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Gleim CPA Test Prep: Financial

(137 questions)

[1] Gleim #: 12.1.1 -- Source: CPA 1189 T-18 Bonds payable issued with scheduled maturities at various dates are called

Serial Bonds A. B. C. D. No No Yes Yes

Term Bonds Yes No No Yes

[2] Gleim #: 12.1.2 -- Source: CPA 591 I-47 Hancock Co.s December 31, Year 4, balance sheet contained the following items in the long-term liabilities section: Unsecured 9.375% registered bonds ($25,000 maturing annually beginning in Year 8) 11.5% convertible bonds, callable beginning in Year 13, due Year 24 Secured 9.875% guaranty security bonds, due Year 24 10.0% commodity backed bonds ($50,000 maturing annually beginning in Year 8) $250,000 200,000 $275,000 125,000

What are the total amounts of serial bonds and debenture bonds?

Serial Bonds A. B. C. D. $475,000 $475,000 $450,000 $200,000

Debenture Bonds $400,000 $125,000 $400,000 $650,000

[3] Gleim #: 12.1.3 -- Source: CPA 1192 I-39 Blue Corp.s December 31, Year 4, balance sheet contained the following items in the long-term liabilities section: 9-3/4% registered debentures, callable in Year 15, due in Year 20 9-1/2% collateral trust bonds, convertible into common stock beginning in Year 13, due in Year 23 10% subordinated debentures ($30,000 maturing annually beginning in Year 10) $700,000 600,000 300,000

What is the total amount of Blues term bonds?

A. B. C. D.

$600,000 $700,000 $1,000,000 $1,300,000

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Gleim CPA Test Prep: Financial


(137 questions)

[4] Gleim #: 12.1.4 -- Source: Publisher, adapted Debentures are

A. B. C. D.

Income bonds that require interest payments only when earnings permit. Subordinated debt and rank behind convertible bonds. Bonds secured by the full faith and credit of the issuing firm. A form of lease financing similar to equipment trust certificates.

[5] Gleim #: 12.1.5 -- Source: Publisher, adapted Which one of the following characteristics distinguishes income bonds from other bonds?

A. B. C. D.

The bondholder is guaranteed an income over the life of the security. By promising a return to the bondholder, an income bond is junior to preferred and common stock. Income bonds are junior to subordinated debt but senior to preferred and common stock. Income bonds pay interest only if the issuing company has earned the interest.

[6] Gleim #: 12.1.6 -- Source: Publisher, adapted Serial bonds are attractive to investors because

A. B. C. D.

All bonds in the issue mature on the same date. The yield to maturity is the same for all bonds in the issue. Investors can choose the maturity that suits their financial needs. The coupon rate on these bonds is adjusted to the maturity date.

[7] Gleim #: 12.1.7 -- Source: Publisher, adapted The best advantage of a zero-coupon bond to the issuer is that the

A. B. C. D.

Bond requires a low issuance cost. Bond requires no interest income calculation to the holder or issuer until maturity. Interest can be amortized annually by the APR method and need not be shown as an interest expense to the issuer. Interest can be amortized annually on a straight-line basis but is a noncash outlay.

[8] Gleim #: 12.1.8 -- Source: CPA 0908 FIN-13 What type of bonds in a particular bond issuance will not all mature on the same date?

A. B. C. D.

Debenture bonds. Serial bonds. Term bonds. Sinking fund bonds.

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Gleim CPA Test Prep: Financial


(137 questions)

[9] Gleim #: 12.1.9 -- Source: CPA 593 I-16 The following information relates to noncurrent investments that Fall Corp. placed in trust as required by the underwriter of its bonds: Bond sinking-fund balance, 1/1 Additional investment during year Dividends on investments Interest revenue Administration costs Carrying amount of bonds payable $ 450,000 90,000 15,000 30,000 5,000 1,025,000

What amount should Fall report in its December 31 balance sheet related to its noncurrent investment for bond sinking-fund requirements?

A. B. C. D.

$585,000 $580,000 $575,000 $540,000

[10] Gleim #: 12.1.10 -- Source: CPA 1191 T-36 An issuer of bonds uses a sinking fund for the retirement of the bonds. Cash was transferred to the sinking fund and subsequently used to purchase investments. The sinking fund I. Increases by revenue earned on the investments II. Is not affected by revenue earned on the investments III. Decreases when the investments are purchased

A. B. C. D.

I only. I and III only. II and III only. III only.

[11] Gleim #: 12.1.11 -- Source: CPA 1193 T-43 On March 1, Year 1, a company established a sinking fund in connection with an issue of bonds due in Year 13. At December 31, Year 5, the independent trustee held cash in the sinking-fund account representing the annual deposits to the fund and the interest earned on those deposits. How should the sinking fund be reported in the companys classified balance sheet at December 31, Year 5?

A. B. C. D.

The cash in the sinking fund should appear as a current asset. Only the accumulated deposits should appear as a noncurrent asset. The entire balance in the sinking-fund account should appear as a current asset. The entire balance in the sinking-fund account should appear as a noncurrent asset.

[12] Gleim #: 12.2.12 -- Source: CPA 1191 T-35 The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest

A. B. C. D.

Less the present value of all future interest payments at the market (effective) rate of interest. Less the present value of all future interest payments at the rate of interest stated on the bond. Plus the present value of all future interest payments at the market (effective) rate of interest. Plus the present value of all future interest payments at the rate of interest stated on the bond.

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Gleim CPA Test Prep: Financial


(137 questions)

[13] Gleim #: 12.2.13 -- Source: CPA 592 I-30 The following information pertains to Camp Corp.s issuance of bonds on July 1, Year 4: Face amount Term Stated interest rate Interest payment dates Yield $800,000 10 years 6% Annually on July 1 9% At 6% Present value of 1 for 10 periods Future value of 1 for 10 periods Present value of ordinary annuity of 1 for 10 periods 0.558 1.791 7.360 At 9% 0.422 2.367 6.418

What should the issue price be for each $1,000 bond?

A. B. C. D.

$1,000 $943 $864 $807

[14] Gleim #: 12.2.14 -- Source: CPA 594 F-46 A bond issued on June 1, Year 4, has interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, Year 4, is for a period of

A. B. C. D.

3 months. 4 months. 6 months. 7 months.

[15] Gleim #: 12.2.15 -- Source: CPA 1190 I-24 On June 30, Year 4, Huff Corp. issued 1,000 of its 8%, $1,000 bonds at 99. The bonds were issued through an underwriter to whom Huff paid bond issue costs of $35,000. On June 30, Year 4, Huff should report the bond liability at

A. B. C. D.

$955,000 $990,000 $1,000,000 $1,025,000

[16] Gleim #: 12.2.16 -- Source: CPA 1193 I-29 On January 31, Year 4, Beau Corp. issued $300,000 maturity value, 12% bonds for $300,000 cash. The bonds are dated December 31, Year 3, and mature on December 31, Year 13. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should Beau report in its September 30, Year 4, balance sheet?

A. B. C. D.

$27,000 $24,000 $18,000 $9,000

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Gleim CPA Test Prep: Financial


(137 questions)

[17] Gleim #: 12.2.17 -- Source: CPA 0605 FIN-4 On June 1 of the current year, Dahli Corp. issued $300,000 of 8% bonds payable at par with interest payment dates of April 1 and October 1. In its income statement for the current year ended December 31, what amount of interest expense should Dahli report?

A. B. C. D.

$6,000 $8,000 $12,000 $14,000

[18] Gleim #: 12.2.18 -- Source: CPA 0605 FIN-27 Album Co. issued 10-year $200,000 debenture bonds on January 2. The bonds pay interest semiannually. Album uses the effective interest method to amortize bond premiums and discounts. The carrying amount of the bonds on January 2 was $185,953. A journal entry was recorded for the first interest payment on June 30, debiting interest expense for $13,016 and crediting cash for $12,000. What is the annual stated interest rate for the debenture bonds?

A. B. C. D.

6% 7% 12% 14%

[19] Gleim #: 12.2.19 -- Source: CPA 595 F-20 On January 2, Year 4, Nast Co. issued 8% bonds with a face amount of $1 million that mature on January 2, Year 10. The bonds were issued to yield 12%, resulting in a discount of $150,000. Nast incorrectly used the straight-line method instead of the effective-interest method to amortize the discount. How is the carrying amount of the bonds affected by the error?

