Question : 31. Firms frequently sign contracts promising to pay defined amounts in : 1230339

31. Firms frequently sign contracts promising to pay defined amounts in the future in return for future benefits. If the firm has not received past or current benefits, but will receive the benefits in the future, accounting treats the obligation as a(n)  _____ contract and typically _____. A. contingent; does recognize a liabilityB. executory; does not recognize a liabilityC. executory; does recognize a liabilityD. contingent; does not recognize a liabilityE. future; does recognize a liability

32. Eagle Airlines (Eagle) needs additional aircraft to expand internationally, and it could borrow the needed funds and purchase the aircraft. This arrangement places additional debt on the balance sheet. Instead, Eagle signs an lease agreement in which it agrees to pay the owner of the aircraft certain amounts each year for 12 years. The aircraft has an estimated service life of 18 years. Eagle paints its name on the aircraft, uses the aircraft in operations, and makes the required lease payments. Which of the following is/are true? A. Eagle receives benefits when it uses the aircraft, not when it initially signs the lease.B. Eagle has future benefits, not past or current benefits.C. Eagle obtains financing for its flight equipment without showing a liability on the balance sheetD. Eagle has entered into an operating lease that is an executory contract. E. all of the above

33. Eagle Airlines (Eagle) needs additional aircraft to expand internationally, and it could borrow the needed funds and purchase the aircraft. This arrangement places additional debt on the balance sheet. Instead, Eagle signs an lease agreement in which it agrees to pay the owner of the aircraft certain amounts each year for 12 years. The aircraft has an estimated service life of 18 years. Eagle paints its name on the aircraft, uses the aircraft in operations, and makes the required lease payments. Which of the following is not true? A. Eagle receives benefits when it uses the aircraft, not when it initially signs the lease.B. Eagle has future benefits, not past or current benefits.C. Eagle obtains financing for its flight equipment without showing a liability on the balance sheetD. Eagle has entered into an operating lease that is an executory contract. E. Eagle has entered into an financing lease that is recorded as an asset purchase and financing transaction..

34. Eaglet Airlines (Eaglet) needs additional aircraft to expand internationally, and it could borrow the needed funds and purchase the aircraft. This arrangement places additional debt on the balance sheet. Instead, Eaglet signs an lease agreement in which it agrees to pay the owner of the aircraft certain amounts each year for 18 years. The aircraft has an estimated service life of 18 years. Eaglet paints its name on the aircraft, uses the aircraft in operations, and makes the required minimum lease payments that compensates the lessor for the cost of the aircraft and provides a reasonable return for the risk involved.  Which of the following is true? A. Eaglet has entered into a contingent lease and does not show a liability on the balance sheet.B. Eaglet recognizes lease expense on a straight-line basis during the 18 year period.C. Eaglet obtains financing for its flight equipment without showing a liability on the balance sheetD. Eaglet has entered into an operating lease and recognizes a lease liability on its balance sheet. E. Eaglet has entered into a capital lease and recognizes a lease liability on its balance sheet.

35. Tweedledee Corporation and Tweedledum Company (forest products companies) need additional pulp-processing capacity. Each firm could borrow the needed funds and build its own manufacturing plant. Instead, they form a joint venture to build a pulp-processing plant. Each firm agrees to use half of the new plant’s capacity each year for 20 years and to pay half of all operating and debt service costs. The joint venture uses the purchase commitments of Tweedledee Corporation and Tweedledum Company to obtain a loan to build the facility. The firms structure the arrangement so that neither firm controls the joint venture. Which of the following is/are true? A. Accounting views the purchase commitments as executory contracts.B. Neither firm will recognize a liability for its portion of the loan. C. The loan will appear as a liability on the balance sheet of the joint venture. D. Each firm obtains financing for the services of the plant without showing a liability on its balance sheet.E. all of the above

36. Tweedledee Corporation and Tweedledum Company (forest products companies) need additional pulp-processing capacity. Each firm could borrow the needed funds and build its own manufacturing plant. Instead, they form a joint venture to build a pulp-processing plant. Each firm agrees to use half of the new plant’s capacity each year for 20 years and to pay half of all operating and debt service costs. The joint venture uses the purchase commitments of Tweedledee Corporation and Tweedledum Company to obtain a loan to build the facility. The firms structure the arrangement so that neither firm controls the joint venture. The lender requires both firms to guarantee payment of the loan in case the joint venture defaults, Which of the following is/are true? A. Under both U.S. GAAP and IFRS, the guarantors would recognize the fair value of the guarantee when they signed the loan. B. If it becomes probable that the joint venture will default, then the guarantor would apply loss contingency accounting (U.S. GAAP) and recognize a liability. C. If it becomes probable that the joint venture will default, then the guarantor would apply provision accounting (IFRS) and recognize a liability. D. all of the aboveE. none of the above

