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2) When bonds are retired at maturity, assuming the last interest payment has already been recorded, the
journal entry includes a debit to the Bonds Payable account and a credit to the Cash account.
3) When bonds are retired at maturity, ________.
A) the bondholders are paid the face value plus the unamortized premium or less the unamortized
discount
B) the carrying value equals the face value plus the unamortized premium or less the unamortized
discount
C) the carrying value always equals the face value
D) the entry to retire the bonds may include a gain or loss on retirement of bonds
4) Scotland, Inc. issued a $5,000 face value, 10%, five-year bond at 98. What will be the journal entries at
the maturity of the bond? The bonds have semiannual interest, and the company uses the straight-line
method of amortization. Omit explanations.
5) England Corporation issued a $400,000, 5.5%, 10-year bonds payable at 101 on January 1, 2009. The
bonds are retired on January 1, 2019. Prepare the journal entries on the date of issuance and at the date of
retirement. Omit explanations.
6) The main reason companies retire bonds prior to their maturity date is to relieve the pressure of paying
interest payments.
7) An alternative to calling the bonds is to purchase any available bonds in the open market at their
current market price.
8) Callable bonds are bonds that the issuer may call and pay off at a specified price whenever the issuer
wants.
9) On July 1, 2019, Montana Company has bonds with balances as shown below.
Bonds Payable
70,000
Discount on Bonds Payable
3600
If the company retires the bonds for $71,150, what will be the effect on the income statement?
A) loss on retirement of $4750
B) gain on retirement of $4750
C) sales revenue of $66,400
D) no effect on net income
10) On July 1, 2019, Michigan Company has bonds with balances as shown below.
Bonds Payable
71,000
Premium on Bonds Payable
3800
If the company retires the bonds for $74,150, what will be the effect on the income statement?
A) gain on retirement of $6950
B) loss on retirement of $6950
C) gain on retirement of $650
D) loss on retirement of $650
11) On March 21, 2019, the bond accounts of Pet Supplies Sales showed the following balances.
Pet Supplies Sales retires the bonds for $66,150. Prepare the journal entry to record the retirement of the
bonds. Omit explanation.
12) On March 21, 2019, the bond accounts of Fitzhugh Sales showed the following balances.
Fitzhugh Sales retires the bonds for $66,150. Prepare the journal entry to record the retirement of the
bonds. Omit explanation.
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Copyright © 2018 Pearson Education, Inc.
Learning Objective 12-5
1) The United Way Payable account would normally be shown on the balance sheet under current
liabilities.
2) FICA—OASDI Taxes Payable would normally be shown on the balance sheet under long-term
liabilities.
3) Federal Unemployment Taxes Payable is typically shown on the balance sheet under the long-term
liabilities section.
4) The Current Portion of Long-Term Notes Payable would normally be shown on the balance sheet
under current liabilities.
5) The Employee Bonus Payable would normally be shown on the balance sheet under long-term
liabilities.
6) The balance sheet shows the balance in Bonds Payable plus any discount or minus any premium.
7) Refer to the following list of liability balances at December 31, 2018.
Accounts Payable
$22,000
Employee Health Insurance Payable
1450
Employee Income Tax Payable
400
Estimated Warranty Payable (Due 2019)
1200
Long-Term Notes Payable (Due 2022)
37,000
FICA—OASDI Taxes Payable
1560
Sales Tax Payable
1270
Mortgage Payable (Due 2023)
7000
Bonds Payable (Due 2024)
53,000
Current Portion of Long-Term Notes Payable
7500
What is the total amount of current liabilities?
A) $35,380
B) $27,880
C) $27,480
D) $26,280
8) Refer to the following list of liability balances at December 31, 2019.
Accounts Payable
$15,000
Employee Health Insurance Payable
1150
Employee Income Tax Payable
600
Estimated Warranty Payable (Due 2020)
1400
Long-Term Notes Payable (Due 2022)
40,000
FICA—OASDI Taxes Payable
1060
Sales Tax Payable
670
Mortgage Payable (Due 2023)
15,000
Bonds Payable (Due 2024)
54,000
Current Portion of Long-Term Notes Payable
10,500
What is the total amount of long-term liabilities?
A) $55,000
B) $109,000
C) $94,000
D) $40,000
9) List the two categories of liabilities reported on the balance sheet and provide an example of each.
10) At December 31, 2018, Micro Instruments owes $47,000 on Accounts Payable. The balance of Salaries
Payable is $14,000 and the balance of Income Tax Payable is $8,000. Micro also has $250,000 of Bonds
Payable that were issued at face value. These bonds require payment of a $25,000 installment next year
and payment of the remainder in later years. The bonds payable require an annual interest payment of
$7,500. Micro still owes this for the current year.
Requirement:
Report Micro Instruments' liabilities on its classified balance sheet on December 31, 2018.
1) The debt to equity ratio measures the proportion of total liabilities relative to the total equity.
2) The lower the debt to equity ratio, the greater the company's financial risk.
3) If the debt to equity ratio is greater than 1, the company is financing more assets with equity than with
debt.
4) If a company is financing more assets with debt than with equity, the ________.
A) debt to equity ratio will be more than 1
B) debt to equity ratio will be between 0 to 1
C) debt to equity ratio will be equal to 1
D) debt to equity ratio will be negative
5) Which of the following statements is true of the debt to equity ratio?
A) The higher the debt to equity ratio, the lower the company's financial risk.
B) The higher the debt to equity ratio, the greater the company's financial risk.
C) If the debt to equity ratio is greater than 1, the company is financing more assets with equity than with
debt.
D) If the debt to equity ratio is less than 1, the company is financing more assets with debt than with
equity.