At Dec. 31, Year 4 A. B. C. D. Overstated Overstated Understated Understated

At Jan. 2, Year 10 Understated No effect Overstated No effect

[20] Gleim #: 12.2.20 -- Source: CPA 1193 I-36 Webb Co. has outstanding a 7%, 10-year bond with a $100,000 face amount. The bond was originally sold to yield 6% annual interest. Webb uses the effective-interest method to amortize bond premium. On June 30, Year 3, the carrying amount of the outstanding bond was $105,000. What amount of unamortized premium on the bond should Webb report in its June 30, Year 4, balance sheet?

A. B. C. D.

$1,050 $3,950 $4,300 $4,500

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Gleim CPA Test Prep: Financial


(137 questions)

[21] Gleim #: 12.2.21 -- Source: CPA 595 F-19 On July 1, Year 1, Eagle Corp. issued 600 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, Year 1, and mature on April 1, Year 11. Interest is payable semiannually on April 1 and October 1. What amount did Eagle receive from the bond issuance?

A. B. C. D.

$579,000 $594,000 $600,000 $609,000

[22] Gleim #: 12.2.22 -- Source: CPA 1194 F-24 On January 2, Year 1, West Co. issued 9% bonds in the amount of $500,000, which mature on January 2, Year 11. The bonds were issued for $469,500 to yield 10%. Interest is payable annually on December 31. West uses the interest method of amortizing bond discount. In its June 30, Year 1, balance sheet, what amount should West report as bonds payable?

A. B. C. D.

$469,500 $470,475 $471,025 $500,000

[23] Gleim #: 12.2.23 -- Source: CPA 594 F-29 On January 1, Year 2, Oak Co. issued 400 of its 8%, $1,000 bonds at 97 plus accrued interest. The bonds are dated October 1, Year 1, and mature on October 1, Year 11. Interest is payable semiannually on April 1 and October 1. Accrued interest for the period October 1, Year 1, to January 1, Year 2, amounted to $8,000. On January 1, Year 2, what amount should Oak report as bonds payable, net of discount?

A. B. C. D.

$380,300 $388,000 $388,300 $392,000

[24] Gleim #: 12.2.24 -- Source: CPA 591 T-6 On March 1, Clark Co. issued bonds at a discount. Clark incorrectly used the straight-line method instead of the effective-interest method to amortize the discount. How were the following amounts, as of December 31 affected by the error?

Bond Carrying Amount A. B. C. D. Overstated Understated Overstated Understated

Retained Earnings Overstated Understated Understated Overstated

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Gleim CPA Test Prep: Financial


(137 questions)

[25] Gleim #: 12.2.25 -- Source: CPA 1188 T-14 The issue price of a bond is equal to the present value of the future cash flows for interest and principal when the bond is issued

At Par A. B. C. D. Yes Yes No Yes

At a Discount No No Yes Yes

At a Premium Yes No Yes Yes

[26] Gleim #: 12.2.26 -- Source: CPA 1189 T-26 A bond issued on June 1 has interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31 would be for a period of

A. B. C. D.

Three months. Four months. Six months. Seven months.

[27] Gleim #: 12.2.27 -- Source: CPA 1189 I-25 On January 1, Year 2, Pine Corp. sold 200 of its 8%, $1,000 bonds at 97 plus accrued interest. The bonds are dated October 1, Year 1, and mature on October 1, Year 11. Interest is payable semiannually on April 1 and October 1. Accrued interest for the period October 1, Year 1, to January 1, Year 2, amounted to $4,000. On January 1, Year 2, Pine should report bonds payable, net of discount, at

A. B. C. D.

$196,000 $194,150 $194,000 $190,150

[28] Gleim #: 12.2.28 -- Source: CPA 1189 T-17 How is the carrying amount of a bond payable affected by amortization of the following?

Discount A. B. C. D. Increase Decrease Increase Decrease

Premium Increase Decrease Decrease Increase

[29] Gleim #: 12.2.29 -- Source: CPA 588 T-14 A 5-year term bond was issued on January 1, Year 1, at a discount. The carrying amount of the bond at December 31, Year 2, will be

A. B. C. D.

Higher than the carrying amount at December 31, Year 1. Lower than the carrying amount at December 31, Year 1. The same as the carrying amount at January 1, Year 1. Higher than the carrying amount at December 31, Year 3.

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Gleim CPA Test Prep: Financial


(137 questions)

[30] Gleim #: 12.2.30 -- Source: CPA 590 I-38 On January 1, Year 1, Kay, Inc. issued 10% bonds in the face amount of $400,000, which mature on January 1, Year 11. The bonds were issued for $354,000 to yield 12%, resulting in bond discount of $46,000. Kay uses the interest method of amortizing bond discount. Interest is payable semiannually on July 1 and January 1. At June 30, Year 1, Kays unamortized bond discount should be

A. B. C. D.

$46,000 $44,760 $43,700 $42,000

[31] Gleim #: 12.2.31 -- Source: CPA 1190 I-25 On January 1, Year 1, Wolf Corp. issued its 10% bonds in the face amount of $1 million. They mature on January 1, Year 11. The bonds were issued for $1,135,000 to yield 8%, resulting in bond premium of $135,000. Wolf uses the interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, Year 1, Wolfs adjusted unamortized bond premium should be

A. B. C. D.

$135,000 $125,800 $121,500 $115,864

[32] Gleim #: 12.2.32 -- Source: CPA 1190 I-41 On January 1, Korn Co. sold to Kay Corp. $400,000 of its 10% bonds for $354,118 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Korn report as interest expense for the 6 months ended June 30?

A. B. C. D.

$17,706 $20,000 $21,247 $24,000

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Gleim CPA Test Prep: Financial


(137 questions)

[33] Gleim #: 12.2.33 -- Source: CPA 1184 I-24 On December 31, Year 1, Arnold, Inc. issued $200,000, 8% serial bonds, to be repaid in the amount of $40,000 each year. Interest is payable annually on December 31. The bonds were issued to yield 10% per year. The bond proceeds were $190,280 based on the present values at December 31, Year 1, of the five annual payments: Amounts Due Due Date 12/31/Yr 2 12/31/Yr 3 12/31/Yr 4 12/31/Yr 5 12/31/Yr 6 Principal $40,000 40,000 40,000 40,000 40,000 Interest $16,000 12,800 9,600 6,400 3,200 Present Value at 12/31/Yr 1 $ 50,900 43,610 37,250 31,690 26,830 $190,280

Arnold amortizes the bond discount by the interest method. In its December 31, Year 2, balance sheet, at what amount should Arnold report the carrying value of the bonds?

A. B. C. D.

$139,380 $149,100 $150,280 $153,308

[34] Gleim #: 12.2.34 -- Source: CPA 1186 T-17 For a bond issue that sells for less than its par value, the market rate of interest is

A. B. C. D.

Dependent on the rate stated on the bond. Equal to the rate stated on the bond. Less than the rate stated on the bond. Higher than the rate stated on the bond.

[35] Gleim #: 12.2.35 -- Source: CPA 1192 I-23 On November 1, Mason Corp. issued $800,000 of its 10-year, 8% term bonds dated October 1. The bonds were sold to yield 10%, with total proceeds of $700,000 plus accrued interest. Interest is paid every April 1 and October 1. What amount should Mason report for interest payable in its December 31 balance sheet?

A. B. C. D.

$17,500 $16,000 $11,667 $10,667

[36] Gleim #: 12.2.36 -- Source: CPA 592 T-22 A bond issued on June 1 has interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31 is for a period of

A. B. C. D.

7 months. 6 months. 4 months. 3 months.

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Gleim CPA Test Prep: Financial


(137 questions)

[37] Gleim #: 12.2.37 -- Source: CPA 0706 FIN-11 When debt is issued at a discount, interest expense over the term of debt equals the cash interest paid

A. B. C. D.

Minus discount. Minus discount minus par value. Plus discount. Plus discount plus par value.

[38] Gleim #: 12.2.38 -- Source: CPA 0407 FIN-20 Foley Co. is preparing the electronic spreadsheet below to amortize the discount on its 10-year, 6%, $100,000 bonds payable. Bonds were issued on December 31 to yield 8%. Interest is paid annually. Foley uses the effective interest method to amortize bond discounts. A Year 1 2 B Cash paid $6,000 C Interest expense D Discount amortization E Carrying amount $86,580

1 2 3

Which formula should Foley use in cell E3 to calculate the bonds carrying amount at the end of Year 2?

A. B. C. D.

E2 + D3. E2 D3. E2 + C3. E2 C3.

[39] Gleim #: 12.2.39 -- Source: CPA 0908 FIN-12 On January 1, a company issued a $50,000 face amount, 8% five-year bond for $46,139 that will yield 10%. Interest is payable on June 30 and December 31. What is the bond carrying amount on December 31 of the current year?

