Financial Accounting Testbank part 4

LIABILITIES

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy

Item

LO

BT

Item

LO

BT

Item

LO

BT

Item

LO

BT

Item

LO

BT

True-False Statements

1.

1

C

13.

3

K

25.

4

K

37.

5

C

a 49.

10

K

2.

1

K

14.

3

C

26.

4

C

38.

5

AP

sg 50.

1

K

3.

1

C

15.

3

AP

27.

4

C

39.

5

C

sg 51.

2

K

4.

1

C

16.

3

C

28.

4

K

40.

5

K

sg 52.

3

K

5.

2

K

17.

3

K

29.

4

K

41.

6

K

sg 53.

4

K

6.

2

K

18.

3

AP

30.

4

C

42.

6

C

sg 54.

4

K

7.

2

C

19.

3

K

31.

4

C

43.

6

K

sg 55.

5

K

8.

2

AP

20.

3

K

32.

5

K

44.

6

K

sg 56.

5

K

9.

2

C

21.

4

K

33.

5

C

45.

7

K

sg 57.

6

K

10.

2

K

22.

4

K

34.

5

C

46.

7

K

sg 58.

8

K

11.

2

C

23.

4

K

35.

5

C

47.

8

K

12.

2

K

24.

4

K

36.

5

C

a 48.

9

K

Multiple Choice Questions

59.

1

K

84.

2

AN

109.

3

C

134.

4

K

159.

5

C

60.

1

C

85.

2

AN

110.

3

AP

135.

4

K

160.

5

K

61.

1

K

86.

2

AP

111.

3

AP

136.

4

K

161.

5

C

62.

1

K

87.

2

AP

112.

3

AP

137.

4

K

162.

5

C

63.

1

K

88.

2

AP

113.

3

K

138.

4

K

163.

5

C

64.

1

C

89.

2

AP

114.

3

AP

139.

4

K

164.

5

K

65.

1

C

90.

2

AP

115.

3

C

140.

4

K

165.

5

AP

66.

1

C

91.

2

AP

116.

3

C

141.

4

C

166.

5

C

67.

1

C

92.

3

AP

117.

3

K

142.

4

K

167.

5

AP

68.

2

K

93.

3

AP

118.

3

AP

143.

4

C

168.

5

AP

69.

2

K

94.

3

C

119.

3

C

144.

4

K

169.

6

AP

70.

2

K

95.

3

C

120.

3

AP

145.

4

K

170.

6

AP

71.

2

C

96.

3

AP

121.

3

K

146.

4

K

171.

6

AP

72.

2

AP

97.

3

C

122.

3

K

147.

4

C

172.

6

AP

73.

2

AN

98.

3

C

123.

3

K

148.

4

K

173.

6

AP

74.

2

AP

99.

3

AP

124.

4

K

149.

4

AP

174.

6

AP

75.

2

C

100.

3

AP

125.

4

C

150.

4

AP

175.

6

C

76.

2

C

101.

3

AP

126.

4

AP

151.

5

K

176.

6

C

77.

2

AN

102.

3

C

127.

4

K

152.

5

C

177.

6

C

78.

2

AN

103.

3

K

128.

4

K

153.

5

AP

178.

6

C

79.

2

AP

104.

3

AP

129.

4

C

154.

5

C

179.

6

AP

80.

2

C

105.

3

K

130.

4

K

155.

5

C

180.

6

AP

81.

3

C

106.

3

K

131.

4

K

156.

5

C

181.

6

AP

82.

3

K

107.

3

K

132.

4

K

157.

5

AP

182.

6

AP

83.

3

K

108.

3

K

133.

4

K

158.

5

K

183.

6

AP

sg This question also appears in the Study Guide.

st This question also appears in a self-test at the student companion website.

a This question covers a topic in an appendix to the chapter.

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy

184.

7

AP

197.

8

AP

a 210.

10

AP

a 223.

11

AP

a 236.

11

AP

185.

7

K

198.

8

AP

a 211.

10

AP

a 224.

11

AP

237.

1

K

186.

7

K

199.

8

AP

a 212.

10

AP

a 225.

11

AP

238.

1

K

187.

7

C

200.

8

K

a 213.

10

AP

a 226.

11

AP

239.

2,3

K

188.

7

C

a 201.

9

AP

a 214.

10

AP

a 227.

11

AP

240.

3

K

189.

7

AP

a 202.

9

AP

a 215.

10

C

a 228.

11

AP

st 241.

4

K

190.

7

AP

a 203.

10,11

C

a 216.

11

AP

a 229.

11

AP

sg 242.

5

AP

191.

7

AP

a 204.

10

AP

a 217.

11

AP

a 230.

11

AP

sg 243.

5

K

192.

7

AP

a 205.

10

K

a 218.

11

AP

a 231.

11

AP

st 244.

6

K

193.

8

K

a 206.

10

C

a 219.

11

AP

a 232.

11

C

sg 245.

6

AP

194.

8

K

a 207.

10

C

a 220.

11

AP

a 233.

11

C

st 246.

7

K

195.

8

K

a 208.

10

AP

a 221.

11

AP

a 234.

11

C

st 247.

8

K

196.

8

AP

a 209.

10

AP

a 222.

11

AP

a 235.

11

AP

sg 248.

9

K

Brief Exercises

249.

1

C

252.

3

AP

255.

5

AP

258.

5

AP

261.

8

AP

250.

1

K

253.

3

AP

256.

5

AP

259.

6

AP

a 262.

10

AP

251.

2

APP

254.

4

AP

257.

5

AP

260.

7

AP

a 263.

11

AP

Exercises

264.

1,3

AP

271.

3

AN

278.

5

AP

285.

7

AP

292.

11

AN

265.

2

AP

272.

3

S

279.

5

AN

286.

7

AP

293.

11

AN

266.

2

AP

273.

3

AP

280.

5

AP

287.

7

AP

294.

11

AN

267.

2

AN

274.

4

AP

281.

5, 6

AP

288.

8

AP

295.

11

AN

268.

3

AN

275.

4

AN

282.

6

AP

289.

8

AN

269.

3

AP

276.

4

AN

283.

6

AP

290.

9

AP

270.

3

AP

277.

4

AN

284.

6

AN

291.

10

AN

Challenge Exercises

296.

2

AP

297.

3

AP

298.

5, 6

AP

Completion Statements

299.

1

K

303.

3

K

307.

4

K

311.

5

AP

315.

11

K

300.

1

K

304.

3

K

308.

5

K

312.

6

K

316.

11

K

301.

2

K

305.

4

K

309.

5

AP

313.

9

K

302.

2

K

306.

4

K

310.

5

K

314.

10

K

Matching

317.

5

N/A A

Short-Answer Essay

318.

5

N/A

320.

6

N/A

322.

10

N/A

324.

5

N/A

319.

5

N/A

321.

9

N/A

323.

3

N/A

Matching: 317, IFRS Questions: 325-330

sg This question also appears in the Study Guide.

st This question also appears in a self-test at the student companion website.

a This question covers a topic in an appendix to the chapter.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Learning Objective 1

1.

TF

4.

TF

60.

MC

63.

MC

66.

MC

238.

MC

264.

Ex

2.

TF

50.

TF

61.

MC

64.

MC

67.

MC

249.

BE

299.

C

3.

TF

59.

MC

62.

MC

65.

MC

237.

MC

250.

BE

300.

C

Learning Objective 2

5.

TF

11.

TF

71.

MC

77.

MC

85.

MC

91.

MC

296.

CE

6.

TF

12.

TF

72.

MC

78.

MC

86.

MC

239.

MC

301.

C

7.

TF

51.

TF

73.

MC

79.

MC

87.

MC

251.

BE

302.

C

8.

TF

68.

MC

74.

MC

80.

MC

88.

MC

265.

Ex

9.

TF

69.

MC

75.

MC

33.

MC

89.

MC

266.

Ex

10.

TF

70.

MC

76.

MC

84.

MC

90.

MC

267.

Ex

Learning Objective 3

13.

TF

52.

TF

96.

MC

104.

MC

112.

MC

120.

MC

269.

Ex

14.

TF

81.

MC

97.

MC

105.

MC

113.

MC

121.

MC

270.

Ex

15.

TF

82.

MC

98.

MC

106.

MC

114.

MC

239.

MC

271.

Ex

16.

TF

83.

MC

99.

MC

107.

MC

115.

MC

240.

MC

272.

Ex

17.

TF

92.

MC

100.

MC

108.

MC

116.

MC

252.

BE

273.

Ex

18.

TF

93.

MC

101.

MC

109.

MC

117.

MC

253.

BE

303.

Ex

19.

TF

94.

MC

102.

MC

110.

MC

118.

MC

264.

Ex

304.

C

20.

TF

95.

MC

103.

MC

111.

MC

119.

MC

268.

Ex

Learning Objective 4

21.

TF

28.

TF

125.

MC

132.

MC

139.

MC

146.

MC

274.

Ex

22.

TF

29.

TF

126.

MC

133.

MC

140.

MC

147.

MC

275.

Ex

23.

TF

30.

TF

127.

MC

134.

MC

141.

MC

148.

MC

276.

Ex

24.

TF

31.

TF

128.

MC

135.

MC

142.

MC

149.

MC

277.

Ex

25.

TF

53.

TF

129.

MC

136.

MC

143.

MC

150.

MC

305.

C

26.

TF

54.

TF

130.

MC

137.

MC

144.

MC

241.

MC

306.

C

27.

TF

124.

MC

131.

MC

138.

MC

145.

MC

254.

BE

307.

C

Learning Objective 5

32.

TF

39.

TF

154.

MC

161.

MC

168.

MC

278.

Ex

311.

C

33.

TF

40.

TF

155.

MC

162.

MC

242.

MC

279.

Ex

218.

Ma

34.

TF

55.

TF

156.

MC

163.

MC

243.

MC

280.

Ex

219.

S-A

35.

TF

56.

TF

157.

MC

164.

MC

255.

BE

281.

Ex

221.

S-A

36.

TF

151.

MC

158.

MC

165.

MC

256.

BE

308.

C

226.

S-A

37.

TF

152.

MC

159.

MC

166.

MC

257.

BE

309.

C

38.

TF

153.

MC

160.

MC

167.

MC

258.

BE

310.

C

Learning Objective 6

41.

TF

169.

MC

174.

MC

179.

MC

244.

MC

283.

Ex

42.

TF

170.

MC

175.

MC

180.

MC

245.

MC

284.

Ex

43.

TF

171.

MC

176.

MC

181.

MC

259.

BE

298.

CE

44.

TF

172.

MC

177.

MC

182.

MC

281.

Ex

312.

C

57.

MC

173.

MC

178.

MC

183.

MC

282.

Ex

322.

S-A

Learning Objective 7

45.

TF

185.

MC

188.

MC

191.

MC

260.

BE

287.

Ex

46.

TE

186.

MC

189.

MC

192.

MC

285.

Ex

184.

MC

187.

MC

190.

MC

246.

MC

286.

Ex

Learning Objective 8

47.

TF

193.

MC

195.

MC

197.

MC

199.

MC

247.

MC

288.

Ex

58.

TF

194.

MC

196.

MC

198.

MC

200.

MC

261.

BE

289.

Ex

Learning Objective a9

a 48.

TF

a 201.

MC

a 202.

MC

a 248.

MC

a 290.

Ex

a 313.

C

a 223.

S-A

Learning Objective a 10

a 49.

TF

a 205.

MC

a 208.

MC

a 211.

MC

a 214.

MC

a 291.

Ex

a 203.

MC

a 206.

MC

a 209.

MC

a 212.

MC

a 215.

MC

a 314.

C

a 204.

MC

a 207.

MC

a 210.

MC

a 213.

MC

a 262

BE

a 224.

S-A

Learning Objective a 11

a 203.

MC

a 220.

MC

a 225.

MC

a 230.

MC

a 235.

MC

a 294.

Ex

a 216.

MC

a 221.

MC

a 226.

MC

a 231.

MC

a 236.

MC

a 295.

Ex

a 217.

MC

a 222.

MC

a 227.

MC

a 232.

MC

a 263.

BE

a 315.

C

a 218.

MC

a 223.

MC

a 228.

MC

a 233.

MC

a 292.

Ex

a 316.

C

a 219.

MC

a 224.

MC

a 229.

MC

a 234.

MC

a 293.

Ex

Note: TF = True-False BE = Brief Exercise C = Completion

MC = Multiple Choice EX = Exercise SA = Short-Answer

Matching: 317

IFRS Questions: 325-330

CHAPTER LEARNING OBJECTIVES

1. Explain a current liability, and identify the major types of current liabilities. A current liability is a debt that a company can reasonably expect to pay (1) from existing current assets or through the creation of other current liabilities, and (2) within one year or the operating cycle, whichever is longer. The major types of current liabilities are notes payable, accounts payable, sales taxes payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest payable.

2. Describe the accounting for notes payable. When a promissory note is interest-bearing, the amount of assets received upon the issuance of the note is generally equal to the face value of the note. Interest expense accrues over the life of the note. At maturity, the amount paid equals the face value of the note plus accrued interest.

3. Explain the accounting for other current liabilities. Companies record sales taxes payable at the time the related sales occur. The company serves as a collection agent for the taxing authority. Sales taxes are not an expense to the company. Companies initially record unearned revenues in an Unearned Revenue account. As the company earns the revenue, a transfer from unearned revenue to earned revenue occurs. Companies report the current maturities of long-term debt as a current liability in the balance sheet.

4. Explain why bonds are issued and identify the types of bonds. Companies may sell bonds to investors to raise long-term capital. Bonds offer the following advantages over common stock: (a) stockholder control is not affected, (b) tax savings result, (c) earnings per share of common stock may be higher. The following types of bonds may be issued: secured and unsecured, term and serial bonds, registered and bearer bonds, and convertible and callable bonds.

5. Prepare the entries for the issuance of bonds and interest expense. When companies issue bonds, they debit Cash for the cash proceeds, and credit Bonds Payable for the face value of the bonds. The account Premium on Bonds Payable shows the bond premium; Discount on Bonds Payable shows a bond discount.

6. Describe the entries when bonds are redeemed or converted. When bondholders redeem bonds at maturity, the issuing company credits Cash and debits Bonds Payable for the face value of the bonds. When bonds are redeemed before maturity, the issuing company (a) eliminates the carrying value of the bonds at the redemption date, (b) records the cash paid, and (c) recognizes the gain or loss on redemption. When bonds are converted to common stock, the issuing company transfers the carrying (or book) value of the bonds to appropriate paid-in capital accounts; no gain or loss is recognized.

7. Describe the accounting for long-term notes payable. Each payment consists of (1) interest on the unpaid balance of the loan and (2) a reduction of loan principal. The interest decreases each period, while the portion applied to the loan principal increases.

8. Identify the methods for the presentation and analysis of long-term liabilities. Companies should report the nature and amount of each long-term debt in the balance sheet or in the notes accompanying the financial statements. Stockholders and long-term creditors are interested in a company’s long-run solvency. Debt to total assets and times interest earned are two ratios that provide information about debt-paying ability and long-run solvency.

a 9. Compute the market price of a bond. Time value of money concepts are useful for pricing bonds. The present value (or market price) of a bond is a function of three variables: (1) the payment amounts, (2) the length of time until the amounts are paid, and (3) the interest rate.

a 10. Apply the effective-interest method of amortizing bond discount and bond premium. The effective-interest method results in varying amounts of amortization and interest expense per period but a constant percentage rate of interest. When the difference between the straight-line and effective-interest method is material, GAAP requires the use of the effective-interest method.

a 11. Apply the straight-line method of amortizing bond discount and bond premium. The straight-line method of amortization results in a constant amount of amortization and interest expense per period.

TRUE-FALSE STATEMENTS

1. A current liability must be paid out of current earnings.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

2. Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

3. The relationship between current liabilities and current assets is important in evaluating a company's ability to pay off its long-term debt.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

4. A company whose current liabilities exceed its current assets may have a liquidity problem.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

5. Notes payable usually require the borrower to pay interest.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

6. Notes payable are often used instead of accounts payable.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

7. A note payable must always be paid before an account payable.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

8. A $60,000, 8%, 9-month note payable requires an interest payment of $3,600 at maturity.

Ans: T, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

9. Most notes are not interest bearing.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

10. With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note's face value.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

11. Interest expense on a note payable is only recorded at maturity.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

12. Interest expense is reported under Other Expenses and Losses in the income statement.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

13. Unearned revenues should be classified as Other Revenues and Gains on the Income Statement.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

14. The higher the sales tax rate, the more profit a retailer can earn.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

15. Metropolitan Symphony sells 200 season tickets for $50,000 that represents a five concert season. The amount of Unearned Ticket Revenue after the second concert is $20,000.

