CPA Financial Accounting and Reporting (FAR) : Debt Covenant Obligations
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
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Example Questions
Example Question #1 : Debt Covenant Obligations
The board of Directors for the Steak Corporation declares a $3 per share cash dividend on November 1, Year 5, to be paid to owners on record at November 15, Year 5. Checks will be distributed on November 29, Year 5. Prior to declaring the dividend, Steak Corporation has 150,000 shares outstanding and held 25,000 shares of treasury stock. On November 23, Year 5, Steak bought back an additional 15,000 shares of treasury stock. On what date should Steak reduce their working capital for this dividend?
November 1, Year 5
November 29, Year 5
November 23, Year 5
November 15, Year 5
November 1, Year 5
Working capital is reduced on the date the dividend is declared.
Example Question #2 : Debt Covenant Obligations
A company issues 15,000 shares of its $10 par value common stock at $18 per share. Later, 3,000 of these shares are bough back as treasury stock at a cost of $20 per share. Which of the following is true?
Retained earnings cannot be affected by the reassurance of these shares
The par value method and the cost method have the same total impact on stockholder's equity
Losses on the resale of these shares would impact net income for the year
The cost of the treasury stock is reported as an asset on the company's balance sheet
The par value method and the cost method have the same total impact on stockholder's equity
The impact on total stockholder's equity will be the same no matter what method is used to account for the treasury stock purchase. However, each method will impact accounts with stockholder's equity differently.
Example Question #3 : Debt Covenant Obligations
The Marine Company has 200,000 common shares issued and outstanding. The stock was issued several years ago at a price above the $20 par value per share. During the current year, the board of directors declared a 30% stock dividend when the price of the shares was $45 per share. What reduction is recorded in the amount of retained earnings as a result of this dividend?
$2,700,000
$1,200,000
$1,500,000
$0
$1,200,000
Because this is considered a large stock dividend, retained earnings must be adjusted for this stock dividend. The entry is calculated using the number of shares outstanding and the par value. Thus, the debit to retained earnings is 200K shares x 30% x $20 per share.
Example Question #4 : Debt Covenant Obligations
Of the following is not a criteria for recognizing a liability associated with exit or disposal activities?
The entity has no discretion to avoid the future transfer of assets
The existence of a present obligation to transfer assets in the future
A commitment to an exit plan
The occurrence of an obligating event
A commitment to an exit plan
An entity's commitment to an exit or disposal plan, is not enough to result in liability recognition.
Example Question #5 : Debt Covenant Obligations
At year end, ABC company estimates that its employees have earned vacation pay of $50,000. Employees will receive their vacation pay in year 2. Should ABC accrue a liability at year end if the rights to this compensation accumulated over time or if the rights are vested?
Neither
Accumulated
Vested
Both
Both
Employees compensation for future absences should be accrued if: Services have already been rendered, the obligation relates to vested or accumulated rights, the amount can be reasonable estimated, and payment is probable.
Example Question #1 : Debt Covenant Obligations
A bond that matures in installments is known as a:
Term bond
Sinking fund bond
Debenture bond
Serial bond
Serial bond
Serial bonds do not all mature at the same date and mature in installments. Debentures are unsecured bonds, term bonds have a single maturity date, and a bond sinking fund is used to pay off a bond at maturity.
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