CA Corporate Accounting 4 — Questions and Answers
Question 1: A company issues $1,000,000 of 8% bonds at 96. What is the carrying value of the bonds at issuance and how is the $40,000 discount treated over the bond's life?
- Carrying value $960,000; discount added to interest expense each period (Correct answer)
- Carrying value $1,000,000; discount ignored
- Carrying value $960,000; discount subtracted from interest expense each period
- Carrying value $1,040,000; discount amortized as interest income
Correct answer: Carrying value $960,000; discount added to interest expense each period
Bonds issued at a discount have a carrying value below face; the discount is amortized, increasing total interest expense over the bond's life.
Question 2: Under the effective-interest method, interest expense in period 1 on a $500,000 bond issued at $478,000 with a stated rate of 6% and effective rate of 7% equals:
- $30,000
- $33,460 (Correct answer)
- $35,000
- $28,680
Correct answer: $33,460
Interest expense = Carrying value × Effective rate = $478,000 × 7% = $33,460.
Question 3: Which of the following is classified as a financing activity on the statement of cash flows?
- Purchase of equipment
- Payment of dividends to shareholders (Correct answer)
- Collection of interest on a loan receivable
- Payment of income taxes
Correct answer: Payment of dividends to shareholders
Dividend payments to shareholders are financing activities because they represent transactions with equity providers.
Question 4: A company has total assets of $2,000,000, total liabilities of $800,000, and 50,000 shares outstanding at a market price of $40. What is the book value per common share?
- $24.00 (Correct answer)
- $40.00
- $16.00
- $32.00
Correct answer: $24.00
Book value per share = (Total assets – Total liabilities) ÷ Shares = $1,200,000 ÷ 50,000 = $24.00.
Question 5: Under ASC 842, an operating lease with a lease term of 5 years requires the lessee to record on the balance sheet:
- Nothing — operating leases remain off-balance-sheet
- A right-of-use asset and a lease liability (Correct answer)
- Only a lease liability, not a right-of-use asset
- A finance lease asset and accumulated amortization
Correct answer: A right-of-use asset and a lease liability
ASC 842 requires lessees to recognize a right-of-use asset and a corresponding lease liability for virtually all leases with terms exceeding 12 months.
Question 6: A deferred tax liability arises when:
- Tax expense exceeds taxes currently payable (Correct answer)
- Taxes currently payable exceed tax expense
- A tax loss carryforward is recognized
- Accelerated depreciation is used only for financial reporting
Correct answer: Tax expense exceeds taxes currently payable
A deferred tax liability occurs when taxable income is less than book income now but will be higher in a future period, creating a future tax obligation.
Question 7: Which segment of the statement of cash flows would reflect proceeds from selling long-term investments in marketable equity securities?
- Operating activities
- Investing activities (Correct answer)
- Financing activities
- Supplemental disclosure only
Correct answer: Investing activities
Buying and selling long-term investments are investing activities because they involve the acquisition and disposal of long-term assets.
CA Corporate Accounting 4
A company issues $1,000,000 of 8% bonds at 96.
What is the carrying value of the bonds at issuance and how is the $40,000 discount treated over the bond's life?