Ans: F, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

16. During the month, a company sells goods for a total of $108,000, which includes sales taxes of $8,000; therefore, the company should recognize $100,000 in Sales Revenues and $8,000 in Sales Tax Expense.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

17. Current maturities of long-term debt refers to the amount of interest on a note payable that must be paid in the current year.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

18. The current ratio permits analysts to compare the liquidity of different sized companies.

Ans: T, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

19. Working capital is current assets divided by current liabilities.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

20. FICA taxes withheld and federal income taxes withheld are mandatory payroll deductions.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

21. Each bondholder may vote for the board of directors in proportion to the number of bonds held.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

22. Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

23. Registered bonds are bonds that are delivered to owners by U.S. registered mail service.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

24. A debenture bonds is an unsecured bond which is issued against the general credit of the borrower.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

25. Bonds are a form of interest-bearing notes payable.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

26. Neither corporate bond interest nor dividends are deductible for tax purposes.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

27. A 10% stock dividend is the equivalent of a $1,000 par value bond paying annual interest of 10%.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

28. The holder of a convertible bond can convert an interest payment received into a cash dividend paid on common stock if the dividend is greater than the interest payment.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: None, AICPA PC: None, IMA: Business Economics

29. The board of directors may authorize more bonds than are issued.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

30. The contractual interest rate is always equal to the market interest rate on the date that bonds are issued.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

31. If $150,000 face value bonds are issued at 103, the proceeds received will be $103,000.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

32. Discount on bonds is an additional cost of borrowing and should be recorded as interest expense over the life of the bonds.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

33. If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

34. A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market interest rate.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

35. If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

36. If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

37. If the market interest rate is greater than the contractual interest rate, bonds will sell at a discount.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

38. If $800,000, 6% bonds are issued on January 1, and pay interest semiannually, the amount of interest paid on July 1 will be $24,000.

Ans: T, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

39. If bonds sell at a premium, the interest expense recognized each year will be greater than the contractual interest rate.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

40. The carrying value of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

41. The loss on bond redemption is the difference between the cash paid and the carrying value of the bonds.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

42. If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss on redemption will be recorded.

Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

43. Gains and losses are not recognized when convertible bonds are converted into common stock.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

44. Generally, convertible bonds do not pay interest.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

45. Each payment on a mortgage note payable consists of interest on the original balance of the loan and a reduction of the loan principal.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

46. A long-term note that pledges title to specific property as security for a loan is known as a mortgage payable.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

47. The times interest earned ratio is computed by dividing net income by interest expense.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a 48. The present value of a bond is a function of two variables: (1) the payment amounts and (2) the interest (discount) rate.

Ans: F, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

a 49. The effective-interest method of amortization results in varying amounts of amortization and interest expense per period but a constant interest rate.

Ans: T, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

50. A debt that is expected to be paid within one year through the creation of long-term debt is a current liability.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

51. Notes payable usually are issued to meet long-term financing needs.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

52. Current maturities of long-term debt are often identified as long-term debt due within one year on the balance sheet.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

53. Bonds that mature at a single specified future date are called term bonds.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

54. The terms of the bond issue are set forth in a formal legal document called a bond indenture.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

55. The carrying value of bonds at maturity should be equal to the face value of the bonds.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

56. Premium on Bonds Payable is a contra account to Bonds Payable.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

57. When bonds are converted into common stock, the carrying value of the bonds is transferred to paid-in capital accounts.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

58. Long-term liabilities are reported in a separate section of the balance sheet immediately following current liabilities.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to True-False Statements

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

1.

F

10.

F

19.

F

28.

F

37.

T

46.

T

55.

T

2.

T

11.

F

20.

T

29.

T

38.

T

47.

F

56.

F

3.

F

12.

T

21.

F

30.

F

39.

F

a 48.

F

57.

T

4.

T

13.

F

22.

T

31.

F

40.

F

a 49.

T

58.

T

5.

T

14.

F

23.

F

32.

T

41.

T

50.

F

6.

T

15.

F

24.

T

33.

F

42.

T

51.

F

7.

F

16.

F

25.

T

34.

F

43.

T

52.

T

8.

T

17.

F

26.

F

35.

F

44.

F

53.

T

9.

F

18.

T

27.

F

36.

T

45.

F

54.

T

MULTIPLE CHOICE QUESTIONS

59. All of the following are reported as current liabilities except

a. accounts payable.

b. bonds payable.

c. notes payable.

d. unearned revenues.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

60. The relationship between current liabilities and current assets is

a. useful in determining income.

b. useful in evaluating a company's liquidity.

c. called the matching principle.

d. useful in determining the amount of a company's long-term debt.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

61. Most companies pay current liabilities

a. out of current assets.

b. by issuing interest-bearing notes payable.

c. by issuing stock.

d. by creating long-term liabilities.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

62. A current liability is a debt that can reasonably be expected to be paid

a. within one year or the operating cycle, whichever is longer.

b. between 6 months and 18 months.

c. out of currently recognized revenues.

d. out of cash currently on hand.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

63. Liabilities are classified on the balance sheet as current or

a. deferred.

b. unearned.

c. long-term.

d. accrued.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

64. From a liquidity standpoint, it is more desirable for a company to have current

a. assets equal current liabilities.

b. liabilities exceed current assets.

c. assets exceed current liabilities.

d. liabilities exceed long-term liabilities.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

65. The relationship of current assets to current liabilities is used in evaluating a company's

a. operating cycle.

b. revenue-producing ability.

c. short-term debt paying ability.

d. long-range solvency.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

66. Which of the following is usually not an accrued liability?

a. Interest payable

b. Wages payable

c. Taxes payable

d. Notes payable

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

67. In most companies, current liabilities are paid within

a. one year through the creation of other current liabilities.

b. the operating cycle through the creation of other current liabilities.

c. one year or the operating cycle out of current assets.

d. the operating cycle out of current assets.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

68. The entry to record the issuance of an interest-bearing note credits Notes Payable for the note's

a. maturity value.

b. market value.

c. face value.

d. cash realizable value.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

69. With an interest-bearing note, the amount of assets received upon issuance of the note is generally

a. equal to the note's face value.

b. greater than the note's face value.

c. less than the note's face value.

d. equal to the note's maturity value.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

70. A note payable is in the form of

a. a contingency that is reasonably likely to occur.

b. a written promissory note.

c. an oral agreement.

d. a standing agreement.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

71. The entry to record the proceeds upon issuing an interest-bearing note is

a. Interest Expense

Cash

Notes Payable

b. Cash

Notes Payable

c. Notes Payable

Cash

d. Cash

Notes Payable

Interest Payable

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

72. Admire County Bank agrees to lend Givens Brick Company $300,000 on January 1. Givens Brick Company signs a $300,000, 8%, 9-month note. The entry made by Givens Brick Company on January 1 to record the proceeds and issuance of the note is

a. Interest Expense.................................................................... 18,000

Cash....................................................................................... 282,000

Notes Payable.............................................................. 300,000

b. Cash....................................................................................... 300,000

Notes Payable.............................................................. 300,000

c. Cash....................................................................................... 300,000

Interest Expense.................................................................... 18,000

Notes Payable.............................................................. 318,000

d. Cash....................................................................................... 300,000

Interest Expense.................................................................... 18,000

Notes Payable.............................................................. 300,000

Interest Payable............................................................ 18,000

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

73. Admire County Bank agrees to lend Givens Brick Company $300,000 on January 1. Givens Brick Company signs a $300,000, 8%, 9-month note. What is the adjusting entry required if Givens Brick Company prepares financial statements on June 30?

a. Interest Expense.................................................................... 12,000

Interest Payable............................................................ 12,000

b. Interest Expense.................................................................... 12,000

Cash.............................................................................. 12,000

c. Interest Payable..................................................................... 12,000

Cash.............................................................................. 12,000

d. Interest Payable..................................................................... 12,000

Interest Expense........................................................... 12,000

Ans: A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

74. Admire County Bank agrees to lend Givens Brick Company $300,000 on January 1. Givens Brick Company signs a $300,000, 8%, 9-month note. What entry will Givens Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30?

a. Notes Payable....................................................................... 318,000

Cash.............................................................................. 318,000

b. Notes Payable....................................................................... 300,000

Interest Payable..................................................................... 18,000

Cash.............................................................................. 318,000

c. Interest Expense.................................................................... 18,000

Notes Payable....................................................................... 300,000

Cash.............................................................................. 318,000

d. Interest Payable..................................................................... 12,000

Notes Payable....................................................................... 300,000

Interest Expense.................................................................... 6,000

Cash.............................................................................. 318,000

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

75. As interest is recorded on an interest-bearing note, the Interest Expense account is

a. increased; the Notes Payable account is increased.

b. increased; the Notes Payable account is decreased.

c. increased; the Interest Payable account is increased.

d. decreased; the Interest Payable account is increased.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

76. When an interest-bearing note matures, the balance in the Notes Payable account is

a. less than the total amount repaid by the borrower.

b. the difference between the maturity value of the note and the face value of the note.

c. equal to the total amount repaid by the borrower.

d. greater than the total amount repaid by the borrower.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

77. On October 1, Steve's Carpet Service borrows $250,000 from First National Bank on a 3-month, $250,000, 8% note. What entry must Steve's Carpet Service make on December 31 before financial statements are prepared?

a. Interest Payable..................................................................... 5,000

Interest Expense........................................................... 5,000

b. Interest Expense.................................................................... 20,000

Interest Payable............................................................ 20,000

c. Interest Expense.................................................................... 5,000

Interest Payable............................................................ 5,000

d. Interest Expense.................................................................... 5,000

Notes Payable.............................................................. 5,000

Ans: C, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

78. On October 1, Steve's Carpet Service borrows $250,000 from First National Bank on a 3-month, $250,000, 8% note. The entry by Steve's Carpet Service to record payment of the note and accrued interest on January 1 is

a. Notes Payable....................................................................... 255,000

Cash.............................................................................. 255,000

b. Notes Payable....................................................................... 250,000

Interest Payable..................................................................... 5,000

Cash.............................................................................. 255,000

c. Notes Payable....................................................................... 250,000

Interest Payable..................................................................... 20,000

Cash.............................................................................. 270,000

d. Notes Payable....................................................................... 250,000

Interest Expense.................................................................... 5,000

Cash.............................................................................. 255,000

Ans: B, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

79. Interest expense on an interest-bearing note is

a. always equal to zero.

b. accrued over the life of the note.

c. only recorded at the time the note is issued.

d. only recorded at maturity when the note is paid.

Ans: B, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

80. The entry to record the payment of an interest-bearing note at maturity after all interest expense has been recognized is

a. Notes Payable

Interest Payable

Cash

b. Notes Payable

Interest Expense

Cash

c. Notes Payable

Cash

MC. 80 (Cont.)

d. Notes Payable

Cash

Interest Payable

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

81. Sales taxes collected by a retailer are recorded by

a. crediting Sales Taxes Revenue.

b. debiting Sales Taxes Expense.

c. crediting Sales Taxes Payable.

d. debiting Sales Taxes Payable.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

82. Unearned Rent Revenue is

a. a contra account to Rent Revenue.

b. a revenue account.

c. reported as a current liability.

d. debited when rent is received in advance.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

83. Sales taxes collected by the retailer are recorded as a(n)

a. revenue.

b. liability.

c. expense.

d. asset.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

84. On September 1, Joe's Painting Service borrows $100,000 from National Bank on a 4-month, $100,000, 6% note. What entry must Joe's Painting Service make on December 31 before financial statements are prepared?

a. Interest Payable..................................................................... 2,000

Interest Expense........................................................... 2,000

b. Interest Expense.................................................................... 6,000

Interest Payable............................................................ 6,000

c. Interest Expense.................................................................... 2,000

Interest Payable............................................................ 2,000

d. Interest Expense.................................................................... 2,000

Notes Payable.............................................................. 2,000

Ans: C, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

85. On September 1, Joe's Painting Service borrows $100,000 from National Bank on a 4-month, $100,000, 6% note. The entry by Joe's Painting Service to record payment of the note and accrued interest on January 1 is

a. Notes Payable....................................................................... 102,000

Cash.............................................................................. 102,000

b. Notes Payable....................................................................... 100,000

Interest Payable..................................................................... 2,000

Cash.............................................................................. 102,000

MC. 85 (Cont.)

c. Notes Payable....................................................................... 100,000

Interest Payable..................................................................... 6,000

Cash.............................................................................. 106,000

d. Notes Payable....................................................................... 100,000

Interest Expense.................................................................... 2,000

Cash.............................................................................. 102,000

Ans: B, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

86. The interest charged on a $200,000 note payable, at the rate of 8%, on a 90-day note would be

a. $16,000.

b. $8,888.

c. $4,000.

d. $1,333.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

87. The interest charged on a $100,000 note payable, at the rate of 6%, on a 60-day note would be

a. $6,000.

b. $3,333.

c. $1,500.

d. $1,000.

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

88. The interest charged on a $75,000 note payable, at the rate of 8%, on a 3-month note would be

a. $6,000.

b. $3,000.

c. $1,500.

d. $1,000.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

89. The interest charged on a $50,000 note payable, at the rate of 6%, on a 2-month note would be

a. $3,000.

b. $1,500.

c. $750.

d. $500.

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

90. On October 1, 2013, Pennington Company issued an $80,000, 10%, nine-month interest-bearing note. If the Pennington Company is preparing financial statements at December 31, 2013, the adjusting entry for accrued interest will include a:

a. credit to Notes Payable of $2,000.

b. debit to Interest Expense of $2,000

c. credit to Interest Payable of $4,000.

d. debit to Interest Expense of $3,000.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

91. On October 1, 2013, Pennington Company issued an $80,000, 10%, nine-month interest-bearing note. Assuming interest was accrued in June 30, 2014, the entry to record the payment of the note on July 1, 2014, will include a:

a. debit to Interest Expense of $2,000.

b. credit to Cash of $80,000

c. debit to Interest Payable of $6,000.

d. debit to Notes Payable of $86,000.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

92. Crawford Company has total proceeds (before segregation of sales taxes) from sales of $4,770. If the sales tax is 6%, the amount to be credited to the account Sales Revenue is:

a. $4,770.

b. $4,484.

c. $5,056.

d. $4,500.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

93. Reliable Insurance Company collected a premium of $30,000 for a 1-year insurance policy on May 1. What amount should Reliable report as a current liability for Unearned Insurance Revene at December 31?

a. $0.

b. $10,000.

c. $20,000.

d. $30,000.

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

94. A company receives $198, of which $18 is for sales tax. The journal entry to record the sale would include a

a. debit to Sales Tax Expense for $18.

b. credit to Sales Taxes Payable for $18.

c. debit to Sales Revenue for $198.

d. debit to Cash for $180.

Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

95. A company receives $348, of which $28 is for sales tax. The journal entry to record the sale would include a

a debit to Sales Tax Expense for $28.

b. debit to Sales Taxes Payable for $28.

c. debit to Sales Revenue for $348.

d. debit to Cash for $348.

Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

96. A retail store credited the Sales Revenue account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales Revenue account amounted to $525,000, what is the amount of the sales taxes owed to the taxing agency?

a. $500,000

b. $525,000

c. $26,250

d. $25,000

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

97. On January 1, 2013, Howard Company, a calendar-year company, issued $800,000 of notes payable, of which $200,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2013, is

a. Current Liabilities, $800,000.

b. Long-term Debt, $800,000.

c. Current Liabilities, $400,000; Long-term Debt, $400,000.

d. Current Liabilities, $200,000; Long-term Debt, $600,000.

Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

98. On January 1, 2013, Donahue Company, a calendar-year company, issued $500,000 of notes payable, of which $125,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2013, is

a. Current Liabilities, $500,000.

b. Long-term Debt , $500,000.

c. Current Liabilities, $125,000; Long-term Debt, $375,000.

d. Current Liabilities, $375,000; Long-term Debt, $125,000.

