized for the period from April
1 to December 31?
a. $0.
b. $33,600.
c. $8,400.
d. $25,200.
94. Collier borrowed $350,000 on October 1 and is required to pay $360,000 on March 1.
What amount is the note payable recorded at on October 1 and how much interest is
recognized from October 1 to December 31?
a. $350,000 and $0.
b. $350,000 and $6,000.
c. $360,000 and $0.
d. $350,000 and $10,000.
95. Purest owes $2 million that is due on February 28. The company borrows $1,600,000 on
February 25 (5-year note) and uses the proceeds to pay down the $2 million note and
uses other cash to pay the balance. How much of the $2 million note is classified as long-
term in the December 31 financial statements.
a. $2,000,000.
b. $0.
c. $1,600,000.
d. $400,000.
96. Vista newspapers sold 6,000 of annual subscriptions at $125 each on September 1. How
much unearned revenue will exist as of December 31?
a. $0.
b. $500,000.
c. $250,000.
d. $750,000.
97. Purchase Retailer made cash sales during the month of October of $221,000. The sales
are subject to a 6% sales tax that was also collected. Which of the following would be
included in the summary journal entry to reflect the sale transactions?
a. Debit Cash for $221,000.
b. Credit Sales Taxes Payable for $12,510.
c. Credit Sales Revenue for $208,490.
d. Credit Sales Taxes Payable for $13,260.
98. On February 10, 2012, after issuance of its financial statements for 2011, House
Company entered into a financing agreement with Lebo Bank, allowing House Company
to borrow up to $6,000,000 at any time through 2014. Amounts borrowed under the
agreement bear interest at 2% above the bank's prime interest rate and mature two years
from the date of loan. House Company presently has $2,250,000 of notes payable with
First National Bank maturing March 15, 2012. The company intends to borrow $3,750,000
under the agreement with Lebo and liquidate the notes payable to First National. The
agreement with Lebo also requires House to maintain a working capital level of
$9,000,000 and prohibits the payment of dividends on common stock without prior
approval by Lebo Bank. From the above information only, the total short-term debt of
House Company as of the December 31, 2012 balance sheet date is
a. $0.
b. $2,250,000.
c. $3,000,000.
d. $6,000,000.
99. On December 31, 2012, Irey Co. has $4,000,000 of short-term notes payable due on
February 14, 2013. On January 10, 2013, Irey arranged a line of credit with County Bank
which allows Irey to borrow up to $3,000,000 at one percent above the prime rate for three
years. On February 2, 2013, Irey borrowed $2,400,000 from County Bank and used
$1,000,000 additional cash to liquidate $3,400,000 of the short-term notes payable. The
amount of the short-term notes payable that should be reported as current liabilities on the
December 31, 2012 balance sheet which is issued on March 5, 2013 is
a. $0.
b. $600,000.
c. $1,000,000.
d. $1,600,000.
Use the following information for questions 100 and 101.

Stine Co. is a retail store operating in a state with a 6% retail sales tax. The retailer may keep 2%
of the sales tax collected. Stine Co. records the sales tax in the Sales Revenue account. The
amount recorded in the Sales Revenue account during May was $222,600.
100. The amount of sales taxes (to the nearest dollar) for May is
a. $13,089.
b. $12,600.
c. $13,356.
d. $14,157.
101. The amount of sales taxes payable (to the nearest dollar) to the state for the month of
May is
a. $12,826.
b. $12,348.
c. $13,089.
d. $13,873.
102. Vopat, Inc., is a retail store operating in a state with a 5% retail sales tax. The state law
provides that the retail sales tax collected during the month must be remitted to the state
during the following month. If the amount collected is remitted to the state on or before
the twentieth of the following month, the retailer may keep 3% of the sales tax collected.
On April 10, 2012, Vopat remitted $135,800 tax to the state tax division for March 2012
retail sales. What was Vopat 's March 2012 retail sales subject to sales tax?
a. $2,716,000.
b. $2,660,000.
c. $2,800,000.
d. $2,741,667.
103. Jenkins Corporation has $2,500,000 of short-term debt it expects to retire with proceeds
from the sale of 90,000 shares of common stock. If the stock is sold for $20 per share
subsequent to the balance sheet date, but before the balance sheet is issued, what
amount of short-term debt could be excluded from current liabilities?
a. $1,800,000
b. $2,500,000
c. $700,000
d. $0
104. Ermler Corporation has $1,800,000 of short-term debt it expects to retire with proceeds
a. $1,000,000
b. $1,800,000
c. $800,000
d. $0
105. Preston Co., which has a taxable payroll of $700,000, is subject to FUTA tax of 6.2% and
a state contribution rate of 5.4%. However, because of stable employment experience, the
company’s state rate has been reduced to 2%. What is the total amount of federal and
state unemployment tax for Preston Co.?
a. $81,900
b. $57,400
c. $28,000
d. $19,600
106. Roark Co., which has a taxable payroll of $600,000, is subject to FUTA tax of 6.2% and a
state contribution rate of 5.4%. However, because of stable employment experience, the
state unemployment tax for Roark Co.?
a. $70,200
b. $49,200
c. $24,000
d. $16,800
107. A company gives each of its 50 employees (assume they were all employed continuously
through 2012 and 2013) 12 days of vacation a year if they are employed at the end of the
year. The vacation accumulates and may be taken starting January 1 of the next year.
The employees work 8 hours per day. In 2012, they made $21 per hour and in 2013 they
made $24 per hour. During 2013, they took an average of 9 days of vacation each. The
company’s policy is to record the liability existing at the end of each year at the wage rate
for that year. What amount of vacation liability would be reflected on the 2012 and 2013
balance sheets, respectively?
a. $100,800; $140,400
b. $115,200; $144,000
c. $100,800; $144,000
d. $115,200; $140,400
The employees work 8 hours per day. In 2012, they made $24.50 per hour and in 2013
they made $28 per hour. During 2013, they took an average of 9 days of vacation each.
The company’s policy is to record the liability existing at the end of each year at the wage
rate for that year. What amount of vacation liability would be reflected on the 2012 and
2013 balance sheets, respectively?
a. $117,600; $163,800
b. $134,400; $168,000
c. $117,600; $168,000
d. $134,400; $163,800
109. The total payroll of Teeter Company for the month of October, 2012 was $600,000, of
which $150,000 represented amounts paid in excess of $106,800 to certain employees.
$500,000 represented amounts paid to employees in excess of the $7,000 maximum
subject to unemployment taxes. $150,000 of federal income taxes and $15,000 of union
dues were withheld. The state unemployment tax is 1%, the federal unemployment tax
is .8%, and the current F.I.C.A. tax is 7.65% on an employee’s wages to $106,800 and
1.45% in excess of $106,800. What amount should Teeter record as payroll tax expense?
a. $197,700.
b. $188,400.
c. $38,400.
d. $47,400.

Vargas Company has 35 employees who work 8-hour days and are paid hourly. On January 1,
2011, the company began a program of granting its employees 10 days of paid vacation each
year. Vacation days earned in 2011 may first be taken on January 1, 2012. Information relative to
these employees is as follows:
Hourly Vacation Days Earned Vacation Days Used
Year Wages by Each Employee by Each Employee
2011 $21.50 10 0
2012 22.50 10 8
2013 23.75 10 10
Vargas has chosen to accrue the liability for compensated absences at the current rates of pay in
effect when the compensated time is earned.
110. What is the amount of expense relative to compensated absences that should be reported
on Vargas’s income statement for 2011?
a. $0.
b. $57,400.
c. $63,000.
d. $60,200.
111. What is the amount of the accrued liability for compensated absences that should be
reported at December 31, 2013?
a. $79,100.
b. $75,600.
c. $66,500.
d. $79,800.
112. CalCount pays a weekly payroll of $170,000 that includes federal taxes withheld of
$25,400, FICA taxes withheld of $15,780, and 401(k) withholdings of $18,000. What is the
effect of assets and liabilities from this transaction?
a. Assets decrease $170,000 and liabilities do not change.
b. Assets decrease $128,820 and liabilities increase $41,180.
c. Assets decrease $128,820 and liabilities decrease $41,180.
d. Assets decrease $110,820 and liabilities increase $59,180.
113. CalCount provides its employees two weeks of paid vacation per year. As of December
31, 65 employees have earned two weeks of vacation time to be taken the following year.
If the average weekly salary for these employees is $1,140, what is the required journal
entry?
a. Debit Salaries and Wages Expense for $148,200 and credit Salaries and Wages
Payable for $148,200.
b. No journal entry required.
c. Debit Salaries and Wages Payable for $147,600 and credit Salaries and Wages
Expense for $147,600.
d. Debit Salaries and Wages Expense for $74,100 and credit Salaries and Wages
114. Tender Foot Inc. is involved in b. When the future events are probable
to occur and the amount can be reasonably estimated.
c. When the future events are probable to occur.
d. When the future events will possibly occur and the amount can be reasonably
estimated.
61. Which of the following is an example of a contingent liability?

a. Obligations related to product warranties.
b. Possible receipt from a litigation settlement.
c. Pending court case with a probable favorable outcome.
d. Tax loss carryforwards.
62. Which of the following terms is associated with recording a contingent liability?
a. Possible.
b. Likely.
c. Remote.
d. Probable.
63. Which of the following is the proper way to report a gain contingency?
a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional disclosure explaining the nature of the
contingency.
d. As a disclosure only.
64. Which of the following contingencies need not be disclosed in the financial statements or
the notes thereto?
a. Probable losses not reasonably estimable
b. Environmental liabilities that cannot be reasonably estimated
c. Guarantees of indebtedness of others
d. All of these must be disclosed.
65. Which of the following sets of conditions would give rise to the accrual of a contingency
under current generally accepted accounting principles?
a. Amount of loss is reasonably estimable and event occurs infrequently.
b. Amount of loss is reasonably estimable and occurrence of event is probable.
c. Event is unusual in nature and occurrence of event is probable.
d. Event is unusual in nature and event occurs infrequently.
66. Jeff Beck is a farmer who owns land which borders on the right-of-way of the Northern
Railroad. On August 10, 2012, due to the admitted negligence of the Railroad, hay on the
farm was set on fire and burned. Beck had had a dispute with the Railroad for several
years concerning the ownership of a small parcel of land. The representative of the
Railroad has offered to assign any rights which the Railroad may have in the land to Beck
in exchange for a release of his right to reimbursement for the loss he has sustained from
the fire. Beck appears inclined to accept the Railroad's offer. The Railroad's 2012 financial
statements should include the following related to the incident:
a. recognition of a loss and creation of a liability for the value of the land.
b. recognition of a loss only.
c. creation of a liability only.
d. disclosure in note form only.
67. A contingency can be accrued when

a. it is certain that funds are available to settle the disputed amount.
b. an asset may have been impaired.
c. the amount of the loss can be reasonably estimated and it is probable that an asset
has been impaired or a liability incurred.
d. it is probable that an asset has been impaired or a liability incurred even though the
amount of the loss cannot be reasonably estimated.
68. A contingent liability

