CHAPTER 10: LONG-TERM LIABILITIES
1. The current portion of long-term debt is a balance sheet item for Flavorful Products Company. How would it most
likely be classified on the balance sheet?
a. Current liability
b. Long-term liability
c. Current asset
d. Long-term liability
2. A ten-year lease obligation appears on the balance sheet of Generic Products Company. How would it most likely
be classified on the balance sheet?
a. Current asset
b. Long-term liability
c. Long-term asset
d. Contra-liability
3. Rent owed to the landlord is a balance sheet item for Generic Products Company. How would it most likely be
classified on the balance sheet?
a. Current liability
b. Long-term liability
c. Current asset
d. Owners’ equity
4. Which of the following statements is true with respect to long-term liabilities?
a. They are obligations that will be satisfied within one year.
b. An account payable is a good example of a long-term liability because it is interest-bearing.
c. Long-term liabilities include bonds, other long-term liabilities and deferred income taxes.
d. Accrued expenses are considered to be long-term liabilities.
5. Which of the following items should not appear in the long-term liability section of the balance sheet?
a. Accrued income taxes
b. Deferred income taxes
c. Bonds payable
d. Pension obligations
Chapter 10: Long-Term Liabilities
6. A convertible bond is one where
a. the issuer can convert from a fixed interest rate to a floating one.
b. the issuer can convert it from long-term to short-term.
c. the issuer can retire the bond before its specified due date.
d. the holder can convert the bond into common stock at a future time.
7. Crystal, Inc. issued $41,000,000 of bonds. Assuming the most common denomination of bonds, the number of
bonds sold was
a. 41,000.
b. 410,000.
c. 4,100,000.
d. 41,000,000.
8. Which of the following statements regarding bonds payable is true?
a. Generally, bonds are issued in denominations of $100.
b. When an issuing company’s bonds are traded in the “secondary” market, the company will receive part of the
proceeds when the bonds are sold from the first purchaser to the second purchaser.
c. A debenture bond is backed by specific assets of the issuing company.
d. Most bonds are term bonds, meaning that the entire principal amount will mature on a single date.
9. If a company’s bonds are callable,
a. the investor or buyer of the bonds has the right to retire the bonds.
b. the issuing company is likely to retire the bonds before maturity if the bonds are paying 9% interest while
the market rate of interest is 6%.
c. the bonds are never allowed to remain outstanding until the maturity date.
d. the investor never knows what the redemption price will be until the bonds are actually called.
10. Convertible bonds are attractive to investors because
a. they usually carry a higher rate of interest than non-convertible bonds.
b. they carry a convertible interest rate that can be increased when the prime rate of interest increases.
c. they can be converted into stock at the issuer’s option.
d. the issuing company cannot retire the bonds before maturity.
Chapter 10: Long-Term Liabilities
11. Which of the following statements regarding serial bonds is true?
a. They are likely to be issued by food companies.
b. They have shorter lives than term bonds.
c. They are strongly backed by the issuer’s collateral.
d. The bonds do not all mature on the same date.
12. Bonds are a popular source of financing because
a. bond interest expense is deductible for tax purposes, while dividends paid on stock are not.
b. financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of
stock.
c. a company having cash flow problems can postpone payment of interest to bondholders.
d. the bondholders can always convert their bonds into stock if they choose.
13. On January 2, 2015, Roof Master Construction, Inc. issued $500,000, 10-year bonds for $574,540. The bonds pay
interest on June 30 and December 31. The face rate is 8% and the market rate is 6%. At the maturity date, besides
an interest payment, Roof Master would repay the bondholders
a. $574,540.
b. $520,000.
c. $500,000.
d. only the last interest payment.
14. When bonds are issued by a company, the accounting entry shows an
a. increase in liabilities and a decrease in stockholders’ equity.
b. increase in liabilities and an increase in stockholders’ equity.
c. increase in assets and an increase in liabilities.
d. increase in assets and an increase in stockholders’ equity.