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

99. A cash register tape shows cash sales of $1,500 and sales taxes of $120. The journal entry to record this information is

a. Cash....................................................................................... 1,620

Sales Revenue............................................................. 1,620

b. Cash....................................................................................... 1,620

Sales Taxes Payable.................................................... 120

Sales Revenue............................................................. 1,500

c. Cash....................................................................................... 1,500

Sales Tax Expense................................................................ 120

Sales Revenue............................................................. 1,620

d. Cash....................................................................................... 1,620

Sales Revenue............................................................. 1,500

Sales Taxes Revenue.................................................. 120

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

100. Ed’s Bookstore has collected $750 in sales taxes during April. If sales taxes must be remitted to the state government monthly, what entry will Ed's Bookstore make to show the April remittance?

a. Sales Taxes Payable............................................................. 750

Cash.............................................................................. 750

b. Sales Tax Expense................................................................ 750

MC. 100 (Cont.)

Cash.............................................................................. 750

c. Sales Tax Expense................................................................ 750

Sales Taxes Payable.................................................... 750

d. No entry required.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

101. Layton Company does not ring up sales taxes separately on the cash register. Total receipts for October amounted to $27,300. If the sales tax rate is 5%, what amount must be remitted to the state for October's sales taxes?

a. $1,300

b. $1,365

c. $65

d. It cannot be determined.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

102. Valerie's Salon has total receipts for the month of $18,550 including sales taxes. If the sales tax rate is 6%, what are Valerie's sales for the month?

a. $17,437

b. $19,663

c. $17,500

d. It cannot be determined.

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

103. The amount of sales tax collected by a retail store when making sales is

a. a miscellaneous revenue for the store.

b. a current liability.

c. not recorded because it is a tax paid by the customer.

d. recorded as an operating expense.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

104. A retail store credited the Sales Revenue account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales Revenue account amounted to $273,000, what is the amount of the sales taxes owed to the taxing agency?

a. $260,000

b. $273,000

c. $13,650

d. $13,000

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

105. Advances from customers are classified as a(n)

a. revenue.

b. expense.

c. current asset.

d. current liability.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

106. The current portion of long-term debt should

a. be paid immediately.

b. be reclassified as a current liability.

c. be classified as a long-term liability.

d. not be separated from the long-term portion of debt.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

107. Sales taxes collected by a retailer are expenses

a. of the retailer.

b. of the customers.

c. of the government.

d. that are not recognized by the retailer until they are submitted to the government.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

108. Sales taxes collected by a retailer are reported as

a. contingent liabilities.

b. revenues.

c. expenses.

d. current liabilities.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

109. Julie's Boutique has total receipts for the month of $30,660 including sales taxes. If the sales tax rate is 5%, what are Julie's sales for the month?

a. $29,127

b. $29,200

c. $32,193

d. It cannot be determined.

Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

110. A cash register tape shows cash sales of $2,500 and sales taxes of $150. The journal entry to record this information is

a. Cash....................................................................................... 2,500

Sales Revenue............................................................. 2,500

b. Cash....................................................................................... 2,650

Sales Tax Revenue...................................................... 150

Sales Revenue............................................................. 2,500

c. Cash....................................................................................... 2,500

Sales Tax Expense................................................................ 150

Sales Revenue............................................................. 2,650

d. Cash....................................................................................... 2,650

Sales Revenue............................................................. 2,500

Sales Taxes Payable.................................................... 150

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

111. Jim's Pharmacy has collected $600 in sales taxes during March. If sales taxes must be remitted to the state government monthly, what entry will Jim's Pharmacy make to show the March remittance?

a. Sales Tax Expense................................................................ 600

Cash.............................................................................. 600

b. Sales Taxes Payable............................................................. 600

Cash.............................................................................. 600

c. Sales Tax Expense................................................................ 600

Sales Taxes Payable.................................................... 600

d. No entry required.

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

112. Oakley Company does not ring up sales taxes separately on the cash register. Total receipts for February amounted to $32,100. If the sales tax rate is 7%, what amount must be remitted to the state for February's sales taxes?

a. $2,247

b. $2,100

c. $3,210

d. It cannot be determined.

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

113. Any balance in an unearned revenue account is reported as a(n)

a. current liability.

b. long-term debt.

c. revenue.

d. unearned liability.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

114. Pickett Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 80,000 subscriptions in January at $15 each. What entry is made in January to record the sale of the subscriptions?

a. Subscriptions Receivable...................................................... 1,200,000

Subscription Revenue.................................................. 1,200,000

b. Cash ...................................................................................... 1,200,000

Unearned Subscription Revenue................................. 1,200,000

c. Subscriptions Receivable...................................................... 200,000

Unearned Subscription Revenue................................. 200,000

d. Prepaid Subscriptions............................................................ 1,200,000

Cash.............................................................................. 1,200,000

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

115. Hilton Company issued a four-year interest-bearing note payable for $400,000 on January 1, 2012. Each January the company is required to pay $100,000 on the note. How will this note be reported on the December 31, 2013 balance sheet?

a. Long-term debt, $400,000.

b. Long-term debt, $300,000.

c. Long-term debt, $200,000; Long-term debt due within one year, $100,000.

d. Long-term debt, $300,000; Long-term debt due within one year, $100,000.

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

116. Kelly Rice has a large consulting practice. New clients are required to pay one-half of the consulting fees up front. The balance is paid at the conclusion of the consultation. How does Rice account for the cash received at the end of the engagement?

a. Cash

Unearned Service Revenue

b. Cash

Service Revenue

c. Prepaid Service Fees

Service Revenue

d. No entry is required when the engagement is concluded.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

117. Which one of the following is shown first under current liabilities by many companies as a matter of custom?

a. Accrued expenses

b. Current maturities of long-term debt

c. Sales taxes payable

d. Notes payable

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

118. Working capital is

a. current assets plus current liabilities.

b. current assets minus current liabilities.

c. current assets divided by current liabilities.

d. current assets multiplied by current liabilities.

Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

119. The current ratio is

a. current assets plus current liabilities.

b. current assets minus current liabilities.

c. current assets divided by current liabilities.

d. current assets multiplied by current liabilities.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

120. Hardy Company has current assets of $90,000, current liabilities of $100,000, long-term assets of $180,000 and long-term liabilities of $80,000. Hardy Company's working capital and its current ratio are:

a. $90,000 and .90:1.

b. -$10,000 and 1.50:1.

c. $10,000 and .90:1.

d. -$10,000 and .90:1.

Ans: D, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitative Methods

121. Current liabilities generally appear

a. after long-term debt on the balance sheet.

b. in decreasing order of magnitude on the balance sheet.

c. in order of maturity on the balance sheet.

d. in increasing order of magnitude on the balance sheet.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

122. Employee payroll deductions include each of the following except

a. federal unemployment taxes.

b. federal income taxes.

c. FICA taxes.

d. insurance and pensions.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

123. Which one of the following payroll taxes does not result in a payroll tax expense for the employer?

a. FICA tax

b. Federal income tax

c. Federal unemployment tax

d. State unemployment tax

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

124. Each of the following is correct regarding bonds except they are

a. a form of interest-bearing notes payable.

b. attractive to many investors.

c. issued by corporations and governmental agencies.

d. sold in large denominations.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

125. From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that

a. bond interest is deductible for tax purposes.

b. interest must be paid on a periodic basis regardless of earnings.

c. income to stockholders may increase as a result of trading on the equity.

d. the bondholders do not have voting rights.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

126. If a corporation issued $3,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?

a. $3,000,000

b. $90,000

c. $300,000

d. $210,000

Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

127. Secured bonds are bonds that

a. are in the possession of a bank.

b. are registered in the name of the owner.

c. have specific assets of the issuer pledged as collateral.

d. have detachable interest coupons.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

128. A legal document which summarizes the rights and privileges of bondholders as well as the obligations and commitments of the issuing company is called

a. a bond indenture.

b. a bond debenture.

c. trading on the equity.

d. a term bond.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

129. Stockholders of a company may be reluctant to finance expansion through issuing more equity because

a. leveraging with debt is always a better idea.

b. their earnings per share may decrease.

c. the price of the stock will automatically decrease.

d. dividends must be paid on a periodic basis.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

130. Which of the following is not an advantage of issuing bonds instead of common stock?

a. Stockholder control is not affected.

b. Earnings per share on common stock may be lower.

c. Income to common stockholders may increase.

d. Tax savings result.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

131. Bonds that are secured by real estate are termed

a. mortgage bonds.

b. serial bonds.

c. debentures.

d. bearer bonds.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

132. Bonds that mature at a single specified future date are called

a. coupon bonds.

b. term bonds.

c. serial bonds.

d. debentures.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

133. Bonds that may be exchanged for common stock at the option of the bondholders are called

a. options.

b. stock bonds.

c. convertible bonds.

d. callable bonds.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

134. Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called

a. callable bonds.

b. early retirement bonds.

c. options.

d. debentures.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

135. Investors who receive checks in their names for interest paid on bonds must hold

a. registered bonds.

b. coupon bonds.

c. bearer bonds.

d. direct bonds.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

136. A bondholder that sends in a coupon to receive interest payments must have a(n)

a. unsecured bond.

b. bearer bond.

c. mortgage bond.

d. serial bond.

Ans: B, LO: L, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

137. Bonds that are not registered are

a. bearer bonds.

b. debentures.

c. registered bonds.

d. transportable bonds.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

138. Bonds that are issued in the name of the owner are

a. coupon bonds.

b. bearer bonds.

c. serial bonds.

d. registered bonds.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

139. Corporations are granted the power to issue bonds through

a. tax laws.

b. state laws.

c. federal security laws.

d. bond debentures.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

140. The party who has the right to exercise a call option on bonds is the

a. investment banker.

b. bondholder.

c. bearer.

d. issuer.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

141. A major disadvantage resulting from the use of bonds is that

a. earnings per share may be lowered.

b. interest must be paid on a periodic basis.

c. bondholders have voting rights.

d. taxes may increase.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

142. Bonds will always fall into all but which one of the following categories?

a. Callable or convertible

b. Term or serial

c. Registered or bearer

d. Secured or unsecured

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

143. Which of the following statements concerning bonds is not a true statement?

a. Bonds are generally sold through an investment company.

b. The bond indenture is prepared after the bonds are printed.

c. The bond indenture and bond certificate are separate documents.

d. The trustee keeps records of each bondholder.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

144. A bond trustee does not

a. issue the bonds.

b. keep a record of each bondholder.

c. hold conditional title to pledged property.

d. maintain custody of unsold bonds.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

145. The contractual interest rate is always stated as a(n)

a. monthly rate.

b. daily rate.

c. semiannual rate.

d. annual rate.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

146. When authorizing bonds to be issued, the board of directors does not specify the

a. total number of bonds authorized to be sold.

b. contractual interest rate.

c. selling price.

d. total face value of the bonds.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

147. The following exhibit is for Kmart bonds.

Bonds Close Yield Volume Net Change

Kmart 8 3/8 17 100¼ 8.4 35 +7/8

The contractual interest rate of the K mart bonds is

a. greater than the market interest rate.

b. less than the market interest rate.

c. equal to the market interest rate.

d. not determinable.

Ans: B, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

148. The following exhibit is for Kmart bonds.

Bonds Close Yield Volume Net Change

Kmart 8 3/8 17 100¼ 8.4 35 +7/8

On the day of trading referred to above,

a. no Kmart bonds were traded.

b. bonds with market prices of $3,500 were traded.

c. at closing, the selling price of the bond was higher than the previous day's price.

d. the bond sold for $100.25

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

149. A $1,000 face value bond with a quoted price of 97 is selling for

a. $1,000.

b. $970.

c. $907.

d. $97.

Ans: B, LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

150. A bond with a face value of $200,000 and a quoted price of 102¼ has a selling price of

a. $240,450.

b. $204,050.

c. $200,450.

d. $204,500.

Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

151. Premium on Bonds Payable

a. has a debit balance.

b. is a contra account.

c. is considered to be a reduction in the cost of borrowing.

d. is deducted from bonds payable on the balance sheet.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

152. If the market interest rate is greater than the contractual interest rate, bonds will sell

a. at a premium.

b. at face value.

c. at a discount.

d. only after the stated interest rate is increased.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

153. On January 1, 2013, Carter Corporation issued $5,000,000, 10-year, 8% bonds at 103. Interest is payable semiannually on January 1 and July 1. The journal entry to record this transaction on January 1, 2013 is

a. Cash....................................................................................... 5,000,000

Bonds Payable............................................................. 5,000,000

b. Cash....................................................................................... 5,150,000

Bonds Payable............................................................. 5,150,000

c. Premium on Bonds Payable.................................................. 150,000

Cash....................................................................................... 5,000,000

Bonds Payable............................................................. 5,150,000

MC. 153 (Cont.)

d. Cash....................................................................................... 5,150,000

Bonds Payable............................................................. 5,000,000

Premium on Bonds Payable......................................... 150,000

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

154. The total cost of borrowing is increased only if the

a. bonds were issued at a premium.

b. bonds were issued at a discount.

c. bonds were sold at face value.

d. market interest rate is less than the contractual interest rate on that date.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

155. If the market interest rate is 10%, a $10,000, 12%, 10-year bond, that pays interest semiannually would sell at an amount

a. less than face value.

b. equal to face value.

c. greater than face value.

d. that cannot be determined.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

156. The present value of a $10,000, 5-year bond, will be less than $10,000 if the

a. contractual interest rate is less than the market interest rate.

b. contractual interest rate is greater than the market interest rate.

c. bond is convertible.

d. contractual interest rate is equal to the market interest rate.

Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

157. Hernandez Corporation issues 3,000, 10-year, 8%, $1,000 bonds dated January 1, 2013, at 98. The journal entry to record the issuance will show a

a. debit to Cash of $3,000,000.

b. credit to Discount on Bonds Payable for $60,000.

c. credit to Bonds Payable for $3,040,000.

d. debit to Cash for $2,960,000.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

158. The market interest rate is often called the

a. stated rate.

b. effective rate.

c. coupon rate.

d. contractual rate.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

159. If bonds are issued at a discount, it means that the

a. financial strength of the issuer is suspect.

b. market interest rate is higher than the contractual interest rate.

c. market interest rate is lower than the contractual interest rate.

d. bondholder will receive effectively less interest than the contractual interest rate.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

160. Each of the following accounts is reported as long-term liabilities except

a. Interest Payable.

b. Bonds Payable.

c. Discount on Bonds Payable.

d. Premium on Bonds Payable.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

161. The statement that "Bond prices vary inversely with changes in the market interest rate" means that if the

a. market interest rate increases, the contractual interest rate will decrease.

b. contractual interest rate increases, then bond prices will go down.

c. market interest rate decreases, then bond prices will go up.

d. contractual interest rate increases, the market interest rate will decrease.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

162. The carrying value of bonds will equal the market price

a. at the close of every trading day.

b. at the end of the fiscal period.

c. on the date of issuance.

d. every six months on the date interest is paid.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

163. The sale of bonds above face value

a. is a rare occurrence.

b. will cause the total cost of borrowing to be less than the bond interest paid.

c. will cause the total cost of borrowing to be more than the bond interest paid.

d. will have no net effect on Interest Expense by the time the bonds mature.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

164. In the balance sheet, the account, Premium on Bonds Payable, is

a. added to Bonds Payable.

b. deducted from Bonds Payable.

c. classified as a stockholders' equity account.

d. classified as a revenue account.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

165. Four thousand bonds with a face value of $1,000 each, are sold at 104. The entry to record the issuance is

a. Cash ...................................................................................... 4,160,000

Bonds Payable ............................................................ 4,160,000

b. Cash ...................................................................................... 4,000,000

Premium on Bonds Payable ................................................. 160,000

Bonds Payable ............................................................ 4,160,000

c. Cash ...................................................................................... 4,160,000

Premium on Bonds Payable ........................................ 160,000

Bonds Payable ............................................................ 4,000,000

MC. 165 (Cont.)

d. Cash ...................................................................................... 4,160,000

Discount on Bonds Payable ........................................ 160,000

Bonds Payable ............................................................ 4,000,000

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

166. Bond interest paid is

a. higher when bonds sell at a discount.

b. lower when bonds sell at a premium.

c. the same whether bonds sell at a discount or a premium.

d. higher when bonds sell at a discount and lower when bonds sell at a premium.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

167. Ward Corporation issues 5,000, 10-year, 8%, $1,000 bonds dated January 1, 2013, at 104. The journal entry to record the issuance will show a

a. debit to Cash of $5,000,000.

b. credit to Premium on Bonds Payable for $200,000.

c. credit to Bonds Payable for $5,040,000.

d. credit to Cash for $5,020,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

168. Lake Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2011. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Lake uses the straight-line method of amortization.