a. definitely exists as a liability but its amount and due date are indeterminable.
b. is accrued even though not reasonably estimated.
c. is not
d. when it is probable the asset will be retired.
71. Assume that a manufacturing corporation has (1) good quality control, (2) a one-year
operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy
of guaranteeing new products against defects for three years that has resulted in material
but rather stable warranty repair and replacement costs. Any liability for the warranty
a. should be reported as long-term.
b. should be reported as current.
c. should be reported as part current and part long-term.
d. need not be disclosed.
72. Ortiz Corporation, a manufacturer of household paints, is preparing annual financial
statements at December 31, 2012. Because of a recently proven health hazard in one of
its paints, the government has clearly indicated its intention of having Ortiz recall all cans
of this paint sold in the last six months. The management of Ortiz estimates that this recall
would cost $800,000. What accounting recognition, if any, should be accorded this
situation?
a. No recognition
b. Note disclosure only
c. Operating expense of $800,000 and liability of $800,000
d. Appropriation of retained earnings of $800,000
73. Information available prior to the issuance of the financial statements indicates that it is
probable that, at the date of the financial statements, a liability has been incurred for
obligations related to product warranties. The amount of the loss involved can be
reasonably estimated. Based on the above facts, an estimated loss contingency should be
a. accrued.
b. disclosed but not accrued.
c. neither accrued nor disclosed.
d. classified as an appropriation of retained earnings.
P
74. Espinosa Co. has a loss contingency to accrue. The loss amount can only be reasonably
estimated within a range of outcomes. No single amount within the range is a better
estimate than any other amount. The amount of loss accrual should be
a. zero.
b. the minimum of the range.
c. the mean of the range.
d. the maximum of the range.
S
75. Dean Company becomes aware of a lawsuit after the date of the financial statements, but
before they are issued. A loss and related liability should be reported in the financial
statements if the amount can be reasonably estimated, an unfavorable outcome is highly
probable, and
a. the Dean Company admits guilt.
b. the court will decide the case within one year.
c. the damages appear to be material.
d. the cause for action occurred during the accounting period covered by the financial
statements.
S
76. Use of the accrual method in accounting for product warranty costs
a. is required for federal income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are immaterial.
c. finds the expense account being charged when the seller performs in compliance with
the warranty.
d. represents accepted practice and should be used whenever the warranty is an integral
and inseparable part of the sale.
77. Which of the following best describes the accrual method of accounting for warranty
costs?
a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.
78. Which of the following best describes the cash-basis method of accounting for warranty
costs?
a. Expensed based on estimate in year of sale.
b. Expensed when liability is accrued.
c. Expensed when warranty claims are certain.
d. Expensed when incurred.
79. Which of the following is a characteristic of the expense warranty approach, but not the
sales warranty approach?
a. Estimated liability under warranties.
b. Warranty expense.
c. Unearned warranty revenue.
d. Warranty revenue.
80. An electronics store is running a promotion where for every video game purchased, the
customer receives a coupon upon checkout to purchase a second game at a 50%
discount. The coupons expire in one year. The store normally recognized a gross profit
margin of 40% of the selling price on video games. How would the store account for a
purchase using the discount coupon?
a. The reduction in sales price attributed to the coupon is recognized as premium
expense.
b. The difference between the cost of the video game and the cash received is
recognized as premium expense.
c. Premium expense is not recognized.
d. The difference between the cost of the video game and the selling price prior to the
coupon is recognized as premium expense.
81. What condition is necessary to recognize an asset retirement obligation?

a. Company has an existing legal obligation and can reasonably estimate the amount of
the liability.
b. Company can reasonably estimate the amount of the liability.
c. Company has an existing legal obligation.
d. Obligation event has occurred.
82. Which of the following are not factors that are considered when evaluating whether or not
to record a liability for pending litigation?
a. Time period in which the underlying cause of action occurred.
b. The type of litigation involved.
c. The probability of an unfavorable outcome.
d. The ability to make a reasonable estimate of the amount of the loss.
83. How do you determine the acid-test ratio?

a. The sum of cash and short-term investments divided by short-term debt.
b. Current assets divided by current liabilities.
c. Current assets divided by short-term debt.
d. The sum of cash, short-term investments and net receivables divided by current
liabilities.
84. What does the current ratio inform you about a company?
a. The extent of slow-moving inventories.
b. The efficient use of assets.
c. The company's liquidity.
d. The company's profitability.
S
85. Which of the following is not acceptable treatment for the presentation of current
liabilities?
a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities immediately below current assets to obtain a presentation of
working capital
P
86. The ratio of current assets to current liabilities is called the
a. current ratio.
b. acid-test ratio.
c. current asset turnover ratio.
d. current liability turnover ratio.
87. Accrued liabilities are disclosed in financial statements by

a. a footnote to the statements.
b. showing the amount among the liabilities but not extending it to the liability total.
c. an appropriation of retained earnings.
d. appropriately classifying them as regular liabilities in the balance sheet.
88. The numerator of the acid-test ratio consists of

a. total current assets.
b. cash and marketable securities.
c. cash and net receivables.
d. cash, marketable securities, and net receivables.
89. Each of the following are included in both the current ratio and the acid-test ratio except
a. cash.
b. short-term investments.
c. net receivables.
d. inventory.

21. d 31. c 41. a 51. d 61. a 71. c 81. a
22. d 32. d 42. b 52. d 62. d 72. c 82. b
23. a 33. c 43. c 53. c 63. d 73. a 83. d
24. a 34. d 44. d 54. d 64. d 74. b 84. c
25. b 35. b 45. d 55. d 65. b 75. d 85. c
26. d 36. a 46. d 56. d 66. a 76. d 86. a
27. c 37. a 47. a 57. b 67. c 77. c 87. d
28. d 38. c 48. d 58. c 68. d 78. d 88. d
29. c 39. d 49. b 59. d 69. b 79. a *89. d
30. d 40. d 50. d 60. b 70. c 80. b
22. A long-term debt maturing currently to be paid with current assets is a current liability.
32. Accounts Payable, Wages Payable, etc., would be examples of current liabilities.
44. The company must both intend to refinance the obligation on a long-term basis and
demonstrate the ability to consummate the refinancing to exclude a short-term obligation
from current liabilities.
90. Glaus Corp. signed a three-month, zero-interest-bearing note on November 1, 2012 for
the purchase of $250,000 of inventory. The face value of the note was $253,675.
Assuming Glaus used a “Discount on Note Payable” account to initially record the note
and that the discount will be amortized equally over the 3-month period, the adjusting
entry made at December 31, 2012 will include a
a. debit to Discount on Note Payable for $1,225.
b. debit to Interest Expense for $2,450.
c. credit to Discount on Note Payable for $1,255.
d. credit to Interest Expense for $2,450.
91. The effective interest on a 12-month, zero-interest-bearing note payable of $300,000,

discounted at the bank at 8% is
a. 8.51%.
b. 8%.
c. 11.49%.
d. 8.70%.
92. On September 1, Hydra purchased $13,300 of inventory items on credit with the terms
1/15, net 30, FOB destination. Freight charges were $280. Payment for the purchase was
made on September 18. Assuming Hydra uses the perpetual inventory system and the net
method of accounting for purchase discounts, what amount is recorded as inventory from
this purchase?
a. $13,167.
b. $13,447.
c. $13,580.
d. $13,300.
93. Sodium Inc. borrowed $280,000 on April 1. The note requires interest at 12% and
principal to be paid in one year. How much interest is recognized for the period from April
1 to December 31?
a. $0.
b. $33,600.
c. $8,400.
d. $25,200.
94. Collier borrowed $350,000 on October 1 and is required to pay $360,000 on March 1.
What amount is the note payable recorded at on October 1 and how much interest is
recognized from October 1 to December 31?
a. $350,000 and $0.
b. $350,000 and $6,000.
c. $360,000 and $0.
d. $350,000 and $10,000.
95. Purest owes $2 million that is due on February 28. The company borrows $1,600,000 on
February 25 (5-year note) and uses the proceeds to pay down the $2 million note and
uses other cash to pay the balance. How much of the $2 million note is classified as long-
term in the December 31 financial statements.
a. $2,000,000.
b. $0.
c. $1,600,000.
d. $400,000.
96. Vista newspapers sold 6,000 of annual subscriptions at $125 each on September 1. How
much unearned revenue will exist as of December 31?
a. $0.
b. $500,000.
c. $250,000.
d. $750,000.
97. Purchase Retailer made cash sales during the month of October of $221,000. The sales
are subject to a 6% sales tax that was also collected. Which of the following would be
included in the summary journal entry to reflect the sale transactions?
a. Debit Cash for $221,000.
b. Credit Sales Taxes Payable for $12,510.
c. Credit Sales Revenue for $208,490.
d. Credit Sales Taxes Payable for $13,260.
98. On February 10, 2012, after issuance of its financial statements for 2011, House
Company entered into a financing agreement with Lebo Bank, allowing House Company
to borrow up to $6,000,000 at any time through 2014. Amounts borrowed under the
agreement bear interest at 2% above the bank's prime interest rate and mature two years
from the date of loan. House Company presently has $2,250,000 of notes payable with
First National Bank maturing March 15, 2012. The company intends to borrow $3,750,000
under the agreement with Lebo and liquidate the notes payable to First National. The
agreement with Lebo also requires House to maintain a working capital level of
$9,000,000 and prohibits the payment of dividends on common stock without prior
approval by Lebo Bank. From the above information only, the total short-term debt of
House Company as of the December 31, 2012 balance sheet date is
a. $0.
b. $2,250,000.
c. $3,000,000.
d. $6,000,000.
99. On December 31, 2012, Irey Co. has $4,000,000 of short-term notes payable due on
February 14, 2013. On January 10, 2013, Irey arranged a line of credit with County Bank
which allows Irey to borrow up to $3,000,000 at one percent above the prime rate for three
years. On February 2, 2013, Irey borrowed $2,400,000 from County Bank and used
$1,000,000 additional cash to liquidate $3,400,000 of the short-term notes payable. The
amount of the short-term notes payable that should be reported as current liabilities on the
December 31, 2012 balance sheet which is issued on March 5, 2013 is
a. $0.
b. $600,000.
c. $1,000,000.
d. $1,600,000.

Stine Co. is a retail store operating in a state with a 6% retail sales tax. The retailer may keep 2%
of the sales tax collected. Stine Co. records the sales tax in the Sales Revenue account. The
amount recorded in the Sales Revenue account during May was $222,600.
100. The amount of sales taxes (to the nearest dollar) for May is
a. $13,089.
b. $12,600.
c. $13,356.
d. $14,157.
101. The amount of sales taxes payable (to the nearest dollar) to the state for the month of
May is
a. $12,826.
b. $12,348.
c. $13,089.
d. $13,873.
102. Vopat, Inc., is a retail store operating in a state with a 5% retail sales tax. The state law
provides that the retail sales tax collected during the month must be remitted to the state
during the following month. If the amount collected is remitted to the state on or before
the twentieth of the following month, the retailer may keep 3% of the sales tax collected.
On April 10, 2012, Vopat remitted $135,800 tax to the state tax division for March 2012
retail sales. What was Vopat 's March 2012 retail sales subject to sales tax?
a. $2,716,000.
b. $2,660,000.
c. $2,800,000.
d. $2,741,667.
103. Jenkins Corporation has $2,500,000 of short-term debt it expects to retire with proceeds
a. $1,800,000
b. $2,500,000
c. $700,000
d. $0
104. Ermler Corporation has $1,800,000 of short-term debt it expects to retire with proceeds
a. $1,000,000
b. $1,800,000
c. $800,000
d. $0
105. Preston Co., which has a taxable payroll of $700,000, is subject to FUTA tax of 6.2% and
a state contribution rate of 5.4%. However, because of stable employment experience, the
state unemployment tax for Preston Co.?
a. $81,900
b. $57,400
c. $28,000
d. $19,600
106. Roark Co., which has a taxable payroll of $600,000, is subject to FUTA tax of 6.2% and a
state contribution rate of 5.4%. However, because of stable employment experience, the
state unemployment tax for Roark Co.?
a. $70,200
b. $49,200
c. $24,000
d. $16,800
The employees work 8 hours per day. In 2012, they made $21 per hour and in 2013 they
made $24 per hour. During 2013, they took an average of 9 days of vacation each. The
company’s policy is to record the liability existing at the end of each year at the wage rate
for that year. What amount of vacation liability would be reflected on the 2012 and 2013
balance sheets, respectively?
a. $100,800; $140,400
b. $115,200; $144,000
c. $100,800; $144,000
d. $115,200; $140,400
The employees work 8 hours per day. In 2012, they made $24.50 per hour and in 2013
they made $28 per hour. During 2013, they took an average of 9 days of vacation each.
The company’s policy is to record the liability existing at the end of each year at the wage
rate for that year. What amount of vacation liability would be reflected on the 2012 and
2013 balance sheets, respectively?
a. $117,600; $163,800
b. $134,400; $168,000
c. $117,600; $168,000
d. $134,400; $163,800
109. The total payroll of Teeter Company for the month of October, 2012 was $600,000, of
which $150,000 represented amounts paid in excess of $106,800 to certain employees.
$500,000 represented amounts paid to employees in excess of the $7,000 maximum
subject to unemployment taxes. $150,000 of federal income taxes and $15,000 of union
dues were withheld. The state unemployment tax is 1%, the federal unemployment tax
is .8%, and the current F.I.C.A. tax is 7.65% on an employee’s wages to $106,800 and
1.45% in excess of $106,800. What amount should Teeter record as payroll tax expense?
a. $197,700.
b. $188,400.
c. $38,400.
d. $47,400.