A. B. C. D.

$46,139 $46,446 $46,768 $47,106

[40] Gleim #: 12.2.40 -- Source: CPA 0409 FIN-44 A company issued a bond with a stated rate of interest that is less than the effective interest rate on the date of issuance. The bond was issued on one of the interest payment dates. What should the company report on the first interest payment date?

A. B. C. D.

An interest expense that is less than the cash payment made to bondholders. An interest expense that is greater than the cash payment made to bondholders. A debit to the unamortized bond discount. A debit to the unamortized bond premium.

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Gleim CPA Test Prep: Financial


(137 questions)

[41] Gleim #: 12.2.41 -- Source: CPA 0409 FIN-50 A company issues bonds at 98, with a maturity value of $50,000. The entry the company uses to record the original issue should include which of the following?

A. B. C. D.

A debit to bond discount of $1,000. A credit to bonds payable of $49,000. A credit to bond premium of $1,000. A debit to bonds payable of $50,000.

[42] Gleim #: 12.2.42 -- Source: CPA 591 I-33 Mann Corp.s liability account balances at June 30, Year 2, included a 10% note payable in the amount of $3.6 million. The note is dated October 1, Year 1, and is payable in three equal annual payments of $1.2 million plus interest. The first interest and principal payment was made on October 1, Year 2. In Manns June 30, Year 3, balance sheet, what amount should be reported as accrued interest payable for this note?

A. B. C. D.

$270,000 $180,000 $90,000 $60,000

[43] Gleim #: 12.2.43 -- Source: CPA 1183 I-7 On January 1, Year 1, Gilson Corporation issued for $1,030,000 one thousand of its 9%, $1,000 callable bonds. The bonds are dated January 1, Year 1, and mature on December 31, Year 15. Interest is payable semiannually on January 1 and July 1. The bonds can be called by the issuer at 102 on any interest payment date after December 31, Year 5. The unamortized bond premium was $14,000 at December 31, Year 8, and the market price of the bonds was 99 on this date. In its December 31, Year 8, balance sheet, at what amount should Gilson report the carrying value of the bonds?

A. B. C. D.

$1,020,000 $1,016,000 $1,014,000 $990,000

[44] Gleim #: 12.2.44 -- Source: CPA 591 I-55 On July 1, Day Co. received $103,288 for $100,000 face amount, 12% bonds, a price that yields 10%. Interest expense for the 6 months ended December 31 should be

A. B. C. D.

$6,197 $6,000 $5,164 $5,000

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Gleim CPA Test Prep: Financial


(137 questions)

[45] Gleim #: 12.2.45 -- Source: CPA 587 I-27 On July 1, Year 3, Lundy Company issued for $438,000 500 of its 8%, $1,000 bonds. The bonds were issued to yield 10%. The bonds are dated July 1, Year 3, and mature on July 1, Year 13. Interest is payable semiannually on January 1 and July 1. Using the interest method, how much of the bond discount should be amortized for the 6 months ended December 31, Year 3?

A. B. C. D.

$3,800 $3,100 $2,480 $1,900

[46] Gleim #: 12.2.46 -- Source: CPA 1191 I-36 On January 1, Year 4, Celt Corp. issued 9% bonds in the face amount of $1 million, which mature on January 1, Year 14. The bonds were issued for $939,000 to yield 10%, resulting in a bond discount of $61,000. Celt uses the interest method of amortizing bond discount. Interest is payable annually on December 31. At December 31, Year 4, Celts unamortized bond discount should be

A. B. C. D.

$51,000 $51,610 $52,000 $57,100

[47] Gleim #: 12.3.47 -- Source: CPA 590 I-37 During Year 4, Eddy Corp. incurred the following costs in connection with the issuance of bonds: Printing and engraving Legal fees Fees paid to independent accountants for registration information Commissions paid to underwriter $ 30,000 160,000 20,000 300,000

What amount should be recorded as a deferred charge to be amortized over the term of the bonds?

A. B. C. D.

$510,000 $480,000 $300,000 $210,000

[48] Gleim #: 12.3.48 -- Source: CPA 1193 I-34 On January 2, Year 3, Gill Co. issued $2 million of 10-year, 8% bonds at par. The bonds, dated January 1, Year 3, pay interest semiannually on January 1 and July 1. Bond issue costs were $250,000. What amount of bond issue costs are unamortized at June 30, Year 4?

A. B. C. D.

$237,500 $225,000 $220,800 $212,500

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Gleim CPA Test Prep: Financial


(137 questions)

[49] Gleim #: 12.3.49 -- Source: CPA FIN R99-9 Perk, Inc. issued $500,000, 10% bonds to yield 8%. Bond issuance costs were $10,000. How should Perk calculate the net proceeds to be received from the issuance?

A. B. C. D.

Discount the bonds at the stated rate of interest. Discount the bonds at the market rate of interest. Discount the bonds at the stated rate of interest and deduct bond issuance costs. Discount the bonds at the market rate of interest and deduct bond issuance costs.

[50] Gleim #: 12.3.50 -- Source: CPA 1188 T-15 A company issued 10-year term bonds at a discount in Year 1. Bond issue costs were incurred at that time. The company uses the effectiveinterest method to amortize bond issue costs. Reporting the bond issue costs as a deferred charge results in

A. B. C. D.

More of a reduction in net income in Year 2 than reporting the bond issue costs as a reduction of the related debt liability. The same reduction in net income in Year 2 as reporting the bond issue costs as a reduction of the related debt liability. Less of a reduction in net income in Year 2 than reporting the bond issue costs as a reduction of the related debt liability. No reduction in net income in Year 2.

[51] Gleim #: 12.3.51 -- Source: CPA 1190 I-23 On March 1, Year 1, Cain Corp. issued, at 103 plus accrued interest, 200 of its 9%, $1,000 bonds. The bonds are dated January 1, Year 1, and mature on January 1, Year 11. Interest is payable semiannually on January 1 and July 1. Cain paid bond issue costs of $10,000. Cain should realize net cash receipts from the bond issuance of

A. B. C. D.

$216,000 $209,000 $206,000 $199,000

[52] Gleim #: 12.3.52 -- Source: CPA 592 I-29 Dixon Co. incurred costs of $3,300 when it issued, on August 31, Year 1, 5-year debenture bonds dated April 1, Year 1. What amount of issue expense should Dixon report in its income statement for the year ended December 31, Year 1?

A. B. C. D.

$220 $240 $495 $3,300

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Gleim CPA Test Prep: Financial


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[53] Gleim #: 12.3.53 -- Source: CPA 1192 I-37 Lake Co. issued 3,000 of its 9%, $1,000 face amount bonds at 101 1/2. In connection with the sale of these bonds, Lake paid the following expenses: Promotion costs Engraving and printing Underwriters commissions $ 20,000 25,000 200,000

What amount should Lake record as bond issue costs to be amortized over the term of the bonds?

A. B. C. D.

$0 $220,000 $225,000 $245,000

[54] Gleim #: 12.4.54 -- Source: CPA 0908 FIN-37 Which of the following statements characterizes convertible debt?

A. B. C. D.

The holder of the debt must be repaid with shares of the issuers stock. No value is assigned to the conversion feature when convertible debt is issued. The transaction should be recorded as the issuance of stock. The issuers stock price is less than market value when the debt is converted.

[Fact Pattern #1] On January 2, Year 1, Chard Co. issued 10-year convertible bonds at 105. During Year 4, these bonds were converted into common stock having an aggregate par value equal to the total face amount of the bonds. At conversion, the market price of Chards common stock was 50% above its par value. [55] Gleim #: 12.4.55 -- Source: CPA 1190 T-29 (Refers to Fact Pattern #1) On January 2, Year 1, Chard should have reported cash proceeds from the issuance of the convertible bonds as

A. B. C. D.

Contributed capital for the entire proceeds. Contributed capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance. A liability for the face amount of the bonds and contributed capital for the premium. A liability for the entire proceeds.

[56] Gleim #: 12.4.56 -- Source: CPA 1190 T-30 (Refers to Fact Pattern #1) Depending on whether the book-value method or the market-value method was used, Chard should have recognized gains or losses on conversion when using the

Book-Value Method A. B. C. D. Either gain or loss Either gain or loss Neither gain nor loss Neither gain nor loss

Market-Value Method Gain Loss Loss Gain

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Gleim CPA Test Prep: Financial


(137 questions)

[57] Gleim #: 12.4.57 -- Source: CPA 593 T-12 On March 31, Year 4, Ashley, Inc.s bondholders exchanged their convertible bonds for common stock. The carrying amount of these bonds on Ashleys books was less than the market value but greater than the par value of the common stock issued. If Ashley used the book-value method of accounting for the conversion, which of the following statements accurately states an effect of this conversion?