15. Bonds in the amount of $100,000 and a life of 10 years were issued by the Focus Company. If the face rate is 6%
and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds?
a. $ 60,000
b. $120,000
c. $ 30,000
d. $ 6,000
Chapter 10: Long-Term Liabilities
16. When determining the amount of interest to be paid on a bond, which of the following information is not necessary?
a. The face amount of the bonds
b. The selling price of the bonds
c. The face rate of interest on the bonds
d. The length of the interest period, annually or semiannually
17. Bennington Corp. issued a $40,000, 10-year bond at the face rate of 8%, paid semiannually. How much cash will
the bond investors receive at the end of the first interest period?
a. $ 800
b. $1,600
c. $3,200
d. $4,000
18. Which of the following statements is correct?
a. Bonds are issued at a price that reflects the stated rate of interest on the day the bond is purchased.
b. If the face rate of interest on a bond is not equal to the market rate of interest, then the company desiring to
issue the bonds must reprint its bond certificates.
c. The actual issue price of a bond represents the present value of all future cash flows related to the bond.
d. The market rate of interest has no bearing on the selling price of the bonds.
19. The bond issue price is determined by calculating the
a. present value of the stream of interest payments and the future value of the maturity amount.
b. future value of the stream of interest payments and the future value of the maturity amount.
c. future value of the stream of interest payments and the present value of the maturity amount.
d. present value of the stream of interest payments and the present value of the maturity amount.
20. Micro Company wishes to issue $400,000 of 5-year, 6% bonds, with interest paid annually at the end of the year.
The market rate of interest is currently 5%. What information is needed in order to determine the selling price?
a. The market rate of interest, the stated rate of interest, the bond rating, and the bond life.
b. The face amount of the bonds, the stated rate of interest, the market rate of interest, and the bond life.
c. The life of the bonds, the market rate of interest, the bond rating, and the face amount of the bonds.
d. The face amount of the bonds, the market rate of interest, the purpose of the issue, and the bond life.
Chapter 10: Long-Term Liabilities
21. Which of the following statements about bond accounting under the effective interest method is correct?
a. The cash interest paid is calculated as the bond face value × the effective rate.
b. The interest expense is calculated as the carrying value × the effective rate.
c. The difference between the cash interest paid and the interest expense is added to the carrying value of the
bonds if bonds were sold at a premium.
d. The difference between the interest expense and the interest paid is deducted from the carrying value of the
bonds if bonds were sold at a discount.
22. Which of the following terms does not describe an interest rate used to calculate the interest expense on the
income statement?
a. Nominal rate
b. Market rate
c. Effective rate
d. Yield rate
23. Use the information provided in the time value of money tables (Tables 9-1 through 9-4) in the text to
answer the question that follows.
Global Company issued $1,000,000, 8%, 7 year bonds, interest payable semiannually. The market rate of
interest was 6%. The issuance price of the bonds is
a. $1,111,560
b. $1,000,000
c. $1,151,480
d. $1,112,840
24. All of the following refer to the face rate of interest on a bond except:
a. stated rate
b. effective rate
c. nominal rate
d. coupon rate
25. Endeavor Company issued 20-year bonds with a coupon rate of 6% when the market rate of interest was 9%. This
means that the bonds were issued
a. at a premium.
b. at a discount.
c. at the face value.
d. with an additional 3 years of interest.
Chapter 10: Long-Term Liabilities
26. Flagg Company issued $500,000 of bonds for $498,351, Interest is paid semiannually. The bond markets and
the financial press are likely to state the bond issue price as
a. 498.35.
b. 100.00.
c. 99.67.
d. 49.84.
27. If bonds are issued at 101.25, this means that
a. a $1,000 bond sold for $101.25.
b. the bonds sold at a discount.
c. a $1,000 bond sold for $1,012.50.
d. the bond rate of interest is 10.13% of the market rate of interest.
28. When bonds are sold for less than the face amount, this means that the
a. maturity value will be less than the face amount.
b. maturity value will be greater than the face amount.
c. bonds are sold at a premium.
d. face rate of interest is less than the market rate of interest.
29. Which of the following terms does not describe the interest rate printed on the bond certificate?
a. Coupon rate
b. Effective rate
c. Face rate
d. Stated rate
30. Which of the following trends can be unfavorable from the viewpoint of a bondholder?
a. The issuing company’s debt ratio is steadily declining.
b. The issuing company’s interest coverage ratio is steadily rising.
c. Market interest rates are steadily rising.
d. The issuing company’s net cash flow from operating activities is steadily increasing.
Chapter 10: Long-Term Liabilities
31. On the issuance date, the Bonds Payable account had a balance of $50,000,000 and Premium on Bonds Payable
had a balance of $1,000,000. What was the issue price of the bonds?
a. $50,000,000
b. $49,000,000
c. $51,000,000
d. Unable to determine from the information given
32. The Discount on Bonds Payable account is shown on the balance sheet as
a. an asset.
b. an expense.
c. a long-term liability.
d. a contra long-term liability.