Vargas Company has 35 employees who work 8-hour days and are paid hourly. On January 1,
2011, the company began a program of granting its employees 10 days of paid vacation each
year. Vacation days earned in 2011 may first be taken on January 1, 2012. Information relative to
these employees is as follows:
Hourly Vacation Days Earned Vacation Days Used
Year Wages by Each Employee by Each Employee
2011 $21.50 10 0
2012 22.50 10 8
2013 23.75 10 10
Vargas has chosen to accrue the liability for compensated absences at the current rates of pay in
effect when the compensated time is earned.
110. What is the amount of expense relative to compensated absences that should be reported
on Vargas’s income statement for 2011?
a. $0.
b. $57,400.
c. $63,000.
d. $60,200.
111. What is the amount of the accrued liability for compensated absences that should be
reported at December 31, 2013?
a. $79,100.
b. $75,600.
c. $66,500.
d. $79,800.
112. CalCount pays a weekly payroll of $170,000 that includes federal taxes withheld of
$25,400, FICA taxes withheld of $15,780, and 401(k) withholdings of $18,000. What is the
effect of assets and liabilities from this transaction?
a. Assets decrease $170,000 and liabilities do not change.
b. Assets decrease $128,820 and liabilities increase $41,180.
c. Assets decrease $128,820 and liabilities decrease $41,180.
d. Assets decrease $110,820 and liabilities increase $59,180.
113. CalCount provides its employees two weeks of paid vacation per year. As of December
31, 65 employees have earned two weeks of vacation time to be taken the following year.
If the average weekly salary for these employees is $1,140, what is the required journal
entry?
a. Debit Salaries and Wages Expense for $148,200 and credit Salaries and Wages
b. No journal entry required.
c. Debit Salaries and Wages Payable for $147,600 and credit Salaries and Wages
Expense for $147,600.
d. Debit Salaries and Wages Expense for $74,100 and credit Salaries and Wages
114. Tender Foot Inc. is involved in CHAPTER 14

LONG-TERM LIABILITIES
T 1. Bond interest payments.
F 2. Debenture bonds.
T 3. Definition of serial bonds.
F 4. Market rate vs. coupon rate.
F 5. Definition of stated interest rate.
T 6. Stated rate and coupon rate.
F 7. Amortization of premium and discount.
F 8. Issuance of bonds.
F 9. Interest paid vs. interest expense.

T 10. Accounting for bond issue costs.
T 11. Refunding of bond issue.
F 12. Long-term notes payable.
T 13. Implicit interest rate.
T 14. Definition of unrealized holiday gain/loss.
T 15. Off-balance-sheet financing.
T 16. Debt to total assets ratio.
F 17. Refinancing long-term debt.
F 18. Times interest earned ratio.
F *19. Loss recognized on impaired loan.
F *20. Gain/loss in troubled debt restructuring.
a 21. Liability identification.
a 22. Bond terms.
b 23. Definition of "debenture bonds."
a P
24. Definition of bearer bonds.
S
d 25. Definition of income bonds.
a S
26. Effective-interest vs. straight-line method.
S
d 27. Interest rate of the bond indenture.
d 28. Rate of interest earned by the bondholders.
d 29. Calculating the issue price of bonds.
d 30. Calculating the issue price of bonds.
b 31. Premium and interest rates.
a 32. Interest and discount amortization.
d 33. Effective-interest amortization method.
d 34. Impact of effective-interest method.
c 35. Recording bonds issued between interest dates.
d 36. Bonds issued at other than an interest date.
d 37. Classification of bond issuance costs.
c 38. Bond issuance costs.
b 39. Classification of treasury bonds.
d 40. Early extinguishment of bonds payable.
d 41. Gain or loss on extinguishment of debt.
P
c 42. In-substance defeasance.
c P
43. Reporting long-term debt.
S
a 44. Debt instrument exchanged for property.
d 45. Valuation of note issued in noncash transaction.
d 46. Stated interest rate of note.
c 47. Accounting for the fair value option.
d 48. Off-balance-sheet financing.
c S
49. Off-balance-sheet financing.
S
d 50. Long-term debt maturing within one year.
d 51. Required bond disclosures.
d 52. Long-term debt disclosures.
c 53. Times interest earned ratio.
c. 54. Debt to total assets ratio.

c *55. Modification of terms in debt restructure.
d *56. Gain/loss on troubled debt restructuring.
b *57. Gain/loss on troubled debt restructuring.
b *58. Interest and troubled debt restructuring.
c *59. Creditor's calculations for modification of terms.
P
S
* This topic is dealt with in an Appendix to the chapter.
a 60. Calculate the present value of bond principal.
b 61. Calculate the present value of bond interest.
a 62. Determine the issue price of bonds.
c 63. Proceeds from bond issuance.
c 64. Bonds issued between interest dates.
c 65. Proceeds from bond issuance.
c 66. Bonds issued between interest dates.
c 67. Effective-interest method interest expense.
a 68. Effective-interest method carrying value.
d 69. Straight-line method carrying value.
d 70. Straight-line amortization/interest expense.
c 71. Effective-interest method interest expense.
a 72. Effective-interest method carrying value.
d 73. Straight-line method carrying value.
d 74. Straight-line method amortization/interest expense.
b 75. Interest expense using effective-interest method.
c 76. Interest expense using effective-interest method.
d 77. Entry to record issuance of bonds.
a 78. Calculate bond interest expense.
b 79. Entry to record issuance of bonds.
c 80. Calculate bond interest expense.
b 81. Calculate interest expense for two periods.
b 82. Calculate unamortized bond discount balance.
b 83. Calculate unamortized bond premium balance.
c 84. Calculate interest expense for two periods.
b 85. Entry to record bond redemption.
b 86. Entry to record bond redemption.
b 87. Calculate loss on bond redemption.
c 88. Calculate loss on bond redemption.
c 89. Calculate gain on retirement of bonds.
b 90. Calculate gain on retirement of bonds.
b 91. Calculate loss on retirement of bonds.
b 92. Bond retirement with call premium.
b 93. Calculate loss on retirement of bonds.
b 94. Early extinguishment of debt.

b 95. Early extinguishment of debt.
a 96. Interest on noninterest-bearing note.
c 97. Interest on installment note payable.
b 98. Determine balance of discount on notes payable.
d 99. Calculate times interest earned ratio.
a 100. Calculate times interest earned ratio.
c 101. Calculate income before taxes with times interest earned ratio.
d 102. Determine total long-term liabilities.
b *103. Transfer of equipment in debt settlement.
d *104. Recognizing gain on debt restructure.
a *105. Interest and troubled debt restructuring.

a 106. Determine proceeds from bond issue.
b 107. Determine unamortized bond premium.
a 108. Determine unamortized bond discount.
c 109. Calculate bond interest expense.
a 110. Calculate loss on retirement of bonds.
d 111. Calculate loss on retirement of bonds.
d 112. Calculate gain on retirement of bonds.
c 113. Determine carrying value of bonds to be retired.
c 114. Carrying value of bonds with call provision.
c 115. Classification of gain from debt refunding.
d *116. Classification of gain from troubled debt restructuring.
EXERCISES
Item Description
E14-117 Terms related to long-term debt.
E14-118 Bond issue price and premium amortization.
E14-119 Amortization of discount or premium.
E14-120 Entries for bonds payable.
E14-121 Retirement of bonds.
E14-122 Early extinguishment of debt.
*E14-123 Accounting for a troubled debt settlement.
*E14-124 Accounting for troubled debt restructuring.
*E14-125 Accounting for troubled debt.
PROBLEMS
Item Description
P14-126 Bond discount amortization.
P14-127 Bond interest and discount amortization.
P14-128 Entries for bonds payable.
P14-129 Entries for bonds payable.
P14-130 Fair value option
*P14-131 Accounting for a troubled debt settlement.
1. Describe the formal procedures associated with issuing long-term debt.
2. Identify various types of bond issues.
3. Describe the accounting valuation for bonds at date of issuance.
4. Apply the methods of bond discount and premium amortization.
5. Describe the accounting for the extinguishment of debt.
6. Explain the accounting for long-term notes payable.
7. Describe the accounting for the fair value option.
8. Explain the reporting of off-balance-sheet financing arrangements.
9. Indicate how to present and analyze long-term debt.
*10. Describe the accounting for a debt restructuring.

1. TF 21. MC 22. MC
P S
2. TF 3. TF 23. MC 24. MC 25. MC
4. TF 27. MC 30. MC 62. MC 117. E
5. TF 28. MC 60. MC 63. MC 118. E
6. TF 29. MC 61. MC 65. MC 126. P
7. TF 34. MC 67. MC 75. MC 83. MC 119. E
8. TF 35. MC 68. MC 76. MC 84. MC 120. E
9. TF 36. MC 69. MC 77. MC 106. MC 126. P
10. TF 37. MC 70. MC 78. MC 107. MC 127. P
26. MC 38. MC 71. MC 79. MC 108. MC 128. P
31. MC 39. MC 72. MC 80. MC 109. MC 129. P
32. MC 64. MC 73. MC 81. MC 117. E
33. MC 66. MC 74. MC 82. MC 118. E
11. TF 85. MC 89. MC 93. MC 111. MC 115. MC 122. E
40. MC 86. MC 90. MC 94. MC 112. MC 117. E 128. P
41. MC 87. MC 91. MC 95. MC 113. MC 120. E
P
42. MC 88. MC 92. MC 110. MC 114. MC 121. E
P
12. TF 43. MC 45. MC 47. MC 97. MC
13. TF S
44. MC 46. MC 96. MC 98. MC
14. TF 47 MC 130. P
S
15. TF 48. MC 49. MC
16. TF 18. TF 51. MC 53. MC 99. MC 101. MC
17. TF 50.
S
MC 52. MC 54. MC 100. MC 102. MC
Learning Objective *10
19. TF 56. MC 59. MC 105. MC 124. E
20. TF 57. MC 103. MC 106. MC 125. E
55. MC 58. MC 104. MC 123. E 131. P

TRUE FALSE—Conceptual
1. Companies usually make bond interest payments semiannually, although the interest rate
is generally expressed as an annual rate.
2. A mortgage bond is referred to as a debenture bond.
3. Bond issues that mature in installments are called serial bonds.
4. If the market rate is greater than the coupon rate, bonds will be sold at a premium.
5. The interest rate written in the terms of the bond indenture is called the effective yield or
market rate.
6. The stated rate is the same as the coupon rate.
7. Amortization of a premium increases bond interest expense, while amortization of a

discount decreases bond interest expense.
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. Off-balance-sheet financing is an attempt to borrow monies in such a way to minimize the
reporting of debt on the balance sheet.
16. The debt to total assets ratio will go up if an equal amount of assets and liabilities are
added to the balance sheet.
17. If a company plans to retire long-term debt from a bond retirement fund, it should report
the debt as current.
18. The times interest earned ratio is computed by dividing income before interest expense by
interest expense.
*19. The loss to be recognized by a creditor on an impaired loan is the difference between the
investment in the loan and the expected undiscounted future cash flows from the loan.
*20. In a troubled debt restructuring, the loss recognized by the creditor will equal the gain
recognized by the debtor.
True False Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans.
1. T 6. T 11. T 16. T
2. F 7. F 12. F 17. F
3. T 8. F 13. T 18. F
4. F 9. F 14. T 19. F
5. F 10. T 15. T 20. F
21. An example of an item which is not a liability is
a. dividends payable in stock.
b. advances from customers on contracts.
c. accrued estimated warranty costs.
d. the portion of long-term debt due within one year.
22. The covenants and other terms of the agreement between the issuer of bonds and the
lender are set forth in the
a.bond indenture.
b.bond debenture.
c.registered bond.
d.bond coupon.
23. The term used for bonds that are unsecured as to principal is
a.junk bonds.
b.debenture bonds.
c.indebenture bonds.
d.callable bonds.
P
24.Bonds for which the owners' names are not registered with the issuing corporation are
called
a.bearer bonds.
b.term bonds.
c.debenture bonds.
d.secured bonds.
S
25. Bonds that pay no interest unless the issuing company is profitable are called
a.collateral trust bonds.
b.debenture bonds.
c.revenue bonds.
d.income bonds.
S
26. If bonds are issued initially at a premium and the effective-interest method of amortization
is used, interest expense in the earlier years will be
a.greater than if the straight-line method were used.
b.greater than the amount of the interest payments.
cthe same as if the straight-line method were used.
d.less than if the straight-line method were used.
27. The interest rate written in the terms of the bond indenture is known as the
a.coupon rate.
b.nominal rate.
c.stated rate.
d.coupon rate, nominal rate, or stated rate.
28. The rate of interest actually earned by bondholders is called the

a.stated rate.
b.yield rate.
c.effective rate.
d.effective, yield, or market rate.
Use the following information for questions 29 and 30:

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are
sold to yield 8%.
29.One step in calculating the issue price of the bonds is to multiply the principal by the table
value for
a.10 periods and 10% from the present value of 1 table.
b.20 periods and 5% from the present value of 1 table.
c.10 periods and 8% from the present value of 1 table.
d.20 periods and 4% from the present value of 1 table.
30. Another step in calculating the issue price of the bonds is to

a.multiply $10,000 by the table value for 10 periods and 10% from the present value of an annuity
table.
b.multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity
table.
c.multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity
table.
d.none of these.
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. The generally accepted method of accounting for gains or losses from the early
extinguishment of debt treats any gain or loss as
a.an adjustment to the cost basis of the asset obtained by the debt issue.
b.an amount that should be considered a cash adjustment to the cost of any other debt issued
over the remaining life of the old debt instrument.
c.an amount received or paid to obtain a new debt instrument and, as such, should be amortized
over the life of the new debt.
d.a difference between the reacquisition price and the net carrying amount of the debt which
should be recognized in the period of redemption.
P
42. "In-substance defeasance" is a term used to refer to an arrangement whereby
a.a company gets another company to cover its payments due on long-term debt.
b.a governmental unit issues debt instruments to corporations.
c.a company provides for the future repayment of a long-term debt by placing purchased
securities in an irrevocable trust.
d.a company legally extinguishes debt before its due date.
P
43.A corporation borrowed money from a bank to build a building. The long-term note signed
by the corporation is secured by a mortgage that pledges title to the building as security
for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay
the loan. Which of the following relationships can you expect to apply to the situation?
a.The balance of mortgage payable at a given balance sheet date will be reported as a long-term
liability.
b.The balance of mortgage payable will remain a constant amount over the 10-year period.
c.The amount of interest expense will decrease each period the loan is outstanding, while the
portion of the annual payment applied to the loan principal will increase each period.
d.The amount of interest expense will remain constant over the 10-year period.
S
44. A debt instrument with no ready market is exchanged for property whose fair value is
currently indeterminable. When such a transaction takes place
a.the present value of the debt instrument must be approximated using an imputed interest rate.
b.it should not be recorded on the books of either party until the fair value of the property
becomes evident.
c.the board of directors of the entity receiving the property should estimate a value for the
property that will serve as a basis for the transaction.
d.the directors of both entities involved in the transaction should negotiate a value to be assigned
to the property.
45. When a note payable is issued for property, goods, or services, the present value of the
note is measured by
a.the fair value of the property, goods, or services.

b.the fair value of the note.
c.using an imputed interest rate to discount all future payments on the note.
d.any of these.
46. When a note payable is exchanged for property, goods, or services, the stated interest
rate is presumed to be fair unless
a.no interest rate is stated.
b.the stated interest rate is unreasonable.
c.the stated face amount of the note is materially different from the current cash sales price for
similar items or from current fair value of the note.
d.any of these.
47.If a company chooses the fair value option, a decrease in the fair value of the liability is
recorded by crediting
a.Bonds Payable.
b.Gain on Restructuring of Debt.
c.Unrealized Holding Gain/Loss-Income.
d.None of these.
48. Which of the following is an example of "off-balance-sheet financing"?

1.Non-consolidated subsidiary.
2.Special purpose entity.
3.Operating leases.
a. 1
b. 2
c. 3
d.All of these are examples of "off-balance-sheet financing."
S
49. When a business enterprise enters into what is referred to as off-balance-sheet financing,
the company
a.is attempting to conceal the debt from shareholders by having no information about the debt
included in the balance sheet.
b.wishes to confine all information related to the debt to the income statement and the statement
of cash flow.
c.can enhance the quality of its financial position and perhaps permit credit to be obtained more
readily and at less cost.
d.is in violation of generally accepted accounting principles.
S
50. Long-term debt that matures within one year and is to be converted into stock should be
reported
a.as a current liability.
b.in a special section between liabilities and stockholders’ equity.
c.as noncurrent.
d.as noncurrent and accompanied with a note explaining the method to be used in its liquidation.
51. Which of the following must be disclosed relative to long-term debt maturities and sinking
fund requirements?
a.The present value of future payments for sinking fund requirements and long-term debt
maturities during each of the next five years.
b.The present value of scheduled interest payments on long-term debt during each of the next
five years.
c.The amount of scheduled interest payments on long-term debt during each of the next five
years.
d.The amount of future payments for sinking fund requirements and long-term debt maturities
during each of the next five years.
52. Note disclosures for long-term debt generally include all of the following except
a.assets pledged as security.
b.call provisions and conversion privileges.
c.restrictions imposed by the creditor.
d.names of specific creditors.
53. The times interest earned ratio is computed by dividing

a.net income by interest expense.
b.income before taxes by interest expense.
c.income before income taxes and interest expense by interest expense.
d.net income and interest expense by interest expense.
54. The debt to total assets ratio is computed by dividing

a.current liabilities by total assets.
b.long-term liabilities by total assets.
c.total liabilities by total assets.
d.total assets by total liabilities.
*55. In a troubled debt restructuring in which the debt is continued with modified terms and the
carrying amount of the debt is less than the total future cash flows,
a.a loss should be recognized by the debtor.
b.a gain should be recognized by the debtor.
c.a new effective-interest rate must be computed.
d.no interest expense or revenue should be recognized in the future.
*56. A troubled debt restructuring will generally result in a

a.loss by the debtor and a gain by the creditor.
b.loss by both the debtor and the creditor.
c.gain by both the debtor and the creditor.
d.gain by the debtor and a loss by the creditor.
*57. In a troubled debt restructuring in which the debt is restructured by a transfer of assets
with a fair value less than the carrying amount of the debt, the debtor would recognize
a.no gain or loss on the restructuring.
b.a gain on the restructuring.
c.a loss on the restructuring.
d.none of these.
*58. In a troubled debt restructuring in which the debt is continued with modified terms, a gain
should be recognized at the date of restructure, but no interest expense should be
recognized over the remaining life of the debt, whenever the
a.carrying amount of the pre-restructure debt is less than the total future cash flows.
b.carrying amount of the pre-restructure debt is greater than the total future cash flows.
c.present value of the pre-restructure debt is less than the present value of the future cash flows.
d.present value of the pre-restructure debt is greater than the present value of the future cash
flows.
*59. In a troubled debt restructuring in which the debt is continued with modified terms and the
carrying amount of the debt is less than the total future cash flows, the creditor should
a.compute a new effective-interest rate.
b.not recognize a loss.
c.calculate its loss using the historical effective rate of the loan.
d.calculate its loss using the current effective rate of the loan.

21. a 27. d 33. d 39. b 45. d 51. d *57. b
22. a 28. d 34. d 40. d 46. d 52. d *58. b
23. b 29. d 35. c 41. d 47. c 53. c *59. c
24. a 30. d 36. d 42. c 48. d 54. c
25. d 31. b 37. d 43. c 49. c *55. c
26. a 32. a 38. c 44. a 50. d *56. d
30. multiply $5,000 by the table value for 20 periods and 4% from the present value of
an annuity table.
Use the following information for questions 60 through 62:
On January 1, 2012, Ellison Co. issued eight-year bonds with a face value of $2,000,000 and a
stated interest rate of 6%, payable semiannually on June 30 and December 31. The
bonds were sold to yield 8%. Table values are:
Present value of 1 for 8 periods at 6% .627
Present value of annuity for 8 periods at 6% 6.210
60. The present value of the principal is

a. $1,068,000.
b. $1,080,000.
c. $1,246,000.
d. $1,254,000.
61. The present value of the interest is

a. $689,640.
b. $699,120.
c. $745,200.
d. $753,660.
62. The issue price of the bonds is

a. $1,767,120.
b. $1,769,640.
c. $1,779,120.
d. $1,999,200.
63. Downing Company issues $3,000,000, 6%, 5-year bonds dated January 1, 2012
on January 1, 2012. The bonds pay interest semiannually on June 30 and December 31.
The bonds are issued to yield 5%. What are the proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
a.$3,000,000
b.$3,129,896
c.$3,131,285
d.$3,130,385
64. Feller Company issues $10,000,000 of 10-year, 9% bonds on March 1, 2012 at 97 plus
accrued interest. The bonds are dated January 1, 2012, and pay interest on June 30 and
December 31. What is the total cash received on the issue date?
a.$9,700,000
b.$10,225,000
c.$9,850,000
d.$9,550,000
65. Everhart Company issues $15,000,000, 6%, 5-year bonds dated January 1, 2012 on
January 1, 2012. The bonds pays interest semiannually on June 30 and December 31.
The bonds are issued to yield 5%. What are the proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
a.$15,000,000
b.$15,649,482
c.$15,656,427
d.$15,651,924
66. Farmer Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2012 at 97 plus
accrued interest. The bonds are dated January 1, 2012, and pay interest on June 30 and
December 31. What is the total cash received on the issue date?
a.$19,400,000
b.$20,450,000
c.$19,700,000
d.$19,100,000
67. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$14,703,109. Using effective-interest amortization, how much interest expense will be
recognized in 2012?
a.$585,000
b.$1,170,000
c.$1,176,374
d.$1,176,249
$14,703,109. Using effective-interest amortization, what will the carrying value of the
bonds be on the December 31, 2012 balance sheet?
a. $14,709,482
b. $15,000,000
c. $14,718,844
d. $14,706,232
$14,703,109. Using straight-line amortization, what is the carrying value of the bonds on
December 31, 2013?
a. $14,752,673
b. $14,955,466
c. $14,725,375
d. $14,747,642
$14,703,109. What is interest expense for 2013, using straight-line amortization?
a. $1,540,207
b. $1,170,000
c. $1,176,894
d. $1,184,845
$9,802,072. Using effective-interest amortization, how much interest expense will be
recognized in 2012?
a. $390,000
b. $780,000
c. $784,248
d. $784,166
$9,802,072. Using effective-interest amortization, what will the carrying value of the bonds
be on the December 31, 2012 balance sheet?
a. $9,806,320
b. $10,000,000
c. $9,812,562
d. $9,804,154
$9,802,072. Using straight-line amortization, what is the carrying value of the bonds on
December 31, 2013?
a. $9,835,116
b. $9,970,312
c. $9,816,916
d. $9,831,762
$9,802,072. What is interest expense for 2013, using straight-line amortization?
a. $770,104
b. $780,000
c. $784,596
d. $789,896
75. On January 1, 2012, Huber Co. sold 12% bonds with a face value of $800,000. The
bonds mature in five years, and interest is paid semiannually on June 30 and December
31. The bonds were sold for $861,600 to yield 10%. Using the effective-interest method of
amortization, interest expense for 2012 is
a. $80,000.
b. $85,914.
c. $86,160.
d. $96,000.
76. On January 2, 2012, a calendar-year corporation sold 8% bonds with a face value of
$900,000. These bonds mature in five years, and interest is paid semiannually on June 30
and December 31. The bonds were sold for $830,400 to yield 10%. Using the effective-
interest method of computing interest, how much should be charged to interest expense in 2012?
a. $72,000.
b. $83,040.
c. $83,316.
d. $90,000.
The following information applies to both questions 77 and 78.
On October 1, 2012 Macklin Corporation issued 5%, 10-year bonds with a face value of
$2,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or
discounts amortized on a straight-line basis.
77. The entry to record the issuance of the bonds would include a credit of
a. $50,000 to Interest Payable.
b. $80,000 to Discount on Bonds Payable.
c. $1,920,000 to Bonds Payable.
d. $80,000 to Premium on Bonds Payable.
78. Bond interest expense reported on the December 31, 2012 income statement of
Macklin Corporation would be
a. $23,000
b. $25,000
c. $27,000
d. $46,000
The following information applies to both questions 79 and 80.