A. B. C. D.

Equity is increased. Additional paid-in capital is decreased. Retained earnings is increased. An extraordinary loss is recognized.

[58] Gleim #: 12.4.58 -- Source: CPA 1193 I-37 On July 1, Year 4, after recording interest and amortization, York Co. converted $1 million of its 12% convertible bonds into 50,000 shares of $1 par value common stock. On the conversion date, the carrying amount of the bonds was $1.3 million, the market value of the bonds was $1.4 million, and Yorks common stock was publicly trading at $30 per share. Using the book-value method, what amount of additional paid-in capital should York record as a result of the conversion?

A. B. C. D.

$950,000 $1,250,000 $1,350,000 $1,500,000

[59] Gleim #: 12.4.59 -- Source: CPA 1189 I-30 Faber, Inc. had outstanding 10%, $1 million face amount convertible bonds maturing on December 31, Year 5, on which interest is paid June 30 and December 31. After amortization through June 30, Year 1, the unamortized balance in the bond discount account was $30,000. On that date, all of these bonds were converted into 40,000 shares of $20 par value common stock. Faber incurred expenses of $10,000 in connection with the conversion. Recording the conversion by the book value (carrying amount) method, Faber should credit additional paid-in capital for

A. B. C. D.

$160,000 $170,000 $180,000 $230,000

[60] Gleim #: 12.4.60 -- Source: CPA 0407 FIN-47 Which of the following is generally associated with the terms of convertible debt securities?

A. B. C. D.

An interest rate that is lower than nonconvertible debt. An initial conversion price that is less than the market value of the common stock at time of issuance. A noncallable feature. A feature to subordinate the security to nonconvertible debt.

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[61] Gleim #: 12.4.61 -- Source: CPA 0409 FIN-34 On January 1, Stunt Corp. had outstanding convertible bonds with a face value of $1,000,000 and an unamortized discount of $100,000. On that date, the bonds were converted into 100,000 shares of $1 par stock. The market value on the date of conversion was $12 per share. The transaction will be accounted for with the book value method. By what amount will Stunts stockholders equity increase as a result of the bond conversion?

A. B. C. D.

$100,000 $900,000 $1,000,000 $1,200,000

[62] Gleim #: 12.4.62 -- Source: CPA 588 T-16 When bonds are issued with stock purchase warrants, a portion of the proceeds should be allocated to additional paid-in capital for bonds issued with

Detachable Stock Purchase Warrants A. B. C. D. No Yes Yes No

Nondetachable Stock Purchase Warrants Yes Yes No No

[63] Gleim #: 12.4.63 -- Source: CPA 1191 T-37 Bonds with detachable stock warrants were issued by Flack Co. Immediately after issue, the aggregate market value of the bonds and the warrants exceeds the proceeds. Is the portion of the proceeds allocated to the warrants less than their market value, and is that amount recorded as contributed capital?

Less Than Warrants' Market Value A. B. C. D. No Yes Yes No

Contributed Capital Yes No Yes No

[64] Gleim #: 12.4.64 -- Source: CPA 1193 I-33 On December 30, Year 4, Fort, Inc. issued 1,000 of its 8%, 10-year, $1,000 face value bonds with detachable stock warrants at par. Each bond carried a detachable warrant for one share of Forts common stock at a specified option price of $25 per share. Immediately after issuance, the market value of the bonds without the warrants was $1,080,000 and the market value of the warrants was $120,000. In its December 31, Year 4, balance sheet, what amount should Fort report as bonds payable?

A. B. C. D.

$1,000,000 $975,000 $900,000 $880,000

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[65] Gleim #: 12.4.65 -- Source: CPA 593 T-13 Quoit, Inc. issued preferred stock with detachable common stock warrants. The issue price exceeded the sum of the warrants fair value and the preferred stocks par value. The preferred stocks fair value was not determinable. What amount should be assigned to the warrants outstanding?

A. B. C. D.

Total proceeds. Excess of proceeds over the par value of the preferred stock. The proportion of the proceeds that the warrants fair value bears to the preferred stocks par value. The fair value of the warrants.

[66] Gleim #: 12.4.66 -- Source: CPA 0908 FIN-36 On July 28, Vent Corp. sold $500,000 of 4%, 8-year subordinated debentures for $450,000. The purchasers were issued 2,000 detachable warrants, each of which was for one share of $5 par common stock at $12 per share. Shortly after issuance, the warrants sold at a market price of $10 each. What amount of discount on the debentures should Vent record at issuance?

A. B. C. D.

$50,000 $60,000 $70,000 $74,000

[67] Gleim #: 12.4.67 -- Source: Publisher, adapted Cuddy Corp. issued bonds with a face amount of $200,000. Each $1,000 bond contained detachable stock warrants for 100 shares (one share per warrant) of Cuddys common stock. Total proceeds from the issue amounted to $240,000. The fair value of each warrant was $2, and the fair value of the bonds without the warrants was $196,000. Under IFRSs, the bonds were issued at a discount of

A. B. C. D.

$0 $678 $4,000 $40,678

[68] Gleim #: 12.4.68 -- Source: Publisher, adapted A freestanding combination of one written put option on the issuers equity shares and a second option may be a liability or an asset. Assume the first option requires the entity to buy 1,000 shares of the entitys own stock at a given date for $30 per share if the market price declines below $30. The second option is a purchased call option that permits the issuer to buy 1,000 shares on the given date for $30 per share if the price rises above $31. If the fair value of the put at issuance exceeds the fair value of the call,

A. B. C. D.

The issuer pays cash. The combined instrument is classified as a liability. Classification of the combined instrument depends on the settlement provision. The combined instrument is a net written option classified as an asset.

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[69] Gleim #: 12.4.69 -- Source: Publisher, adapted The issuer agrees to a forward contract to repurchase 100,000 of its equity shares for $50 per share in 3 years. No other consideration is given or received, and no unstated rights or privileges are involved. The quoted market price of these shares is $42 per share at the inception of the contract, which will be physically settled in cash. How should the issuer account for this contract?

A. B. C. D.

A memorandum entry. As an asset if price movements are favorable and the contract is net-cash settled. Initially debit equity and credit a liability for $5,000,000. Initially debit equity and credit a liability for $4,200,000.

[70] Gleim #: 12.4.70 -- Source: CPA 593 I-32 On March 1, Year 4, Evan Corp. issued $1 million of 10%, nonconvertible bonds at 103. They were due on February 28, Year 14. Each $1,000 bond was issued with 30 detachable stock warrants, each of which entitled the holder to purchase, for $50, one share of Evan common stock, par value $25. On March 1, Year 4, the quoted market value of Evans common stock was $20 per share, and the market value of each warrant was $4. What amount of the bond issue proceeds should Evan record as an increase in equity?

A. B. C. D.

$120,000 $90,000 $30,000 $0

[71] Gleim #: 12.4.71 -- Source: CPA 1190 T-31 Main Co. issued bonds with detachable common stock warrants. Only the warrants had a known fair value. The sum of the fair value of the warrants and the face amount of the bonds exceeds the cash proceeds. This excess is reported as

A. B. C. D.

Discount on bonds payable. Premium on bonds payable. Common stock subscribed. Contributed capital in excess of par-stock warrants.

[72] Gleim #: 12.4.72 -- Source: CPA 591 II-5 Ray Corp. issued bonds with a face amount of $200,000. Each $1,000 bond contained detachable stock warrants for 100 shares of Rays common stock. Total proceeds from the issue amounted to $240,000. The market value of each warrant was $2, and the market value of the bonds without the warrants was $196,000. The bonds were issued at a discount of

A. B. C. D.

$0 $678 $4,000 $40,678

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[73] Gleim #: 12.4.73 -- Source: CPA 1189 I-28 On May 1, Kreal Corp. issued $2 million of 20-year, 10% bonds for $2,120,000. Each $1,000 bond had a detachable warrant eligible for the purchase of one share of Kreals $50 par common stock for $60. Immediately after the bonds were issued, Kreals securities had the following market values: 10% bond without warrant Warrant Common stock, $50 par $1,040 20 56

What amount should Kreal credit to premium on bonds payable?

A. B. C. D.

$120,000 $80,000 $40,000 $0

[74] Gleim #: 12.4.74 -- Source: CPA 594 F-34 On December 31, Moss Co. issued $1 million of 11% bonds at 109. Each $1,000 bond was issued with 50 detachable stock warrants, each of which entitled the bondholder to purchase one share of $5 par common stock for $25. Immediately after issuance, the market value of each warrant was $4. On December 31, what amount should Moss record as discount or premium on issuance of bonds?

