Question 1 1. A capital lease is recorded in the accounting records of the lessee by an entry: Answer A) Debiting Rent Expense and crediting
1. A capital lease is recorded in the accounting records of the lessee by an entry:
A) Debiting Rent Expense and crediting Cash each time a lease payment is made.
B) Debiting Cash and crediting Rental Revenue each time a lease payment is received.
C) Debiting an asset account and crediting a liability account for the present value of the future lease payments.
D) Debiting an asset account and crediting Sales for the present value of the future lease payments.
2. Which of the following are factors in determining pension expense?
A) Average age, retirement age, and life expectancy of employees.
B) Employee turnover rate.
C) Expected rate of return to be earned by the pension fund.
D) All three of the above.
3. A liability for deferred income taxes represents:
A) Income taxes on earnings already reported in the income statement, but that will be taxed in future periods.
B) Income taxes already paid on earnings which have not yet been reported in the company’s income statement.
C) Income tax obligations being disputed with the Internal Revenue Service.
D) Income taxes levied in prior years which are now past due.
4. Which of the following is an example of a loss contingency that should be disclosed in a footnote to a company’s financial statements?
A) The president of the company has threatened to resign if the board of directors does not vote to increase executive salaries.
B) A lawsuit has been brought against the company, but the company hopes to prevail in the suit and thereby avoid any liability.
C) The allowance for uncollectible accounts receivable is estimated at $200,000.
D) The company owns special-purpose machinery which, if sold, would probably bring a price less than its current book value.
5. Day Company is a defendant in a lawsuit alleging damages of $4 billion. The litigation is expected to continue for several years, and no reasonable estimate can be made at this time of Day Company’s ultimate financial responsibility. This situation is an example of:
A) Off-balance-sheet financing.
B) A loss contingency which should be disclosed in notes to Day Company’s financial statements.
C) An estimated liability which must appear in Day Company’s balance sheet.
D) A loss in purchasing power caused by inflation.
6. HotRock Studio issues a contract to a new recording artist to produce a number of albums over the next five years at $1 million per album. This situation is an example of:
A) A contingent liability which should be recorded in the accounting records.
B) A contingent liability requiring footnote disclosure.
C) An estimated liability, since the number of albums to be produced is not yet determined.
D) A commitment which, if material, may be disclosed in a footnote.