On October 1, 2012 Bartley Corporation issued 5%, 10-year bonds with a face value of
$3,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or
discounts amortized on a straight-line basis.
79. The entry to record the issuance of the bonds would include a
a. credit of $75,000 to Interest Payable.
b. credit of $120,000 to Premium on Bonds Payable.
c. credit of $2,880,000 to Bonds Payable.
d. debit of $120,000 to Discount on Bonds Payable.
80. Bond interest expense reported on the December 31, 2012 income statement of
Bartley Corporation would be
a. $40,500
b. $69,000
c. $34,500
d. $37,500
81. At the beginning of 2012, Wallace Corporation issued 10% bonds with a face value of
$1,500,000. These bonds mature in the five years, and interest is paid semiannually on
June 30 and December 31. The bonds were sold for $1,389,600 to yield 12%. Wallace
uses a calendar-year reporting period. Using the effective-interest method of amortization,
what amount of interest expense should be reported for 2012? (Round your answer to the
nearest dollar.)
a. $172,080
b. $167,255
c. $166,750
d. $166,250
82. On January 1, Patterson Inc. issued $3,000,000, 9% bonds for $2,817,000. The
market rate of interest for these bonds is 10%. Interest is payable annually on December
31. Patterson uses the effective-interest method of amortizing bond discount. At the end
of the first year, Patterson should report unamortized bond discount of
a. $164,700.
b. $171,300.
c. $154,830.
d. $153,000.
83. On January 1, Martinez Inc. issued $4,000,000, 11% bonds for $4,260,000. The
market rate of interest for these bonds is 10%. Interest is payable annually on December
31. Martinez uses the effective-interest method of amortizing bond premium. At the end of
the first year, Martinez should report unamortized bond premium of:
a. $246,840
b. $246,000
c. $231,400
d. $220,000
84. At the beginning of 2012, Winston Corporation issued 10% bonds with a face value of
$1,200,000. These bonds mature in five years, and interest is paid semiannually on June
30 and December 31. The bonds were sold for $1,111,680 to yield 12%. Winston uses a
calendar-year reporting period. Using the effective-interest method of amortization, what
amount of interest expense should be reported for 2012? (Round your answer to the
nearest dollar.)
a. $133,000
b. $133,400
c. $133,804
d. $137,664
85. Kant Corporation retires its $500,000 face value bonds at 102 on January 1, following
the payment of interest. The carrying value of the bonds at the redemption date is
$481,250. The entry to record the redemption will include a
a. credit of $18,750 to Loss on Bond Redemption.
b. credit of $18,750 to Discount on Bonds Payable.
c. debit of $28,750 to Gain on Bond Redemption.
d. debit of $10,000 to Premium on Bonds Payable.
86. Carr Corporation retires its $500,000 face value bonds at 105 on January 1, following
the payment of interest. The carrying value of the bonds at the redemption date is
$518,725. The entry to record the redemption will include a
a. credit of $18,725 to Loss on Bond Redemption.
b. debit of $18,725 to Premium on Bonds Payable.

c. credit of $6,275 to Gain on Bond Redemption.
d. debit of $25,000 to Premium on Bonds Payable.
87. At December 31, 2012 the following balances existed on the books of Foxworth
Corporation:
Bonds Payable $3,000,000
Discount on Bonds Payable 240,000
Interest Payable 75,000
Unamortized Bond Issue Costs 180,000
If the bonds are retired on January 1, 2013, at 102, what will Foxworth report as a loss on
redemption?
a. $555,000
b. $480,000
c. $405,000
d. $300,000
88. At December 31, 2012 the following balances existed on the books of Rentro
Corporation:
Bonds Payable $2,500,000
Discount on Bonds Payable 200,000
Unamortized Bond Issue Costs 150,000
If the bonds are retired on January 1, 2013, at 102, what will Rentro report as a loss on
redemption?
a. $250,000
b. $337,500
c. $400,000
d. $460,000
89. The December 31, 2012, balance sheet of Hess Corporation includes the following
items:
9% bonds payable due December 31, 2021 $2,000,000
Unamortized premium on bonds payable 54,000
The bonds were issued on December 31, 2011, at 103, with interest payable on July 1 and
December 31 of each year. Hess uses straight-line amortization. On March 1, 2013, Hess
retired $800,000 of these bonds at 98 plus accrued interest. What should Hess record as
a gain on retirement of these bonds? Ignore taxes.
a. $37,600.
b. $21,600.
c. $37,200.
d. $40,000.
90. On January 1, 2006, Hernandez Corporation issued $3,600,000 of 10% ten-year

bonds at 103. The bonds are callable at the option of Hernandez at 105. Hernandez has
recorded amortization of the bond premium on the straight-line method (which was not
materially different from the effective-interest method).
On December 31, 2012, when the fair value of the bonds was 96, Hernandez
repurchased $800,000 of the bonds in the open market at 96. Hernandez has recorded
interest and amortization for 2012. Ignoring income taxes and assuming that the gain is
material, Hernandez should report this reacquisition as
a. a loss of $39,200.
b. a gain of $39,200.
c. a loss of $48,800.
d. a gain of $48,800.
91. The 10% bonds payable of Nixon Company had a net carrying amount of $760,000 on
December 31, 2012. The bonds, which had a face value of $800,000, were issued at a
discount to yield 12%. The amortization of the bond discount was recorded under the
effective-interest method. Interest was paid on January 1 and July 1 of each year. On
July 2, 2013, several years before their maturity, Nixon retired the bonds at 102. The
interest payment on July 1, 2013 was made as scheduled. What is the loss that Nixon
should record on the early retirement of the bonds on July 2, 2013? Ignore taxes.
a. $16,000.
b. $50,400.
c. $44,800.
d. $56,000.
92. A corporation called an outstanding bond obligation four years before maturity. At that
time there was an unamortized discount of $600,000. To extinguish this debt, the
company had to pay a call premium of $200,000. Ignoring income tax considerations, how
should these amounts be treated for accounting purposes?
a. Amortize $800,000 over four years.
b. Charge $800,000 to a loss in the year of extinguishment.
c. Charge $200,000 to a loss in the year of extinguishment and amortize $600,000 over four
years.
d. Either amortize $800,000 over four years or charge $800,000 to a loss immediately,
whichever management selects.
93. The 12% bonds payable of Nyman Co. had a carrying amount of $2,080,000 on
December 31, 2012. The bonds, which had a face value of $2,000,000, were issued at a
premium to yield 10%. Nyman uses the effective-interest method of amortization. Interest is
paid on June 30 and December 31. On June 30, 2013, several years before their maturity,
Nyman retired the bonds at 104 plus accrued interest. The loss on retirement, ignoring
taxes, is
a. $0.
b. $16,000.
c. $24,800.
d. $80,000.
94. Didde Company issues $15,000,000 face value of bonds at 96 on January 1, 2011.
The bonds are dated January 1, 2011, pay interest semiannually at 8% on June 30 and
December 31, and mature in 10 years. Straight-line amortization is used for discounts and
premiums. On September 1, 2014, $9,000,000 of the bonds are called at 102 plus
accrued interest. What gain or loss would be recognized on the called bonds on
September 1, 2014?
a. $900,000 loss
b. $408,000 loss
c. $540,000 loss
d. $680,000 loss
95. Cortez Company issues $3,000,000 face value of bonds at 96 on January 1, 2011.
The bonds are dated January 1, 2011, pay interest semiannually at 8% on June 30 and
December 31, and mature in 10 years. Straight-line amortization is used for discounts and
premiums. On September 1, 2014, $1,800,000 of the bonds are called at 102 plus
accrued interest. What gain or loss would be recognized on the called bonds on
September 1, 2014?
a. $180,000 loss
b. $81,600 loss
c. $108,000 loss
d. $136,000 loss
96. On January 1, 2012, Ann Price loaned $90,156 to Joe Kiger. A zero-interest-bearing
note (face amount, $120,000) was exchanged solely for cash; no other rights or privileges
were exchanged. The note is to be repaid on December 31, 2014. The prevailing rate of
interest for a loan of this type is 10%. The present value of $120,000 at 10% for three
years is $90,156. What amount of interest income should Ms. Price recognize in 2012?
a. $9,016.
b. $12,000.
c. $36,000.
d. $27,048.
97. On January 1, 2012, Jacobs Company sold property to Dains Company which
originally cost Jacobs $950,000. There was no established exchange price for this
property. Danis gave Jacobs a $1,500,000 zero-interest-bearing note payable in three
equal annual installments of $500,000 with the first payment due December 31, 2012. The
note has no ready market. The prevailing rate of interest for a note of this type is 10%.
The present value of a $1,500,000 note payable in three equal annual installments of
$500,000 at a 10% rate of interest is $1,243,500. What is the amount of interest income
that should be recognized by Jacobs in 2012, using the effective-interest method?
a. $0.
b. $50,000.
c. $124,350.
d. $150,000.
98. On January 1, 2012, Crown Company sold property to Leary Company. There was no
established exchange price for the property, and Leary gave Crown a $3,000,000 zero-
interest-bearing note payable in 5 equal annual installments of $600,000, with the first
payment due December 31, 2012. The prevailing rate of interest for a note of this type is
9%. The present value of the note at 9% was $2,163,000 at January 1, 2012. What should
be the balance of the Discount on Notes Payable account on the books of Leary at
December 31, 2012 after adjusting entries are made, assuming that the effective-interest
method is used?
a. $0
b. $642,330
c. $669,600
d. $837,000
99. Putnam Company’s 2012 financial statements contain the following selected data:
Income taxes $40,000
Interest expense 25,000
Net income 60,000
Putnam’s times interest earned for 2012 is
a. 3.0 times
b. 3.4 times.
c. 4.0 times.
d. 5.0 times.
100. In the recent year Hill Corporation had net income of $280,000, interest expense of
$60,000, and tax expense of $80,000. What was Hill Corporation's times interest earned
ratio for the year?
a. 7.0
b. 5.0
c. 4.7
d. 3.7
101. In recent year Cey Corporation had net income of $350,000, interest expense of
$70,000, and a times interest earned ratio of 9. What was Cey Corporation's income
before taxes for the year?
a. $700,000
b. $630,000
c. $560,000
102. 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
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.
Use the following information for questions *103 through *105:
On December 31, 2010, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is
a $1,200,000 note with $120,000 accrued interest payable to Piper, Inc. Piper agrees to
accept from Nolte equipment that has a fair value of $580,000, an original cost of
$960,000, and accumulated depreciation of $460,000. Piper also forgives the accrued
interest, extends the maturity date to December 31, 2013, reduces the face amount of the
note to $500,000, and reduces the interest rate to 6%, with interest payable at the end of
each year.
*103. Nolte should recognize a gain or loss on the transfer of the equipment of
a. $0.
b. $80,000 gain.
c. $120,000 gain.
d. $380,000 loss.
*104. Nolte should recognize a gain on the partial settlement and restructure of the debt
of
a. $0.
b. $30,000.
c. $110,000.
d. $150,000.
*105. Nolte should record interest expense for 2013 of

a. $0.
b. $30,000.
c. $60,000.
d. $90,000.
Multiple Choice Answers—Computational

60. a 67. c 74. d 81. b 88. c 95. b 102. d
61. b 68. a 75. b 82. b 89. c 96. a *103. b
62. a 69. d 76. c 83. b 90. b 97. c *104. d
63. c 70. d 77. d 84. c 91. b 98. b *105. a
64. c 71. c 78. a 85. b 92. b 99. d
65. c 72. a 79. b 86. b 93. b 100. a
66. c 73. d 80. c 87. b 94. b 101. c

