True & False Statements Accounting

Chapters: 8, 9, 10, 11, 12, 13

Chapter 9:
1. All plant assets (fixed assets) must be depreciated for accounting purposes.
2. When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a
Land Improvements account.
3. When purchasing delivery equipment, sales taxes and motor vehicle licenses should be charged
to Delivery Equipment.
4. Once cost is established for a plant asset, it becomes the basis of accounting for the
asset unless the asset appreciates in value, in which case, fair value becomes the basis
for accountability.
5. Land is reported on the statement of financial position at its cost less accumulated
depletion, or at its fair value, whichever is higher.
6. Land improvements are reported on the statement of financial position at their cost less
accumulated depreciation.
7. Accumulated depreciation is reported on the statement of financial position as a
deduction from plant assets.
8. Recording depreciation on plant assets affects the statement of financial position and
the income statement.
9. The depreciable cost of a plant asset is its original cost minus obsolescence.
10. Recording depreciation each period is an application of the expense recognition
principle.
11. The Accumulated Depreciation account represents a cash fund available to replace
plant assets.
12. In calculating depreciation, both plant asset cost and useful life are based on estimates.
13. Using the units-of-activity method of depreciating factory equipment will generally result
in more depreciation expense being recorded over the life of the asset than if the
straightline method had been used.
14. Residual value is not subtracted from plant asset cost in determining depreciation
expense under the declining-balance method of depreciation.
15. The declining-balance method of depreciation is called an accelerated depreciation
method because it depreciates an asset in a shorter period of time than the asset's
useful life.
16. Under the double-declining-balance method, the depreciation rate used each year
remains constant.
17. Tax laws often do not require the taxpayer to use the same depreciation method on the
tax return that is used in preparing financial statements
18. Depending on whether a company uses the straight-line or declining-balance method,
annual depreciation expense varies, but total depreciation is the same.
19. A corporation may use straight-line depreciation in the financial statements to maximize
net income, and at the same time, use an accelerated-depreciation method on the tax
return to minimize income taxes.
20. Component depreciation is a method used to ensure that the depreciation rate remains
constant from year to year.
21. Component depreciation is the method of depreciation recommended for an asset that
is expected to be significantly more productive in the first half of its useful life.

22. IFRS allows companies to revalue plant assets to fair value at the reporting date. 23.
Assets that are experiencing rapid price changes must be revalued on an annual basis,
otherwise less frequent revaluation is acceptable.

24. The journal entry to record a revaluation when the asset's price has increased includes a
credit to the account Revaluation Surplus.

25. The "Revaluation Surplus" account that results from a revaluation of plant assets to fair
value is reported on the statement of financial position as a contra account to the plant asset
that was revalued.

26. A change in the estimated useful life of a plant asset may cause a change in the amount
of depreciation recognized in the current and future periods, but not to prior periods.

27. A change in the estimated residual value of a plant asset requires a restatement of prior
years' depreciation.

28. To determine a new depreciation amount after a change in estimate of a plant asset's
useful life, the asset's remaining depreciable cost is divided by its remaining useful life.

29. Additions and improvements to a plant asset that increase the asset's operating
efficiency, productive capacity, or expected useful life are generally expensed in the period
incurred.

30. Capital expenditures are expenditures that increase the company's investment in
productive facilities.

31. Ordinary repairs should be recognized when incurred as revenue expenditures. 32. A
characteristic of capital expenditures is that the expenditures occur frequently during the
period of ownership.

33. Revenue expenditures are reported on the statement of financial position and would
include the cost to paint a building.

34. Once an asset is fully depreciated, no additional depreciation can be taken even though
the asset is still being used by the business.

35. The fair value of a plant asset is always the same as its book value.

36. If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal
occurs.

37. A loss on disposal of a plant asset can only occur if the cash proceeds received from the
asset sale is less than the asset's book value.

38. The book value of a plant asset is the amount originally paid for the asset less anticipated
residual value.

39. A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the
same way
 40. A plant asset must be fully depreciated before it can be removed from the books.

41. If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold
section of the income statement.

42. Depletion cost per unit is computed by dividing the total cost of a natural resource by the
estimated number of units in the

43. The Accumulated Depletion account is deducted from the cost of the natural resource in
the statement of financial position.

44. Depletion expense for a period is only recognized on natural resources that have been
extracted and sold during the period.

45. The cost of natural resources is not allocated to expense because the natural resources
are not replaceable.

46. Natural resources include standing timber and resources extracted from the ground,
such as oil, gas, and minerals.

47. The depletion associated with extracting copper from a mine will be reported on the
statement of financial position if the company has not yet sold the copper.

