978-0134125053 Chapter 9 Part 2

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5) The disclosure of a contingent liability only in the footnotes designates that the possibility of

an actual obligation occurring is:

A) remote.

B) possible.

C) probable.

D) certain.

Question Type: Concept

6) If the likelihood of an obligation is remote:

A) no action is necessary in the accounting treatment.

B) the disclosure with explanation is put into the financial statement footnotes.

C) the obligation with the estimated dollars is recorded on the Balance Sheet.

D) the obligation with the estimated dollars is recorded and put into the footnotes.

Question Type: Concept

7) The disclosure of a contingent liability in the footnotes and on the Balance Sheet indicates that

the potential for the obligation occurring is:

A) remote.

B) possible.

C) probable.

D) certain.

Question Type: Concept

8) Which of the following would NOT be considered a contingent liability?

A) Pending legal action

B) Potential fines from the EPA

C) Mortgage Payable

D) Cosigning a loan

Question Type: Concept

9) Which of the following accurately describes how contingent liabilities are reported on the

Balance Sheet?

A) Contingent liabilities are not reported.

B) Contingent liabilities are disclosed in the footnotes only.

C) Contingent liabilities are reported in the liabilities section.

D) The accounting treatment for contingent liability could be A, B, or C depending on the

likelihood of an actual obligation occurring.

Question Type: Concept

10) KLR Oil Company is being investigated, following an explosion on one of their oil rigs.

They have multiple prior citations for safety violations, and this explosion killed several workers.

The related damages are still unknown and cannot be reasonably estimated. What accounting

treatment should KLR use for the investigation?

A) Because damages are still unknown, no action is necessary.

B) Because the likelihood of the obligation occurring is remote, footnote disclosure is all that is

required.

C) Because the likelihood of the obligation occurring is probable, but the amount is unknown,

this should be disclosed in the footnotes.

D) Because the likelihood of the obligation occurring is reasonably possible, this should be

disclosed in the footnotes.

Question Type: Application

9.5 Account for long-term debt

1) If the market rate of interest is higher than the stated rate of interest, then investors will be

willing to pay more and the bond is sold at a premium.

Question Type: Concept

2) The Discount on Bonds Payable account is known as an adjunct account.

Question Type: Concept

3) In general it is better to use current liabilities to finance current assets and long-term debt to

finance long-term assets.

Question Type: Concept

4) Debentures are bonds that are backed only by the general credit of the company issuing the

bond.

Question Type: Concept

5) Under a capital lease, the title of an asset remains with the lessor at the end of the lease.

Question Type: Concept

6) A mortgage is a special type of long-term note payable.

Question Type: Concept

7) A mortgage is a secured note because the building will serve as collateral.

Question Type: Concept

8) A person or business who pays another party for the use of an asset is a lessee.

Question Type: Concept

9) A $5,000 bond quoted at 104.4 will cost $5,220.

Question Type: Application

10) TLR Productions issued $10,000 of 6% bonds payable when the market rate was 8%;

therefore, they will sell them for more than $10,000.

Question Type: Application

11) On January 1, Greene Autos signed a $250,000, 6%, 30-year mortgage that requires

semiannual payments of $9,033 on June 30 and December 31 of each year. The journal entry to

record the first semiannual payment would be (round interest calculation to the nearest dollar) to:

A) debit Mortgage Payable, $9,033; credit Cash, $9,033.

B) debit Interest Expense, $1,533; debit Mortgage Payable, $7,500; credit Cash, $9,033.

C) debit Interest Expense, $7,500; debit Mortgage expense, $1,533; credit Cash, $9,033.

D) debit Interest Expense, $7,500; debit Mortgage Payable, $1,533; credit Cash, $9,033.

Question Type: Application

12) On January 1, Greene Autos signed a $270,000, 8%, 30-year mortgage that requires

semiannual payments of $11,934 on June 30 and December 31 of each year. The journal entry to

record the second semiannual payment would be: (Round your final answer to the nearest

dollar.)

A) debit Interest Expense, $10,755; debit Mortgage Payable, $1,179; credit Cash, $11,934.

B) debit Mortgage Payable, $11,934; credit Cash, $11,934.

C) debit Interest Expense, $10,755; debit Mortgage expense, $1,179; credit Cash, $11,934.

D) debit Interest Expense, $1,179; debit Mortgage Payable,$10,755; credit Cash, $11,934.

Question Type: Application

13) On January 1, Clive Corporation signed a $460,000, 6%, 30–year mortgage that requires

semiannual payments of $16,621 on June 30 and December 31 of each year. The journal entry to

record the first semiannual payment would be: (Round your final answer to the nearest dollar.)