33. The Premium on Bonds Payable account is shown on the balance sheet as
a. a contra asset.
b. a reduction of an expense.
c. an addition to a long-term liability.
d. a subtraction from a long-term liability.
34. Bonds are sold at a premium if the
a. issuing company has a better reputation than other companies in the same business.
b. market rate of interest was less than the face rate at the time of issue.
c. market rate of interest was more than the face rate at the time of issue.
d. company will have to pay a premium to retire the bonds.
35. Churchill Company planned to raise $100,000 by issuing bonds. The bond certificates were printed bearing an
interest rate of 8%, which was equal to the market rate of interest. However, before the bonds could be issued,
economic conditions forced the market rate up to 9%. If the life of the bonds is 6 years and interest is paid annually
on December 31, how much will Churchill receive from the sale of the bonds?
a. Exactly $100,000 because Churchill Company would still pay interest at the face rate of 8%.
b. Less than $100,000 because the market rate of interest at 9% was more than the face rate.
c. Greater than $100,000 because the face rate of interest at 8% was less than the market rate.
d. The bonds would not be sold at all; Churchill Company would have the certificates reprinted bearing
the market rate of 9%.
Chapter 10: Long-Term Liabilities
36. When will bonds sell at a discount?
a. The credit standing of the issuing company is not as good as other companies in a similar line of business.
b. The face rate of interest is less than the market rate of interest at the time of issue.
c. The face rate of interest is more than the market rate of interest at the time of issue.
d. The issuing company will be able to retire the bonds at less than face at maturity.
37. Discount on Bonds Payable is a balance sheet item for Covington Products Company. How would it most likely
be classified on the balance sheet?
a. Current liability
b. Long-term liability
c. Current asset
d. Contra-liability
38. Premium on Bonds Payable is a balance sheet item for Ohio Products Company. How would it most likely be
classified on the balance sheet?
a. An increase to a long-term liability
b. Revenue
c. Long-term asset
d. Contra liability
39. Weather Corp. issued 10-year, 8%, $100,000 bonds paying interest on an annual basis, at a $5,200 premium.
Which one of the following statements is true?
a. Weather’s annual interest expense on the bonds will be greater than the amount of interest payments to
bondholders each year.
b. Weather’s annual interest expense on the bonds will be less than the amount of interest payments to bondholders
each year.
c. Weather will receive $94,800 as the issue price.
d. The cash paid to bondholders will be $520 each interest period.
40. With the effective interest method of amortization, the amortization of bond discount results in a(n)
a. increase in stockholders’ equity.
b. decrease of stockholders’ equity.
c. increase in interest expense.
d. decrease in interest expense.
Chapter 10: Long-Term Liabilities
41. With the effective interest method of amortization, the amortization of bond premium results in a(n)
a. increase in stockholders’ equity.
b. no change in stockholders’ equity.
c. increase in interest expense.
d. decrease in interest expense.
42. On January 2, 2015, Wynn Corporation sold $750,000 of bonds for $745,000. The bonds will mature in 10 years
and pay interest annually on December 31. Wynn properly recorded the payment of interest and amortization of the
discount using the effective interest method. Which of the following statements is true about the carrying value of
the bonds and/or the unamortized discount at the end of 2015?
a. The carrying value will be less than $745,000.
b. The carrying value will be $745,000.
c. The carrying value will be greater than $745,000.
d. The unamortized premium will be less than $5,000.
43. In 2015, Suez Company issued $200,000 of bonds for $189,640. If the face rate of interest was 6.73% and the
effective rate of interest was 8%, how would Suez calculate the interest expense for the first year on the bonds
using the effective interest method?
a. $189,640 × 6.73%
b. $189,640 × 8%
c. $10,000 × 6.73%
d. $10,000 × 8%
44. The result of using the effective interest method of amortization of discount on bonds is that the
a. interest expense for each amortization period is constant.
b. effective interest rate for each amortization period is constant.
c. amount of interest expense decreases each period.
d. cash interest payment is greater than the interest expense.
45. If bonds were initially issued at a premium, the carrying value of the bonds on the issuer’s books will
a. decrease as the bonds approach their maturity date.
b. increase as the bonds approach their maturity date.
c. remain constant throughout the bonds’ life.
d. fluctuate throughout the bonds’ life.