48. Costs incurred during the research phase are reported as an intangible asset on the
statement of financial position.

49. Costs incurred in the development phase after technological feasibility has been
achieved are expensed as incurred.

50. If an acquired franchise or license has an indefinite life, the cost of the asset is not
amortized.

51. When an entire business is purchased, goodwill is the excess of cost over the book value
of the net assets acquired

52. Development costs incurred after technological feasibility has been achieved are charged to
an expense account.

53. The cost of a patent should be amortized over its legal life or useful life, whichever is shorter.

54. The balances of the major classes of plant assets and accumulated depreciation by major
classes should be disclosed in the statement of financial position or notes

55. The asset turnover ratio is calculated as total sales divided by ending total assets.

56. Franchises can be classified as a property, plant, and equipment item or as an intangible
asset.

57. U.S. GAAP requires companies to use component depreciation for assets which qualify for
the treatment

58. U.S. GAAP requires companies to expense all research and development costs as incurred.
59. Gains on exchanges of assets when the exchange has commercial substance are recognized
under both IFRS and U.S. GAAP.

60. Changes in depreciation method under IFRS are reported in current and future periods, but
under U.S. GAAP such changes are treated as prior period adjustments.

61. IFRS permits revaluation of all intangible assets, whereas U.S. GAAP prohibits revaluation of
intangible assets.

62. An exchange of plant assets has commercial substance if the future cash flows change as a
result of the exchange

63. Companies record a gain or loss on the exchange of plant assets because most exchanges
have commercial substance.

64. When plant assets are exchanged, the cost of the new asset is the book value of the old
asset plus any cash paid.

65. When constructing a building, a company is permitted to include the acquisition cost and
certain interest costs incurred in financing the project.

66. Recognition of depreciation permits the accumulation of cash for the replacement of the
asset.

67. When an asset is purchased during the year, it is not necessary to record depreciation
expense in the first year under the declining-balance depreciation method.

68. Depletion expense is reported in the income statement as an operating expense.

69. Goodwill is not recognized in accounting unless it is acquired from another business
enterprise.

70. A loss on the exchange of plant assets occurs when the fair value of the old asset is less than
its book value.
Chapter 11 : True & false

1) Bond Corporation issues 5,000, 10-year, 8%, €1,000 bonds dated January 1, 2020, at
103. The journal entry to record the issuance will show a

a. debit to Cash of €5,000,000. b. credit to Bonds Payable for €5,150,000.

c. credit to Bonds Payable for €5,030,000. d. credit to Cash for €5,150,000

2) Rikki Company received proceeds of €188,000 on 10-year, 6% bonds issued on January 1,

2020. The bonds had a face value of €200,000, pay interest annually on December 31, and
have a call price of 101. Rikki uses the straight-line method of amortization.

What is the amount of interest Rikki must pay the bondholders in 2020?

a. €11,200 b. €12,000

c. €13,200 d. €10,800

3) A HK $600,000 bond was retired at 102 when the carrying value of the bond was
HK $622,000. The entry to record the retirement would include a

a. gain on bond redemption of HK $12,000. b. loss on bond redemption of HK $10,000.

c. loss on bond redemption of HK $12,000. d. gain on bond redemption of HK $10,000

4) Brooks Company received proceeds of €188,500 on 10-year, 8% bonds issued on

January 1, 2018. The bonds had a face value of €200,000, pay interest annually on
January 1, and have a call price of 101. Brooks uses the straight-line method of
amortization.

Brooks Company decided to redeem the bonds on January 1, 2020. What amount of gain or
loss would Brooks report on its 2020 income statement?

a. €9,200 gain b. €11,200 gain

c. €11,200 loss d. €9,200 loss

5) Robin Corporation retires its £800,000 face value bonds at 104 on January 1,
following the payment of annual interest. The carrying value of the bonds at the
redemption date is £829,960. The entry to record the redemption will include a

a. credit of £2,040 to Loss on Bond Redemption. b. debit of £2,040 to Loss on Bond

Redemption. c. credit of £32,040 to Premium on Bonds Payable. d.
debit of £32,000 to Premium on Bonds Payable

6) Garland Company received proceeds of €188,000 on 10-year, 6% bonds issued on

January 1, 2018. The bonds had a face value of €200,000, pay interest annually on
January 1, and have a call price of 101. Garland uses the straight-line method of
amortization.

What is the carrying value of the bonds on January 1, 2020?