What is the amount of interest Lake must pay the bondholders in 2011?

a. $15,080

b. $16,000

c. $17,150

d. $14,850

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

169. Beonce Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2011. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Beonce uses the straight-line method of amortization.

Beonce Company decided to redeem the bonds on January 1, 2013. What amount of gain or loss would Beonce report on its 2013 income statement?

a. $9,200 gain

b. $11,200 gain

c. $11,200 loss

d. $9,200 loss

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

170. Bargain Company has $1,600,000 of bonds outstanding. The unamortized premium is $21,600. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption?

a. $5,600 gain

b. $5,600 loss

MC. 170 (Cont.)

c. $16,000 gain

d. $16,000 loss

Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

171. The current carrying value of Kane’s $900,000 face value bonds is $897,000. If the bonds are retired at 103, what would be the amount Kane would pay its bondholders?

a. $897,000

b. $900,000

c. $906,000

d. $927,000

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

172. Lark Corporation retires its $800,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $829,960. The entry to record the redemption will include a

a. credit of $10,040 to Loss on Bond Redemption.

b. debit of $10,040 to Loss on Bond Redemption.

c. credit of $10,040 to Premium on Bonds Payable.

d. debit of $40,000 to Premium on Bonds Payable.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

173. A $600,000 bond was retired at 103 when the carrying value of the bond was $622,000. The entry to record the retirement would include a

a. gain on bond redemption of $18,000.

b. loss on bond redemption of $12,000.

c. loss on bond redemption of $18,000.

d. gain on bond redemption of $4,000.

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

174. If sixty $1,000 convertible bonds with a carrying value of $69,000 are converted into 9,000 shares of $5 par value common stock, the journal entry to record the conversion is

a. Bonds Payable ..................................................................... 69,000

Common Stock ............................................................ 69,000

b. Bonds Payable ..................................................................... 60,000

Premium on Bonds Payable ................................................. 9,000

Common Stock ............................................................ 69,000

c. Bonds Payable ..................................................................... 60,000

Premium on Bonds Payable ................................................. 9,000

Common Stock ............................................................ 45,000

Paid-in Capital in Excess of Par .................................. 24,000

d. Bonds Payable ..................................................................... 69,000

Discount on Bonds Payable ........................................ 9,000

Common Stock ............................................................ 45,000

Paid-in Capital in Excess of Par .................................. 15,000

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

175. A corporation recognizes a gain or loss

a. only when bonds are converted into common stock.

b. only when bonds are redeemed before maturity.

c. when bonds are redeemed at or before maturity.

d. when bonds are converted into common stock and when they are redeemed before maturity.

Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

176. If there is a loss on bonds redeemed early, it is

a. debited directly to Retained Earnings.

b. reported as an "Other Expense" on the income statement.

c. reported as an "Extraordinary Item" on the income statement.

d. debited to Interest Expense, as a cost of financing.

Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

177. If bonds can be converted into common stock,

a. they will sell at a lower price than comparable bonds without a conversion feature.

b. they will carry a higher interest rate than comparable bonds without the conversion feature.

c. they will be converted only if the issuer calls them in for conversion.

d. the bondholder may benefit if the market price of the common stock increases substantially.

Ans: D, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

178. When bonds are converted into common stock,

a. the market price of the stock on the date of conversion is credited to the Common Stock account.

b. the market price of the bonds on the date of conversion is credited to the Common Stock account.

c. the market price of the stock and the bonds is ignored when recording the conversion.

d. gains or losses on the conversion are recognized.

Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

179. If bonds with a face value of $150,000 are converted into common stock when the carrying value of the bonds is $135,000, the entry to record the conversion will include a debit to

a. Bonds Payable for $150,000.

b. Bonds Payable for $135,000.

c. Discount on Bonds Payable for $15,000.

d. Bonds Payable equal to the market price of the bonds on the date of conversion.

Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

180. A $600,000 bond was retired at 98 when the carrying value of the bond was $592,000. The entry to record the retirement would include a

a. gain on bond redemption of $8,000.

b. loss on bond redemption of $8,000.

c. loss on bond redemption of $4,000.

d. gain on bond redemption of $4,000.

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

181. Thirty $1,000 bonds with a carrying value of $39,600 are converted into 3,000 shares of $5 par value common stock. The common stock had a market value of $9 per share on the date of conversion. The entry to record the conversion is

a. Bonds Payable ..................................................................... 39,600

Common Stock ............................................................ 15,000

Paid-in Capital in Excess of Par................................... 24,600

b. Bonds Payable ..................................................................... 30,000

Premium on Bonds Payable ................................................. 9,600

Common Stock ............................................................ 27,000

Paid-in Capital in Excess of Par .................................. 12,600

c. Bonds Payable ..................................................................... 30,000

Premium on Bonds Payable ................................................. 9,600

Common Stock ............................................................ 15,000

Paid-in Capital in Excess of Par................................... 24,600

d. Bonds Payable ..................................................................... 39,600

Common Stock ............................................................ 27,000

Paid-in Capital in Excess of Par................................... 12,600

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

182. On March 31, 2014, $5,000,000 of 6%, 10-year bonds payable, dated December 31, 2013, are issued. Interest on the bonds is payable semiannually each June 30 and December 31. The total amount received (including accrued interest) by the issuing corporation is $5,060,000. Which of the following is correct?

a. The bonds were issued at a premium.

b. The amount of cash paid to bondholders on the next interest date, June 30, 2013, is $300,000.

c. The amount of cash paid to bondholders on the next interest date, June 30, 3013, is $50,000.

d. The bonds were issued at a discount.

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

183. Townson Co. has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94. If Townson Co. calls $10 million of these bonds it will report:

a. A $700,000 gain.

b. A $400,000 loss.

c. An unrealized gain.

d. Neither gains nor losses are recognized on early retirements of debt.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

184. On December 1, 2013, Crawley Corporation incurs a 15-year $400,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $4,800, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, 2013. The portion of the second monthly payment made on January 31, 2014, which represents repayment of principal is:

MC. 184 (Cont.)

a. $800.

b. $808.

c. $4,800.

d. $3,992.

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

185. Which one of the following amounts increases each period when accounting for long-term notes payable?

a. Cash payment

b. Interest expense

c. Principal balance

d. Reduction of principal

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

186. In the balance sheet, mortgage notes payable are reported as

a. a current liability only.

b. a long-term liability only.

c. both a current and a long-term liability.

d. a current liability except for the reduction in principal amount.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

187. A mortgage note payable with a fixed interest rate requires the borrower to make installment payments over the term of the loan. Each installment payment includes interest on the unpaid balance of the loan and a payment on the principal. With each installment payment, indicate the effect on the portion allocated to interest expense and the portion allocated to principal.

Portion Allocated Portion Allocated

to Interest Expense to Payment of Principal

a. Increases Increases

b. Increases Decreases

c. Decreases Decreases

d. Decreases Increases

Ans: D, LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

188. The entry to record an installment payment on a long-term note payable is

a. Mortgage Payable

Cash

b. Interest Expense

Cash

c. Mortgage Payable

Interest Expense

Cash

d. Bonds Payable

Cash

Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

189. Winter Company purchased a building on January 2 by signing a long-term $600,000 mortgage with monthly payments of $5,400. The mortgage carries an interest rate of 10 percent.

The entry to record the first monthly payment will include a

a. debit to the Cash account for $5,400.

b. credit to the Cash account for $5,000.

c. debit to the Interest Expense account for $5,000.

d. credit to the Mortgage Payable account for $5,400.

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

190. Horton Company purchased a building on January 2 by signing a long-term $480,000 mortgage with monthly payments of $4,400. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be

a. $480,000.

b. $479,600.

c. $476,000.

d. $475,600.

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

191. Farris Company borrowed $800,000 from BankTwo on January 1, 2012 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 9.5%. What is the amount of expense Farris must recognize on its 2013 income statement?

a. $76,000

b. $63,427

c. $56,206

d. $49,659

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

192. Farris Company borrowed $800,000 from BankTwo on January 1, 2012 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 9.5%. What is the balance in the notes payable account at December 31, 2013?

a. $800,000

b. $522,729

c. $667,651

d. $648,000

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

193. Each of the following may be shown on a supporting schedule instead of on the balance sheet except the

a. current maturities of long-term debt.

b. conversion privileges.

c. interest rates.

d. maturity dates.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

194. The times interest earned ratio is computed by dividing

a. net income by interest expense.

b. income before income taxes by interest expense.

c. income before interest expense by interest expense.

d. income before income taxes and interest expense by interest expense.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

195. The discount on bonds payable or premium on bonds payable is shown on the balance sheet as an adjustment to bonds payable to arrive at the carrying value of the bonds. Indicate the appropriate addition or subtraction to bonds payable:

Premium on Discount on

Bonds Payable Bonds Payable

a. Add Add

b. Deduct Add

c. Add Deduct

d. Deduct Deduct

Ans: C, LO: 8, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

196. In a recent year Joey Corporation had net income of $140,000, interest expense of $40,000, and tax expense of $20,000. What was Joey Corporation’s times interest earned ratio for the year?

a. 5.00

b. 4.00

c. 3.50

d. 3.00

Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

197. In a recent year Cold Corporation had net income of $250,000, interest expense of $50,000, and a times interest earned ratio of 9. What was Cold Corporation’s income before taxes for the year?

a. $500,000

b. $450,000

c. $400,000

d. None of the above.

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

198. The adjusted trial balance for Lamar Corp. at the end of the current year, 2013, contained the following accounts.

5-year Bonds Payable 8% $1,600,000

Interest Payable 50,000

Premium on Bonds Payable 150,000

Notes Payable (3 mo.) 40,000

Notes Payable (5 yr.) 145,000

Mortgage Payable ($15,000 due currently) 300,000

Salaries and Wages Payable 18,000

Taxes Payable (due 3/15 of 2014) 25,000

MC. 198 (Cont.)

The total long-term liabilities reported on the balance sheet are

a. $2,045,000.

b. $2,100,000.

c. $2,195,000.

d. $2,180,000.

Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

199. The 2013 financial statements of Marker Co. contain the following selected data (in millions).

Current Assets $ 75

Total Assets 140

Current Liabilities 40

Total Liabilities 95

Cash 8

The debt to total assets ratio is

a. 67.9%.

b. 96.4%.

c. 28.6%.

d. 256%.

Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

200. The current balance sheet of Greyson Inc. reports total assets of $40 million, total liabilities of $4 million, and stockholders' equity of $36 million. Greyson is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others. What will be the effect on Greyson's debt to total assets ratio if Greyson issues an additional $8 million in stock to finance its expansion?

a. The debt to total asset ratio will decrease from .1(4/40) to .083 (4/48) after the additional stock sale.

b. The debt to total asset ratio will decrease from 4/36 before to 4/44 after the additional stock sale.

c. The debt to total asset ratio will increase from 40 before to 48 after the additional investment.

d. The additional stock issuance will have no effect on the debt to total asset ratio.

Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

a 201. The present value of a bond is also known as its

a. face value.

b. market price.

c. future value.

d. deferred value.

Ans: B, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a 202. $3 million, 8%, 10-year bonds are issued at face value. Interest will be paid semi-annually. When calculating the market price of the bond, the present value of

a. $240,000 received for 10 periods must be calculated.

b. $3 million received in 10 periods must be calculated.

c. $3 million received in 20 periods must be calculated.

d. $120,000 received for 10 periods must be calculated.

Ans: C, LO: 9, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 203. Either the straight-line method or the effective-interest method of amortization will always result in

a. the same amount of interest expense being recognized over the term of the bonds.

b. the same amount of interest expense being recognized each year.

c. more interest expense being recognized than if premium or discounts were not amortized.

d. the same carrying value each year during the term of the bonds.

Ans: A, LO: 10, 11, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

a 204. A corporation issued $600,000, 10%, 5-year bonds on January 1, 2013 for $648,666, which reflects an effective-interest rate of 8%. Interest is paid semiannually on January 1 and July 1. If the corporation uses the effective-interest method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1, 2013, is

a. $30,000.

b. $24,000.

c. $32,434.

d. $25,946.

Ans: D, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 205. A bond discount must

a. always be amortized using straight-line amortization.

b. always be amortized using the effective-interest method.

c. be amortized using the effective-interest method if it yields annual amounts that are materially different than the straight-line method.

d. be amortized using the straight-line method if it yields annual amounts that are materially different than the effective-interest method.

s

Ans: C, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a 206. When the effective-interest method of bond discount amortization is used,

a. the applicable interest rate used to compute interest expense is the prevailing market interest rate on the date of each interest payment date.

b. the carrying value of the bonds will decrease each period.

c. interest expense will not be a constant dollar amount over the life of the bond.

d. interest paid to bondholders will be a function of the effective-interest rate on the date the bonds are issued.

Ans: C, LO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a 207. When the effective-interest method of bond premium amortization is used, the

a. amount of premium amortized will get larger with successive amortization.

b. carrying value of the bonds will increase with successive amortization.

c. interest paid to bondholders will increase after each interest payment date.

d. interest rate used to calculate interest expense will be the contractual rate.

Ans: A, LO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a 208. Silk Company issued $500,000 of 6%, 10-year bonds on one of its interest dates for $431,850 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. Interest is paid annually.

What amount of discount (to the nearest dollar) should be amortized for the first interest period?

a. $14,089

b. $6,815

c. $9,096

d. $4,548

Ans: D, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 209. Silk Company issued $500,000 of 6%, 10-year bonds on one of its interest dates for $431,850 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. Interest is paid annually.

The journal entry on the first interest payment date, to record the payment of interest and amortization of discount will include a

a. debit to Interest Expense for $30,000.

b. credit to Cash for $34,548.

c. credit to Discount on Bonds Payable for $4,548.

d. debit to Interest Expense for $40,000.

Ans: C, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 210. Silk Company issued $500,000 of 6%, 10-year bonds on one of its interest dates for $431,850 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used.

How much bond interest expense (to the nearest dollar) should be reported on the income statement for the end of the first year?

a. $34,639

b. $34,548

c. $34,457

d. $30,000

Ans: B, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

a 211. On January 1, Greene Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Greene uses the effective-interest method of amortizing bond discount. At the end of the first year, Greene should report unamortized bond discount of

a. $274,500.

b. $285,500.

c. $258,050.

d. $255,000.

Ans: B, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

a 212. On January 1, Dade Corporation issued $3,000,000, 14%, 5-year bonds with interest payable on December 31. The bonds sold for $3,216,288. The market rate of interest for these bonds was 12%. On the first interest date, using the effective-interest method, the debit entry to Interest Expense is for

a. $360,000.

b. $376,473.

c. $385,955.

d. $420,000.

Ans: C, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 213. On January 1, Jorge Inc. issued $3,000,000, 9% bonds for $2,817,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Jorge uses the effective-interest method of amortizing bond discount. At the end of the first year, Jorge should report unamortized bond discount of:

a. $164,700.

b. $171,300.

c. $154,830.

d. $153,000.

Ans: B, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

a 214. On January 1, Runner Corporation issued $2,000,000, 14%, 5-year bonds with interest payable on July 1 and January 1. The bonds sold for $2,197,080. The market rate of interest for these bonds was 12%. On the first interest date, using the effective-interest method, the debit entry to Interest Expense is for:

a. $120,000.

b. $153,796.

c. $131,825.

d. $263,650.

Ans: C, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 215. Which of the following statements regarding the effective-interest method of accounting for bonds characteristics is false?

a. GAAP always requires use of the effective interest method.

b. The amount of periodic interest expense decreases over the life of a discounted bond issue when the effective-interest method is used.

c. Over the life of the bonds, the carrying value increases for discounted bonds when using the effective-interest method.

d. The effective-interest method applies a constant percentage to the bond carrying value to compute interest expense.