Chapter 10: Long-Term Liabilities
46. If bonds were initially issued at a discount, the interest expense on the bonds calculated using the effective interest
method will
a. decrease as the bonds approach their maturity date.
b. increase as the bonds approach their maturity date.
c. remain constant throughout the bonds’ life.
d. fluctuate throughout the bonds’ life.
47. Under the effective interest method, the cash paid on each interest payment date will
a. decrease if bonds are issued at a premium.
b. increase if bonds are issued at a premium.
c. remain constant regardless of the issuance price.
d. increase if bonds are issued at a discount.
48. On January 1, 2015, Chain, Inc. issued $400,000, 10-year, 10% bonds for $354,200. The bonds pay interest on
June 30 and December 31. The market rate is 12%. The interest expense on the bonds at June 30, 2015 is
a. $20,000
b. $24,000
c. $21,252
d. $17,710
49. On January 1, 2015, Clarkson, Inc. issued $400,000, 10-year, 10% bonds for $354,200. The bonds pay interest on
June 30 and December 31. The market rate is 12%. What is the carrying value of the bonds after the first interest
payment is made on June 30, 2015?
a. $352,960
b. $354,200
c. $355,452
d. $400,000
50. On January 1, 2015, Corner Store, Inc. issued $400,000, 10-year, 10% bonds for $354,200. The bonds pay
interest on June 30 and December 31. The market rate is 12%. The cash payment on June 30, 2015 is
a. $20,000.
b. $21,200.
c. $24,000.
d. $17,710.
Chapter 10: Long-Term Liabilities
51. On January 1, 2015, Clark, Inc. issued $400,000, 10-year, 10% bonds for $354,200. The bonds pay interest on
June 30 and December 31. The market rate is 12%. What is the carrying value of the bonds at the end of the ten
years?
a. $400,000
b. $480,000
c. $380,000
d. $354,200
52. On January 2, 2015, Garage Master Construction, Inc. issued $500,000, 10-year bonds for $574,540. The bonds
pay interest on June 30 and December 31. The face rate is 8% and the market rate is 6%.The interest expense on
the bonds at June 30, 2015 is
a. $ 2,764.
b. $17,236.
c. $20,000.
d. $22,764.
53. On January 2, 2015, Hi-Tech Master Construction, Inc. issued $500,000, 10-year bonds for $574,540. The bonds
pay interest on June 30 and December 31. The face rate is 8% and the market rate is 6%. The annual cash
payment (paid in semiannual payments) on the bonds is
a. $40,000.
b. $30,000.
c. $20,000.
d. $15,000.
54. On January 2, 2015, Concrete Master Construction, Inc. issued $500,000, 10-year bonds for $574,540. The bonds
pay interest on June 30 and December 31. The face rate is 8% and the market rate is 6%. What is the carrying
value of the bonds after the first interest payment is made on June 30, 2015?
a. $574,540
b. $571,776
c. $568,920
d. $500,000
55. On January 2, 2015, Lawn Master Construction, Inc. issued $500,000, 10-year bonds for $574,540. The bonds pay
interest on June 30 and December 31. The face rate is 8% and the market rate is 6%. What is the carrying value of
the bonds at the end of ten years before the final maturity payment is made?
a. $574,540
b. $525,000
c. $500,000
d. $425,460
Chapter 10: Long-Term Liabilities
56. Which of the following statements regarding amortization is true?
a. Amortization of the premium causes the premium on bonds payable account to increase.
b. Amortization of the premium causes the amount of interest expense to increase.
c. Cash interest payments on bonds equals interest expense on the income statement when there is amortization
of bond premium.
d. Amortization of premium continues over the life of the bond until the balance in the account is reduced to
zero.
57. Amortization of bond discount results in a(n)
a. decrease of the bonds payable account.
b. decrease of stockholders’ equity.
c. increase of stockholders’ equity.
d. decrease in the cash account.
58. Amortization of bond premium results in a(n)
a. decrease of the carrying value of bonds.
b. no change in stockholders’ equity.
c. increase in interest expense.
d. decrease in the cash account.
59. Neville Company issued $100,000 of 6%, 10 year bonds when the market rate of interest was 5%. The proceeds
from this bond issue were $107,732. Using the effective interest method of amortization, which of the following
statements is true? Assume interest is paid annually.
a. Interest payments to bondholders each period will be $6,464.
b. Interest payments to bondholders each period will be $5,000.
c. Amortization of the premium for the first interest period will be $1,226.
d. Amortization of the premium for the first interest period will be $613.
