Chapter 10 5 The Gain Loss The difference Between The Cash

Document Type
Test Prep
Book Title
Financial Accounting-- Binder Ready Version: Tools for Business Decision Making 8th Edition
Authors
Donald E. Kieso, Jerry J. Weygandt, Paul D. Kimmel
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
10-72
COMPLETION STATEMENTS
279. A current liability is a debt that can be expected to be paid within ____________ year(s)
or the ______________, whichever is longer.
280. Liabilities are classified on the balance sheet as being _______________ liabilities or
______________ liabilities.
281. Obligations in written form are called ______________ and usually require the borrower
to pay interest.
282. With an interest-bearing note, a borrower must pay the ________________ of the note
plus _________________ at maturity.
283. Sales taxes collected from customers are a ______________ of the business until they
are remitted to the taxing agency.
284. Payroll taxes include the employer’s share of ________________ taxes and both state
and federal ________________ taxes.
285. Bonds that mature at a single specified future date are called _________________ bonds,
whereas bonds that mature in installments are called __________________ bonds.
286. The terms of a bond issue are set forth in a formal legal document called a bond
________________.
287. Unsecured bonds that are issued against the general credit of the borrower are called
________________ bonds.
Reporting and Analyzing Liabilities
FOR INSTRUCTOR USE ONLY
10-73
288. The market price of bonds is obtained by computing the present value of the
________________ paid at maturity, and all ________________ payments to be made
over the term of the bond.
289. If bonds are issued at face value (par), it indicates that the ________________ rate of
interest must be equal to the ________________ rate of interest.
290. If a $1 million, 10%, 10-year bond issue was sold at 97, the cash proceeds from the
issuance of the bonds amounted to $________________.
291. If bonds were issued at a premium, then the contractual rate of interest was
_______________ than the market rate of interest.
292. Discount on Bonds Payable is ________________ (“deducted from” or “added to”) bonds
payable on the balance sheet. Premium on Bonds Payable is ________________
(“deducted from” or “added to”) bonds payable on the balance sheet.
293. The ________________ provides an indication of a company’s ability to meet interest
payments as they come due.
*294. A method of amortizing bond discount or premium that allocates an equal amount each
period is the ________________ method.
Answers to Completion Statements
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
10-74
MATCHING
295. Match the items below by entering the appropriate code letter in the space provided.
A. Serial bonds F. Current ratio
B. Debenture bonds G. Straight-line method of amortization
C. Bond indenture H. Times interest earned
D. Market interest rate I. Callable bonds
E. Discount on bonds payable J. Maturity date
____ 1. Bonds subject to retirement at a stated dollar amount prior to maturity.
____ 2. A legal document that sets forth the terms of a bond issue.
____ 3. Bonds that mature in installments.
____ 4. A measure of a company’s short-term liquidity.
____ 5. The time that the final payment on a bond is due from the bond issuer.
____ 6. A measure of a company’s solvency.
____ 7. The rate investors demand for loaning funds to a corporation.
____ 8. Unsecured bonds issued against the general credit of the borrower.
____ 9. Occurs when the contractual rate of interest is less than the market rate of interest.
____ 10. Produces a periodic interest expense that is the same amount each interest period.
SHORT-ANSWER ESSAY QUESTIONS
S-A E 296
(a) Identify three taxes commonly paid by employers on employees' salaries and wages.
(b) Where in the financial statements does the employer report taxes withheld from employees'
pay?
Reporting and Analyzing Liabilities
FOR INSTRUCTOR USE ONLY
10-75
Solution 296
S-A E 297
(a) What is a convertible bond?
(b) Discuss the advantages of a convertible bond from the standpoint of the bondholders and
of the issuing corporation.
S-A E 298
When determining the value of a bond using present value, what are the two components used in
the calculation?
S-A E 299
When a bond sells at a discount, what is probably true about the market interest rate versus the
stated interest rate? Discuss.
S-A E 300
Bonds are frequently issued at amounts greater or less than face value. Describe how the market
rate of interest, relative to the contractual rate of interest, affects the selling price of bonds.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
10-76
Solution 300
the bonds will be issued at a premium.
S-A E 301
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.
S-A E 302
(a) In general, what are the requirements for the financial statement presentation of long-term
liabilities?
(b) What ratios may be computed to evaluate a company's liquidity and solvency?
S-A E 303
Maria Gomez is discussing the advantages of the effective-interest method of bond amortization
with her accounting staff. What do you think Maria is saying?
Reporting and Analyzing Liabilities
FOR INSTRUCTOR USE ONLY
10-77
Solution 303
S-A E 304 (Ethics)
Wishbone 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.