A. B. C. D.

$40,000 premium. $90,000 premium. $110,000 discount. $200,000 discount.

[75] Gleim #: 12.4.75 -- Source: CPA 575 I-8 Roaster Company issued bonds with detachable stock warrants. Each warrant granted an option to buy one share of $40 par value common stock for $75 per share. Five hundred warrants were originally issued, and $4,000 was appropriately credited to warrants. If 90% of these warrants are exercised when the market price of the common stock is $85 per share, how much should be credited to capital in excess of par on this transaction?

A. B. C. D.

$19,350 $19,750 $23,850 $24,250

[76] Gleim #: 12.4.76 -- Source: Publisher, adapted On July 1, Year 5, Wistar Corp. issued 1,000 of its 6%, 10-year, $1,000 face amount bonds with detachable stock warrants at 110. Each warrant could be redeemed for one share of Wistars common stock at a specified option price of $25 per share. Immediately after issuance, the fair value of the bonds without the warrants was $1,080,000, and the fair value of the warrants was $120,000. Under IFRSs, Wistar will record the warrants at

A. B. C. D.

$0 $2,500 $20,000 $120,000

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[77] Gleim #: 12.4.77 -- Source: Publisher, adapted Under IFRSs, which of the following is the method of allocating the proceeds of a compound financial instrument that contains both a liability and an equity component?

A. B. C. D.

Liability component at fair value, equity component at fair value, difference to premium or discount on bonds payable. Liability component at fair value, difference to equity component. Equity component at fair value, difference to liability component. The method most appropriate given all events and circumstances.

[78] Gleim #: 12.5.78 -- Source: CPA 1193 T-25 On March 1, Year 1, Somar Co. issued 20-year bonds at a discount. By September 1, Year 6, the bonds were quoted at 106 when Somar exercised its right to retire the bonds at 105. How should Somar report the bond retirement on its Year 6 income statement?

A. B. C. D.

A gain in continuing operations. A loss in continuing operations. An extraordinary gain. An extraordinary loss.

[79] Gleim #: 12.5.79 -- Source: CPA 591 T-5 A 15-year bond was issued in Year 1 at a discount. During Year 10, a 10-year bond was issued at face amount with the proceeds used to retire the 15-year bond at its face amount. The net effect of the Year 10 bond transactions was to increase long-term liabilities by the excess of the 10-year bonds face amount over the 15-year bonds

A. B. C. D.

Face amount. Carrying amount. Face amount minus the deferred loss on bond retirement. Carrying amount minus the deferred loss on bond retirement.

[80] Gleim #: 12.5.80 -- Source: Publisher, adapted A debtor should derecognize a liability in which circumstances? I. The debtor pays the creditor and is relieved of its obligation with respect to the liability. II. The debtor is legally released from being the primary obligor. III. The debtor irrevocably places cash or other assets in a trust to be used solely for satisfying scheduled payments of interest and principal of a specific obligation.

A. B. C. D.

I only. I and II only. II and III only. I, II, and III.

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[81] Gleim #: 12.5.81 -- Source: CPA 1194 F-42 On July 31, Year 4, Dome Co. issued $1,000,000 of 10%, 15-year bonds at par and used a portion of the proceeds to call its 600 outstanding 11%, $1,000 face amount bonds, due on July 31, Year 14, at 102. On that date, unamortized bond premium relating to the 11% bonds was $65,000. In its Year 4 income statement, what amount should Dome report as gain or loss, before income taxes, from retirement of bonds?

A. B. C. D.

$53,000 gain. $0 $(65,000) loss. $(77,000) loss.

[82] Gleim #: 12.5.82 -- Source: CPA 1190 I-50 On January 1, Year 13, Hart, Inc. redeemed its 15-year bonds of $500,000 par value for 102. They were originally issued on January 1, Year 1, at 98 with a maturity date of January 1, Year 16. The bond issue costs relating to this transaction were $20,000. Hart properly amortizes discounts, premiums, and bond issue costs using the straight-line method. What amount of loss should Hart recognize on the redemption of these bonds?

A. B. C. D.

$16,000 $12,000 $10,000 $0

[83] Gleim #: 12.5.83 -- Source: CPA 1193 I-40 On June 2, Year 1, Tory, Inc. issued $500,000 of 10%, 15-year bonds at par. Interest is payable semiannually on June 1 and December 1. Bond issue costs were $6,000. On June 2, Year 6, Tory retired half of the bonds at 98. What is the net carrying amount that Tory should use in computing the gain or loss on retirement of debt?

A. B. C. D.

$250,000 $248,000 $247,000 $246,000

[84] Gleim #: 12.5.84 -- Source: CPA 1188 T-16 A 10-year term bond was issued in Year 2 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in Year 4, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in Year 4 should have equaled the

A. B. C. D.

Call price. Call price less unamortized discount. Face amount less unamortized discount. Face amount plus unamortized discount.

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[85] Gleim #: 12.5.85 -- Source: CPA 590 I-40 On January 1, Year 1, Fox Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. These bonds were to mature on January 1, Year 11, but were callable at 101 anytime after December 31, Year 4. Interest was payable semiannually on July 1 and January 1. On July 1, Year 6, Fox called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Foxs gain or loss in Year 6 on this early extinguishment of debt was a

A. B. C. D.

$30,000 gain. $22,000 gain. $10,000 loss. $8,000 gain.

[86] Gleim #: 12.5.86 -- Source: CPA 1190 II-11 On its December 31, Year 1, balance sheet, Nilo Corp. reported bonds payable of $8 million and related unamortized bond issue costs of $430,000. The bonds had been issued at par. On January 2, Year 2, Nilo retired $4 million of the outstanding bonds at par plus a call premium of $100,000. What amount should Nilo report in its Year 2 income statement as loss on extinguishment of debt?

A. B. C. D.

$0 $100,000 $215,000 $315,000

[87] Gleim #: 12.5.87 -- Source: CPA 1190 I-27 On June 30, Year 1, Town Co. had outstanding 8%, $2 million face amount, 15-year bonds maturing on June 30, Year 11. Interest is payable on June 30 and December 31. The unamortized balances of bond discount and deferred issue costs on June 30, Year 1, were $70,000 and $20,000, respectively. On June 30, Year 1, Town 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. B. C. D.

$1,980,000 $1,930,000 $1,910,000 $1,880,000

[88] Gleim #: 12.5.88 -- Source: CPA 1195 F-41 In open market transactions, Gold Corp. simultaneously sold its noncurrent investment in Iron Corp. bonds and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions. Golds gain on the purchase of its own bonds exceeded its loss on the sale of the Iron bonds. Gold should report the

A. B. C. D.

Net effect of the two transactions as an extraordinary gain. Net effect of the two transactions in income before extraordinary items. Gain on its purchase in income before extraordinary items and the loss on the sale as an extraordinary loss. Gain on its purchase as an extraordinary gain and the loss on the sale in income before extraordinary items.

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[89] Gleim #: 12.5.89 -- Source: Publisher, adapted On December 31, Marcar Co. placed cash of $430,000 in an irrevocable trust. The trusts assets are to be used solely for satisfying scheduled payments of both interest and principal on Marcars $550,000 bond payable. The possibility that Marcar will be required to make future payments with respect to that debt is remote. Marcar has not been legally released from its obligations under the bond agreement. On December 31, the bonds carrying amount was $520,000, and its present value was $400,000. Disregarding income taxes, what amount of gain (loss) should Marcar report in its income statement for the year?

A. B. C. D.

$0 $90,000 $120,000 $150,000

[90] Gleim #: 12.5.90 -- Source: CPA 1190 T-38 Whetstone Co. took advantage of market conditions to refund debt. This refunding operation was the fourth carried out by Whetstone within the last 3 years. The excess of the carrying amount of the old debt over the amount paid to extinguish it should be reported as a(n)

A. B. C. D.

Extraordinary gain, net of income taxes. Extraordinary loss, net of income taxes. Part of continuing operations. Deferred credit to be amortized over the life of the new debt.

[91] Gleim #: 12.5.91 -- Source: CPA 1189 I-50 Lowe Corp. had the following gains, net of applicable taxes, during the current year: Foreign currency transaction gain resulting from major devaluation Gain from early extinguishment of Lowes debt

$175,000 250,000

What amount should Lowe report as extraordinary gains in its income statement?