60. Because of changing market conditions, Friendly Corporation made the decision to redeem $300,000 of its bonds
prior to maturity. The bonds had been issued at a discount and the balance in the discount account at the time of
redemption was $15,000. The corporation’s bond certificates indicated that the bonds could be retired early at 103.
Friendly’s retirement of the bonds would result in a(n)
a. loss of $24,000.
b. gain of $6,000.
c. decrease in owners’ equity of $9,000.
d. increase in assets of $15,000.
Chapter 10: Long-Term Liabilities
61. Which of the following statements is true with regard to early retirement of bonds?
a. If the carrying value of the bonds is higher than the redemption price, the issuing firm must record a loss.
b. Firms always find it advantageous to retire bonds issued at lower rates with bonds issued at higher rates.
c. It is always advantageous to carry out early retirement for bonds issued at a premium but not for bonds
issued at a discount.
d. Any gain or loss resulting from early retirement of bonds would appear on the income statement of the
issuing company.
62. A gain on bond redemption
a. is considered unusual and infrequent.
b. should be treated as part of operating income.
c. decreases a company’s income.
d. is always included when predicting a company’s future income.
63. Shuttle Master Airlines has leased an aircraft from Streamline Aircraft Company. The annual payments are
$1,000,000 and the life of the lease is 18 years. It is estimated that the useful life of the aircraft is 20 years. How
would Shuttle Master Airlines record the acquisition of the aircraft? The effective rate of interest is 9%.
a. The company would not record the aircraft as an asset but would record rent expense of $1,000,000 per year
for 18 years.
b. The company would not record the aircraft as an asset but would record rent expense of $900,000 per year
for 20 years.
c. The aircraft would be recorded as an asset with a cost of $8,756,000.
d. The aircraft would be recorded as an asset with a cost of $9,129,000.
64. Which of the following statements regarding leases is false?
a. Lease agreements are a popular form of financing the purchase of assets because leases do not require a
large initial outlay of cash.
b. Accounting recognizes two types of leases—operating and capital leases.
c. If a lessor classifies a lease as a capital lease, then the lessee records a lease liability on its balance sheet.
d. If a lease is classified as an operating lease, the lessee records a lease liability on its balance sheet.
65. Which of the following lease conditions would result in a capital lease to the lessee?
a. The lessee will return the property to the lessor at the end of the lease term.
b. The lessee can purchase the property for $1 at the end of the lease term.
c. The fair market value of the property at the inception of the lease is $18,000; the present value of the
minimum lease payments is $15,977.
d. The lease term is 70% of the property’s economic life.
Chapter 10: Long-Term Liabilities
66. Surplus Mining Company has leased a machine from Craft Machinery Company. The annual payments are $6,000
and the life of the lease is 8 years. It is estimated that the useful life of the machine is 9 years. How would Surplus
Mining record the acquisition of the machine?
a. The machine would be recorded as an asset with a cost of $48,000.
b. The company would not record the machine as an asset but would record rent expense of $6,000 per year.
c. The machine would be recorded as an asset, at the present value of the annual cash payments, $6,000 for 8
years.
d. The machine would be recorded as an asset, at the present value of the annual cash payments, $6,000 for 9
years.
67. Which of the following accounts would not appear on the balance sheet of a lessee company recording a capital
lease?
a. Accumulated depreciation on the leased asset
b. Lease obligation in the current liability section
c. Lease obligation in the long-term liability section
d. Rent expense on the income statement
68. Happy Corporation leased a building from Sensor Company. The 10-year lease is recorded as a capital lease. The
annual payments are $10,000 and the recorded cost of the asset is $67,100. The straight-line method is used to
calculate depreciation. Which of the following statements is true?
a. Depreciation expense of $6,710 will be recorded each year.
b. Depreciation expense of $10,000 will be recorded each year.
c. No depreciation expense will be recorded by Happy Corporation.
d. No interest expense will be recorded by Happy Corporation.
69. All of the following statements are true except:
a. The criteria to determine whether a lease contract should be considered a capital lease are applied in a more
rigid way under U.S. GAAP than IFRS.
b. The criteria to determine whether a lease contract should be considered a capital lease are applied in a more
rigid way under IFRS than U.S. GAAP.
c. The lease criteria under IFRS are to be used as guidelines rather than rules.
d. IFRS requires more accounting judgment than U.S. GAAP in the determination of whether a lease is
classified as an operating lease or a capital lease.