Ans: B, LO: 10, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a 216. On January 1, Gage Corporation issues $1,000,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. The carrying value of the bonds at the end of the third interest period is:

a. $972,000

b. $976,000

c. $944,000

d. $928,000

Ans: A, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

a 217. If bonds are originally sold at a discount using the straight-line amortization method:

a. Interest expense in the earlier years of the bond’s life will be less than the interest to be paid.

b. Interest expense in the earlier years of the bond’s life will be the same as interest to be paid.

c. Unamortized discount is subtracted from the face value of the bond to determine its carrying value.

d. Unamortized discount is added to the face value of the bond to determine its carrying value.

Ans: C, LO: 11, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 218. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $208,000 and uses annual straight-line amortization.

BOND AMORTIZATION SCHEDULE

Interest Period

Interest Paid

Interest Expense

Premium Amortization

Unamortized Premium

Bond Carrying Value

January 1, 2012

$8,000

$208,000

January 1, 2013

(i)

(ii)

(iii)

(iv)

(v)

Which of the following amounts should be shown in cell (i)?

a. $20,800

b. $21,600

c. $20,000

d. $4,000

Ans: C, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 219. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $208,000 and uses annual straight-line amortization.

BOND AMORTIZATION SCHEDULE

Interest Period

Interest Paid

Interest Expense

Premium Amortization

Unamortized Premium

Bond Carrying Value

January 1, 2012

$8,000

$208,000

January 1, 2013

(i)

(ii)

(iii)

(iv)

(v)

Which of the following amounts should be shown in cell (ii)?

a. $21,600

b. $18,400

c. $20,800

d. $19,200

Ans: B, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 220. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $212,000 and uses annual straight-line amortization.

BOND AMORTIZATION SCHEDULE

Interest Period

Interest Paid

Interest Expense

Premium Amortization

Unamortized Premium

Bond Carrying Value

January 1, 2012

$12,000

$212,000

January 1, 2013

(i)

(ii)

(iii)

(iv)

(v)

Which of the following amounts should be shown in cell (iii)?

a. $6,000

b. $12,000

c. $2,400

d. $1,200

Ans: C, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 221. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $212,000 and uses annual straight-line amortization.

BOND AMORTIZATION SCHEDULE

Interest Period

Interest Paid

Interest Expense

Premium Amortization

Unamortized Premium

Bond Carrying Value

January 1, 2012

$12,000

$212,000

January 1, 2013

(i)

(ii)

(iii)

(iv)

(v)

Which of the following amounts should be shown in cell (iv)?

a. $10,800

b. $7,200

c. $14,400

d. $9,600

Ans: D, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 222. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $208,000 and uses annual straight-line amortization.

BOND AMORTIZATION SCHEDULE

Interest Period

Interest Paid

Interest Expense

Premium Amortization

Unamortized Premium

Bond Carrying Value

January 1, 2012

$8,000

$208,000

January 1, 2013

(i)

(ii)

(iii)

(iv)

(v)

Which of the following amounts should be shown in cell (v)?

a. $209,600

b. $208,800

c. $206,400

d. $207,200

Ans: C, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 223. On January 1, Health Corporation issues $3,000,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. The entry on December 31 to record accrued bond interest and the amortization of bond discount using the straight-line method will include a

a. debit to Interest Expense, $180,000.

b. debit to Interest Expense, $360,000.

c. credit to Discount on Bonds Payable, $12,000.

d. credit to Discount on Bonds Payable, $24,000.

Ans: C, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

224. On January 1, 2013, $2,000,000, 10-year, 10% bonds, were issued for $1,940,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount is

a. $19,400.

b. $6,000.

c. $1,616.

d. $500.

Ans: D, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

225. A corporation issues $500,000, 10%, 5-year bonds on January 1, 2013, for $479,000. Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization of bond discount, the amount of bond interest expense to be recognized in December 31, 2013’s adjusting entry is

a. $54,200.

b. $50,000.

c. $45,800.

d. $4,200.

Ans: A, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 226. Stable Company issued $600,000 of 6%, 5-year bonds at 98, with interest paid annually. Assuming straight-line amortization, what is the total interest cost of the bonds?

a. $180,000

b. $192,000

c. $168,000

d. $174,000

Ans: B, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 227. Pakota Company issued $800,000 of 6%, 5-year bonds at 98, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year?

a. $784,000

b. $785,600

c. $787,200

d. $790,400

Ans: C, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

a 228. Trendy Company issued $600,000 of 8%, 5-year bonds at 106. Assuming straight-line amortization and annual interest payments, how much bond interest expense is recorded on the next interest date?

a. $48,000

b. $55,200

c. $40,800

d. $7,200

Ans: C, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 229. Dart Company issued $600,000 of 8%, 5-year bonds at 106, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year?

a. $636,000

b. $632,400

c. $628,800

d. $639,600

Ans: C, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

a 230. On January 1, 2013, $3,000,000, 5-year, 10% bonds, were issued for $2,910,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount is

a. $17,424.

b. $18,000.

c. $1,452.

d. $1,500.

Ans: D, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 231. A corporation issues $500,000, 10%, 5-year bonds on January 1, 2013 for $479,000. Interest is paid semiannually on January 1 and July 1. If the corporation uses the straight- line method of amortization of bond discount, the amount of bond interest expense to be recognized on July 1, 2013 is

a. $52,100.

b. $25,000.

c. $27,100.

d. $22,900.

Ans: C, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 232. Over the term of the bonds, the balance in the Discount on Bonds Payable account will

a. fluctuate up and down if the market is volatile.

b. decrease.

c. increase.

d. be unaffected until the bonds mature.

Ans: B, LO: 11, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a 233. Bond discount should be amortized to comply with

a. the historical cost principle.

b. the matching principle.

c. the revenue recognition principle.

d. conservatism.

Ans: B, LO: 11, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a 234. If bonds have been issued at a discount, over the life of the bonds, the

a. carrying value of the bonds will decrease.

b. carrying value of the bonds will increase.

c. interest expense will increase, if the discount is being amortized on a straight-line basis.

d. unamortized discount will increase.

Ans: B, LO: 11, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a 235. Hooke Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2012. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Hooke uses the straight-line method of amortization.

What is the amount of interest expense Hooke will show with relation to these bonds for the year ended December 31, 2013?

a. $16,000

b. $15,080

c. $17,150

d. $14,850

Ans: C, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: FSA

a 236. Jarmin Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2011. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Jarmin uses the straight-line method of amortization.

What is the carrying value of the bonds on January 1, 2013?

a. $200,000

b. $190,800

c. $197,700

d. $189,650

Ans: B, LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

237. A current liability is a debt the company reasonably expects to pay from existing current assets within

a. one year.

b. the operating cycle.

c. one year or the operating cycle, whichever is longer.

d. one year or the operating cycle, whichever is shorter.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

238. Which of the following statements concerning current liabilities is incorrect?

a. Current liabilities include unearned revenues.

b. A company that has more current liabilities than current assets is usually the subject of some concern.

c. Current liabilities include prepaid expenses.

d. A current liability is a debt that can reasonably be expected to be paid out of existing current assets or result in the creation of other current liabilities.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

239. On August 1, 2012, a company borrowed cash and signed a one-year interest-bearing note on which both the face value and interest are payable on August 1, 2013. How will the note payable and the related interest be classified in the December 31, 2012, balance sheet?

Note Payable Interest Payable

a. Current liability Noncurrent liability

b. Noncurrent liability Current liability

c. Current liability Current liability

d. Noncurrent liability Not shown

Ans: C, LO: 2,3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

240. Companies report current liabilities on the balance sheet in

a. alphabetical order.

b. order of maturity.

c. random order.

d. order of magnitude.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

241. The market value (present value) of a bond is a function of all of the following except the

a. dollar amounts to be received.

b. length of time until the amounts are received.

c. market rate of interest.

d. length of time until the bond is sold.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

242. On the date of issue, Chudzick Corporation sells $5 million of 5-year bonds at 97. The entry to record the sale will include the following debits and credits:

Bonds Payable Discount on Bonds Payable

a. $4,850,000 Cr. $0 Dr.

b. $5,000,000 Cr. $150,000 Dr.

c. $5,000,000 Cr. $1,250,000 Dr.

d. $5,000,000 Cr. $15,000 Dr.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

243. The market rate of interest for a bond issue which sells for more than its face value is

a. independent of the interest rate stated on the bond.

b. higher than the interest rate stated on the bond.

c. equal to the interest rate stated on the bond.

d. less than the interest rate stated on the bond.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

244. When a company retires bonds before maturity, the gain or loss on redemption is the difference between the cash paid and the

a. carrying value of the bonds.

b. face value of the bonds.

c. original selling price of the bonds.

d. maturity value of the bonds.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

245. Aire Corporation retires its bonds at 106 on January 1, following the payment of semi-annual interest. The face value of the bonds is $600,000. The carrying value of the bonds at the redemption date is $631,500. The entry to record the redemption will include a

a. credit of $31,500 to Loss on Bond Redemption.

b. debit of $36,000 to Premium on Bonds Payable.

c. credit of $5,250 to Gain on Bond Redemption.

d. debit of $31,500 to Premium on Bonds Payable.

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

246. Each payment on a mortgage note payable consists of

a. interest on the original balance of the loan.

b. reduction of loan principal only.

c. interest on the original balance of the loan and reduction of loan principal.

d. interest on the unpaid balance of the loan and reduction of loan principal.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

247. The debt to total assets ratio is computed by dividing

a. long-term liabilities by total assets.

b. total debt by total assets.

c. total assets by total debt.

d. total assets by long-term liabilities.

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a 248. The market price of a bond is the

a. present value of its principal amount at maturity plus the present value of all future interest payments.

b. principal amount plus the present value of all future interest payments.

c. principal amount plus all future interest payments.

d. present value of its principal amount only.

Ans: A, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Answers to Multiple Choice Questions

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

59.

b

87.

d

115.

c

143.

b

171.

d

199.

a

a 227.

c

60.

b

88.

c

116.

b

144.

a

172.

b

200.

a

a 228.

c

61.

a

89.

d

117.

d

145.

d

173.

d

a 201.

b

a 229.

c

62.

a

90.

b

118.

b

146.

c

174.

c

a 202.

c

a 230.

d

63.

c

91.

c

119.

c

147.

b

175.

b

a 203.

a

a 231.

c

64.

c

92.

d

120.

d

148.

c

176.

b

a 204.

d

a 232.

b

65.

c

93.

b

121.

b

149.

b

177.

d

a 205.

c

a 233.

b

66.

d

94.

b

122.

a

150.

d

178.

c

a 206.

c

a 234.

b

67.

c

95.

d

123.

b

151.

c

179.

a

a 207.

a

235.

c

68.

c

96.

d

124.

d

152.

c

180.

d

a 208.

d

236.

b

69.

a

97.

d

125.

b

153.

d

181.

c

a 209.

c

237.

c

70.

b

98.

c

126.

d

154.

b

182.

d

a 210.

b

238.

c

71.

b

99.

b

127.

c

155.

c

183.

b

a 211.

b

239.

c

72.

b

100.

a

128.

a

156.

a

184.

b

a 212.

c

240.

d

73.

a

101.

a

129.

b

157.

d

185.

d

a 213.

b

241.

d

74.

b

102.

c

130.

b

158.

b

186.

c

a 214.

c

242.

b

75.

c

103.

b

131.

a

159.

b

187.

d

a 215.

b

243.

d

76.

a

104.

d

132.

b

160.

a

188.

c

a 216.

a

244.

a

77.

c

105.

d

133.

c

161.

c

189.

c

a 217.

c

245.

d

78.

b

106.

b

134.

a

162.

c

190.

b

a 218.

c

246.

d

79.

b

107.

b

135.

a

163.

b

191.

b

a 219.

b

247.

b

80.

a

108.

d

136.

b

164.

a

192.

b

a 220.

c

248.

a

81.

c

109.

b

137.

a

165.

c

193.

a

a 221.

d

82.

c

110.

d

138.

d

166.

c

194.

d

a 222.

c

83.

b

111.

b

139.

b

167.

b

195.

c

a 223.

c

84.

c

112.

b

140.

d

168.

b

196.

a

a 224.

d

85.

b

113.

a

141.

b

169.

c

197.

c

a 225.

a

86.

c

114.

b

142.

a

170.

a

198.

d

a 226.

b

BRIEF EXERCISES

BE 249

Kingery Sales Company has the following selected accounts after posting adjusting entries:

Accounts Payable $ 62,000

Notes Payable, 3-month 40,000

Accumulated Depreciation—Equipment 14,000

Notes Payable, 5-year, 6% 80,000

Payroll Tax Expense 4,000

Interest Payable 3,000

Mortgage Payable 120,000

Sales Taxes Payable 38,000

Instructions

Prepare the current liability section of Kingery Sales Company's balance sheet, assuming $16,000 of the mortgage is payable next year.

Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 249 (5 min.)

KINGERY SALES COMPANY

Current Liabilities

Notes Payable, 3-month $ 40,000

Accounts Payable 62,000

Sales Taxes Payable 38,000

Current portion of long-term debt 16,000

Interest Payable 3,000

Total Current Liabilities $159,000

BE 250

Identify which of the following would be classified as current liabilities as of December 31, 2012:

1. Wages Payable

2. Bonds Payable, maturing in 2017

3. Interest Payable, due July 1, 2013

4. Sales Taxes Payable

5. Notes Payable, due January 30, 2014

Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Solution 250 (3 min.)

Current liabilities include: Wages Payable, Sales Taxes Payable, and Interest Payable

BE 251

On December 1, Gilman Corporation borrowed $10,000 on a 90-day, 6% note. Prepare the entries to record the issuance of the note, the accrual of interest at year end, and the payment of the note.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 251 (5 min.)

Dec. 1 Cash.......................................................................................... 10,000

Notes Payable................................................................. 10,000

Dec. 31 Interest Expense....................................................................... 50

Interest Payable............................................................... 50

Mar. 1 Interest Expense....................................................................... 100

Interest Payable........................................................................ 50

Notes Payable.......................................................................... 10,000

Cash................................................................................. 10,150

BE 252

During December 2012, Markowitz Publishing sold 2,500 12-month annual magazine subscriptions at a rate of $20 each. The first issues were mailed in February 2013. Prepare the entries on Markowitz’s books to record the sale of the subscriptions and the mailing of the first issues.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 252 (4 min.)

December 2012 Cash........................................................................... 50,000

Unearned Subscription Revenue..................... 50,000

(2,500 × $20 = $50,000)

February 2013 Unearned Subscription Revenue.............................. 4,167

Subscription Revenue...................................... 4,167

($50,000 ÷ 12 = $4,167)

BE 253

Putman Company had cash sales of $65,100 (including taxes) for the month of June. Sales are subject to 8.5% sales tax. Prepare the entry to record the sale.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 253 (3 min.)

Cash................................................................................................ 65,100

Sales Revenue...................................................................... 60,000

Sales Taxes Payable............................................................. 5,100

BE 254

Layton Inc. is considering two alternatives to finance its construction of a new $5 million plant.

(a) Issuance of 500,000 shares of common stock at the market price of $10 per share.

(b) Issuance of $5 million, 9% bonds at par.

Instructions

Complete the following table.

Issue Stock Issue Bonds

Income before interest and taxes $2,000,000 $2,000,000

Interest expense from bonds _________ _________

Income before income taxes $ $

Income tax expense (30%) _________ _________

Net income $________ $________

Outstanding shares _________ 700,000

Earnings per share _________ _________

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 254 (5 min.)

Issue Stock Issue Bonds

Income before interest and taxes $2,000,000 $2,000,000

Interest ($5,000,000 × 9%) 0 450,000

Income before income taxes 2,000,000 1,550,000

Income tax expense (30%) 600,000 465,000

Net income (a) $1,400,000 $1,085,000

Outstanding shares (b) 1,200,000 700,000

Earnings per share (a) ÷ (b) $1.17 $1.55

BE 255

On January 1, 2013, Morris Enterprises issued 9%, 5-year bonds with a face amount of $800,000 at par. Interest is payable semiannually on June 30 and December 31.