106. On July 1, 2012, Spear Co. issued 3,000 of its 10%, $1,000 bonds at 99 plus accrued
interest. The bonds are dated April 1, 2012 and mature on April 1, 2022. Interest is
payable semiannually on April 1 and October 1. What amount did Spear receive from the
bond issuance?
a.$3,045,000
b.$3,000,000
c.$2,970,000
d.$2,895,000
107. On January 1, 2012, Solis Co. issued its 10% bonds in the face amount of $4,000,000,
which mature on January 1, 2022. The bonds were issued for $4,540,000 to yield 8%,
resulting in bond premium of $540,000. Solis uses the effective-interest method of
amortizing bond premium. Interest is payable annually on December 31. At December 31,
2012, Solis's adjusted unamortized bond premium should be
a. $540,000.
b. $503,200.
c. $486,000.
d. $406,000.
108. On July 1, 2011, Noble, Inc. issued 9% bonds in the face amount of $10,000,000, which
mature on July 1, 2017. The bonds were issued for $9,390,000 to yield 10%, resulting in a
bond discount of $610,000. Noble uses the effective-interest method of amortizing bond
discount. Interest is payable annually on June 30. At June 30, 2013, Noble's unamortized
bond discount should be
a. $528,100.
b. $510,000.
c. $488,000.
d. $430,000.
109. On January 1, 2012, Huff Co. sold $3,000,000 of its 10% bonds for $2,655,888 to yield
12%. Interest is payable semiannually on January 1 and July 1. What amount should Huff
report as interest expense for the six months ended June 30, 2012?
a. $132,798
b. $150,000
c. $159,353
d. $180,000
110. On January 1, 2013, Doty Co. redeemed its 15-year bonds of $3,500,000 par value for
102. They were originally issued on January 1, 2001 at 98 with a maturity date of
January 1, 2016. The bond issue costs relating to this transaction were $210,000. Doty
amortizes discounts, premiums, and bond issue costs using the straight-line method.
What amount of loss should Doty recognize on the redemption of these bonds (ignore
taxes)?
a. $126,000
b. $84,000
c. $70,000
d. $0
111. On its December 31, 2012 balance sheet, Emig Corp. reported bonds payable of
$9,000,000 and related unamortized bond issue costs of $480,000. The bonds had been
issued at par. On January 2, 2013, Emig retired $4,500,000 of the outstanding bonds at
par plus a call premium of $105,000. What amount should Emig report in its 2013 income
statement as loss on extinguishment of debt (ignore taxes)?
a. $0
b. $105,000
c. $240,000
d. $345,000
112. On January 1, 2008, Goll Corp. issued 4,000 of its 10%, $1,000 bonds for $4,160,000.
These bonds were to mature on January 1, 2016 but were callable at 101 any time after
December 31, 2011. Interest was payable semiannually on July 1 and January 1. On
July 1, 2013, Goll called all of the bonds and retired them. Bond premium was amortized
on a straight-line basis. Before income taxes, Goll's gain or loss in 2013 on this early
extinguishment of debt was
a. $120,000 gain.
b. $48,000 gain.
c. $40,000 loss.
d. $32,000 gain.
113. On June 30, 2013, Omara Co. had outstanding 8%, $4,000,000 face amount, 15-year
bonds maturing on June 30, 2023. Interest is payable on June 30 and December 31. The
unamortized balances in the bond discount and deferred bond issue costs accounts on
June 30, 2013 were $140,000 and $40,000, respectively. On June 30, 2013, Omara
acquired all of these bonds at 94 and retired them. What net carrying amount should be
used in computing gain or loss on this early extinguishment of debt?
a. $3,960,000.
b. $3,860,000.
c. $3,820,000.
d. $3,760,000.
114. A ten-year bond was issued in 2011 at a discount with a call provision to retire the bonds.
When the bond issuer exercised the call provision on an interest date in 2013, the carrying
amount of the bond was less than the call price. The amount of bond liability removed
from the accounts in 2013 should have equaled the
a. call price.
b. call price less unamortized discount.
c. face amount less unamortized discount.
d. face amount plus unamortized discount.
115. Paige Co. took advantage of market conditions to refund debt. This was the fourth
refunding operation carried out by Paige within the last three years. The excess of the
carrying amount of the old debt over the amount paid to extinguish it should be reported
as a
a. gain, net of income taxes.
b. loss, net of income taxes.
c. part of continuing operations.
d. deferred credit to be amortized over the life of the new debt.
*116. Eddy Co. is indebted to Cole under a $600,000, 12%, three-year note dated
December 31, 2011. Because of Eddy's financial difficulties developing in 2013, Eddy
owed accrued interest of $72,000 on the note at December 31, 2013. Under a troubled
debt restructuring, on December 31, 2013, Cole agreed to settle the note and accrued
interest for a tract of land having a fair value of $540,000. Eddy's acquisition cost of the
land is $435,000. Ignoring income taxes, on its 2013 income statement Eddy should
report as a result of the troubled debt restructuring
Gain on Disposal Restructuring Gain
a. $237,000 $0
b. $165,000 $0
c. $105,000 $60,000
d. $105,000 $132,000
Multiple Choice Answers—CPA Adapted

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
106. a 108. a 110. a 112. d 114. c *116. d
107. b 109. c 111. d 113. c 115. c
DERIVATIONS — Computational
60. a $2,000,000 × .534 = $1,068,000.
61. b ($2,000,000 × .03) × 11.652 = $699,120.
62. a $1,068,000 + $699,120 = $1,767,120.
63. c ($3,000,000 × .78120) + ($90,000 × 8.75206) = $3,131,285.
64. c ($10,000,000 × .97) + ($900,000 × 2/12) = $9,850,000.
65. c ($15,000,000 × .78120) + ($450,000 × 8.75206) = $15,656,427.
66. c ($20,000,000 × .97) + ($1,800,000 × 2/12) = $19,700,000.
67. c ($14,703,109 × .04) + 14,706,233 × .04) = $1,176,374.
68. a $14,703,109 + [($14,703,109 × .04) – $585,000]

+ [$14,706,233 × .04) – $585,000] = $14,709,482.
69. d $14,703,109 + ($296,891 × 3/20) = $14,747,642.
70. d ($15,000,000 × .078) + ($296,891 ÷ 20) = $1,184,845.
71. c ($9,802,072 × .04) + ($9,804,154 × .04) = $784,248.
72. a $9,802,072 + [($9,802,072 × .04) – $390,000] + [($9,804,154 × .04) – $390,000]

= $9,806,321.
73. d $9,802,072 + ($197,928 × 3/20) = $9,831,762.
74. d ($10,000,000 × .078) + ($197,928 ÷ 20) = $789,896.
75. b $861,600 × .05 = $43,080

[$861,600 – ($48,000 – $43,080)] × .05 = 42,834
$85,914
76. c $830,400 × .05 = $41,520

[$830,400 + ($41,520 – $36,000)] × .05 = 41,796
$83,316

77. d ($2,000,000 × 1.04) – $2,000,000 = $80,000 premium.
78. a [($2,000,000 × .05) × 3/12] – [($80,000 ÷ 10) × 3/12] = $23,000.
79. b ($3,000,000 × 1.04) – $3,000,000 = $120,000 premium.
80. c [($3,000,000 × .05) × 3/12] – [($120,000 ÷ 10) × 3/12] = $34,500.
81. b ($1,389,600 × .06) = $83,376; [$83,376 – ($1,500,000 × .05)] = $8,376

($1,389,600 + $8,376) × .06 = $83,879
$83,376 + $83,879 = $167,255.
82. b ($2,817,000 × .10) – ($3,000,000 × .09) = $11,700

($3,000,000 – $2,817,000) – $11,700 = $171,300.
83. b ($4,000,000 × .11) – ($4,260,000 × .10) = $14,000

($4,260,000 – $4,000,000) – $14,000 = $246,000.
84. c ($1,111,680 × .06) = $66,701; [$66,701 – ($1,200,000 × .05)] = $6,701

($1,111,680 + $6,701) × .06 = $67,103
$66,701 + $67,103 = $133,804.
85. b $500,000 – $481,250 = $18,750 discount.
86. b $518,725 – $500,000 = $18,725 premium.
87. b ($3,000,000 × 1.02) – ($3,000,000 – $240,000 – $180,000) = $480,000.
88. c ($2,500,000 × 1.02) – ($2,500,000 – $200,000 – $150,000) = $400,000.
89. c = $821,200 (CV of retired bonds)
$821,200 – ($800,000 × .98) = $37,200.
90. b = $807,200 (CV of retired bonds)
$807,200 – ($800,000  .96) = $39,200.
91. b $760,000 + [($760,000 × .06) – ($800,000 × .05)] = $765,600 (CV of bonds)

$765,600 – ($800,000 × 1.02) = $50,400.
92. b $600,000 + $200,000 = $800,000.
93. b $2,080,000 – [($2,000,000 × .06) – ($2,080,000 × .05)] = $2,064,000 (CV of

bonds)
($2,000,000 × 1.04) – $2,064,000 = $16,000.

94. b {$14,400,000 + [$600,000 × (3 2/3 ÷ 10)]} × .60 = $8,772,000
$9,180,000 – $8,772,000 = $408,000.
95. b {$2,880,000 + [$120,000 × (3 2/3 ÷ 10)]} × .60 = $1,754,400

$1,836,000 – $1,754,400 = $81,600.
96. a $90,156 × .10 = $9,016.
97. c $1,243,500 × .10 = $124,350.
98. b $3,000,000 – $2,163,000 – ($2,163,000 × .09) = $642,330.
$60,000 + $40,000 + $25,000

99. d ————————————— = 5 times.
$25,000
100. a ($280,000 + $60,000 + $80,000) ÷ $60,000 = 7.0.
101. c ($350,000 + $70,000 + X) ÷ $70,000 = 9

($420,000 + X) = 9 × $70,000
X = $210,000; IBT = $560,000 ($350,000 + $210,000).
102. d $2,000,000 + $100,000 + $165,000 + ($200,000 – $15,000) = $2,450,000.
*103. b $580,000 – ($960,000 – $460,000) = $80,000.
*104. d ($1,200,000 + $120,000) – [$580,000 + $500,000 + ($500,000 × 06 × 3)]

= $150,000.
*105. a 0. The effective-interest rate is 0%.

106. a ($3,000,000 × .99) + ($3,000,000 × .10 × 3/12) = $3,045,000.
107. b $540,000 – [($4,000,000 × .10) – ($4,540,000 × .08)] = $503,200.
108. a 2011–2012:$9,390,000 + [($9,390,000 × .1) – ($10,000,000 × .09)]

= $9,429,000.
2012–2013:$9,429,000 + ($942,900 – $900,000) = $9,471,900
$10,000,000 – $9,471,900 = $528,100.
109. c $2,655,888 × .06 = $159,353.
110. a ($3,500,000 × 1.02) – = $126,000.

DERIVATIONS — CPA Adapted (cont.)

111. d ($4,500,000 + $105,000) – [($9,000,000 – $480,000) × 1/2] = $345,000.
112. d – ($4,000,000 × 1.01) = $32,000.
113. c $4,000,000 – ($140,000 + $40,000) = $3,820,000.
114. c Conceptual.
115. c Conceptual.
*116. d $540,000 – $435,000 = $105,000

($600,000 + $72,000) – $540,000 = $132,000.
EXERCISES
Ex. 14-117—Terms related to long-term debt.

Place the letter of the best matching phrase before each word.
_____ 1. Indenture _____ 6. Times Interest Earned Ratio
_____ 2. Treasury Bonds _____ 7. Mortgage
_____ 3. Bonds Issued at Par _____ 8. Premium on Bonds
_____ 4. Carrying Value _____ 9. Reacquisition Price
_____ 5. Nominal Rate _____ 10. Market Rate
a. Requires that bond discount be reported in the balance sheet as a direct deduction from the
face of the bond.
b. Rate set by party issuing the bonds which appears on the bond instrument.
c. The interest paid each period is the effective interest at date of issuance.
d. Rate of interest actually earned by the bondholders.
e. Results when bonds are sold below par.
f. Results when bonds are sold above par.
g. Bonds payable reacquired by the issuing corporation that have not been canceled.
h. Price paid by issuing corporation for its own bonds.
i. Book value of bonds at any given date.
j. Ratio of current assets to current liabilities.
k. The bond contract or agreement.
l. Indicates the company’s ability to meet interest payments as they come due.
Ex. 14-117 (Cont.)
m. Ratio of debt to equity.

n. Exclusive right to manufacture a product.
o. A document that pledges title to property as security for a loan.
Solution 14-117
1. k 3. c 5. b 7. o 9. h
2. g 4. i 6 l 8 f 10. d
Ex. 14-118—Bond issue price and premium amortization.

On January 1, 2013, Piper Co. issued ten-year bonds with a face value of $4,000,000 and a
stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were
sold to yield 12%. Table values are:
Present value of 1 for 10 periods at 10% .................................. .386
Present value of 1 for 10 periods at 12% .................................. .322
Present value of 1 for 20 periods at 5% .................................... .377
Present value of 1 for 20 periods at 6% .................................... .312
Present value of annuity for 10 periods at 10% ........................ 6.145
Present value of annuity for 10 periods at 12% ........................ 5.650
Present value of annuity for 20 periods at 5% .......................... 12.462
Present value of annuity for 20 periods at 6% .......................... 11.470
Instructions
(a) Calculate the issue price of the bonds.
(b) Without prejudice to your solution in part (a), assume that the issue price was $3,536,000.
Prepare the amortization table for 2013, assuming that amortization is recorded on interest
payment dates.
Solution 14-118
(a) .312 × $4,000,000 = $1,248,000
11.470 × $200,000 = 2,294,000
$3,542,000
(b) Date Cash Expense Amortization Carrying Amount
1/1/13 $3,536,000
6/30/13 $200,000 $212,160 12,160 3,548,160
12/31/13 200,000 212,890 12,890 3,561,050
Ex. 14-119—Amortization of discount or premium.