37. Red Queen Corporation and Red King Company (forest products companies) need additional pulp-processing capacity. Each firm could borrow the needed funds and build its own manufacturing plant. Instead, they form a joint venture to build a pulp-processing plant. Each firm agrees to use half of the new plant’s capacity each year for 20 years and to pay half of all operating and debt service costs. The joint venture uses the purchase commitments of Red Queen Corporation and Red King Company to obtain a loan to build the facility. The firms structure the arrangement so that neither firm controls the joint venture. Which of the following is not true? A. Accounting views the purchase commitments as executory contracts.B. Neither firm will recognize a liability for its portion of the loan. C. The loan will appear as a liability on the balance sheet of the joint venture. D. Each firm obtains financing for the services of the plant without showing a liability on its balance sheet.E. The loan will appear as a liability on the balance sheet of Red Queen Corporation and Red King Company, half of the loan amount allocated to each.

38. Wonderland Corporation extends credit to its customers to purchase appliances, furniture, and other goods. Wonderland Corporation could borrow from a bank using its accounts receivable as collateral, thereby placing debt on the balance sheet. Wonderland Corporation would then use the cash collections from the receivables to repay the bank loan with interest. Instead, Wonderland Corporation sells the accounts receivable to the bank for an amount that is less than the cash the bank expects to collect from receivables purchased. The amount takes account of expected defaults, which would reduce the cash generated by the receivables. This difference between the amount paid to Wonderland Corporation by the bank for the receivables and the amount that the bank expects to collect from the receivables provides the bank with its expected return.  Which of the following is/are true? A. Wonderland Corporation has no further obligation and will treat this transaction as a sale, with no incremental debt on the balance sheet and recognizing bad debt expense on the income statement.  B. Wonderland Corporation has further obligations and will treat this transaction as a financing arrangement, recognizing bad debt expense on the income statement. C. Wonderland Corporation has further obligations and will treat this transaction as a financing arrangement, recognizing incremental debt on the balance sheet. D. Wonderland Corporation has no further obligation and will treat this transaction as a sale, with no incremental debt on the balance sheet. E. Wonderland Corporation has further obligations and will treat this transaction as a financing arrangement, recognizing incremental debt on the balance sheet and recognizing bad debt expense on the income statement.  

39. Looking Glass Corporation extends credit to its customers to purchase appliances, furniture, and other goods. Looking Glass Corporation could borrow from a bank using its accounts receivable as collateral, thereby placing debt on the balance sheet. Looking Glass Corporation would then use the cash collections from the receivables to repay the bank loan with interest. Instead, Looking Glass Corporation sells the accounts receivable to the bank for an amount that is less than the cash the bank expects to collect from receivables purchased. The amount takes account of expected defaults, which would reduce the cash generated by the receivables. This difference between the amount paid to Looking Glass Corporation by the bank for the receivables and the amount that the bank expects to collect from the receivables provides the bank with its expected return.  Looking Glass Corporation must transfer additional uncollected receivables to the lender/purchaser bank under either of two conditions: (1) if any receivables become uncollectible, and (2) if interest rates rise above a specified level. Which of the following is/are true? A. Looking Glass Corporation bears both credit risk and interest rate risk and should treat the transfer of receivables as a loan, with debt appearing on its balance sheet. B. Looking Glass Corporation bears both credit risk and interest rate risk and should not treat the transfer of receivables as a loan, with no debt appearing on its balance sheet. C. Looking Glass Corporation does not bear credit risk or interest rate risk and should not treat the transfer of receivables as a loan, with no debt appearing on its balance sheet. D. Looking Glass Corporation has no further obligation and will treat this transaction as a sale, with no incremental debt on the balance sheet. E. Looking Glass Corporation bears credit risk but no interest rate risk and should treat the transfer of receivables as a loan, with debt appearing on its balance sheet.

40. Red Rabbit Company, a distiller of liquors, ages its whiskeys for approximately 10 years. The firm must pay the costs to produce the whiskey and to store it during the aging process. Using the whiskey as collateral, Red Rabbit could borrow to finance the costs incurred during the aging process; doing so would, however, lead to Red Rabbit reporting increased liabilities. Instead, Red Rabbit sells the whiskey to a bank and agrees to oversee the aging process on the bank’s behalf. At the completion of the aging, Red Rabbit assists the bank in finding a buyer but is not responsible for ensuring that a sale occurs at a specific price, or at all. Under this arrangement, the bank bears the risk of changes in selling prices for the whiskey. Red Rabbit will probably treat this transaction as a(n) A. executory contract, with no incremental debt on the balance sheet. B. financing arrangement, with incremental debt on the balance sheet. C. financing arrangement, with no incremental debt on the balance sheet. D. sale, with no incremental debt on the balance sheet. E. sale, with incremental debt on the balance sheet.