Instructions

Prepare the entries to record the issuance of the bonds and the first semiannual interest payment.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 255 (4 min.)

Jan. 1 Cash....................................................................................... 800,000

Bonds Payable............................................................. 800,000

June 30 Interest Expense.................................................................... 36,000

Cash.............................................................................. 36,000

($800,000 × .09 ÷ 2 = $36,000)

BE 256

On January 1, 2013, Bose Company issued bonds with a face value of $800,000. The bonds carry a stated interest of 7% payable each January 1 and July 1.

Instructions

a. Prepare the journal entry for the issuance assuming the bonds are issued at 95.

b. Prepare the journal entry for the issuance assuming the bonds are issued at 105.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 256 (5 min.)

(a) Cash................................................................................................ 760,000

Discount on Bonds Payable........................................................... 40,000

Bonds Payable...................................................................... 800,000

(b) Cash................................................................................................ 840,000

Bonds Payable...................................................................... 800,000

Premium on Bonds Payable.................................................. 40,000

BE 257

On July 1, 2013, Frog Corporation issued $600,000, 8%, 10-year bonds at face value. Interest is payable semiannually on January 1 and July 1. Frog Corporation has a calendar year end.

Instructions

Prepare all entries related to the bond issue for 2013.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 257 (4 min.)

2013

Jul. 1 Cash....................................................................................... 600,000

Bonds Payable............................................................. 600,000

Dec. 31 Interest Expense.................................................................... 24,000

Interest Payable............................................................ 24,000

BE 258

On January 1, 2012, Zappa Enterprises sold 8%, 20-year bonds with a face amount of $1,000,000 for $950,000. Interest is payable semiannually on July 1 and January 1.

Instructions

Calculate the carrying value of the bond at December 31, 2012 and 2013.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 258 (5 min.)

Annual amortization of discount: $50,000 ÷ 20 = $2,500

December 31, 2012: $1,000,000 – ($50,000 – $2,500) = $952,500

December 31, 2013: $1,000,000 – ($50,000 – $5,000) = $955,000

BE 259

Queen Company issued bonds with a face amount of $1,600,000 in 2010. As of January 1, 2013, the balance in Discount on Bonds Payable is $4,800. At that time, Queen redeemed the bonds at 102.

Instructions

Assuming that no interest is payable, make the entry to record the redemption.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 259 (3 min.)

Jan. 1 Bonds Payable......................................................................... 1,600,000

Loss on Bond Redemption....................................................... 36,800

Discount on Bonds Payable............................................ 4,800

Cash................................................................................. 1,632,000

BE 260

Roxy Inc. issues a $1,300,000, 10%, 10-year mortgage note on December 31, 2013, to obtain financing for a new building. The terms provide for semiannual installment payments of $106,291.

Instructions

Prepare the entry to record the mortgage loan on December 31, 2013, and the first installment payment.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 260 (5 min.)

Dec. 31 Cash....................................................................................... 1,300,000

Mortgage Payable........................................................ 1,300,000

June 30 Interest Expense.................................................................... 65,000

Mortgage Payable................................................................. 41,291

Cash.............................................................................. 106,291

BE 261

Fresh Corporation reports the following selected financial statement information at December 31, 2013:

Total Assets $120,000

Total Liabilities 75,000

Net Income 20,000

Interest Revenue 1,600

Interest Expense 800

Income Tax Expense 400

Instructions

Calculate the debt to total assets and times interest earned ratios.

Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 261 (4 min.)

Debt to total assets: $75,000 ÷ $120,000 = 62.5%

Times interest earned: ($20,000 + $800 + $400) ÷ $800 = 26.5 times

BE 262

On January 1, 2013, Tape Enterprises issued 9%, 10-year bonds with a face amount of $900,000 at 96. Interest is payable semiannually on June 30 and December 31. The bonds were issued for an effective interest rate of 10%.

Instructions

Prepare the entries to record the issuance of the bonds and the first semiannual interest payment assuming that the company uses effective-interest amortization.

Ans: N/A, LO: 10, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 262 (5 min.)

Jan. 1 Cash....................................................................................... 864,000

Discount on Bonds Payable.................................................. 36,000

Bonds Payable............................................................. 900,000

($900,000 × .96 = $864,000)

June 30 Interest Expense.................................................................... 43,200

Discount on Bonds Payable......................................... 2,700

Cash.............................................................................. 40,500

($864,000 × .10 ÷ 2 = $43,200)

($900,000 × .09 ÷ 2 = $40,500)

BE 263

On January 1, 2013, Hogan Enterprises issued 8%, 20-year bonds with a face amount of $5,000,000 at 101. Interest is payable semiannually on June 30 and December 31.

Instructions

Prepare the entries to record the issuance of the bonds and the first semiannual interest payment assuming that the company uses straight-line amortization.

Ans: N/A, LO: 11, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 263 (5 min.)

Jan. 1 Cash....................................................................................... 5,050,000

Premium on Bonds Payable......................................... 50,000

Bonds Payable............................................................. 5,000,000

($5,000,000 × 1.01 = $5,050,000)

June 30 Interest Expense.................................................................... 198,750

Premium on Bonds Payable.................................................. 1,250

Cash.............................................................................. 200,000

($5,000,000 × .08 ÷ 2 = $200,000)

($50,000 ÷ 40 = $1,250)

EXERCISES

Ex. 264

Howell Company has the following selected accounts after posting adjusting entries:

Accounts Payable $ 45,000

Notes Payable, 3-month 70,000

Accumulated Depreciation—Equipment 14,000

FICA Taxes Payable 27,000

Notes Payable, 5-year, 8% 30,000

Warranty Liability 29,000

Payroll Tax Expense 6,000

Interest Payable 3,000

Mortgage Payable 200,000

Sales Taxes Payable 16,000

Instructions

(a) Prepare the current liability section of Howell Company's balance sheet, assuming $25,000 of the mortgage is payable next year. (List liabilities in magnitude order, with largest first.)

Ans: N/A, LO: 1 and 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 264 (10 min.)

(a) HOWELL COMPANY

Current Liabilities

Notes payable, 3-month $ 70,000

Accounts payable 45,000

Warranty liability 29,000

FICA taxes payable 27,000

Long-term debt due within one year 25,000

Sales taxes payable 16,000

Interest payable 3,000

Total Current Liabilities $215,000

Ex. 265

Prepare the necessary journal entries for the following transactions:

(a) On September 1, Cole Company borrowed $180,000 from National Bank on a 6-month, 8% note.

(b) On December 31, Cole Company accrued interest (assume adjusting entries are only made at the end of the year).

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 265 (5 min.)

(a) Cash................................................................................................. 180,000

Notes Payable....................................................................... 180,000

(b) Interest Expense.............................................................................. 4,800

Interest Payable ($180,000 × .08 × 4/12)............................. 4,800

Ex. 266

On March 1, Jordan Company borrows $150,000 from Ottawa State Bank by signing a 6-month, 8%, interest-bearing note.

Instructions

Prepare the necessary entries below associated with the note payable on the books of Jordan Company.

(a) Prepare the entry on March 1 when the note was issued.

(b) Prepare any adjusting entries necessary on June 30 in order to prepare the semi-annual financial statements. Assume no other interest accrual entries have been made.

(c) Prepare the adjusting entry at August 31 to accrue interest.

(d) Prepare the entry to record payment of the note at maturity.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 266 (10 min.)

(a) March 1 Cash.............................................................................. 150,000

Notes Payable..................................................... 150,000

(b) June 30 Interest Expense........................................................... 4,000

Interest Payable ($150,000 × 8% × 4 ÷ 12)........ 4,000

(c) Aug. 31 Interest Expense........................................................... 2,000

Interest Payable................................................... 2,000

(d) Sept. 1 Notes Payable.............................................................. 150,000

Interest Payable............................................................ 6,000

Cash..................................................................... 156,000

Ex. 267

Wellington Company had the following transactions involving notes payable.

Nov. 1, 2012 Borrows $120,000 from Olathe State Bank by signing a 3-month, 10% note.

Dec. 31, 2012 Prepares the adjusting entry.

Feb. 1, 2013 Pays principal and interest to Olathe State Bank.

Instructions

Prepare journal entries for each of the transactions.

Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 267 (8 min.)

November 1, 2012

Cash........................................................................................... 120,000

Notes Payable................................................................... ... 120,000

December 31, 2012

Interest Expense

($120,000 ´ 10% ´ 2/12).......................................................... 2,000

Interest Payable..................................................................... 2,000

February 1, 2013

Notes Payable............................................................................ 120,000

Interest Payable........................................................................... 2,000

Interest Expense......................................................................... 1,000

Cash................................................................................. 123,000

Ex. 268

Flores Company publishes a monthly sports magazine, Hunting Preview. Subscriptions to the magazine cost $25 per year. During October 2012, Flores sells 18,000 subscriptions beginning with the November issue. Flores prepares financial statements quarterly and recognizes subscription revenue earned at the end of the quarter. The company uses the accounts Unearned Subscriptions and Subscription Revenue.

Instructions

(a) Prepare the entry in October for the receipt of the subscriptions.

(b) Prepare the adjusting entry at December 31, 2012, to record subscription revenue earned in December 2012.

(c) Prepare the adjusting entry at March 31, 2013, to record subscription revenue earned in the first quarter of 2013.

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 268 (5 min.)

(a) Oct. 31 Cash................................................................ 450,000

Unearned Subscription Revenue

(18,000 ´ $25)........................................... 450,000

(b) Dec. 31 Unearned Subscription Revenue..... 75,000

Subscription Revenue

($450,000 ´ 2/12)....................... 75,000

(c) Mar. 31 Unearned Subscription Revenue..... 112,500

Subscription Revenue

($450,000 ´ 3/12)....................... 112,500

Ex. 269

English Company billed its customers a total of $1,575,000 for the month of November. The total includes a 5% state sales tax.

Instructions

(a) Determine the proper amount of revenue to report for the month.

(b) Prepare the general journal entry to record the revenue and related liabilities for the month.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 269 (5 min.)

(a) $1,575,000 ÷ 1.05 = $1,500,000 is the total sales revenue.

(b) $1,500,000 × .05 = $75,000 is the state sales tax liability.

Journal Entry:

Accounts Receivable ..................................................................... 1,575,000

Sales Revenue ..................................................................... 1,500,000

Sales Taxes Payable ............................................................ 75,000

Ex. 270

Hibbett Company does not segregate sales and sales taxes on its cash register. Its register total for the month is $291,500, which includes a 6% sales tax.

Instructions

Compute sales taxes payable, and make the entry to record sales and sales taxes payable.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 270 (5 min.)

Sales taxes payable = $14,700 [$291,500 – ($291,500 ¸ 1.06)]

Cash......................................................................................................... 291,500

Sales Taxes Payable....................................................................... 16,500

Sales Revenue ($291,500 ¸ 1.06)................................................... 275,000

Ex. 271

Based on the following information, compute the (1) current ratio and (2) working capital.

Current assets $200,000

Total assets 900,000

Current liabilities 80,000

Total liabilities 500,000

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 271 (4 min.)

(1) Current ratio = 2.5:1 ($200,000 ¸ $80,000)

(2) Working capital = $120,000 ($200,000 – $80,000)

Ex. 272

Mehring's 2013 financial statements contained the following data (in millions).

Current assets $16,890 Accounts receivable $1,550

Total assets 42,430 Interest expense 980

Current liabilities 12,000 Income tax expense 1,270

Total liabilities 32,580 Net income 2,230

Cash 380

Instructions

Compute these values:

(a) Working capital. (b) Current ratio.

Ans: N/A, LO: 3, Bloom: S, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 272 (4 min.)

(a) Working capital = $16,890 – $12,000 = $4,890 million

(b) Current ratio = $16,890 ¸ $12,000 = 1.41:1

Ex. 273

Golf Pro Publications publishes a golf magazine for women. The magazine sells for $3 a copy on the newsstand. Yearly subscriptions to the magazine cost $24 per year (12 issues). During December 2012, Golf Pro Publications sells 12,000 copies of the golf magazine at newsstands and receives payment for 20,000 subscriptions for 2013. Financial statements are prepared monthly.

Instructions

(a) Prepare the December 2012 journal entries to record the newsstand sales and subscriptions received.

(b) Prepare the necessary adjusting entry on January 31, 2013. The January 2013 issue has been mailed to subscribers.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 273 (5 min.)

(a) Cash................................................................................................ 36,000

Sales Revenue...................................................................... 36,000

Cash................................................................................................ 480,000

Unearned Subscription Revenue.......................................... 480,000

(b) $480,000 ÷ 12 months = $40,000

Unearned Subscription Revenue................................................... 40,000

Subscription Revenue........................................................... 40,000

Ex. 274

Sophia Company is considering two alternatives to finance its purchase of a new $4,000,000 office building.

(a) Issue 400,000 shares of common stock at $10 per share.

(b) Issue 8%, 10-year bonds at par ($4,000,000).

Income before interest and taxes is expected to be $3,000,000. The company has a 30% tax rate and has 600,000 shares of common stock outstanding prior to the new financing.

Instructions

Calculate each of the following for each alternative:

(1) Net income.

(2) Earnings per share.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 274 (12–15 min.)

(a) Issue Stock (b) Issue Bonds

Income before interest and taxes $3,000,000 $3,000,000

Interest (8% × $4,000,000) 320,000

Income before income taxes 3,000,000 2,680,000

Income tax expense 900,000 804,000

(1) Net income $2,100,000 $1,876,000

Shares outstanding 1,000,000 600,000

(2) Earnings per share $2.10 $3.13

Ex. 275

The board of directors of Moore Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issuance of $5,000,000, 6%, 20-year bonds at face value. Plan #2 would require the issuance of 100,000 shares of $5 par value common stock which is selling for $40 per share on the open market. Moore Corporation currently has 100,000 shares of common stock outstanding and the income tax rate is expected to be 35%. Assume that income before interest and income taxes is expected to be $500,000 if the new factory equipment is purchased.

Instructions

Prepare a schedule which shows the expected net income after taxes and the earnings per share on common stock under each of the plans that the board of directors is considering.

Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 275 (10–12 min.)

Plan #1 Plan #2

Issue Bonds Issue Stock

Income before interest and taxes $500,000 $500,000

Interest expense ($5,000,000 × 6%) 300,000

Income before taxes 200,000 500,000

Income taxes (35%) 70,000 175,000

Net income $130,000 $325,000

Outstanding shares 100,000 200,000

Earnings per share $1.30 $1.63

Ex. 276

Slotkin Health is considering two alternatives for the financing of some high technology medical equipment. These two alternatives are:

1. Issue 50,000 shares of $10 par value common stock at $50 per share.

2. Issue $3,000,000, 10%, 10-year bonds at par.

It is estimated that the company will earn $900,000 before interest and taxes as a result of acquiring the medical equipment. The company has an estimated tax rate of 40% and has 80,000 shares of common stock outstanding prior to the new financing.

Instructions

Determine the effect on net income and earnings per share for these two methods of financing.

Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 276 (10–15 min.)

The alternative effects on net income and earnings per share are as follows:

Issue Stock Issue Bonds

Income before interest and taxes $900,000 $900,000

Interest (10% × $3,000,000) (300,000)

Income before income taxes 900,000 600,000

Solution 276 (Cont.)

Income tax expense (360,000) (240,000)

Net income $540,000 $360,000

Outstanding shares 130,000 80,000

Earnings per share $4.15 $4.50

Net income is higher if the equipment is financed through the issuance of stock. However, earnings per share is lower because of the additional number of shares of common stock that are outstanding.

Ex. 277

Three plans for financing a $20,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount and the income tax rate is estimated at 30%.

Plan 1 Plan 2 Plan 3

9% Bonds — — $10,000,000

6% Preferred Stock, $100 par — $10,000,000 5,000,000

Common Stock, $10 par $20,000,000 10,000,000 5,000,000

Total $20,000,000 $20,000,000 $20,000,000

It is estimated that income before interest and taxes will be $5,000,000.

Instructions

Determine for each plan, the expected net income and the earnings per share on common stock.

Ans: N/A, LO: 4, Bloom: AN, Difficulty: Hard, Min: 14, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 277 (14–19 min.)