A. B. C. D.

$425,000 $250,000 $175,000 $0

[92] Gleim #: 12.5.92 -- Source: CPA 592 I-55 Ray Finance, Inc. issued a 10-year, $100,000, 9% note on January 1, Year 1. The note was issued to yield 10% for proceeds of $93,770. Interest is payable semiannually. The note is callable after 2 years at a price of $96,000. Due to a decline in the market rate to 8%, Ray retired the note on December 31, Year 3. On that date, the carrying amount of the note was $94,582, and the discounted amount of its cash flows based on the market rate was $105,280. What amount should Ray report as gain (loss) from retirement of the note for the year ended December 31, Year 3?

A. B. C. D.

$9,280 $4,000 $(2,230) $(1,418)

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[93] Gleim #: 12.5.93 -- Source: CPA 1192 I-47 On June 30, Year 7, King Co. had outstanding 9%, $5,000,000 face value bonds maturing on June 30, Year 9. Interest was payable semiannually every June 30 and December 31. On June 30, Year 7, after amortization was recorded for the period, the unamortized bond premium and bond issue costs were $30,000 and $50,000, respectively. On that date, King acquired all its outstanding bonds on the open market at 98 and retired them. At June 30, Year 7, what amount should King recognize as gain before income taxes on redemption of bonds?

A. B. C. D.

$20,000 $80,000 $120,000 $180,000

[94] Gleim #: 12.6.94 -- Source: CPA 0605 FIN-33 Verona Co. had $500,000 in current liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year, but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the current debt. What amount should Verona report as a current liability on its balance sheet at the end of the current year?

A. B. C. D.

$0 $100,000 $400,000 $500,000

[95] Gleim #: 12.6.95 -- Source: CPA 593 I-2 On December 31, Year 4, Largo, Inc. had a $750,000 note payable outstanding due July 31, Year 5. Largo borrowed the money to finance construction of a new plant. Largo planned to refinance the note by issuing noncurrent bonds. Because Largo temporarily had excess cash, it prepaid $250,000 of the note on January 12, Year 5. In February Year 5, Largo completed a $1.5 million bond offering. Largo will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during Year 5. On March 3, Year 5, Largo issued its Year 4 financial statements. What amount of the note payable should Largo include in the current liabilities section of its December 31, Year 4, balance sheet?

A. B. C. D.

$750,000 $500,000 $250,000 $0

[96] Gleim #: 12.6.96 -- Source: CPA 595 F-5 Cali, Inc. had a $4 million note payable due on March 15, Year 2. On January 28, Year 2, before the issuance of its Year 1 financial statements, Cali issued long-term bonds in the amount of $4.5 million. Proceeds from the bonds were used to repay the note when it came due. How should Cali classify the note in its December 31, Year 1, financial statements?

A. B. C. D.

As a current liability, with separate disclosure of the note refinancing. As a current liability, with no separate disclosure required. As a noncurrent liability, with separate disclosure of the note refinancing. As a noncurrent liability, with no separate disclosure required.

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[97] Gleim #: 12.6.97 -- Source: CPA 591 I-35 Ames, Inc. has $1 million of notes payable due June 15, Year 2. At the financial statement date of December 31, Year 1, Ames signed an agreement to borrow up to $1 million to refinance the notes payable on a long-term basis. The financing agreement called for borrowings not to exceed 80% of the value of the collateral Ames was providing. At the date of issue of the December 31, Year 1, financial statements, the value of the collateral was $1.2 million and was not expected to fall below this amount during Year 2. In its December 31, Year 1, balance sheet, Ames should classify the notes payable as

Short-term Obligations A. B. C. D. $0 $40,000 $200,000 $1,000,000

Long-term Obligations $1,000,000 $960,000 $800,000 $0

[98] Gleim #: 12.6.98 -- Source: CPA 1190 I-11 Included in Lee Corp.s liability account balances at December 31, Year 4, were the following: 14% note payable issued October 1, Year 4, maturing September 30, Year 5 16% note payable issued April 1, Year 2, payable in six equal annual installments of $50,000 beginning April 1, Year 3

$125,000 200,000

Lees December 31, Year 4, financial statements were issued on March 31, Year 5. On January 15, Year 5, the entire $200,000 balance of the 16% note was refinanced by issuance of a long-term obligation payable in a lump sum. In addition, on March 10, Year 5, Lee consummated a noncancelable agreement with the lender to refinance the 14%, $125,000 note on a long-term basis, on readily determinable terms that have not yet been implemented. Both parties are financially capable of honoring the agreement, and there have been no violations of the agreements provisions. On the December 31, Year 4, balance sheet, the amount of the notes payable that Lee should classify as short-term obligations is

A. B. C. D.

$175,000 $125,000 $50,000 $0

[99] Gleim #: 12.6.99 -- Source: CPA 0407 FIN-03 On December 31, Year 1, Taylor, Inc. signed a binding agreement with a bank for the refinancing of an existing note payable scheduled to mature in February, Year 2. The terms of the refinancing included extending the maturity date of the note by three years. On January 15, Year 2, the note was refinanced. How should Taylor report the note payable in its December 31, Year 1, balance sheet?

A. B. C. D.

A current liability. A long-term liability. A long-term note receivable. A current note receivable.

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[100] Gleim #: 12.6.100 -- Source: CPA 0407 FIN-28 On December 31, Year 1, Paxton Co. had a note payable due on August 1, Year 2. On January 20, Year 2, Paxton signed a financing agreement to borrow the balance of the note payable from a lending institution to refinance the note. The agreement does not expire within one year, and no violation of any provision in the financing agreement exists. On February 1, Year 2, Paxton was informed by its financial advisor that the lender is not expected to be financially capable of honoring the agreement. Paxtons financial statements were issued on March 31, Year 2. How should Paxton classify the note on its balance sheet at December 31, Year 1?

A. B. C. D.

As a current liability because the financing agreement was signed after the balance sheet date. As a current liability because the lender is not expected to be financially capable of honoring the agreement. As a long-term liability because the agreement does not expire within one year. As a long-term liability because no violation of any provision in the financing agreement exists.

[101] Gleim #: 12.6.101 -- Source: Publisher, adapted On December 31, Year 3, Matricula Corp. reported $100,000 in current liabilities. Matricula issued audited financial statements on March 31, Year 4. On February 15, Year 4, the company issued $80,000 of common stock, the proceeds of which were intended to pay the current debt. What amount of current liabilities should Matricula report in its December 31, Year 3 balance sheet prepared under IFRSs?

A. B. C. D.

$0 $20,000 $80,000 $100,000

[Fact Pattern #2] House Publishers offered a contest in which the winner would receive $1 million, payable over 20 years. On December 31, Year 4, House announced the winner of the contest and signed a note payable to the winner for $1 million, payable in $50,000 installments every January 2. Also on December 31, Year 4, House purchased an annuity for $418,250 to provide the $950,000 prize monies remaining after the first $50,000 installment, which was paid on January 2, Year 5. [102] Gleim #: 12.7.102 -- Source: CPA 1194 F-22 (Refers to Fact Pattern #2) In its December 31, Year 4, balance sheet, at what amount should House measure the note payable, net of current portion?

A. B. C. D.

$368,250 $418,250 $900,000 $950,000

[103] Gleim #: 12.7.103 -- Source: CPA 1194 F-23 (Refers to Fact Pattern #2) In its Year 4 income statement, what should House report as contest prize expense?

A. B. C. D.

$0 $418,250 $468,250 $1,000,000

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[104] Gleim #: 12.7.104 -- Source: CPA 1193 I-27 On December 31, Year 4, Roth Co. issued a $10,000 note payable to Wake Co. in exchange for services rendered to Roth. The transaction was not in the normal course of business. The note, made at usual trade terms, is due in 9 months and bears interest, payable at maturity, at the annual rate of 3%, a rate that is unreasonable in the circumstances. The market interest rate is 8%, the prevailing rate for similar instruments of issuers with similar credit ratings. The compound interest factor of $1 due in 9 months at 8% is .944. At what amount should the note payable be credited in Roths December 31, Year 4, balance sheet?

A. B. C. D.

$10,300 $10,000 $9,652 $9,440

[105] Gleim #: 12.7.105 -- Source: CPA 1195 F-16 On March 1, Year 3, Fine Co. borrowed $10,000 and signed a 2-year note bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, Year 5. What amount should Fine report as a liability for accrued interest at December 31, Year 4?

A. B. C. D.

$0 $1,000 $1,200 $2,320

[106] Gleim #: 12.7.106 -- Source: CPA 590 T-8 A company issued a current note payable with a stated 12% rate of interest to a bank. The bank charged a .5% loan origination fee and remitted the balance to the company. The effective interest rate paid by the company in this transaction is

A. B. C. D.

Equal to 12.5%. More than 12.5%. Less than 12.5%. Independent of 12.5%.

