D104 Intermediate Accounting II - Set 5 - Part 1

Correct Answer: Double-declining balance method

The double-declining balance method does not subtract the salvage value when computing depreciation, which differs from other methods.

Correct Answer: At the fair value of either the stock or the property/service received, whichever is more clearly determinable

The general rule is to value the stock or the property/service at fair value, using whichever is more clearly determinable.

Correct Answer: It increases

As the discount is amortized over time, the carrying value of the bond increases until it equals the face value at maturity.

Correct Answer: Increases interest expense

Amortizing bond discounts increases interest expense because the discount represents additional interest that must be paid over time.

Correct Answer: They are non-compensatory

ESPPs are considered non-compensatory if the discount is 5% or less and all employees can participate equally.

Correct Answer: EPS decreases

Converting bonds into common stock increases the number of shares outstanding, which decreases earnings per share.

Correct Answer: Cash dividends / (Net income – Preferred dividends)

The payout ratio is the percentage of net income that is paid out as dividends to shareholders.

Correct Answer: Proportional method

The proportional method is used when the fair value of both the bond and the warrants is known to allocate the proceeds accordingly.

Correct Answer: Decreases net income

Issuing stock options reduces net income because the cost of the options is recognized as compensation expense.

Correct Answer: Tested annually for impairment

Goodwill is not amortized but is tested annually for impairment to ensure its carrying value is not overstated.

Correct Answer: A security that reduces earnings per share if converted

Dilutive securities, such as convertible bonds and stock options, have the potential to decrease earnings per share if exercised or converted.

Correct Answer: When the market rate is greater than the stated rate

A bond is sold at a discount when the market interest rate exceeds the stated rate on the bond, making it less attractive to investors.

Correct Answer: Debit cash, credit bonds payable, credit premium on bonds payable

When a bond is issued at a premium, cash is debited for the total amount received, and the premium is recorded as a separate credit.

Correct Answer: To measure a company's ability to meet interest payments

The times interest earned ratio measures how many times a company can cover its interest obligations with its earnings.

Correct Answer: Debit bonds payable, debit loss on bond redemption, credit cash

When bonds are reacquired for more than the carrying value, the difference is recorded as a loss on bond redemption.

Correct Answer: At their present value

Noncurrent liabilities are reported at their present value, which accounts for the time value of money.

Correct Answer: Bonds payable due in 10 years

Bonds payable due in 10 years are considered noncurrent liabilities since they are not due within the next year.

Correct Answer: Recorded as a liability and charged to expense

Contingent losses that are probable and reasonably estimable must be recorded as a liability and charged to expense.

Correct Answer: To assess a company’s short-term liquidity

The acid-test ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.

Correct Answer: Straight-line method

The straight-line method assumes depreciation is a function of time, applying the same expense amount each period over the asset’s life.