A) debit Interest Expense, $2,821; debit Mortgage Payable, $13,800; credit Cash, $16,621.

B) debit Interest Expense, $13,800; debit Mortgage Payable, $2,821; credit Cash, $16,621.

C) debit Mortgage Payable, $16,621; credit Cash, $16,621.

D) debit Interest Expense, $13,800; debit Mortgage expense, $2,821; credit Cash, $16,621.

Question Type: Application

14) On January 1, Clive Corporation signed a $450,000, 5%, 30–year mortgage that requires

semiannual payments of $14,559 on June 30 and December 31 of each year. The journal entry to

record the second semiannual payment would be: (Round your final answer to the nearest

dollar.)

A) debit Interest Expense, $11,167; debit Mortgage expense, $3,392; credit Cash, $14,559.

B) debit Interest Expense, $3,392; debit Mortgage Payable, $11,167; credit Cash, $14,559.

C) debit Interest Expense, $11,167; debit Mortgage Payable, $3,392; credit Cash, $14,559.

D) debit Mortgage Payable, $14,559; credit Cash, $14,559.

Question Type: Application

15) Bonds from the same bond issue that mature at different times are called:

A) unsecured bonds.

B) term bonds.

C) convertible bonds.

D) serial bonds.

Question Type: Concept

16) Bonds that may be retired at a prearranged price are called:

A) convertible bonds.

B) term bonds.

C) secured bonds.

D) callable bonds.

Question Type: Concept

17) Bonds that mature all at the same time are:

A) serial bonds.

B) term bonds.

C) secured bonds.

D) callable bonds.

Question Type: Concept

18) Bonds that are backed by collateral are:

A) unsecured bonds.

B) convertible bonds.

C) callable bonds.

D) secured bonds.

Question Type: Concept

19) Bonds that are backed only by the credit of the issuing company are:

A) collateral bonds.

B) callable bonds.

C) unsecured bonds.

D) term bonds.

Question Type: Concept

20) Debenture bonds are the same as:

A) term bonds.

B) serial bonds.

C) secured bonds.

D) unsecured bonds.

Question Type: Concept

21) Bonds that can be exchanged for stock are called:

A) callable bonds.

B) serial bonds.

C) debenture bonds.

D) convertible bonds.

Question Type: Concept

22) The amount that a borrower must pay back to the bondholders on the maturity date is the:

A) principal.

B) interest.

C) stated value.

D) market value.

Question Type: Concept

23) The rate of interest that is printed on the bond is called the ________ rate of interest.

A) stated

B) market

C) variable

D) maturity

Question Type: Concept

24) The rate of interest that investors are willing to receive for similar bonds of equal risk at the

current time is the ________ rate of interest.

A) stated

B) market

C) variable

D) maturity

Question Type: Concept

25) If a bond’s stated rate of interest is equal to the market rate of interest, the bond will be issued

at:

A) a discount.

B) par.

C) a premium.

D) maturity value.

Question Type: Concept

26) If the market rate of interest is greater than the bond’s stated rate of interest, the bond will be

issued at:

A) a discount.

B) par.

C) a premium.

D) maturity value.

Question Type: Concept

27) If the market rate of interest is less than the bond’s stated rate of interest, the bond will be

issued at:

A) par.

B) a premium.

C) a discount.

D) maturity value.

Question Type: Concept

28) A $30,000 bond issue with a stated rate of interest of 6%, when the market rate of interest is

7%, means that the bond will be sold for:

A) $30,000

B) more than $30,000.

C) less than $30,000.

D) the maturity value.

Question Type: Application

29) A $9,000 bond issue with a stated interest rate of 9%, when the market rate of interest is 9%,

means that the bond will sell for:

A) $9,810.

B) $9,000

C) more than $9,000.

D) less than $9,000.

Question Type: Application

30) A $30,000 bond issue with a stated interest rate of 5%, when the market rate of interest is

6%, means that the bond will sell for:

A) $30,000

B) more than $30,000.

C) less than $30,000.

D) $40,000

Question Type: Application

31) A $45,000 bond issue with a stated interest rate of 10%, when the market rate of interest is

7%, means that the bond will sell for:

A) $45,000.

B) more than $45,000.

C) $31,500.

D) less than $45,000.

Question Type: Application

32) A $330,000 bond issue sold at 110 will cost: (Round your final answer to the nearest dollar.)