7) On January 1, Wellness Corporation issues $3,000,000, 5-year, 12% bonds at 95 with
interest payable on January 1. The entry on December 31 to record accrued bond interest
and the amortization of bond discount using the straight-line method will include a debit to

a. Interest Expense, $180,000. b. Interest Expense, $360,000.

c. Bonds Payable, $30,000. d. Bonds Payable, $15,000

8) Dakota Company issued €700,000 of 6%, 5-year bonds at 98, with interest paid annually.
Assuming straight-line amortization, what is the carrying value of the bonds after one
year?

a. €686,000 b. €683,200 c. €688,800 d. €697,200

1. Each bondholder may vote for the board of directors in proportion to the number of
bonds held.

2. Bond interest paid by a corporation is an expense, whereas dividends paid are

not an expense of the corporation.

3. Callable bonds are bonds that can be converted into common stock at the
bondholder’s option.

4. A debenture bond is an unsecured bond which is issued against the general credit of
the borrower

5. Bonds are a form of interest-bearing notes payable.

6. The holder of a convertible bond can convert an interest payment received into
a cash dividend paid on common stock if the dividend is greater than the interest
payment.

7. The board of directors may authorize more bonds than are issued.

8. Gains and losses are not recognized when convertible bonds are converted into
common stock.

9. Generally, convertible bonds do not pay interest.

10. The contractual interest rate is always equal to the market interest rate on the date
that bonds are issued.

11. If $150,000 face value bonds are issued at 103, the proceeds received will be
$103,000.

12. Discount on bonds is an additional cost of borrowing and should be recorded as

interest expense over the life of the bonds.

13. If a corporation issued bonds at an amount less than face value, it indicates
that the corporation has a weak credit rating.
14. Each bondholder may vote for the board of directors in proportion to the number of
bonds held.

15. Bond interest paid by a corporation is not an expense, but dividends paid are an
expense of the corporation.

16. A debenture bond is an unsecured bond which is issued against the general credit
of the borrower.

17. Neither corporate bond interest nor dividends are deductible for tax purposes.

18. A corporation that issues bonds at a discount will recognize interest expense
at a rate which is greater than the market interest rate.

19. If bonds are issued at a discount, the issuing corporation will pay a principal amount
less than the face amount of the bonds on the maturity date.

20. If bonds are issued at a premium, the carrying value of the bonds will be greater
than the face value of the bonds for all periods prior to the bond maturity date.

21. If the market interest rate is greater than the contractual interest rate, bonds will sell
at a discount.

22. If $800,000, 6% bonds are issued on January 1, and pay interest annually, the
amount of interest paid on the following January 1 will be $48,000.

23. If bonds sell at a premium, the interest expense recognized each year will be greater
than the contractual interest rate.

24. A CHF10,000,000 bond with a quoted prices of 101 ¼ is sold for CHF10,250,000.

25. If HK$1,800,000, 5%, bonds are issued on January 1, and pay interest
annually, the amount of interest paid the following January will be HK$90,000.

26. Bonds are reported on the statement of financial position at their carrying value.

27. If $2,000,000 par value bonds with a carrying value of $1,990,400 are redeemed at
97, a loss on redemption will be recorded.

28. The loss on bond redemption is the difference between the cash paid and the
carrying value of the bonds.

29. If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a
loss on redemption will be recorded.

30. Each payment on a mortgage note payable consists of interest on the original
balance of the loan and a reduction of the loan principal.

31. A long-term note that pledges title to specific property as security for a loan is
known as a mortgage payable.
32. The amount by which the principal of a mortgage will be reduced in the next year will
be reported on the statement of financial position as a current liability.

33. Non-current liabilities are reported in a separate section of the statement of

financial position immediately below current liabilities.

34. The times interest earned is computed by dividing net income by interest expense.

35. The debt to assets ratio is computed by dividing non-current liabilities by total
assets.

36. The effective-interest method of amortization results in varying amounts of

amortization and interest expense per period but a constant interest rate.

37. Bond premiums must be amortized using the effective-interest method.

38. Bond discounts must be amortized using the straight-line method.

39. Current maturities of long-term debt are often identified as long-term debt due
within one year on the statement of financial position.

40.The terms of the bond issue are set forth in a formal legal document called a
bond indenture.

41. The carrying value of bonds at maturity should be equal to the face value of the
bonds.

42. Non-current liabilities are reported in a separate section of the statement of

financial position immediately before current liabilities

Chapter 12:

1. A corporation is not an entity which is separate and distinct from its owners

2. A corporation can be organized for the purpose of making a profit or it may be not-for
profit.

3. A corporation acts under its own name rather than in the name of its shareholders.

4. If a corporation pays taxes on its income, then shareholders will not have to pay taxes
on the dividends received from that corporation.