Plan 1 Plan 2 Plan 3

Earnings before interest and income tax $5,000,000 $5,000,000 $5,000,000

Deduct interest on bonds (900,000)

Income before income tax 5,000,000 5,000,000 4,100,000

Deduct income tax (1,500,000) (1,500,000) (1,230,000 )

Net Income 3,500,000 3,500,000 2,870,000

Dividends on preferred stock (600,000) (300,000)

Available for dividends on common stock $3,500,000 $2,900,000 $2,570,000

Shares of common stock outstanding 2,000,000 1,000,000 500,000

Earnings per share on common stock $1.75 $2.90 $5.14

Ex. 278

Korean Corporation issued $2 million, 10-year, 6% bonds on January 1, 2013.

Instructions

Prepare the entry to record the sale of these bonds, assuming they were issued at

(a) 97.

(b) 104.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 278 (5–7 min.)

(a) Cash ($2,000,000 × 97%)................................................................ 1,940,000

Discount on Bonds Payable............................................................. 60,000

Bonds Payable...................................................................... 2,000,000

(b) Cash ($2,000,000 × 104%).............................................................. 2,080,000

Bonds Payable...................................................................... 2,000,000

Premium on Bonds Payable.................................................. 80,000

Ex. 279

On January 1, 2013, Lost Corporation issued $800,000, 8%, 10-year bonds at face value. Interest is payable semiannually on July 1 and January 1. Lost Corporation has a calendar year end.

Instructions

Prepare all entries related to the bond issue for 2013.

Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 279 (6–10 min.)

2013

Jan. 1 Cash....................................................................................... 800,000

Bonds Payable ............................................................ 800,000

July 1 Interest Expense ................................................................... 32,000

Cash ............................................................................. 32,000

($800,000 × 8% × 1/2 = $32,000)

Dec. 31 Interest Expense ................................................................... 32,000

Interest Payable ........................................................... 32,000

Ex. 280

On January 1, Focus Corporation issued $600,000, 12%, 5-year bonds at face value. Interest is payable semiannually on July 1 and January 1.

Instructions

Prepare journal entries to record the

(a) Issuance of the bonds.

(b) Payment of interest on July 1, assuming no previous accrual of interest.

(c) Accrual of interest on December 31.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 280 (8 min.)

(a) Cash................................................................................................ 600,000

Bonds Payable...................................................................... 600,000

(b) Interest Expense............................................................................. 36,000

Cash ($600,000 × 6%).......................................................... 36,000

(c) Interest Expense............................................................................. 36,000

Interest Payable..................................................................... 36,000

Ex. 281

The following section is taken from Blue Corp’s balance sheet at December 31, 2012.

Current liabilities

Interest Payable............................................................ $ 90,000

Long-term liabilities

Bonds Payable, 9%, due January 1, 2017 .................. 2,000,000

Interest is payable semiannually on January 1 and July 1. The bonds are callable on any interest date.

Instructions

(a) Journalize the payment of the bond interest on January 1, 2013.

(b) Assume that on January 1, 2013, after paying interest, Blue calls bonds having a face value of $800,000. The call price is 106. Record the redemption of the bonds.

(c) Prepare the entry to record the payment of interest on July 1, 2013, assuming no previous accrual of interest on the remaining bonds.

Ans: N/A, LO: 5, 6, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 281 (7–10 min.)

(a) Interest Payable.............................................................................. 90,000

Cash....................................................................................... 90,000

(b) Bonds Payable............................................................................... 800,000

Loss on Bond Redemption............................................................. 48,000

Cash....................................................................................... 848,000

($800,000 × 1.06 = $848,000)

($848,000 - $800,000 = $48,000)

(c) Interest Expense............................................................................. 54,000

Cash....................................................................................... 54,000

([$2,000,000 - $800,000] × .09 × 6/12 = $54,000)

Ex. 282

Niebuhr Company issued $500,000 of bonds on January 1, 2013.

Instructions

(a) Prepare the journal entry to record the retirement of the bonds at maturity, assuming the bonds were issued at 100.

(b) Prepare the journal entry to record the retirement of the bonds before maturity at 97. Assume the balance in Premium on Bonds Payable is $5,000.

(c) Prepare the journal entry to record the conversion of the bonds into 15,000 shares of $10 par value common stock. Assume the bonds were issued at par.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 282 (9–12 min.)

Retirement of bonds at maturity

(a) Bonds Payable............................................................................... 500,000

Cash.......................................................................................... 500,000

Retirement of bonds before maturity at 98

(b) Bonds Payable............................................................................... 500,000

Premium on Bonds Payable......................................................... 5,000

Cash............................................................................................................ 485,000

Gain on Bond Redemption......................................................................... 20,000

Conversion of bonds into common stock

(c) Bonds Payable............................................................................... 500,000

Common Stock......................................................................... 150,000

Paid-in-Capital in Excess of Par................................................................. 350,000

Ex. 283

Casey Company retired $500,000 face value, 9% bonds on June 30, 2013 at 96. The carrying value of the bonds at the redemption date was $508,000.

Instructions

Prepare the journal entry to record the redemption of the bonds.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 283 (5–7 min.)

Bonds Payable........................................................................................ 500,000

Premium on Bonds Payable.................................................................... 8,000

Gain on Bond Redemption............................................................. 28,000

Cash ($500,000 × 96%)................................................................. 480,000

Ex. 284

Presented below are three independent situations:

(a) Strike Corporation purchased $350,000 of its bonds on June 30, 2013, at 102 and immediately retired them. The carrying value of the bonds on the retirement date was $339,500. The bonds pay semiannual interest and the interest payment due on June 30, 2013, has been made and recorded.

(b) Worton, Inc. purchased $400,000 of its bonds at 97 on June 30, 2013, and immediately retired them. The carrying value of the bonds on the retirement date was $393,000. The bonds pay semiannual interest and the interest payment due on June 30, 2013, has been made and recorded.

(c) Mountain Company has $80,000, 10%, 12-year convertible bonds outstanding. These bonds were sold at face value and pay semiannual interest on June 30 and December 31 of each year. The bonds are convertible into 40 shares of Mountain $5 par value common stock for each $1,000 par value bond. On December 31, 2013, after the bond interest has been paid, $20,000 par value of bonds were converted. The market value of Mountain’s common stock was $38 per share on December 31, 2013.

Instructions

For each of the independent situations, prepare the journal entry to record the retirement or conversion of the bonds.

Ans: N/A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 284 (13–16 min.)

(a) June 30 Bonds Payable............................................................... 350,000

Loss on Bond Redemption............................................ 17,500

Discount on Bonds Payable................................ 10,500

Cash..................................................................... 357,000

($350,000 – $339,500 = $10,500)

($350,000 × 102% = $357,000)

(b) June 30 Bonds Payable............................................................... 400,000

Discount on Bonds Payable................................ 7,000

Gain on Bond Redemption.................................. 5,000

Cash..................................................................... 388,000

($400,000 – $393,000 = $7,000)

($400,000 × 97% = $388,000)

(c) Dec. 31 Bonds Payable .............................................................. 20,000

Common Stock ................................................... 4,000

Paid-in Capital in Excess of Par ......................... 16,000

($5 × 40 × 20 = $4,000)

Ex. 285

Douglas Company issued a $3,500,000, 10%, 10-year mortgage note payable to finance the construction of a building at December 31, 2013. The terms provide for semiannual installment payments of $200,608.

Instructions

Prepare the entry to record:

(a) the mortgage loan on December 31, 2013.

(b) the first installment payment.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 285 (5–7 min.)

(a) Cash................................................................................................. 3,500,000

Mortgage Payable................................................................. 3,500,000

(b) Interest Expense ($3,500,000 × 5%)............................................... 175,000

Mortgage Payable............................................................................ 25,608

Cash....................................................................................... 200,608

Ex. 286

Adams Corporation issues a $4,500,000, 12%, 20-year mortgage note payable on December 31, 2013, to obtain needed financing for the construction of a building addition. The terms provide for semiannual installment payments of $309,409 on June 30 and December 31.

Instructions

(a) Prepare the journal entries to record the mortgage loan on December 31, 2013, and the first installment payment.

(b) Will the amount of principal reduction in the second installment payment be more or less than with the first installment payment?

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 286 (5–8 min.)

(a) Dec. 31 Cash.............................................................................. 4,500,000

Mortgage Payable............................................... 4,500,000

June 30 Interest Expense........................................................... 270,000

Mortgage Payable........................................................ 39,409

Cash..................................................................... 309,409

($4,500,000 × 12% × 1/2 = $270,000)

(b) The amount of principal reduction will increase with each installment payment.

Ex. 287

Lucky Company borrowed $800,000 on January 1, 2013, by issuing $800,000, 8% mortgage note payable. The terms call for semiannual installment payments of $60,000 on June 30 and December 31.

Instructions

(a) Prepare the journal entries to record the mortgage loan and the first two installment payments.

(b) Indicate the amount of mortgage note payable to be reported as a current liability and as a long-term liability at December 31, 2013.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 287 (5–8 min.)

January 1, 2013

(a) Cash 800,000

Mortgage Payable................................................................ 800,000

June 30, 2013

Interest Expense

($800,000 × 8% × 6/12)............................................................. 32,000

Mortgage Payable ......................................................................... 28,000

Cash..................................................................... 60,000

December 31, 2013

Interest Expense

($772,000 × 8% × 6/12)............................................................. 30,880

Solution 287 (Cont.)

Mortgage Payable ......................................................................... 29,120

Cash..................................................................... 60,000

(b) Current : $61,781

[$60,000 – ($742,880 × 8% × 6/12)] + [$60,000 – ($712,595 × 8% × 6/12)]

Long-term: $681,099 [($800,000 – $28,000 – $29,120) – $61,781]

Ex. 288

The adjusted trial balance for Perry Corporation at the end of 2013 contained the following accounts:

Bonds payable, 10%.............................................................. $700,000

Interest payable..................................................................... 20,000

Discount on bonds payable................................................... 40,000

Lease liability......................................................................... 50,000

Mortgage notes payable, 9%, due 2016............................... 90,000

Accounts payable.................................................................. 120,000

Instructions

(a) Prepare the long-term liabilities section of the balance sheet.

(b) Indicate the proper balance sheet classification for the accounts listed above that do not belong in the long-term liabilities section.

Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 288 (4–7 min.)

(a) Long-term liabilities

Bonds payable 10% $700,000

Less: bond discount 40,000 $660,000

Mortgage payable 9% 90,000

Lease liability 50,000

Total long-term liabilities $800,000

(b) Bond interest payable and accounts payable should be classified as current liabilities.

Ex. 289

Ranger Corporation reports the following amounts in their 2013 financial statements:

At December 31, 2013 For the Year 2013

Total assets $2,000,000

Total liabilities 1,130,000

Total stockholders’ equity ?

Interest expense $20,000

Income tax expense 130,000

Net income 150,000

Instructions

(a) Compute the December 31, 2013, balance in stockholders’ equity.

(b) Compute the debt to total assets ratio at December 31, 2013.

(c) Compute times interest earned for 2013.

Ans: N/A, LO: 8, Bloom: AN, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 289 (4–7 min.)

(a) Total assets..................................................................................... $2,000,000

Less : Total liabilities....................................................................... 1,130,000

Total stockholders’ equity............................................................... $ 870,000

(b) Debt to total assets ratio =

(c) Times interest earned ratio =

=

a Ex. 290

Boxer Corporation is issuing $600,000 of 8%, 5-year bonds when potential bond investors want a return of 10%. Interest is payable semiannually. The present value of 1 factors are 4%, .67556 and 5%, .61391. The present value of an annuity factors are 4%, 8.1109 and 5%, 7.72173.

Instructions

Compute the market price (present value) of the bonds.

Ans: N/A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 290 (5–7 min.)

Present value of principal ($600,000 × .61391)...................................... $368,346

Present value of interest ($24,000 × 7.72173)........................................ 185,322

Market price of bonds.............................................................................. $553,668

a Ex. 291

On January 1, 2013, Plank Corporation issued $800,000, 9%, 5-year bonds for $769,112. The bonds were sold to yield an effective-interest rate of 10%. Interest is paid semiannually on June 30 and December 31. The company uses the effective-interest method of amortization.

Instructions

(a) Prepare a bond discount amortization schedule which shows the amortization of discount for the first two interest payment dates. (Round to the nearest dollar.)

(b) Prepare the journal entries that Plank Corporation would make on January 1, June 30, and December 31, 2013, related to the bond issue.

Ans: N/A, LO: 10, Bloom: AN, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a Solution 291 (15–22 min.)

(a) PLANK CORPORATION

Bond Discount Amortization

Effective-Interest Method—Semiannual Interest Payments

9% Bonds Issued at 10%

Interest Interest to Interest Discount Unamortized Carrying Value

Periods be Paid Expense Amortization Discount of Bonds

1/01/13 (Issue date) $30,888 $769,112

6/30/13 $36,000 $38,456 2,456 28,432 771,568

12/31/13 36,000 38,578 2,578 25,854 774,146

(b) January 1, 2013

Cash................................................................................................ 769,112

Discount on Bonds Payable........................................................... 30,888

Bonds Payable...................................................................... 800,000

(To record issuance of bonds at a discount)

June 30, 2013

Bond Interest Expense................................................................... 38,456

Discount on Bonds Payable.................................................. 2,456

Cash....................................................................................... 36,000

(To record payment of interest and amortization of

discount)

December 31, 2013

Bond Interest Expense................................................................... 38,578

Discount on Bonds Payable.................................................. 2,578

Cash....................................................................................... 36,000

(To record payment of interest and amortization of

discount)

a Ex. 292

On June 30, 2013, Upton, Inc. sold $3,000,000 (face value) of bonds. The bonds are dated June 30, 2013, pay interest semiannually on December 31 and June 30, and will mature on June 30, 2015. The following schedule was prepared by the accountant for 2013.

Semi-Annual Interest to Interest Unamortized Bond

Interest Period be Paid Expense Amortization Amount Carrying Value

$75,000 $2,925,000

1 $120,000 $131,625 $11,625 63,375 1,936,625

Instructions

On the basis of the above information, answer the following questions. (Round your answer to the nearest dollar or percent.)

1. What is the stated interest rate for this bond issue?

2. What is the market interest rate for this bond issue?

3. What was the selling price of the bonds as a percentage of the face value?

4. Prepare the journal entry to record the sale of the bond issue on June 30, 2013.

5. Prepare the journal entry to record the payment of interest and amortization on December 31, 2013.

Ans: N/A, LO: 11, Bloom: AN, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a Solution 292 (12–17 min.)

1. $120,000 ÷ $3,000,000 = .04 × 2 = 8%

2. $131,625 ÷ $2,925,000 = .045 × 2 = 9%

3. $2,925,000 ÷ $3,000,000 = .975 The bonds sold at 97.5.

4. June 30, 2013

Cash................................................................................................... 2,925,000

Discount on Bonds Payable.............................................................. 75,000

Bonds Payable......................................................................... 3,000,000

5. December 31, 2013

Interest Expense................................................................................ 131,625

Discount on Bonds Payable..................................................... 11,625

Cash.......................................................................................... 120,000

a Ex. 293

On January 1, 2013, Sunrise Corporation issued $4,000,000, 9%, 5-year bonds dated January 1, 2013, at 94. The bonds pay semiannual interest on January 1 and July 1. The company uses the straight-line method of amortization and has a calendar year end.

Instructions

Prepare all the journal entries that Sunrise Corporation would make related to this bond issue through January 1, 2014. Be sure to indicate the date on which the entries would be made.

Ans: N/A, LO: 11, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a Solution 293 (8–12 min.)

January 1, 2013

Cash................................................................................................ 3,760,000

Discount on Bonds Payable........................................................... 240,000

Bonds Payable...................................................................... 4,000,000

(To record sale of bonds at a discount)

July 1, 2013

Interest Expense............................................................................. 204,000

Discount on Bonds Payable.................................................. 24,000

Cash....................................................................................... 180,000

(To record semiannual payment of interest and

amortization of discount)

December 31, 2013

Interest Expense............................................................................. 204,000

Discount on Bonds Payable.................................................. 24,000

Interest Payable..................................................................... 180,000

(To record accrued bond interest and amortization of

bond discount)

January 1, 2014

Interest Payable.............................................................................. 180,000

Cash....................................................................................... 180,000

(To record payment of bond interest liability)

a Ex. 294

Venture Company issued $600,000, 10%, 20-year bonds on January 1, 2013, at 103. Interest is payable semiannually on July 1 and January 1. Venture uses the straight-line method of amortization and has a calendar year end.