S-A E 305 (Communication)
Susan Jones works for Trend Press, a fairly large book publishing firm. Her best friend and rival,
Diane Nilson, works for Lifeline Books, a smaller publisher. Both companies issue $100,000 in
bonds on July 1. Trend's bonds were issued at a discount, while Lifeline's were issued at a
premium. Diane sent Susan a fax the next day. She told Susan that it was obvious who the better
publisher was and the market had shown its preference! She reminded Susan again of her recent
increase in salary as further proof of the superiority of Lifeline Books.
Required:
Draft a short note for Susan to send to Diane. Explain how such a result could occur.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
10-78
Reporting and Analyzing Liabilities
10-79
IFRS QUESTIONS
1. Wittebury Corporation retires its £3,000,000 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 $3,112,350. The entry to record the redemption will include
a. a credit of £37,650 to Gain on Bond Redemption.
b. a debit of £37,650 to Loss on Bond Redemption.
c. a credit of £15,000 to Bonds Payable.
d. a credit of £37,650 to Bonds Payable.
2. Chang Company retired bonds with a face amount of ¥60,000,000 at 98 when the carrying
value of the bond was ¥59,780,000. The entry to record the retirement would include a
a. gain on bond redemption of ¥980,000.
b. loss on bond redemption of ¥980,000.
c. loss on bond redemption of ¥1,200,000.
d. gain on bond redemption of ¥1,420,000.
3. Herman Company received proceeds of ₤471,250 on 10-year, 8% bonds issued on
January 1, 2015. The bonds had a face value of 500,000, pay interest semi-annually on
June 30 and December 31, and have a call price of 101. Herman uses the straight-line
method of amortization.
Herman Company decided to redeem the bonds on January 1, 2017. What amount of
gain or loss would Herman report on its 2017 income statement?
a. 23,000 gain
b. 28,000 gain
c. 28,000 loss
d. 23,000 loss
4. Finney Company borrowed 1,600,000 from BankTwo on January 1, 2016 in order to
expand its mining capabilities. The five-year note required annual payments of 416,698
and carried an annual interest rate of 9.5%. What is the balance in the notes payable
account at December 31, 2017 after the annual payment?
a. 1,600,000
b. 1,045,458
c. 1,335,302
d. 1,296,000
5. On January 1, 2017, Michelin Company, a calendar-year company, issued 9,000,000 of
mortgage notes payable, of which 3,000,000 is due on January 1 for each of the next
three years. The proper statement of financial position presentation on December 31,
2017, is
a. Current liabilities, 9,000,000.
b. Long-term Debt, 9,000,000.
c. Current liabilities, 4,500,000; Long-term Debt, 4,500,000.
d. Current liabilities, 3,000,000; Long-term Debt, 6,000,000.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
10-80
6. Whitmore Corporation Issues a £1,800,000, 10%, 10-year mortgage on December 31,
2017. The terms call for semi-annual installment payments of £144,435.The entry to
record the first installment payment will include
a. a debit to Interest Payment of £144,435.
b. a debit to Mortgage Notes Payable of £54,435.
c. a debit to Interest Expense of £180,000.
d. a credit to cash of £144,435.
7. The adjusted trial balance for Beneteau Corporation at the end of the 2017 included the
following accounts:
5-year Bonds Payable 8% €6,620,000
Bond Interest Payable 240,000
Notes Payable (3 mo.) 50,000
Notes Payable (5 yr.) 1,650,000
Mortgage Payable (€150,000 due currently) 2,000,000
Salaries and Wages Payable 68,000
Taxes Payable (due 3/15 of next year) 85,000
The total non-current liabilities reported on the statement of financial position at December
31, 2017 are
a. €9,880,000
b. 10,030,000
c. 10,120,000
d. 10,360,000
8. Selected data from 2017 financial statements of Xi Corporation include the following
(amount in millions):
Current assets ¥ 759
Total assets 1,200
Current liabilities 400
Total liabilities 750
Cash 80
Interest expense 50
income taxes 100
Net income 160
The debt to assets ratio is
a. 62.5%.
b. 52.7%.
c. 1.60%.
d. 6.2 times.
Reporting and Analyzing Liabilities
10-81
a
9. ¥2 billion, 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. ¥160,000,000 received for 10 periods must be calculated.
b. ¥2 billion received in 10 periods must be calculated.
c. ¥2 billion received in 20 periods must be calculated.
d. ¥80,000,000 received for 10 periods must be calculated.
a
10. On January 1, 2017, Asianic Inc. issued 10-year bonds with a face amount of ¥25,000,000
and a contract rate of 8% payable annually on January 1. The effective-interest rate on
the bonds is 10%. Present value factors are as follows:
At 8% At 10%
PV of 1 for 10 periods 0.463 0.386
PV of an ordinary annuity if 1 for 10 periods 6.710 6.145
Total issue price of the bonds was
a. ¥25,000,000.
b. ¥24,500,000.
c. ¥23,000,000.
d. ¥21,940,000.

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