A) $330,000

B) $363,000

C) $300,000

D) whatever cost is negotiated.

Question Type: Application

33) A $170,000 bond issue sold at 97 will cost: (Round your final answer to the nearest dollar.)

A) whatever cost is negotiated.

B) $170,000

C) $175,258

D) $164,900

Question Type: Application

34) The journal entry to record $400,000 of bonds that were issued at 107 would be to:

A) debit Cash, $400,000; credit Bonds payable, $400,000.

B) debit Cash, $428,000; credit Bonds payable, $428,000.

C) debit Cash, $428,000; credit Bonds payable, $400,000; credit Premium on bonds payable,

$28,000.

D) debit Cash, $400,000; debit Discount on bonds payable, $28,000; credit Bonds payable,

$428,000.

Question Type: Application

35) The journal entry to record $230,000 of bonds that were issued at 98 would be to:

A) debit Cash, $225,400; debit Discount on bonds payable, $4,600; credit Bonds payable,

$230,000.

B) debit Cash, $225,400; credit Bonds payable, $225,400.

C) debit Cash, $230,000; credit Bonds payable, $225,400; credit Premium on bonds payable,

$4,600.

D) debit Cash, $230,000; credit Bonds payable, $230,000.

Question Type: Application

36) The journal entry to record $300,000 of bonds that were issued at 104 would be to:

A) debit Cash, $312,000; credit Bonds payable, $312,000.

B) debit Cash, $312,000; credit Bonds payable, $300,000; credit Premium on bonds payable,

$12,000

C) debit Cash, $300,000; credit Bonds payable, $300,000.

D) debit Cash, $300,000; debit Discount on bonds payable, $12,000; credit Bonds payable,

$312,000.

Question Type: Application

37) The journal entry to record $330,000 of bonds that were issued at 97 would be to:

A) debit Cash, $330,000; credit Bonds payable, $320,100; credit Premium on bonds payable,

$9,900.

B) debit Cash, $320,100; credit Bonds payable, $320,100.

C) debit Cash, $330,000; credit Bonds payable, $330,000.

D) debit Cash, $320,100; debit Discount on bonds payable, $9,900; credit Bonds payable,

$330,000.

Question Type: Application

38) $300,000 of 6%, 20-year bonds were sold for $330,000 on January 1. The bonds require

semiannual interest payments on June 30 and December 31. The entry to record the June 30

interest payment on the bonds would be to: (Round your final answer to the nearest dollar.)

A) debit Interest Expense $9,000; credit Cash, $9,000.

B) debit Interest Expense $9,750; credit Premium on bonds payable, $750; credit Cash, $9,000.

C) debit Interest Expense $8,250; debit Premium on bonds payable, $750; credit Cash, $9,000.

D) debit Interest Expense $8,250; credit Cash, $8,250.

Question Type: Application

39) $500,000 of 8%, 10-year bonds were sold for $520,000 on January 1. The bonds require

semiannual interest payments on June 30 and December 31. The entry to record the June 30

interest payment on the bonds would be to:

A) debit Interest Expense $19,000; debit Premium on bonds payable, $1,000; credit Cash,

$20,000.

B) debit Interest Expense $19,000; credit Cash, $19,000.

C) debit Interest Expense $21,000; credit Premium on bonds payable, $1,000; credit Cash,

$20,000.

D) debit Interest Expense $20,000; credit Cash, $20,000.

Question Type: Application

40) $200,000 of 6%, 25-year bonds were sold for $160,000 on January 1. The bonds require

semiannual interest payments on June 30 and December 31. The entry to record the June 30

interest payment on the bonds would be to:

A) debit Interest Expense $6,000; credit Cash, $6,000.

B) debit Interest Expense $6,800; credit Discount on bonds payable, $800; credit Cash, $6,000.

C) debit Interest Expense $5,200; debit Discount on bonds payable, $800; credit Cash, $6,000.

D) debit Interest Expense $6,800; credit Cash, $6,800.

Question Type: Application

41) $400,000 of 11%, 10-year bonds were sold for $370,000 on January 1. The bonds require

semiannual interest payments on June 30 and December 31. The entry to record the June 30

interest payment on the bonds would be to:

A) debit Interest Expense $22,000; credit Cash, $22,000.

B) debit Interest Expense $20,500; debit Discount on bonds payable, $1,500; credit Cash,

$22,000.

C) debit Interest Expense $23,500; credit Cash, $23,500.

D) debit Interest Expense $23,500; credit Discount on bonds payable, $1,500; credit Cash,

$22,000.

Question Type: Application