12 lease: JK company has the following balances on the 2008 B/S: current assets=70,000, long-term assets=250,000, current liability=40,000, long-term debt=130,000, and stockholders equity=150,000. The company has an operating lease contract. It promises to pay a lessor $10,000 annually for the next three years. The company s average borrowing rate (discount rate) is 10%. If the lease is recorded as a capital lease, what will be the long-term asset total? Answer a. about 250,500 b. about 274,868 c. about 285,131 d. about 296,321 Question 13 cc4-1 M4-O3-Current assets: Which one is not a correct practice under the GAAP? Answer a. trading securities are in current assets, but securities held to maturity is in long-term assets (non current) b. Holding gain or loss for trading and available for sale securities are not reported on income statement. c. Holding gain or loss for held-to-maturity securities are estimated at the end of every accounting period d. Generally cash equivalents include the investments purchased within three months of their maturity value. Question 14 Q12-O3-Equity (treasury): The following items discusses the practices related to the treasury stock. Please choose the item that is not a correct practice. Answer a. To increase the stock price, firms may have treasury stocks. b. Treasury stock is the own common share repurchased by the firm. c. The profit from sales of the treasury stocks is recorded as a capital increase. d. Treasury stock is recorded as an asset on B/S Question 15 stock option2: Now FASB required that all employee stock options should be expensed on income statement. On Jan. 2005, AA company granted total $100,000 (fair value) of stock options to the employee. The exercise price is equal to the market price at the grant time. The employees cannot exercise the options until 2007. According to the new requirement, the company should record an expense $50,000 for 2005 and $50,000 for 2006. During 2008, all options are exercised. What is the effect on the free cash flows for 2005? Answer a. increase b. not determinable c. no effect d. decrease Question 16 Q5-O4-offB/S: Which one is false? Answer a. Off-balance sheet financing may be frequently used by firms who has stronger restrictions on bond covenant. b. Off-balance-sheet financing mostly decreases return on assets (ROA) c. Off-balance sheet financing may reduce the total assets and total liabilities on B/S. d. Generally off-balance sheet financing is not ethical in terms of the users. Question 17 Q7-O4-earnings quality and GAAP: Users are looking for firms who can generate more future cash flows. which one may mostly decrease earnings quality when the users examine the earnings figures as the indicator of future cash flows? Answer a. R&D expense b. Credit sales c. Accruals d. Unrealized holding gain or loss. Question 18 earnings conservatism ratio: Which one is the definition (or implication) of earnings conservatism ratio? Answer a. It is the ratio used as a proxy of firm performance b. It implies the effective tax rate for the firm c. It is used to evaluate the degree of aggressiveness in the firm s accounting d. None of the above Question 19 cc4-2 Q11-O3-Option: Under the disclosure provisions of SFAS No. 123, the estimated stock option expense for 2006 would be $15,500 for W Co.. When the company records this expense: Answer a. the capital decreases by 15,500 b. The equity on B/S has no effect. c. The total assets increase by 15,500 d. Retained earnings account has no effect