Chapter 10: Long-Term Liabilities
70. The current balance sheet of Sanders Inc. reports total assets of $20 million, total liabilities of $2 million, and
owners’ equity of $18 million. Sanders Inc. is considering several financing possibilities in order to expand
operations.
If Sanders Inc.’s owner invests an additional $2 million to finance the expansion, the debt to equity ratio will
a. stay the same
b. decrease
c. increase
d. cannot be determined from this information.
71. The current balance sheet of Handyman Inc. reports total assets of $20 million, total liabilities of $2 million,
and owners’ equity of $18 million. Handyman Inc. is considering several financing possibilities in order to
expand operations.
What is the additional amount that Handyman Inc. can borrow and not exceed a debt to equity ratio of 0.3?
a. $5.4 million
b. $3.4 million
c. $5.5 million
d. $4.0 million
72. Line Corporation’s balance sheet showed the following amounts for their liability and stockholders’ equity accounts:
Current Liabilities, $5,000; Bonds Payable, $1,500; Lease Obligations, $2,000; and Deferred Income Taxes, $300.
Total stockholders’ equity was $6,000. The debt-to–equity ratio is
a. 0.63
b. 0.83
c. 1.42
d. 1.47
73. One way analysts measure the ability of a company to meet its obligations is to calculate the times interest
earned ratio for any outstanding debt the company may have. For Tempo Solutions Corporation, $10,000 of
bonds paying 6.5% annually are outstanding. Income before interest and taxes is $7,000. How would Tempo
Solutions Corporation calculate the times interest earned ratio?
a. Income before interest and taxes divided by the interest expense.
b. Income before interest and taxes divided by carrying value of the bonds outstanding.
c. Income before interest and taxes divided by the face rate on bonds.
d. Face amount of bonds divided by income before interest and taxes.
Chapter 10: Long-Term Liabilities
74. Tampa Corporation’s balance sheet showed the following amounts for their liabilities and stockholders’ equity
accounts: Current Liabilities, $20,000; Bonds Payable, $60,000; Lease Obligations, $12,000; and Deferred
Income Taxes, $2,000. Total stockholders’ equity was $42,000. The debt-to-equity ratio is
a. 0.45
b. 0.58
c. 1.76
d. 2.24
75. A decreasing long-term liability account is presented on the statement of cash flows as
a. a decrease in cash in the Financing Activities category.
b. a decrease in cash in the Investing Activities category.
c. an increase in cash in the Operating Activities category.
d. an increase in cash in the Financing Activities category.
76. On January 1, 2015, the long-term liability section of Quick Silver Co. balance sheet showed a balance of
$800,000 in the bonds payable account. On December 31, 2015, the balance in that same account was $765,000.
This change would appear on the statement of cash flows as
a. an outflow of cash of $35,000 in the financing activities category.
b. an inflow of cash of $35,000 in the financing activities category.
c. an outflow of cash of $35,000 in the investing activities category.
d. an inflow of cash of $35,000 in the investing activities category.
77. An example of a cash flow related to a liability that would not appear in the financing activities category of the
statement of cash flows is
a. mortgage payable.
b. bonds payable.
c. deferred income taxes.
d. a lease obligation.
78. On January 1, 2012, the long-term liability section of Eden Company’s balance sheet showed a balance of $35,000
in the bonds payable account. On December 31, 2012, the balance in that same account was $20,000. This change
would appear on the statement of cash flows as
a. an outflow of cash of $15,000 in the financing activities category.
b. an inflow of cash of $15,000 in the financing activities category.
c. an outflow of cash of $15,000 in the investing activities category.
d. an inflow of cash of $15,000 in the investing activities category.
Chapter 10: Long-Term Liabilities
79. [APPENDIX] The deferred income taxes for a corporation represent
a. the dollar amount of deductions that a corporation may claim for the year.
b. an additional assessment made by the IRS for underpaid taxes.
c. the estimated amount of next year’s taxes.
d. the dollar amount that arises due to the difference between accounting for financial statements and
accounting for tax purposes.
80. [APPENDIX] Deferred income taxes arise because
a. corporations often make errors in their tax estimations.
b. companies can use accounting methods that minimize net income for tax purposes and other methods that
maximize net income for reporting to shareholders.
c. the IRS owes a company a refund from last year.
d. large corporations generally have operations in foreign countries whose tax law is quite different from U.S.
tax law.
