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1. For a liability to exist, a. the identity of the party
1. For a liability to exist,
a. the identity of the party owed must be known.
b. the exact amount must be known.
c. a past transaction or event must have occurred.
d. an obligation to pay cash in the future must exist.
____ 2. Which of the following represents a liability?
a. The obligation to pay for goods that a company expects to order from suppliers next year.
b. The obligation to provide goods that customers have ordered and paid for during the current year.
c. The obligation to pay interest on a five-year note payable that was issued the last day of the current year.
d. The obligation to distribute shares of a company's own common stock next year as a result of a stock dividend declared near the end of the current year.
____ 3. At December 31, 2014, Ambrose Sales & Service has a $100,000, 120-day note payable outstanding. The company has followed the policy of replacing the note rather than repaying it over the last three years. The company's treasurer says that this policy is expected to continue indefinitely, and the arrangement is acceptable to the bank to which the note was issued. The proper classification of the note on the December 31, 2014, balance sheet is
a. dependent on the intention of management.
b. dependent on the actual ability to refinance.
c. current liability, unless specific refinancing criteria are met.
d. noncurrent liability.
____ 4. Which of the following does NOT meet the FASB's definition of a liability?
a. The signing of a three-year employment contract at a fixed annual salary
b. An obligation to provide goods or services in the future
c. A note payable with no specified maturity date
d. An obligation that is estimated in amount
____ 5. Which of the following statements characterizes an operating lease?
a. The lessee records depreciation and interest.
b. The lessee records the lease obligation related to the leased asset.
c. The lessor records depreciation and lease revenue.
d. The lessor transfers title of the leased property to the lessee for the duration of the lease term.
____ 6. Generally accepted accounting principles require that certain lease agreements be accounted for as purchases. The theoretical basis for this treatment is that a lease of this type
a. effectively conveys all of the benefits and risks incident to the ownership of property.
b. is an example of form over substance.
c. provides the use of the leased asset to the lessee for a limited period of time.
d. must be recorded in accordance with the concept of cause and effect.
____ 7. In a lease that is recorded as an operating lease by the lessee, the equal monthly rental payments should be
a. allocated between interest expense and depreciation expense.
b. allocated between a reduction in the liability for leased assets and interest expense.
c. recorded as a reduction in the liability for leased assets.
d. recorded as rental expense.
____ 8. One of the four general criteria for a capital lease specifies that the lease term be equal to or greater than
a. the estimated economic life of the property.
b. 90 percent of the estimated economic life of the property.
c. 75 percent of the estimated economic life of the property.
d. 50 percent of the estimated economic life of the property.
____ 9. For a capital lease, the amount recorded initially by the lessee as a liability should
a. exceed the present value at the beginning of the lease term of minimum lease payments during the lease term.
b. exceed the total of the minimum lease payments during the lease term.
c. not exceed the fair value of the leased property at the inception of the lease.
d. equal the total of the minimum lease payments during the lease term.
____ 10. McCabe Institute leased a new machine having an expected useful life of 12 years. The noncancelable lease term is 10 years, and McCabe may exercise a purchase option at the end of the noncancelable term. The machine should be capitalized by McCabe and depreciated over
a. 10 or 12 years at McCabe's option.
b. 12 years.
c. 10 years.
d. 9 years.
____ 11. What are the three types of period costs that a lessee experiences with capital leases?
a. Interest expense, amortization expense, executory costs
b. Amortization expense, executory costs, lease expense
c. Executory costs, interest expense, lease expense
d. Lease expense, executory costs, initial costs
____ 12. An eight-year capital lease specifies equal minimum annual lease payments. Part of this payment represents interest and part represents a reduction in the net lease liability. The portion of the minimum lease payment in the fourth year applicable to the reduction of the net lease liability should be
a. the same as in the third year.
b. less than in the third year.
c. less than in the fifth year.
d. more than in the fifth year.
____ 13. Lease X does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease Y does not transfer ownershi
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