5. A corporation must be incorporated in each country in which it does business.

6. A shareholder of ordinary shares has the right to vote in the election of the board of
directors.

7. Shareholders have the r4ight to keep the same percentage ownership when new
shares are issued.

8. As soon as a corporation is authorized to issue shares, an accounting journal entry

should be made recording the total value of the shares authorized.
9. The par value of ordinary shares must always be equal to its fair value on the date the
shares are issued.

10. When no-par value shares do not have a stated value, the entire proceeds from the
issuance of the shares becomes legal capital.

11. The fair value of a corporation's shares is determined by the number of shares that
the corporation has been authorized to issue

12. A privately traded corporation would be traded on a national securities exchange

such as the London Stock Exchange.

13. In most countries, a corporation’s creditors’ claim can only be paid out of that
corporation’s assets.

14. Ownership rights in a corporation are evidenced by ordinary shares.

15. Ownership rights of a shareholder include the right to be involved in the daily
operations of the corporation.

16. Corporations can pay dividends out of share capital in most countries.

17. When no-par ordinary shares that have a stated value are issued, the stated value is
credited to Share Capital-Ordinary.

18. The par value of shares issued for noncash assets is never a factor in determining the
cost of the assets received.

19. The acquisition of treasury shares by a corporation increases total assets and total
equity.

20. Treasury shares purchased for €25 per share that are reissued at €20 per share,
result in a Loss on Sale of Treasury Shares being recognized on the income statement.

21. Treasury Shares is a contra equity account.

22. The number of ordinary shares outstanding can never be greater than the number of
shares issued.

23. When treasury shares are purchased, the cost is debited to Share Capital - Ordinary.

24. The priorities associated with preference shares include the right to vote before the
ordinary shareholders.

25. Preference shareholders have the right to receive assets in the event of liquidation
before the ordinary shareholders.

26. Preference shares have contractual preference over ordinary shares in certain areas.

27. Preference shareholders generally do not have the right to vote for the board of
directors.
28. Dividends in arrears on cumulative preference shares are considered a liability.

29. Dividends may be declared and paid in cash or shares.

30.Cash dividends are not a liability of the corporation until they are declared by the
board of directors.

31. The amount of a cash dividend liability is recorded on the date of record because it is
on that date that the persons or entities who will receive the dividend are identified.

32. A 3-for-1 ordinary share split will increase total equity but reduce the par or stated
value per share.

33. Unpaid dividends on non-cumulative preference shares are called dividends in

arrears.

34. Net losses reduce the balance of Share Capital–Ordinary

35. Retained earnings represents the amount of cash available for dividends.

36. Net income of a corporation should be closed to retained earnings and net losses
should be closed to the share premium account.

37. A debit balance in the Retained Earnings account is identified as a deficit.

38. Retained earnings that are restricted are unavailable for dividends.

39. Restricted retained earnings are available for preference share dividends but
unavailable for ordinary share dividends.

40. A comprehensive equity section in the statement of financial position will list the
names of individuals who are eligible to receive dividends on the date of record.

41. Ordinary Share Dividends Distributable is shown in the equity section of the
statement of financial position.

42. Return on ordinary shareholders’ equity is computed by dividing net income by

ending ordinary shareholders’ equity.

43. The share capital category on the statement of financial position includes both
preference and ordinary shares.

44. The term "reserves" is used for forms of equity other than that contributed by
shareholders.

45. When a statement of changes in equity is presented, a retained earnings statement

is not necessary.

46. Changes in the separate accounts comprising equity are not disclosed in the
statement of changes in equity.
47. A statement of changes in equity shows the changes in each equity account and in
total that have occurred during the year.

48. A book value per ordinary share is the same amount as the market value per share.

49. Organization costs are capitalized by debiting an intangible asset entitled

Organization Costs.

50. The cash proceeds from issuing par value shares may be equal to or greater than,
but not less than par value.

51. The cost of a noncash asset acquired in exchange for ordinary shares should be
either the fair value of the consideration given up, or the fair value of the consideration
received, whichever is more clearly determinable

52. Under the cost method, Treasury Shares is debited at the price paid to reacquire the
shares, and the same amount is credited to Treasury Shares when the shares are sold.

53. A dividend declared out of share capital or share premium is termed a liquidating
dividend.

54. Ordinary Share Dividends Distributable is reported as share premium in the equity
section.

55. Companies generally disclose retained earnings in the Notes to the financial
statements.