WGU D105 – Intermediate Accounting
III Exam Final Exam Prep (Latest Update
) Questions and Verified
Answers | 100% Correct | Grade A.
1. A company issues $1,000,000 of bonds at a discount. The bonds have
a stated interest rate of 6%, while the market rate at issuance is 8%.
Which statement best describes the effect of the discount on the
bonds?
A. The discount decreases interest expense over the life of the bonds.
B. The discount causes the effective interest expense to exceed the cash
interest paid.
C. The discount causes the cash interest paid to exceed the effective
interest expense.
D. The discount is reported as an immediate loss on the income
statement.
Answer: B. The discount causes the effective interest expense to
exceed the cash interest paid.
Rationale: When bonds are issued at a discount, the carrying amount is
below face value. Under the effective-interest method, interest expense
is calculated using the market rate applied to the beginning carrying
amount. Because the market rate exceeds the stated rate, interest
expense is greater than the cash interest paid. The difference increases
,the bond's carrying amount over time until it reaches face value at
maturity.
2. On January 1, a company issues $500,000 of 10-year, 7% bonds for
$480,000. Interest is paid annually. If the effective interest rate is 8%,
what is the first year's interest expense?
A. $33,600
B. $35,000
C. $38,400
D. $40,000
Answer: C. $38,400
Rationale: Under the effective-interest method, interest expense equals
the beginning carrying value multiplied by the effective market rate.
Therefore, $480,000 × 8% = $38,400. The company pays only $35,000 in
cash interest ($500,000 × 7%), so $3,400 is added to the bond's carrying
value as the discount is amortized.
3. A company has a bond payable with a carrying amount of $950,000
and a face value of $1,000,000. The bond's effective interest rate is 9%,
and its stated rate is 8%. What amount of interest expense should be
recognized for the period?
A. $76,000
B. $80,000
C. $85,500
D. $90,000
,Answer: C. $85,500
Rationale: Interest expense under the effective-interest method is based
on the bond's carrying value, not its face value. The calculation is
$950,000 × 9% = $85,500. Cash interest is based on face value and the
stated rate, which would be $80,000. The $5,500 difference represents
discount amortization.
4. Which characteristic distinguishes a finance lease from an operating
lease for a lessee under current U.S. GAAP?
A. A finance lease is always recorded as an expense immediately.
B. A finance lease transfers substantially all the risks and rewards
associated with ownership.
C. An operating lease never requires recognition of a lease liability.
D. A finance lease can only involve real estate.
Answer: B. A finance lease transfers substantially all the risks and
rewards associated with ownership.
Rationale: A finance lease is, in substance, a financing arrangement
because the lessee obtains control of the right to use the asset and
substantially all of the economic benefits and risks associated with
ownership. Although both operating and finance leases generally result
in recognition of a right-of-use asset and lease liability, finance leases
have characteristics similar to asset purchases financed with debt.
, 5. A company enters into a five-year lease and recognizes a right-of-use
asset and lease liability. Which of the following is generally true
regarding the initial measurement of the lease liability?
A. It is measured at the total undiscounted lease payments.
B. It is measured at the present value of lease payments.
C. It equals the fair value of the underlying asset in every case.
D. It equals the first year's lease payment.
Answer: B. It is measured at the present value of lease payments.
Rationale: The lease liability represents the present obligation to make
future lease payments. Therefore, it is initially measured at the present
value of the lease payments that are included in the lease
measurement. Discounting reflects the time value of money and results
in recognition of a liability at an amount representing the present value
of the future payments.
6. A company purchases equipment for $600,000 by issuing a note
requiring repayment of $726,000 in three years. The market interest
rate is 10%. Which amount should initially be recorded as the note
payable?
A. $600,000
B. $660,000
C. $726,000
D. $798,600
Answer: A. $600,000
III Exam Final Exam Prep (Latest Update
) Questions and Verified
Answers | 100% Correct | Grade A.
1. A company issues $1,000,000 of bonds at a discount. The bonds have
a stated interest rate of 6%, while the market rate at issuance is 8%.
Which statement best describes the effect of the discount on the
bonds?
A. The discount decreases interest expense over the life of the bonds.
B. The discount causes the effective interest expense to exceed the cash
interest paid.
C. The discount causes the cash interest paid to exceed the effective
interest expense.
D. The discount is reported as an immediate loss on the income
statement.
Answer: B. The discount causes the effective interest expense to
exceed the cash interest paid.
Rationale: When bonds are issued at a discount, the carrying amount is
below face value. Under the effective-interest method, interest expense
is calculated using the market rate applied to the beginning carrying
amount. Because the market rate exceeds the stated rate, interest
expense is greater than the cash interest paid. The difference increases
,the bond's carrying amount over time until it reaches face value at
maturity.
2. On January 1, a company issues $500,000 of 10-year, 7% bonds for
$480,000. Interest is paid annually. If the effective interest rate is 8%,
what is the first year's interest expense?
A. $33,600
B. $35,000
C. $38,400
D. $40,000
Answer: C. $38,400
Rationale: Under the effective-interest method, interest expense equals
the beginning carrying value multiplied by the effective market rate.
Therefore, $480,000 × 8% = $38,400. The company pays only $35,000 in
cash interest ($500,000 × 7%), so $3,400 is added to the bond's carrying
value as the discount is amortized.
3. A company has a bond payable with a carrying amount of $950,000
and a face value of $1,000,000. The bond's effective interest rate is 9%,
and its stated rate is 8%. What amount of interest expense should be
recognized for the period?
A. $76,000
B. $80,000
C. $85,500
D. $90,000
,Answer: C. $85,500
Rationale: Interest expense under the effective-interest method is based
on the bond's carrying value, not its face value. The calculation is
$950,000 × 9% = $85,500. Cash interest is based on face value and the
stated rate, which would be $80,000. The $5,500 difference represents
discount amortization.
4. Which characteristic distinguishes a finance lease from an operating
lease for a lessee under current U.S. GAAP?
A. A finance lease is always recorded as an expense immediately.
B. A finance lease transfers substantially all the risks and rewards
associated with ownership.
C. An operating lease never requires recognition of a lease liability.
D. A finance lease can only involve real estate.
Answer: B. A finance lease transfers substantially all the risks and
rewards associated with ownership.
Rationale: A finance lease is, in substance, a financing arrangement
because the lessee obtains control of the right to use the asset and
substantially all of the economic benefits and risks associated with
ownership. Although both operating and finance leases generally result
in recognition of a right-of-use asset and lease liability, finance leases
have characteristics similar to asset purchases financed with debt.
, 5. A company enters into a five-year lease and recognizes a right-of-use
asset and lease liability. Which of the following is generally true
regarding the initial measurement of the lease liability?
A. It is measured at the total undiscounted lease payments.
B. It is measured at the present value of lease payments.
C. It equals the fair value of the underlying asset in every case.
D. It equals the first year's lease payment.
Answer: B. It is measured at the present value of lease payments.
Rationale: The lease liability represents the present obligation to make
future lease payments. Therefore, it is initially measured at the present
value of the lease payments that are included in the lease
measurement. Discounting reflects the time value of money and results
in recognition of a liability at an amount representing the present value
of the future payments.
6. A company purchases equipment for $600,000 by issuing a note
requiring repayment of $726,000 in three years. The market interest
rate is 10%. Which amount should initially be recorded as the note
payable?
A. $600,000
B. $660,000
C. $726,000
D. $798,600
Answer: A. $600,000