81. [APPENDIX] One example of a temporary difference between financial and tax reporting results from
a. rent expense.
b. tax-exempt interest from municipal bonds.
c. life insurance proceeds resulting from the death of an executive.
d. depreciation of long-term assets.
82. [APPENDIX] Wave Corporation is determining its income tax liability. It has one machine that cost $30,000 with
a 4-year life and no salvage value. Wave is using an accelerated depreciation method for tax purposes. For
accounting purposes, Wave has decided to use the straight-line method. Which of the following statements is true?
a. There will be a temporary difference between accounting income and income for tax purposes.
b. There will be a permanent difference between accounting income and income for tax purposes.
c. Wave’s accounting income and income for tax purposes will be equal.
d. Accounting income will be lower than income for tax purposes, especially in the early years of the
asset’s life.
83. [APPENDIX] Stockton Corporation has made an accounting entry to record deferred taxes as a liability resulting
from temporary differences between accounting income and taxable income. Which of the following statements
is true?
a. Deferred tax will be decreased.
b. Stockholders’ equity will be increased.
c. Stockholders’ equity will be decreased.
d. Assets will be decreased.
Chapter 10: Long-Term Liabilities
84. [APPENDIX] For 2015, Wasabi Company has accounting revenues of $6,000. However, because of temporary
differences between tax and accounting, $1,000 of this is not subject to tax. If expenses are $3,000 for both tax and
accounting, and the tax rate is 40%, what is the amount of tax payable to the IRS?
a. $ 400
b. $ 800
c. $1,200
d. $1,600
85. [APPENDIX] When a company has a credit balance in its Deferred Tax account, this amount would appear as
a(n)
a. contra asset on the balance sheet.
b. stockholders’ equity account on the balance sheet.
c. expense account on the income statement.
d. liability account on the balance sheet.
86. [APPENDIX] The attitude of the Financial Accounting Standards Board toward deferred tax liabilities is that
they are
a. an amount that results in a future obligation and meets the definition of a liability.
b. a bookkeeping item that is used merely to maintain equality of the accounting equation.
c. not true liabilities because the balance increases every year.
d. not payable in the immediate future so it not necessary to record them.
87. [APPENDIX] Deferred income taxes is a balance sheet item for Iowa Products Company. How would it most
likely be classified on the balance sheet?
a. Owners’ equity
b. Long-term liability
c. Expense
d. Contra liability
88. [APPENDIX] A decrease in deferred taxes (liability) would appear on the statement of cash flows, prepared using
the indirect method as a(n)
a. addition to net income in the operating activities category.
b. deduction to net income in the operating activities category.
c. inflow of cash in the financing activities category.
d. outflow of cash in the financing activities category.
Chapter 10: Long-Term Liabilities
89. [APPENDIX] Marshland Company uses the straight-line depreciation for financial reporting purposes and an
accelerated depreciation method for tax purposes. As a result, Marshland will record:
a. a deferred tax asset.
b. a deferred tax liability.
c. a permanent difference.
d. tax-exempt depreciation.
90. Discount on Bonds Payable is classified as a current liability.
a. True
b. False
91. All liabilities that are not classified as current liabilities are classified as long-term.
a. True
b. False
92. Bonds are generally issued in denominations of $1,000.
a. True
b. False
93. Serial bonds are unique because the interest is paid as a series of daily payments.
a. True
b. False
94. Bonds are typically issued in denominations of $10,000.
a. True
b. False
95. If Tanner Company becomes less creditworthy, the market price of its bonds will decline.
a. True
b. False
Chapter 10: Long-Term Liabilities
96. Debenture bonds are backed by specific collateral of the issuing company.
a. True
b. False
97. Convertible bonds normally sell at a higher price than non-convertible bonds.
a. True
b. False
98. If an investor has the right to retire the bonds, they are referred to as callable.
a. True
b. False
99. Callable bonds may be retired by the issuer before their specified due date.
a. True
b. False
100. The most obvious risk to bond investors is that a company will fail and be unable to pay its debts.
a. True
b. False
101. The face rate is also called the nominal or stated rate.
a. True
b. False
102. A bond issue price is the present value of the cash flows that the bond will produce.
a. True
b. False
103. The issue price of a bond is always present valued using the market rate of interest.
a. True
b. False