Grider Industries, Inc. issued $8,000,000 of 8% debentures on May 1, 2012 and received cash
totaling $7,098,102. The bonds pay interest semiannually on May 1 and November 1. The maturity
date on these bonds is November 1, 2020. The firm uses the effective-interest method of amortizing
discounts and premiums. The bonds were sold to yield an effective-interest rate of 10%.
Instructions
Calculate the total dollar amount of discount or premium amortization during the first year (5/1/12
through 4/30/13) these bonds were outstanding. (Show computations and round to the nearest
dollar.)
Solution 14-119
Interest Cash Discount Carrying
Date Expense Interest Amortized Value of Bonds
5/1/12 $7,098,102
11/1/12 $354,905 $320,000 $34,905 7,133,007
5/1/13 356,650 320,000 36,650 7,169,657
Total $71,555
Ex. 14-120—Entries for Bonds Payable.
Prepare journal entries to record the following transactions related to long-term bonds of Quirk Co.
(a) On April 1, 2011, Quirk issued $1,000,000, 9% bonds for $1,075,736 including accrued
interest. Interest is payable annually on January 1, and the bonds mature on January 1,
2021.
(b) On July 1, 2013 Quirk retired $300,000 of the bonds at 102 plus accrued interest. Quirk uses
straight-line amortization.
Solution 14-120
(a) Cash.............................................................................................. 1,075,736
Bonds Payable..................................................................... 1,000,000
Interest Expense ($1,000,000 × 9% × 3/12)......................... 22,500
Premium on Bonds Payable................................................ 53,236
(b) Interest Expense............................................................................ 12,680

Premium on Bonds Payable ($53,236 × .3 × 6/117)...................... 820
Cash ($300,000 × 9% × 6/12).............................................. 13,500
Bonds Payable............................................................................... 300,000

Premium on Bonds Payable ($53,236 × .3 × 90/117)..................... 12,284
Cash.................................................................................... 306,000
Gain on Redemption of Bonds............................................. 6,284
Ex. 14-121—Retirement of bonds.

Prepare journal entries to record the following retirement. (Show computations and round to the
nearest dollar.)
The December 31, 2012 balance sheet of Wolfe Co. included the following items:
7.5% bonds payable due December 31, 2020 $1,600,000
Unamortized discount on bonds payable 64,000
The bonds were issued on December 31, 2010 at 95, with interest payable on June 30 and
December 31. (Use straight-line amortization.)
On April 1, 2013, Wolfe retired $320,000 of these bonds at 101 plus accrued interest.
Solution 14-121
Interest Expense............................................................................. 6,400
Cash ($320,000 × 7.5% × 3/12)........................................... 6,000
Discount on Bonds Payable ($64,000 × 1/5 × 1/8 × 3/12).... 400
Bonds Payable................................................................................ 320,000

Loss on Redemption of Bonds........................................................ 15,600
Discount on Bonds Payable [(1/5 × $64,000) – $400].......... 12,400
Cash.................................................................................... 323,200
Ex. 14-122—Early extinguishment of debt.

Hurst, Incorporated sold its 8% bonds with a maturity value of $4,500,000 on August 1, 2011 for
$4,419,000. At the time of the sale the bonds had 5 years until they reached maturity. Interest on
the bonds is payable semiannually on August 1 and February 1. The bonds are callable at 104 at
any time after August 1, 2013. By October 1, 2013, the market rate of interest has declined and
the market price of Hurst's bonds has risen to a price of 101. The firm decides to refund the
bonds by selling a new 6% bond issue to mature in 5 years. Hurst begins to reacquire its 8%
bonds in the market and is able to purchase $750,000 worth at 101. The remainder of the
outstanding bonds is reacquired by exercising the bonds' call feature. In the final analysis, how
much was the gain or loss experienced by Hurst in reacquiring its 8% bonds? (Assume the firm
used straight-line amortization.) Show calculations.
Solution 14-122
Reacquisition price:
$750,000 × 1.01 = $ 757,500
$3,750,000 × 1.04 = 3,900,000 $4,657,500
Less net carrying amount:
$4,419,000 + ($81,000 × 26/60) = 4,454,100
Loss on early extinguishment $ 203,400
*Ex. 14-123—Accounting for a troubled debt settlement.

Mann, Inc., which owes Doran Co. $1,000,000 in notes payable with accrued interest of $90,000,
is in financial difficulty. To settle the debt, Doran agrees to accept from Mann equipment with a
fair value of $950,000, an original cost of $1,400,000, and accumulated depreciation of $325,000.
Instructions
(a) Compute the gain or loss to Mann on the settlement of the debt.
(b) Compute the gain or loss to Mann on the transfer of the equipment.
(c) Prepare the journal entry on Mann 's books to record the settlement of this debt.
(d) Prepare the journal entry on Doran's books to record the settlement of the receivable.
*Solution 14-123
(a) Note payable $1,000,000
Interest payable 90,000
Carrying amount of debt 1,090,000
Fair value of equipment 950,000
Gain on restructuring of debt $ 140,000
(b) Cost $1,400,000

Accumulated depreciation 325,000
Book value 1,075,000
Fair value of plant assets 950,000
Loss on disposal of equipment $ 125,000
(c) Notes Payable............................................................................... 1,000,000

Interest Payable............................................................................. 90,000
Accumulated Depreciation............................................................. 325,000
Loss on Disposal of Equipment...................................................... 125,000
Equipment.......................................................................... 1,400,000
Gain on Restructuring of Debt............................................ 140,000
(d) Equipment...................................................................................... 950,000

Allowance for Doubtful Accounts................................................... 140,000
Notes Receivable............................................................... 1,000,000
Interest Receivable............................................................. 90,000
*Ex. 14-124—Accounting for a troubled debt restructuring.

On December 31, 2011, Short Co. is in financial difficulty and cannot pay a note due that day. It is
a $750,000 note with $75,000 accrued interest payable to Bryan, Inc. Bryan agrees to forgive the
accrued interest, extend the maturity date to December 31, 2013, and reduce the interest rate to
4%. The present value of the restructured cash flows is $642,000.
Instructions
Prepare entries for the following:
(a) The restructure on Short’s books.
(b) The payment of interest on December 31, 2012.
(c) The restructure on Bryan’s books.
*Solution 14-124
(a) Interest Payable............................................................................. 75,000
Notes Payable ($750,000 × 4% × 2)................................... 60,000
Gain on Restructuring of Debt............................................ 15,000
(b) Notes Payable............................................................................... 30,000

Cash................................................................................... 30,000
(c) Allowance for Doubtful Accounts................................................... 183,000

Notes Receivable............................................................... 108,000
Interest Receivable............................................................. 75,000
*Ex. 14-125—Accounting for troubled debt.

(a) What are the general rules for measuring and recognizing a gain or loss by the debtor on a
settlement of troubled debt which includes the transfer of noncash assets?
(b) What are the general rules for measuring and recognizing a gain and for recording future
payments by the debtor in a troubled debt restructuring?
*Solution 14-125
(a) If the settlement of debt includes the transfer of noncash assets, a gain is measured by the
debtor as the difference between the fair value of the assets transferred and the carrying
amount of the debt, including accrued interest. The debtor also recognizes a gain or loss on
the disposal of assets as the difference between the fair value of the assets transferred and
their book value.
(b) If the carrying amount of the payable is greater than the undiscounted total future cash flows,
the gain is measured by the debtor as the difference between the carrying amount and the
future cash flows. Future payments reduce the principal; no interest expense is recorded by
the debtor.
If the carrying amount of the payable is less than the future cash flows, no restructuring gain
is recognized by the debtor. A new effective-interest rate is calculated that equates the
present value of the future cash flows with the carrying amount of the debt. A part of the
future cash flows is recorded as interest expense by the debtor.
PROBLEMS
Pr. 14-126—Bond discount amortization.

On June 1, 2011, Everly Bottle Company sold $1,000,000 in long-term bonds for $877,600. The
bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The
bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under
the effective-interest method.
Instructions
(a) Construct a bond amortization table for this problem to indicate the amount of interest
expense and discount amortization at each May 31. Include only the first four years. Make
sure all columns and rows are properly labeled. (Round to the nearest dollar.)
(b) The sales price of $877,600 was determined from present value tables. Specifically explain
how one would determine the price using present value tables.
(c) Assuming that interest and discount amortization are recorded each May 31, prepare the
adjusting entry to be made on December 31, 2013. (Round to the nearest dollar.)
Solution 14-126
(a) Debit Credit Carrying Amount
Date Credit Cash Interest Expense Bond Discount of Bonds
6/1/11 $877,600
5/31/12 $80,000 $87,760 $7,760 885,360
5/31/13 80,000 88,535 8,535 893,895
5/31/14 80,000 89,390 9,390 903,285
5/31/15 80,000 90,329 10,329 913,614
(b) (1) Find the present value of $1,000,000 due in 10 years at 10%.
(2) Find the present value of 10 annual payments of $80,000 at 10%.
Add (1) and (2) to obtain the present value of the principal and the interest payments.
(c) Interest Expense.......................................................................... 52,144*

Interest Payable................................................................ 46,667**
Discount on Bonds Payable.............................................. 5,477
*7/12  $89,390 (from Table) = $52,144

**7/12  8%  $1,000,000 = $46,667
Pr. 14-127—Bond interest and discount amortization.

Grove Corporation issued $2,400,000 of 8% bonds on October 1, 2012, due on October 1, 2017.
The interest is to be paid twice a year on April 1 and October 1. The bonds were sold to yield
10% effective annual interest. Grove Corporation closes its books annually on December 31.
Instructions
(a) Complete the following amortization schedule for the dates indicated. (Round all answers to
the nearest dollar.) Use the effective-interest method.
Debit Credit Carrying Amount
Credit Cash Interest Expense Bond Discount of Bonds
October 1, 2012 $2,214,672
April 1, 2013
October 1, 2013
(b) Prepare the adjusting entry for December 31, 2013. Use the effective-interest method.
(c) Compute the interest expense to be reported in the income statement for the year ended
December 31, 2013.
Solution 14-127
(a) Debit Credit Carrying Amount
Credit Cash Interest Expense Bond Discount of Bonds
October 1, 2012 $2,214,672
April 1, 2013 $96,000 $110,733 $14,733 2,229,405
October 1, 2013 96,000 111,471 15,471 2,244,876
(b) Interest Expense ($2,244,876 × 10% × 3/12).................................. 56,121

Interest Payable (1/2 × $96,000) ......................................... 48,000
Discount on Bonds Payable ($56,121 – $48,000) ............... 8,121
(c) $ 55,367(1/2 of $110,733)

111,471
56,121
$222,959
Pr. 14-128—Entries for bonds payable.

Prepare the necessary journal entries to record the following transactions relating to the long-term
issuance of bonds of Pitts Co.:
March 1
Issued $2,000,000 face value Pitts Co. second mortgage, 8% bonds for $2,180,400, including
accrued interest. Interest is payable semiannually on December 1 and June 1 with the bonds
maturing 10 years from this past December 1. The bonds are callable at 102.
June 1
Paid semiannual interest on Pitts Co. bonds. (Use straight-line amortization of any premium or
discount.)
December 1
Paid semiannual interest on Pitts Co. bonds and purchased $1,000,000 face value bonds at the
call price in accordance with the provisions of the bond indenture.
Solution 14-128
March 1: Cash.................................................................................... 2,180,400
Bonds Payable......................................................... 2,000,000
Premium on Bonds Payable..................................... 140,400
Interest Expense ($2,000,000 × 8% × 3/12)............. 40,000
June 1: Interest Expense.................................................................. 76,400

Premium on Bonds Payable ($140,400 × 3/117)................. 3,600
Cash......................................................................... 80,000
Dec. 1: Interest Expense.................................................................. 72,800

Premium on Bonds Payable ($140,400 × 6/117)................. 7,200
Cash......................................................................... 80,000
Bonds Payable..................................................................... 1,000,000

Premium on Bonds Payable*............................................... 64,800
Gain on Redemption of Bonds................................. 44,800
Cash......................................................................... 1,020,000
*1/2 × ($140,400 – $3,600 – $7,200) = $64,800.
Pr. 14-129—Entries for bonds payable.