[107] Gleim #: 12.7.107 -- Source: CPA 594 F-30 The discount resulting from the determination of a note payables present value should be reported on the balance sheet as a(n)

A. B. C. D.

Addition to the face amount of the note. Deferred charge separate from the note. Deferred credit separate from the note. Direct deduction from the face amount of the note.

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Gleim CPA Test Prep: Financial


(137 questions)

[108] Gleim #: 12.7.108 -- Source: CPA 590 I-29 On December 30, Bart, Inc. purchased a machine from Fell Corp. in exchange for a noninterest-bearing note requiring eight payments of $20,000. The first payment was made on December 30, and the other payments are due annually on December 30. At date of issuance, the prevailing rate of interest for this type of note was 11%. Present value factors are as follows: Present Value of Ordinary Annuity of 1 at 11% 4.712 5.146 Present Value of Annuity in Advance of 1 at 11% 5.231 5.712

Period 7 8

On Barts December 31 balance sheet, the carrying amount of the note payable to Fell was

A. B. C. D.

$94,240 $102,920 $104,620 $114,240

[109] Gleim #: 12.7.109 -- Source: CPA 592 T-18 On October 1, Year 1, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the notes market rate of interest was 11%. Fleur recorded the purchase at the notes face amount. All of the merchandise was sold by December 1, Year 1. Fleurs Year 1 financial statements reported interest payable and interest expense on the note for 3 months at 16%. All amounts due on the note were paid February 1, Year 2. Fleurs Year 1 cost of goods sold for the holiday merchandise was

A. Overstated by the difference between the notes face amount and the notes October 1, Year 1, present value. B. Overstated by the difference between the notes face amount and the notes October 1, Year 1, present value plus 11% interest for 2 months. C. Understated by the difference between the notes face amount and the notes October 1, Year 1, present value. D. Understated by the difference between the notes face amount and the notes October 1, Year 1, present value plus 16% interest for 2 months. [110] Gleim #: 12.7.110 -- Source: CPA 0706 FIN-29 On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its income statement for the year, what amount should World report as interest expense?

A. B. C. D.

$0 $14,200 $22,500 $30,000

[111] Gleim #: 12.7.111 -- Source: CPA 1192 I-22 On August 1, Year 1, Vann Corp.s $500,000 1-year, noninterest-bearing note due July 31, Year 2, was discounted at Homestead Bank at 10.8%. Vann uses the straight-line method of amortizing bond discount. What carrying amount should Vann report for notes payable in its December 31, Year 1, balance sheet?

A. B. C. D.

$500,000 $477,500 $468,500 $446,000

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Gleim CPA Test Prep: Financial


(137 questions)

[112] Gleim #: 12.7.112 -- Source: CPA 0409 FIN-22 Which of the following is reported as interest expense?

A. B. C. D.

Pension cost interest. Amortization of discount of a note. Deferred compensation plan interest. Interest incurred to finance a software development for internal use.

[113] Gleim #: 12.8.113 -- Source: CPA FIN R02-9 For a troubled debt restructuring involving only a modification of terms, which of the following items specified by the new terms would be compared with the carrying amount of the debt to determine whether the debtor should report a gain on restructuring?

A. B. C. D.

The total future cash payments. The present value of the debt at the original interest rate. The present value of the debt at the modified interest rate. The amount of future cash payments designated as principal repayments.

[114] Gleim #: 12.8.114 -- Source: CPA FIN R00-10 Ace Corp. entered into a troubled debt restructuring agreement with National Bank. National agreed to accept land with a carrying amount of $75,000 and a fair value of $100,000 in exchange for a note with a carrying amount of $150,000. Disregarding income taxes, what amount should Ace report as extraordinary gain in its income statement?

A. B. C. D.

$0 $25,000 $50,000 $75,000

[115] Gleim #: 12.8.115 -- Source: CPA 593 II-18 On December 30, Year 4, Hale Corp. paid $400,000 cash and issued 80,000 shares of its $1 par value common stock to its unsecured creditors on a pro rata basis pursuant to a reorganization plan under Chapter 11 of the bankruptcy statutes. Hale owed these unsecured creditors a total of $1.2 million. Hales common stock was trading at $1.25 per share on December 30, Year 4. As a result of this transaction, Hales total equity had a net increase of

A. B. C. D.

$1,200,000 $800,000 $100,000 $80,000

[116] Gleim #: 12.8.116 -- Source: Publisher, adapted Under IFRSs, an entity most likely may derecognize a financial liability if it

A. B. C. D.

Transfers amounts to a trust to be used to repay the obligation. Exchanges debt instruments with the lender that have substantially similar terms. Exchanges debt instruments with the lender that have substantially different terms. Transfers amounts in a transaction that meets the requirements of an in-substance defeasance.

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Gleim CPA Test Prep: Financial


(137 questions)

[117] Gleim #: 12.8.117 -- Source: Publisher, adapted Debtor owes Bank on a 10-year, 15% note in the amount of $100,000, plus $30,000 accrued interest. Because of financial difficulty, Debtor has been unable to make annual interest payments for the past 2 years, and the note is now due. Accordingly, Bank legally agreed to restructure Debtors debt as follows: The $30,000 of accrued interest was forgiven. Debtor was given 3 more years to pay off the debt at 8% interest. Payments are to be made annually at year-end. The present value of the payments using the prevailing rate for similar instruments of an issuer with a similar credit rating is $84,018. Under IFRSs, what does Debtor record at the date of the restructuring?

A. B. C. D.

A loss of $30,000. A gain of $30,000. A gain of $45,982. No gain or loss because no extinguishment occurred.

[118] Gleim #: 12.8.118 -- Source: CPA FIN R96-7 When a loan receivable is impaired but foreclosure is not probable, which of the following may the creditor use to measure the impairment? I. The loans observable market price. II. The fair value of the collateral if the loan is collateral dependent.

A. B. C. D.

I only. II only. Either I or II. Neither I nor II.

[119] Gleim #: 12.8.119 -- Source: CPA 1191 I-43 During Year 2, Colt Company experienced financial difficulties and is likely to default on a $500,000, 15%, 3-year note dated January 1, Year 1, and made payable to Cain National Bank. On December 31, Year 2, the bank agreed to settle the note and unpaid Year 2 interest of $75,000. The settlement amount is $410,000 cash payable on January 31, Year 3. What amount should Colt report as a gain from the debt restructuring in its Year 2 income statement?

A. B. C. D.

$165,000 $90,000 $75,000 $0

[Fact Pattern #3] Knob Co. transferred real estate pursuant to a troubled debt restructuring to Mene Corp. in full liquidation of Knobs liability to Mene.

Carrying amount of liability liquidated Carrying amount of real estate transferred Fair value of real estate transferred

$150,000 100,000 90,000

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Gleim CPA Test Prep: Financial


(137 questions)

[120] Gleim #: 12.8.120 -- Source: CPA 1193 I-57 (Refers to Fact Pattern #3) What amount should Knob report as a gain (loss) on restructuring of payables?

A. B. C. D.

($10,000) $0 $50,000 $60,000

[121] Gleim #: 12.8.121 -- Source: CPA 1193 I-58 (Refers to Fact Pattern #3) What amount should Knob report as ordinary gain (loss) on transfer of real estate?

A. B. C. D.

($10,000) $0 $50,000 $60,000

[122] Gleim #: 12.8.122 -- Source: CPA 1191 I-57 E&S Partnership purchased land for $500,000 on May 1, Year 1, paying $100,000 cash and giving a $400,000 note payable to Big State Bank. E&S made three annual payments on the note totaling $179,000, which included interest of $89,000. E&S then defaulted on the note. Title to the land was transferred by E&S to Big State, which canceled the note, releasing the partnership from further liability. At the time of the default, the fair value of the land approximated the note balance. In E&Ss Year 4 income statement, the amount of the loss should be

A. B. C. D.

$279,000 $221,000 $190,000 $100,000

[123] Gleim #: 12.8.123 -- Source: CPA 592 II-9 Wood Corp., a debtor-in-possession under Chapter 11 of the Federal Bankruptcy Code, granted an equity interest to a creditor in full settlement of a $28,000 debt owed to the creditor. At the date of this transaction, the equity interest had a fair value of $25,000. What amount should Wood recognize as a gain on restructuring of debt?

A. B. C. D.

$0 $3,000 $25,000 $28,000

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Gleim CPA Test Prep: Financial


(137 questions)

[124] Gleim #: 12.8.124 -- Source: Publisher, adapted The guidance for accounting by creditors for impairment of a loan requires recognition of an impairment when it is probable that a creditor will be unable to collect

Contractual Principal Payments A. B. C. D. Yes Yes No No

Contractual Interest Payments No Yes Yes No

[125] Gleim #: 12.8.125 -- Source: CPA FIN R99-14 Casey Corp. entered into a troubled debt restructuring agreement with First State Bank. First State agreed to accept land with a carrying amount of $85,000 and a fair value of $120,000 in exchange for a note with a carrying amount of $185,000. Disregarding income taxes, what amount should Casey report as extraordinary gain in its income statement?

