Multiple Choice Questions
1. Halifax Corporation has a December 31 fiscal year-end. As of December 31, Year 1,
the company has a debt covenant violation that results in a 10-year note payable to Nova Scotia Bank becoming due on March 1, Year 2. Halifax will be required to classify the 10-year note payable as a current liability unless it obtains a waiver from the bank
a. Prior to issuance of its Year 1 financial statements that gives the company until January 1, Year 3, to rectify the debt covenant violation.
b. Prior to December 31, Year 1, that gives the company until January 1, Year 3, to rectify the debt covenant violation.
c. Prior to issuance of its Year 1 financial statements, that gives the company until June 30, Year 2, to rectify the debt covenant violation.
d. Prior to December 31, Year 1, that gives the company until June 30, Year 2, to rectify the debt covenant violation.
2. Bull Arm Company has the following items at December 31, Year 1:
• $200,000, 5 percent note payable, due March 15, Year 2. The company has reached an agreement with the bank to refinance the note for two years, but the refinancing has not yet been completed.
• $1,000,000, 4 percent bonds payable, due December 31, Year 5. The company has violated an agreement with the bondholders to maintain a minimum balance in retained earnings, which causes the bonds to come due on January 31, Year 2.
• $50,000 overdraft on a bank account. Overdrafts are a normal part of the company's cash management plan.
Required:
Related to these items, what amount should Bull Arm Company report as current liabilities on its December 31, Year 1, balance sheet?
a. $50,000.
b. $250,000.
c. $1,050,000.
d. $1,200,000.
3.Melbourne Inc. became involved in a tax dispute with the national tax authority. Melbourne's legal counsel indicates that there is a 70 percent likelihood that the company will lose this dispute and estimates that the amount the company will have to pay is between $500,000 and $700,000, with all amounts in that range being equally likely. What amount, if any, should Melbourne recognize as a provision related to this tax dispute?
a. $0.
b. $500,000.
c. $600,000.
d. $700,000.
4. Which of the following is not a criterion that must be met before an entity recognizes a provision related to a restructuring program?
a. The entity has a detailed formal plan for the restructuring.
b. The entity has begun implementation of the restructuring.
c. The restructuring plan indicates that the restructuring will be carried out in a reasonable period of time.
d. The cost of the restructuring is reasonably estimable.
5. Past service cost related to nonvested employees should be recognized as expense
a. In the period the cost is incurred.
b. Over the nonvested employees' remaining vesting period.
c. Over the nonvested employees' estimated remaining working life.
d. Over the nonvested employees' estimated life expectancy.
6. When stock options are granted to employees, what is the basis for determining the amount of compensation cost that will be recognized as expense?
a. The fair value of the service provided by the employees receiving the options at the grant date.
b. The fair value of the stock options at the exercise date.
c. The fair value of the stock options at the grant date.
d. There is no recognition of expense related to stock options.