Prepare journal entries to record the following transactions relating to long-term bonds of Kirby,
Inc. (Show computations.)
(a) On June 1, 2011, Kirby, Inc. issued $3,000,000, 6% bonds for $2,938,200, which includes
accrued interest. Interest is payable semiannually on February 1 and August 1 with the
bonds maturing on February 1, 2021. The bonds are callable at 102.
(b) On August 1, 2011, Kirby paid interest on the bonds and recorded amortization. Kirby uses
straight-line amortization.
(c) On February 1, 2013, Kirby paid interest and recorded amortization on all of the bonds, and
purchased $1,800,000 of the bonds at the call price. Assume that a reversing entry was
made on January 1, 2013.
Solution 14-129
(a) Cash.............................................................................................. 2,938,200
Discount on Bonds Payable........................................................... 121,800
Bonds Payable................................................................... 3,000,000
Interest Expense ($3,000,000 × 6% × 4/12)....................... 60,000
(b) Interest Expense ($3,000,000 × 6% × 6/12) + $2,100.................... 92,100

Cash................................................................................... 90,000
Discount on Bonds Payable ($121,800 × 2/116)................ 2,100
(c) Interest Expense ($90,000 + $6,300)............................................. 96,300

Cash................................................................................... 90,000
Discount on Bonds Payable ($121,800 × 6/116)............... 6,300
Bonds Payable............................................................................... 1,800,000

Loss on Redemption of Bonds....................................................... 96,480
Discount on Bonds Payable [.6 × ($121,800 – $21,000)] . . 60,480
Cash................................................................................... 1,836,000
Pr. 14-130—Fair value option

Harper Company commonly issues long-term notes payable to its various lenders. Harper has
had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on
an annual basis). Harper has elected to use the fair value option for the long-term notes issued to
Barclay’s Bank and has the following data related to the carrying and fair value for these notes.
Carrying Value Fair Value

December 31, 2011 $81,000 $81,000
December 31, 2012 66,000 64,000
December 31, 2013 54,000 57,000
Instructions
(a) Prepare the journal entry at December 31 (Harper’s year-end) for 2011, 2012, and 2013 to
record the fair value option for these notes.
(b) At what amount will the note be reported on Harper’s 2012 balance sheet?
(c) What is the effect of recording the fair value option on these notes on Harper’s 2013 income?
Solution 14-130
(a) December 31, 2011
No entry since the carrying value is equal to the notes’ fair value.
December 31, 2012

Notes Payable 2,000
Unrealized Holding Gain or LossIncome 2,000
December 31, 2013

Unrealized Holding Gain or LossIncome 5,000
Notes Payable [($57,000 – $54,000) + $2,000] 5,000
(b) The note will be reported at $64,000 on Harper’s 2012 balance sheet.
(c) Harper’s 2013 income is $5,000 lower since the change in fair value is reported as part of net
income.
*Pr. 14-131—Accounting for a troubled debt restructuring.

Ludwig, Inc., which owes Giffin Co. $2,400,000 in notes payable, is in financial difficulty. To
eliminate the debt, Giffin agrees to accept from Ludwig land having a fair value of $1,830,000 and
a recorded cost of $1,350,000.
Instructions
(a) Compute the amount of gain or loss to Ludwig, Inc. on the transfer (disposition) of the land.
(b) Compute the amount of gain or loss to Ludwig, Inc. on the restructuring of the debt.
(c) Prepare the journal entry on Ludwig 's books to record the restructuring of this debt.
(d) Compute the gain or loss to Giffin Co. from restructuring of its receivable from Ludwig.
(e) Prepare the journal entry on Giffin's books to record the restructuring of this receivable.
*Solution 14-131
(a) Fair value of the land $1,830,000
Cost of the land to Ludwig, Inc. 1,350,000
Gain on disposal of land $ 480,000
(b) Carrying amount of debt $2,400,000

Fair value of the land given 1,830,000
Gain on restructuring of debt $ 570,000
(c) Notes Payable.............................................................................. 2,400,000

Land.................................................................................. 1,350,000
Gain on Disposal of Land.................................................. 480,000
Gain on Restructuring of Debt........................................... 570,000
(d) Carrying amount of receivable $2,400,000

Land received in restructuring 1,830,000
Loss on restructured debt $570,000
(e) Land............................................................................................. 1,830,000

Allowance for Doubtful Accounts.................................................. 570,000
Notes Receivable.............................................................. 2,400,000
IFRS QUESTIONS
True/False
1. Similar to U.S. practice, IFRS requires that companies present current and noncurrent
liabilities on the face of the balance sheet, with current liabilities generally presented in order
of liquidity.
liabilities on the face of the balance sheet, with current liabilities generally presented in order
of magnitude.
3. Both IFRS and U.S. GAAP prohibit the recognition of liabilities for future losses.
4. IFRS and U.S. GAAP are similar in the treatment of asset retirement obligations.
5. The recognition criteria for an asset retirement obligation (ARO) are more stringent under
IFRS.
6. IFRS and U.S. GAAP are dissimilar in their treatment of contingencies.
7. The criteria for recognizing contingent assets are more stringent under U.S. GAAP.
8. Under IFRS, the measurement of a provision related to a contingency is based on an average

estimate of the expenditure required to settle the obligation.
9. U.S. GAAP permits recognition of a restructuring liability, once a company has committed to a
restructuring plan.
10. The recognition criteria for an ARO are more stringent under U.S. GAAP: The ARO is not
recognized unless there is a present legal obligation and the fair value of the obligation can
be reasonably estimated.
1. True
2. False
3. True
4. True
5. False
6. False
7. False
8. False
9. False
10. True
Multiple Choice Questions

1. The primary IFRS related to reporting and recognition of liabilities is found in
liabilities on the face of the balance sheet with current liabilities
a. generally presented in order of magnitude.
b. presented in alphabetic order.
c. presented in order of liquidity.
d. presented in the order in which they were incurred.
3. Under IFRS, the measurement of a provision related to a contingency is based on

a. the best estimate of the expenditure required to settle the obligation.
b. the minimum amount from among a number of alternative estimates.
c. an average from among a number of alternative estimates.
d. whatever management feels that shareholders would be willing to accept because of the
impact on current earnings.
4. Both U.S. GAAP and IFRS prohibit

a. the recognition of a restructuring liability, once a company has committed to a
restructuring plan.
b. the recognition of liabilities for future losses.
c. communicating information on a restructuring plan to employees, before a liability can be
established.
5. IFRS and U.S. GAAP are

a. similar in the treatment of asset retirement obligations (AROs).
b. significantly different when it comes to the treatment of asset retirement obligations
(AROs).
c. continuing to evolve in the area of asset retirement obligations (AROs).
d. in conflict with respect to the accounting for and presentation of asset retirement
obligations (AROs).
6. Both IFRS and U.S. GAAP permit valuation of long-term debt and other liabilities at
a. present value discounted at the firm's cost of capital.
b. current market values of the obligations, based on changes in the discount rate with
unrealized gains and losses reflected in a separate account in stockholders' equity.
c. fair value with gains and losses on changes in fair value recorded in income in certain
situations.
d. historic costs without reflecting changes in valuation as obligations will be retired at their
maturity date.
7. As there is no comparable institution to the SEC in international securities markets, many

international companies (those not registered with the SEC)
a. voluntarily adhere to SEC criteria in providing information related to contractual
obligations.
b. are not required to provide disclosures such as those related to contractual obligations.
c. follow the requirements established for contractual obligations put forth by the IASB.
d. follow the requirements established for contractual obligations put forth by the FASB.
8. Under U.S. GAAP, contingent assets for insurance recoveries are recognized if __________;
IFRS requires the recovery be "___________" before recognition of an asset is permitted.
a. probable and virtually certain
b. possible and very likely
c. possible and definite
d. certain and probable
9. IFRS rules for establishing restructuring liabilities could be used as an earnings management
tool because IFRS rules are
a. more-stringent that U.S. GAAP.
b. less-stringent that U.S. GAAP.
c. virtually the same as U.S. GAAP.
d. totally different than U.S. GAAP.
10. A concern with IFRS is that its less-stringent rules for establishing restructuring liabilities
could be used as
a. a more appropriate method than that employed under U.S. GAAP.
b. an appropriate method, but complex and difficult to explain to shareholders.
c. a method readily employed to make the understanding of financial information more
comprehensible to shareholders.
d. an earinings management tool.
Answers to multiple choice:

1. c
2. c
3. a
4. b
5. a
6. c
7. b
8. a
9. b
10. d
IFRS Short Answer:
1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with
respect to the accounting for liabilities.
1. Among the similarities are: (1) IFRS requires that companies present current and non-
current liabilities on the face of the balance sheet, with current liabilities generally presented
in order of liquidity, (2) Both GAAPs prohibit the recognition of liabilities for future losses; (3)
IFRS and U.S. GAAP are similar in the treatment of asset retirement obligations (AROs), and
(4) IFRS and U.S. GAAP are similar in their treatment of contingencies.
Although the two GAAPs are similar with respect to the above topics, there are differences,
including: (1) Under IFRS, the measurement of a provision related to a contingency is based
on the best estimate of the expenditure required to settle the obligation. If a range of
estimates is predicted and no amount in the range is more likely than any other amount in the
range, the ‘mid-point’ of the range is used to measure the liability. In U.S. GAAP, the
minimum amount in a range is used; (2) IFRS permits recognition of a restructuring liability,
once a company has committed to a restructuring plan. U.S. GAAP has additional criteria
(i.e., related to communicating the plan to employees), before a restructuring liability can be
established; (3) the recognition criteria for an asset retirement obligation are more stringent
under U.S. GAAP—the ARO is not recognized unless there is a present legal obligation and
the fair value of the obligation can be reasonably estimated; and (4) the criteria for
recognizing contingent assets for insurance recoveries are recognized if probable; IFRS
requires the recovery be “virtually certain,” before recognition of an asset is permited.
2. Briefly discuss how accounting convergence efforts addressing liabilities is related to the
IASB/FASB conceptual framework project.
2. The IASB and FASB are working on a conceptual framework project, part of which will
examine the definition of a liability. In addition, this project will address the difference in
measurements used between IFRS and U.S. GAAP for contingent liabilities. Also, in its
project on business combinations, the IASB is considering changing its definition of a
contingent asset to converge with U.S. GAAP.

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Stockholders’ equity 2,500,000

Total liabilities and

Current assets $ 800,000

Solution 12-145 (Cont.)

(c) Computation of impairment loss:

Fair value of Hall division $1,950,000

Loss on Impairment.................................................................. 250,000

Laboratory research aimed at discovery of new knowledge $600,000

Laboratory research aimed at discovery of new knowledge $600,000

U.S. GAAP and IFRS.

5. The primary IFRS related to intangible assets and impairments is found in

6. IFRS allows reversal of impairment losses when

7. Under U.S. GAAP, impairment losses

57. Research and development costs

58. Which of the following is considered research and development costs?

59. Which of the following is considered research and development costs?

61. If a company constructs a laboratory building to be used as a research and development

64. Which of the following would not be considered an R & D activity?

68. The total amount of patent cost amortized to date is usually

69. Intangible assets are reported on the balance sheet

70. Which of the following is often reported as an extraordinary item?

71. Which of the following is often reported as an extraordinary item?

Multiple Choice Answers—Conceptual

Current assets $ 800,000

Solution 12-145 (Cont.)

(c) Computation of impairment loss:

Fair value of Hall division $1,950,000

Loss on Impairment.................................................................. 250,000

Laboratory research aimed at discovery of new knowledge $600,000

Laboratory research aimed at discovery of new knowledge $600,000

U.S. GAAP and IFRS.

5. The primary IFRS related to intangible assets and impairments is found in

6. IFRS allows reversal of impairment losses when

7. Under U.S. GAAP, impairment losses

57. Research and development costs

58. Which of the following is considered research and development costs?

59. Which of the following is considered research and development costs?

61. If a company constructs a laboratory building to be used as a research and development

64. Which of the following would not be considered an R & D activity?

68. The total amount of patent cost amortized to date is usually

69. Intangible assets are reported on the balance sheet

70. Which of the following is often reported as an extraordinary item?

71. Which of the following is often reported as an extraordinary item?

Multiple Choice Answers—Conceptual

83. b $180,000 – [($180,000 ÷ 10) × 1 1/3] = $156,000.

84. b $900,000 – [($900,000 ÷ 10) × 1 1/3] = $780,000.

85. c $30,000 + $440,000 + $90,000 = $560,000.

86. b ($960,000 ÷ 10) × 5 = $480,000.

87. b [($600,000 – $60,000) + $270,000] ÷ 12 = $67,500.

DERIVATIONS — Computational (cont.)

88. a $1,200,000 ÷ 10 = $120,000.

89. b $2,100,000 – [($2,100,000 ÷ 6) × 2] = $1,400,000.

90. c ($7,500,000 + $450,000) – $3,000,000 = $4,950,000

91. c ($12,000,000 + $800,000) – $5,000 = $7,800,000.

92. d $2,480,000 + $240,000 + $180,000 = $2,900,000.

93. a Since $4,000,000 > $3,400,000, $0 impairment.

94. b $3,000,000 – $2,000,000 = $1,000,000 gain.

95. b $1,290,000 – $975,000 = $315,000.

96. c $7,500,000 – [($7,500,000 ÷ 10) × 2] = $6,000,000.