A. B. C. D.

$0 $35,000 $65,000 $100,000

[126] Gleim #: 12.9.126 -- Source: Publisher, adapted The guidance for asset retirement obligations prescribes the accounting for obligations related to the retirement of long-lived tangible assets. A liability for an asset retirement obligation (ARO) within the scope of this guidance may arise solely from

A. B. C. D.

A plan to sell a long-lived asset. The improper operation of a long-lived asset. The temporary idling of a long-lived asset. The acquisition, construction, development, or normal operation of a long-lived asset.

[127] Gleim #: 12.9.127 -- Source: Publisher, adapted An entity is most likely to account for an asset retirement obligation (ARO) by

A. B. C. D.

Recognizing the fair value of the liability using an expected present value technique. Recognizing a liability equal to the sum of the net undiscounted future cash flows associated with the ARO. Decreasing the carrying amount of the related long-lived asset. Decreasing the liability for the ARO to reflect the accretion expense.

[128] Gleim #: 12.9.128 -- Source: Publisher, adapted A business entity acquired a tangible long-lived asset with an asset retirement obligation (ARO) and included asset retirement cost (ARC) in the assets carrying amount. The entity also recorded a liability for the ARO on the acquisition date. Subsequently, the entity should

A. B. C. D.

Test the ARC for impairment but not amortize it. Test the tangible long-lived asset for impairment and exclude ARC from the carrying amount for this purpose. Recognize accretion expense before the periodic change in the ARO due to revised estimates of cash flows. Discount upward revisions of the undiscounted estimated cash flows relating to the ARO by using the original credit-adjusted riskfree rate.

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Gleim CPA Test Prep: Financial


(137 questions)

[129] Gleim #: 12.9.129 -- Source: Publisher, adapted A business entity acquired a long-lived tangible asset on January 1, Year 4. On that date, it recorded a liability for an asset retirement obligation (ARO) and capitalized asset retirement cost (ARC). The estimated useful life of the long-lived tangible asset is 5 years, the credit-adjusted risk-free (CARF) rate used for initial measurement of the ARO is 10%, the initial fair value of the ARO liability based on an expected present value calculation is $250,000, and no changes occur in the undiscounted estimated cash flows used to calculate that fair value. If the entity settles the ARO on December 31, Year 8, for $420,000, what is the settlement gain or loss (rounded)?

A. B. C. D.

$(17,372) $25,000 $(152,628) $(170,000)

[130] Gleim #: 12.9.130 -- Source: CPA 0407 FIN-45 On January 1, 10 years ago, Andrew Co. created a subsidiary for the purpose of buying an oil tanker depot at a cost of $1,500,000. Andrew expected to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove underground storage tanks. It was estimated that it would cost $150,000 to dismantle the depot and remove the tanks at the end of the depots useful life. However, the actual cost to demolish and dismantle the depot and remove the tanks in the tenth year is $155,000. What amount of loss should Andrew recognize in its financial statements in Year 10?

A. B. C. D.

None. $5,000 $150,000 $155,000

[131] Gleim #: 12.9.131 -- Source: Publisher, adapted Transpone Co. is obligated on a note payable to one of its suppliers. The discounted present value of the remaining cash flows of this liability is $2,800. Transpone has informed the supplier of its intent to default on the note. After negotiations, the supplier has agreed to new terms under which the discounted present value of the cash flows will be $2,600. What amount should Transpone report for gain on extinguishment of debt in its income statement for the year prepared under IFRSs?

A. B. C. D.

$0 $200 $2,800 $4,000

[Fact Pattern #4] Employer plans to close a plant in 18 months. All of the employees of the plant will be terminated at the time of closing. Because of its need to retain employees until closing, Employer defines a one-time benefit arrangement in a plan of termination that meets the criteria established by GAAP, including communication to employees. Under the plan, each employee who provides services for the entire 18-month period will receive a bonus of $5,000 payable 6 months after termination. An employee who leaves voluntarily prior to closing will receive no part of the bonus. The expected value of the cash outflow for this one-time termination benefit is $2,000,000. Employers credit-adjusted risk-free (CARF) rate is 3% semiannually. Potentially relevant interest factors for the present value of $1 include the following:

3% for 1 period 2 periods 3 periods 4 periods

.971 .943 .915 .888

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Gleim CPA Test Prep: Financial


(137 questions)

[132] Gleim #: 12.10.132 -- Source: Publisher, adapted (Refers to Fact Pattern #4) What is the amount of the liability recognized by Employer in the first month of the future service period?

A. B. C. D.

$98,667 $107,889 $1,776,000 $1,942,000

[133] Gleim #: 12.10.133 -- Source: Publisher, adapted (Refers to Fact Pattern #4) Assume that, after 6 months, Employer revises its expected value of the cash outflow for the bonus to $1,600,000 because fewer employees are likely to remain for the full service period. What is the amount of the cumulative-effect change, if any, required to reflect this revised estimate?

A. B. C. D.

$86,311 $129,467 $517,867 $647,334

[134] Gleim #: 12.10.134 -- Source: Publisher, adapted (Refers to Fact Pattern #4) Employer plans to restructure operations at one of its plants and will therefore terminate 80 employees at that location. Employer communicates its plan on June 1, Year 4. The plan to provide one-time termination benefits meets the criteria established by GAAP. Each employee who voluntarily leaves within 21 days will receive $8,500 in 30 days. These payments were duly made July 21, Year 4. Each employee who is involuntarily terminated subsequently will receive $5,500. However, the payments for voluntary and involuntary termination benefits will not be made to more than 80 employees in total. Moreover, Employer estimates that it will reach its employee separation target within the 60-day minimum retention period. In its balance sheet dated June 30, Year 4, assuming that 20 employees accept the offer for voluntary termination, Employer should report a liability for termination benefits of

A. B. C. D.

$60,000 $440,000 $500,000 $680,000

[135] Gleim #: 12.10.135 -- Source: Publisher, adapted Grand Corporation has decided to close its plant in Littleville. Accordingly, it will terminate the 50 employees who work at the plant. Grand gives the employees 60 days notice on March 1 that it will close the plant on April 30. It will pay each employee $3,000 at the time (s)he stops providing services during the retention period. This one-time benefit arrangement is defined in a plan of termination that meets the criteria established by GAAP, including communication to employees. Grand should account for the one-time termination benefits by recognizing a liability

A. B. C. D.

At the communication date at either fair value on that date or $150,000. At the termination date for $150,000. At the communication date at fair value on the termination date. Ratably over the future service period.

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Gleim CPA Test Prep: Financial


(137 questions)

[Fact Pattern #5] Lessee Corp. enters into an operating lease of a building for 12 years at an annual rental rate of $150,000. The rental payment is due at the beginning of each year. After 6 years, Lessee commits to a plan to stop using the building in 1 year, but it will not terminate the lease. According to prices in an active property market for similar properties and lessees with similar credit ratings, Lessee can reasonably expect to sublease the building at an expected value of $120,000 per year. Lessees credit-adjusted risk-free (CARF) rate is 6% annually. The following are potentially relevant present-value factors for an annuity at 6%:

Annuity due (5 years) Annuity due (6 years) Ordinary annuity (5 years) Ordinary annuity (6 years)

4.465 5.212 4.212 4.917

[136] Gleim #: 12.10.136 -- Source: Publisher, adapted (Refers to Fact Pattern #5) Assuming no prepayments or deferrals have been recorded, Lessee should recognize what liability for continuing costs on the cease-use date?

A. B. C. D.

$133,950 $147,510 $631,800 $669,750

[137] Gleim #: 12.10.137 -- Source: Publisher, adapted (Refers to Fact Pattern #5) Assume that Lessee chose not to sublease the building for 1 year after the cease-use date but that it decided to sublease the building for the subsequent term of the lease. The sublease rental per year is $135,000, with payments due at the beginning of each year. The following are potentially relevant present-value factors for an annuity at 6%: Annuity due (4 years) Annuity due (5 years) Ordinary annuity (4 years) Ordinary annuity (5 years) 3.673 4.465 3.465 4.212

What is Lessees total adjustment to the liability for continuing costs recognized at the inception of the sublease 1 year after the cease-use date?

A. B. C. D.

$361,905 increase. $78,855 decrease. $66,975 decrease. $55,095 decrease.

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