Instructions

Prepare all journal entries made in 2013 related to the bond issue.

Ans: N/A, LO: 11, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a Solution 294 (8–12 min.)

Jan. 1 Cash....................................................................................... 618,000

Bonds Payable............................................................. 600,000

Premium on Bonds Payable......................................... 18,000

July 1 Interest Expense.................................................................... 29,550

Premium on Bonds Payable.................................................. 450

Cash.............................................................................. 30,000

($600,000 × 10% × 1/2 = $30,000)

($18,000 × 1/40 = $450)

Dec. 31 Interest Expense.................................................................... 29,550

Premium on Bonds Payable.................................................. 450

Interest Payable............................................................ 30,000

($600,000 × 10% × 1/2 = $30,000)

a Ex. 295

Magic Company issued $500,000, 10%, 10-year bonds on December 31, 2012, for $460,000. Interest is payable semiannually on June 30 and December 31. Magic uses the straight-line method of amortization and has a calendar year end.

Instructions

Prepare the appropriate journal entries on

(a) December 31, 2012.

(b) June 30, 2013.

Ans: N/A, LO: 11, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a Solution 295 (8–12 min.)

(a) 2012

Dec. 31 Cash.............................................................................. 460,000

Discount on Bonds Payable......................................... 40,000

Bonds Payable.................................................... 500,000

(b) 2013

June 30 Interest Expense........................................................... 27,000

Discount on Bonds Payable................................ 2,000

Cash..................................................................... 25,000

($500,000 × 10% × 1/2 = $25,000;

$40,000 × 1/20 = $2,000)

CHALLENGE EXERCISES

CE 296

Wilkinson Company had the following transactions involving notes payable.

Aug. 1, 2012 Borrows $80,000 from City National Bank by signing a 9-month, 9% note.

Dec. 1, 2012 Borrows $60,000 from Admire State Bank by signing a 3-month, 10% note.

Dec. 31, 2012 Prepare adjusting entries.

Mar. 1, 2013 Pays principal and interest to Admire State Bank.

Instructions

(a) Prepare journal entries for each of the transactions shown above.

(b) What amount of interest expense is reported in the 2012 income statement?

Solution 296

(a) August 1, 2012

Cash.............................................................................................. 80,000

Notes Payable................................................................... 80,000

December 1, 2012

Cash........................................................................................... 60,000

Notes Payable................................................................ 60,000

December 31, 2012

Interest Expense.............................................................................. 3,000

($80,000 ´ 9% ´ 5/12)

Interest Payable............................................................. 3,000

Interest Expense.......................................................................... 500

($60,000 ´ 10% ´ 1/12)

Interest Payable.............................................................. .............. 500

March 1, 2013

Notes Payable......................................................................... 60,000

Interest Payable...................................................................... 500

Interest Expense..................................................................... 1,000

Cash............................................................................... 61,500

(b) The 2012 income statement will include interest expense of $3,500 ($3,000 + 500).

CE 297

Queen Company publishes a monthly fashion magazine, Tiara. Subscriptions to the magazine cost $25 per year. During October 2013, Queen sells 12,000 subscriptions beginning with the November issue. Queen prepares financial statements quarterly and recognizes subscription revenue earned at the end of quarter.

Instructions

(a) Prepare the entry in October for the receipt of the subscriptions.

(b) Prepare the adjusting entry at December 31, 2013, to record subscription revenue earned in 2013.

(c) Indicate the effect that the transactions in (a) and (b) have on assets, liabilities, and stockholders' equity.

(d) Indicate how the unearned subscriptions are reported in the 12/31/13 financial statement, including the amount.

Solution 297

(a) Oct. Cash.................................................................................. 300,000

Unearned Subscription Revenue................................ 300,000

(12,000 ´ $25)

(b) Dec. Unearned Subscription Revenue..................................... 50,000

Subscription Revenue................................................. 50,000

($300,000 ´ 2/12)

(c) Transaction (a) increases assets and increases liabilities. Transaction (b) decreases liabilities and increases stockholders' equity (due to the revenue).

(d) Unearned subscription revenue is reported in the current liabilities section of the balance sheet at $250,000 ($300,000 - $50,000; or, $300,000 ´ 10/12).

CE 298

The following section is taken from Gordon Corp. 's balance sheet at December 31, 2012.

Current liabilities

Interest payable $ 90,000

Long-term liabilities

Bonds payable, 6%, due January 1, 2017 3,000,000

Interest is payable semiannually on January 1 and July 1. The bonds are callable on any interest date.

Instuctions

(a) Journal the payment of the bond interest on January 1, 2013.

(b) Assume that on January 1, 2013, after paying interest, Gordon calls bonds having a face value of $1,200,000. The call price is 98. Record the redemption of the bonds.

(c) Prepare the entry to record the payment of interest on July 1, 2013, assuming no previous accrual of interest on the remaining bonds.

(d) Prepare the entry to record the retirement of half the bonds still outstanding on July 2, 2013 for a cash payment of $915,000.

Solution 298

(a) Jan. 1 Interest Payable............................................................. 90,000

Cash........................................................................... .......................... 90,000

(b) Jan 1 Bonds Payable 1,200,000

Gain on Bond Redemption........................................ 24,000

Cash ($1,200,000 ´ .98)............................................. 1,176,000

Solution 298 (Cont.)

(c) July 1 Interest Expense........................................................... 54,000

Cash ($1,800,000 ´ 6% ´ 1/2).................................. 54,000

(d) July 1 Bonds Payable................................................................ 900,000

Loss on Bond Redemption............................................ 15,000

Cash........................................................................... .............. 915,000

COMPLETION STATEMENTS

299. A current liability is a debt that can be expected to be paid within ______________ year or the ______________, whichever is longer.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

300. Liabilities are classified on the balance sheet as being _______________ liabilities or ______________ liabilities.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

301. Obligations in written form are called ______________ and usually require the borrower to pay interest.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

302. With an interest-bearing note, a borrower must pay the ________________ of the note plus _________________ at maturity.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

303. Sales taxes collected from customers are a ______________ of the business until they are remitted to the taxing agency.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

304. The current ratio is current assets divided by ______________.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

305. Bonds that mature at a single specified future date are called _______________ bonds, whereas bonds that mature in installments are called ________________ bonds.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

306. The terms of a bond issue are set forth in a formal legal document called a bond ________________.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

307. Unsecured bonds that are issued against the general credit of the borrower are called ________________ bonds.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

308. If bonds were issued at a premium, then the contractual interest rate was _____________ than the market interest rate.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

309. Discount on Bonds Payable is ________________ (from)(to) bonds payable on the balance sheet. Premium on Bonds Payable is ________________ (from)(to) bonds payable on the balance sheet.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

310. If bonds are issued at face value (par), it indicates that the ________________ interest rate must be equal to the ________________ interest rate.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

311. If a $1 million, 10%, 10-year bond issue was sold at 97, the cash proceeds from the issuance of the bonds amounted to $________________.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

312. When bonds are converted into common stock and the conversion is recorded, the ________________ of the bonds is transferred to paid-in capital accounts.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a 313. The market price of a bond is obtained by discounting to its present value the _______________ paid at maturity, and all _____________ payments to be made over the term of the bond.

Ans: N/A, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

a 314. When there is a ________________ difference between the straight-line and effective-interest methods of amortization, the ________________ method is required under GAAP.

Ans: N/A, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a 315. A method of amortizing bond discount or premium that allocates an equal amount each period is the ________________ method.

Ans: N/A, LO: 11, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a 316. The straight-line method of amortization allocates the same amount to _______________ in each interest period.

Ans: N/A, LO: 11, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Answers to Completion Statements

299. one, operating cycle 308. greater

300. current, long-term 309. deducted, added

301. notes payable 310. stated (contractual), market (effective)

302. face value, interest 311. 970,000

303. current liability 312. carrying value

304. current liabilities a 313. principal, interest

305. term, serial a 314. material, effective-interest

306. indenture a 315. straight-line

307. debenture a 316. interest expense

MATCHING

317. Match the items below by entering the appropriate code letter in the space provided.

A. Serial bonds G. Straight-line method of amortization

B. Debenture bonds H. Bonds

C. Bond indenture I. Debt to total assets ratio

D. Premium on bonds payable J. Current liability

E. Discount on bonds payable K. Current ratio

F. Effective-interest method of amortization L. Registered bonds

_____ 1. A debt that can reasonably be expected to be paid from current assets.

_____ 2. A legal document that sets forth the terms of a bond issue.

_____ 3. Bonds that mature in installments.

_____ a 4. Produces a periodic interest expense equal to a constant percentage of the carrying value of the bonds.

_____ 5. Bonds issued in the name of the owner.

_____ 6. A form of interest-bearing notes payable used by corporations.

_____ 7. Occurs when the contractual interest rate is greater than the market interest rate.

_____ 8. Unsecured bonds issued against the general credit of the borrower.

_____ 9. A measure of a company's liquidity

_____ 10. A solvency measure that indicates the percentage of assets provided by creditors.

_____ 11. Occurs when the contractual interest rate is less than the market interest rate.

_____ a 12. Produces a periodic interest expense that is the same amount each interest period.

Ans: N/A, SO: 1, 2, 5, Bloom: , Difficulty: Easy, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Matching

1. J 7. D

2. C 8. B

3. A 9. K

a 4. F 10. I

5. L 11. E

6. H a 12. G

SHORT-ANSWER ESSAY QUESTIONS

S-A E 318

Bonds are frequently issued at amounts greater or less than face value. Describe how the market interest rate, relative to the contractual interest rate, affects the selling price of bonds. Also explain the rationale for requiring an investor to pay accrued interest when a bond is purchased between interest payment dates.

Ans: N/A, LO: 5, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 318

The market interest rate often is different from the contractual interest rate and therefore bonds are frequently issued at amounts greater or less than face value. When the market interest rate is higher than the contractual rate, investors can find better investments elsewhere and consequently there is less demand for the bonds. So to make the bonds more attractive the issue price will be lowered and the bonds will be issued at a discount. Conversely, if the market interest rate is less than the contractual rate there will be greater demand for the bonds because of the higher interest rate. Thus, the issue price will be greater than face value and the bonds will be issued at a premium.

The investor is required to pay accrued interest because it allows the bond issuer to make the same interest payment to all bondholders on the same interest payment date. Otherwise the bond issuer would have to determine the interest payment for each bondholder based on how long that particular bond had been outstanding. Thus, the bond issuer does not have to maintain detailed records and saves bookkeeping costs.

S-A E 319

When a bond sells at a discount, what is probably true about the market interest rate versus the stated interest rate? Discuss.

Ans: N/A, LO: 5, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 319

For someone to purchase a bond at a discount, the stated interest rate normally must be below the market interest rate for similar bonds. Investors will need to make up the difference by paying less than the face value for the bonds.

S-A E 320

Bonds may be redeemed (retired) before maturity by the issuing corporation. Explain why a company would decide to retire bonds before maturity and the necessary steps to record the redemption.

Ans: N/A, LO: 6, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: Communications, IMA: Business Economics

Solution 320

A company may decide to retire bonds before maturity to reduce interest cost and remove debt from its balance sheet. A company will retire debt early only if it has sufficient cash resources.

When bonds are retired before maturity, it is necessary to eliminate the carrying value of the bonds at the redemption date and recognize a gain or loss on redemption. The gain or loss is the difference between the cash paid and the carrying value of the bonds.

a S-A E 321

Kim Estes and Jeff Malone are discussing how the market price of a bond is determined. Kim believes that the market price of a bond is solely a function of the amount of the principal payment at the end of the term of a bond. Is she right? Discuss.

Ans: N/A, LO: 9, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Research, AICPA PC: Communications, IMA: Business Economics

a Solution 321

No, Kim is not right. The market price of any bond is a function of three factors: (1) The dollar amounts to be received by the investor (interest and principal), (2) The length of time until the amounts are received (interest payment dates and maturity date), and (3) The market interest rate.

a S-A E 322

Megan Stone is discussing the advantages of the effective-interest method of bond amortization with her accounting staff. What do you think Megan is saying?

Ans: N/A, LO: 10, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: Communications, IMA: Business Economics

a Solution 322

Megan is probably indicating that since the borrower has the use of the bond proceeds over the term of the bonds, the borrowing rate in each period should be the same. The effective-interest method results in a varying amount of interest expense but a constant rate of interest on the balance outstanding. Accordingly, it results in a better matching of expenses with revenues than the straight-line method.

S-A E 323 (Ethics)

Hannah Company maintains two separate accounts payable computer systems. One is known to all the users, and is used to process payments to vendors. Employees enter the vendor code, or the name and address of new vendors, the amount, the account, and so on. The other system is a secret one. It is used to cross-check the vendors against an approved vendor list. If a vendor is not listed as approved, the payment process is halted. Internal audit employees seek to verify the existence of a bona fide claim by the vendor. All inquiries are made at the top management level, and very discreetly. No one but top management, the internal audit staff, and the Board of Directors of the company is even aware of the second system.

Required:

Is it ethical for a company to have a secret system like the one described? Explain.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Internal Controls

Solution 323

Secret systems that seek to verify the integrity of the non-secret primary system are certainly ethical. In fact, nearly all fraud and theft detection systems are secret. It is only the misuse of these systems, such as to obtain unauthorized information, or to commit some other crime, that is unethical.

S-A E 324 (Communication)

Susan Kline works for Trend Press, a fairly large book publishing firm. Her best friend and rival, Lisa, works for Silver Books, a smaller publisher. Both companies issue $100,000 in bonds on July 1. Trend's bonds were issued at a discount, while Silver's were issued at a premium. Lisa sent Susan a fax the next day. She told Susan that it was obvious who the better publisher was—the market had shown its preference! She reminded Susan again of her recent increase in salary as further proof of the superiority of Silver Books.

Required:

Draft a short note for Susan to send to Lisa. Explain how such a result could occur.

Ans: N/A, LO: 5, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Communications, IMA: Business Economics

Solution 324

Many answers are possible. The format should be fairly informal, and the point that a discount or premium is not necessarily a judgment on the strength or weakness of a company should be addressed. A suggested note follows:

Lisa—

I can't believe that Silver can survive with people like you handling their money! I also can't believe their lack of judgment in giving you a raise! Just kidding! Seriously, though, you can't prove that Trend is a bad company just by the bond price.

Our bonds were issued at a discount, not because of the market's evaluation of our company, but because we underestimated interest rates. Silver got a premium because it overestimated interest rates. You'll have to find some other evidence to prove your company is better, (which you can't, because it isn't).

Seriously (again), congratulations on your raise. Shall we still meet for lunch on Wednesday? How about trying our luck with chopsticks at the Chinese Panda? Let me know if your plans change.

(signed)

IFRS QUESTIONS

325. Under IFRS, liabilities

a. must be legally enforceable by a contract.

b. must be legally enforceable by law.

c. may be legally enforceable by a contract or law but need not be.

d. are defined differently than under GAAP.

Ans: C, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

326. When current liabilities are presented under IFRS, they are generally shown

a. alphabetically.

b. in order of magnitude.

c. in order of the dates they become due.

d. in order of liquidity.

Ans: D, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

327. Which of the following statements about liabilities in incorrect?

Companies sometimes show

a. liabilities before assets.

b. long-term liabilities before current assets.

c. current liabilities netted against current assets.

d. liabilities in order of magnitude.

Ans: D, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

328. The effective-interest method for amortization of bond discounts is required under

a. GAAP only.

b. IFRS only.

c. Both GAAP and IFRS.

d. Neither GAAP or IFRS.

Ans: c, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

329. Under IFRS, the proceeds from the issuance of convertible debt are reported as

a. debt only.

b. equity only.

c. debt or equity depending on the circumstances.

d. both debt and equity.

Ans: d, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

330. Under IFRS, companies do not use a

a. discount account but do use a premium account.

b. premium account but do use a discount account.

c. bonds payable account.

d. discount or premium account.

Ans: d, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting