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CHAPTER 10
LIABILITIES
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Item
LO
BT
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True-False Statements
1.
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4
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37.
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a
49.
10
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2.
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3
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3.
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AP
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sg
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2
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sg
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3
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2
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41.
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4
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2
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18.
3
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sg
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K
7.
2
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3
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4
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8.
2
AP
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sg
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5
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6
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4
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12.
2
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36.
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a
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9
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Multiple Choice Questions
59.
1
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84.
2
AN
109.
3
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134.
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5
C
60.
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110.
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135.
4
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86.
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111.
3
AP
136.
4
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C
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2
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112.
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4
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113.
3
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163.
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C
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114.
3
AP
139.
4
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5
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65.
1
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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
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94.
3
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119.
3
C
144.
4
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169.
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AP
70.
2
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95.
3
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120.
3
AP
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4
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170.
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AP
71.
2
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96.
3
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3
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146.
4
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171.
6
AP
72.
2
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3
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122.
3
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4
C
172.
6
AP
73.
2
AN
98.
3
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123.
3
K
148.
4
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6
AP
74.
2
AP
99.
3
AP
124.
4
K
149.
4
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6
AP
75.
2
C
100.
3
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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.
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AP
178.
6
C
79.
2
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104.
3
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129.
4
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5
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2
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105.
3
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4
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6
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81.
3
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106.
3
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131.
4
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5
C
181.
6
AP
82.
3
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107.
3
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132.
4
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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.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 2
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
184.
7
AP
199.
8
AP
a
214.
10
AP
a
229.
11
AP
st
244.
6
K
185.
7
K
200.
8
K
a
215.
10
C
a
230.
11
AP
sg
245.
6
AP
186.
7
K
a
201.
9
AP
a
216.
11
AP
a
231.
11
AP
st
246.
7
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7
C
a
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st
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8
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7
C
a
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10,11
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9
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2,3
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st
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Brief Exercises
255.
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Exercises
270.
1,3
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3
AN
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298.
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S
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AP
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286.
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7
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AN
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AN
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4
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287.
5, 6
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AN
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AN
Completion Statements
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Matching
320.
5
N/A
A
Short-Answer Essay
321.
5
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322.
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N/A
324.
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N/A
326.
3
N/A
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.
Liabilities
FOR INSTRUCTOR USE ONLY
10 - 3
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
270.
Ex
2.
TF
50.
TF
61.
MC
64.
MC
67.
MC
255.
BE
302.
C
3.
TF
59.
MC
62.
MC
65.
MC
237.
MC
256.
BE
303.
C
Learning Objective 2
5.
TF
11.
TF
71.
MC
77.
MC
85.
MC
91.
MC
304.
C
6.
TF
12.
TF
72.
MC
78.
MC
86.
MC
239.
MC
305.
C
7.
TF
51.
TF
73.
MC
79.
MC
87.
MC
257.
BE
8.
TF
68.
MC
74.
MC
80.
MC
88.
MC
271.
Ex
9.
TF
69.
MC
75.
MC
33.
MC
89.
MC
272.
Ex
10.
TF
70.
MC
76.
MC
84.
MC
90.
MC
273.
Ex
Learning Objective 3
13.
TF
81.
MC
98.
MC
107.
MC
116.
MC
240.
MC
279.
Ex
14.
TF
82.
MC
99.
MC
108.
MC
117.
MC
258.
BE
306.
C
15.
TF
83.
MC
100.
MC
109.
MC
118.
MC
259.
BE
307.
C
16.
TF
92.
MC
101.
MC
110.
MC
119.
MC
270.
Ex
326.
S-A
17.
TF
93.
MC
102.
MC
111.
MC
120.
MC
274.
Ex
18.
TF
94.
MC
103.
MC
112.
MC
121.
MC
275.
Ex
19.
TF
95.
MC
104.
MC
113.
MC
122.
MC
276.
Ex
20.
TF
96.
MC
105.
MC
114.
MC
123.
MC
277.
Ex
52.
TF
97.
MC
106.
MC
115.
MC
239.
MC
278.
Ex
Learning Objective 4
21.
TF
28.
TF
125.
MC
132.
MC
139.
MC
146.
MC
280.
Ex
22.
TF
29.
TF
126.
MC
133.
MC
140.
MC
147.
MC
281.
Ex
23.
TF
30.
TF
127.
MC
134.
MC
141.
MC
148.
MC
282.
Ex
24.
TF
31.
TF
128.
MC
135.
MC
142.
MC
149.
MC
283.
Ex
25.
TF
53.
TF
129.
MC
136.
MC
143.
MC
150.
MC
308.
C
26.
TF
54.
TF
130.
MC
137.
MC
144.
MC
241.
MC
309.
C
27.
TF
124.
MC
131.
MC
138.
MC
145.
MC
260.
BE
310.
C
Learning Objective 5
32.
TF
39.
TF
154.
MC
161.
MC
168.
MC
284.
Ex
314.
C
33.
TF
40.
TF
155.
MC
162.
MC
242.
MC
285.
Ex
320.
Ma
34.
TF
55.
TF
156.
MC
163.
MC
243.
MC
286.
Ex
321.
S-A
35.
TF
56.
TF
157.
MC
164.
MC
261.
BE
287.
Ex
322.
S-A
36.
TF
151.
MC
158.
MC
165.
MC
262.
BE
311.
C
327.
S-A
37.
TF
152.
MC
159.
MC
166.
MC
263.
BE
312.
C
38.
TF
153.
MC
160.
MC
167.
MC
264.
BE
313.
C
Learning Objective 6
41.
TF
169.
MC
174.
MC
179.
MC
244.
MC
289.
Ex
42.
TF
170.
MC
175.
MC
180.
MC
245.
MC
290.
Ex
43.
TF
171.
MC
176.
MC
181.
MC
265.
BE
315.
C
44.
TF
172.
MC
177.
MC
182.
MC
287.
Ex
323.
S-A
57.
MC
173.
MC
178.
MC
183.
MC
288.
Ex
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 4
Learning Objective 7
45.
TF
185.
MC
188.
MC
191.
MC
266.
BE
293.
Ex
46.
TF
186.
MC
189.
MC
192.
MC
291.
Ex
184.
MC
187.
MC
190.
MC
246.
MC
292.
Ex
Learning Objective 8
47.
TF
193.
MC
195.
MC
197.
MC
199.
MC
247.
MC
294.
Ex
58.
TF
194.
MC
196.
MC
198.
MC
200.
MC
267.
BE
295.
Ex
Learning Objective a9
a48.
TF
a201.
MC
a202.
MC
a248.
MC
a296.
Ex
a316.
C
a324.
S-A
Learning Objective a10
a49.
TF
a205.
MC
a208.
MC
a211.
MC
a214.
MC
a297.
Ex
a203.
MC
a206.
MC
a209.
MC
a212.
MC
a215.
MC
a317.
C
a204.
MC
a207.
MC
a210.
MC
a213.
MC
a268
BE
a325.
S-A
Learning Objective a11
a203.
MC
a220.
MC
a225.
MC
a230.
MC
a235.
MC
a300.
Ex
a216.
MC
a221.
MC
a226.
MC
a231.
MC
a236.
MC
a301.
Ex
a217.
MC
a222.
MC
a227.
MC
a232.
MC
a269.
BE
a318.
C
a218.
MC
a223.
MC
a228.
MC
a233.
MC
a298.
Ex
a319.
C
a219.
MC
a224.
MC
a229.
MC
a234.
MC
a299.
Ex
Learning Objective 12
249.
MC
250.
MC
251.
MC
252.
MC
253.
MC
254.
MC
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice EX = Exercise SA = Short-Answer
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 expects to pay 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 a company recognizes
revenue, a transfer from unearned revenue to revenue occurs. Companies report the current
maturities of long-term debt as a current liability in the balance sheet.
Liabilities
FOR INSTRUCTOR USE ONLY
10 - 5
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, 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 a 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 assets and times interest earned
are two ratios that provide information about debt-paying ability and long-run solvency.
a9. 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.
a10. 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.
a11. 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.
Test Bank for Financial Accounting, Ninth Edition
10 - 6
TRUE-FALSE STATEMENTS
1. A current liability must be paid out of current earnings.
2. Current liabilities are expected to be paid within one year or the operating cycle,
whichever is longer.
3. The relationship between current liabilities and current assets is important in evaluating a
company's ability to pay off its long-term debt.
4. A company whose current liabilities exceed its current assets may have a liquidity
problem.
5. Notes payable usually require the borrower to pay interest.
6. Notes payable are often used instead of accounts payable.
7. A note payable must always be paid before an account payable.
8. A $30,000, 8%, 9-month note payable requires an interest payment of $1,800 at maturity.
9. Most notes are not interest bearing.
10. With an interest-bearing note, the amount of cash received upon issuance of the note
generally exceeds the note's face value.
11. Interest expense on a note payable is only recorded at maturity.
12. Interest expense is reported under Other Expenses and Losses in the income statement.
13. Unearned revenues should be classified as Other Revenues and Gains on the Income
Statement.
Liabilities
10 - 7
14. The higher the sales tax rate, the more profit a retailer can earn.
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.
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.
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.
18. The current ratio permits analysts to compare the liquidity of different sized companies.
19. Working capital is current assets divided by current liabilities.
20. FICA taxes withheld and federal income taxes withheld are mandatory payroll deductions.
21. Each bondholder may vote for the board of directors in proportion to the number of bonds
held.
22. Bond interest paid by a corporation is an expense, whereas dividends paid are not an
expense of the corporation.
23. Bonds that the issuing company can redeem at a stated dollar amount prior to maturity
are convertible bonds.
24. A debenture bond is an unsecured bond which is issued against the general credit of the
borrower.
25. Bonds are a form of interest-bearing notes payable.
26. Neither corporate bond interest nor dividends are deductible for tax purposes.
Test Bank for Financial Accounting, Ninth Edition
10 - 8
27. A 10% stock dividend is the equivalent of a $1,000 par value bond paying annual interest
of 10%.
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.
29. The board of directors may authorize more bonds than are issued.
30. The contractual interest rate is always equal to the market interest rate on the date that
bonds are issued.
31. If $150,000 face value bonds are issued at 103, the proceeds received will be $103,000.
32. Discount on bonds is an additional cost of borrowing and should be recorded as interest
expense over the life of the bonds.
33. If a corporation issued bonds at an amount less than face value, it indicates that the
corporation has a weak credit rating.
34. A corporation that issues bonds at a discount will recognize interest expense at a rate
which is greater than the market interest rate.
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.
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.
37. If the market interest rate is greater than the contractual interest rate, bonds will sell at a
discount.
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.
Liabilities
10 - 9
39. If bonds sell at a premium, the interest expense recognized each year will be greater than
the contractual interest rate.
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.
41. The loss on bond redemption is the difference between the cash paid and the carrying
value of the bonds.
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.
43. Gains and losses are not recognized when convertible bonds are converted into common
stock.
44. Generally, convertible bonds do not pay interest.
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.
46. A long-term note that pledges title to specific property as security for a loan is known as a
mortgage payable.
47. The times interest earned ratio is computed by dividing net income by interest expense.
a
48. The present value of a bond is a function of two variables: (1) the payment amounts and
(2) the interest (discount) rate.
a
49. The effective-interest method of amortization results in varying amounts of amortization
and interest expense per period but a constant interest rate.
50. A debt that is expected to be paid within one year through the creation of long-term debt is
a current liability.
51. Notes payable usually are issued to meet long-term financing needs.
Test Bank for Financial Accounting, Ninth Edition
10 - 10
52. Current maturities of long-term debt are often identified as long-term debt due within one
year on the balance sheet.
53. Bonds that permit bondholders to convert them into common stock at their option are
known as callable bonds.
54. The terms of the bond issue are set forth in a formal legal document called a bond
indenture.
55. The carrying value of bonds at maturity should be equal to the face value of the bonds.
56. Premium on Bonds Payable is a contra account to Bonds Payable.
57. When bonds are converted into common stock, the carrying value of the bonds is
transferred to paid-in capital accounts.
58. Long-term liabilities are reported in a separate section of the balance sheet immediately
following current liabilities.
Answers to True-False Statements
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.
Liabilities
10 - 11
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.
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.
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.
63. Liabilities are classified on the balance sheet as current or
a. deferred.
b. unearned.
c. long-term.
d. accrued.
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.
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.
66. Which of the following is usually not an accrued liability?
a. Interest payable
b. Wages payable
c. Taxes payable
d. Notes payable
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 12
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.
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.
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.
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.
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
72. Admire County Bank agrees to lend Givens Brick Company $600,000 on January 1.
Givens Brick Company signs a $600,000, 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 ................................................................. 36,000
Cash. .................................................................................. 564,000
Notes Payable ............................................................ 600,000
b. Cash ................................................................................... 600,000
Notes Payable ............................................................ 600,000
Liabilities
10 - 13
MC. 72 (Cont.)
c. Cash ................................................................................... 600,000
Interest Expense ................................................................. 36,000
Notes Payable ............................................................ 636,000
d. Cash ................................................................................... 600,000
Interest Expense ................................................................. 36,000
Notes Payable ............................................................ 600,000
Interest Payable ......................................................... 36,000
73. Admire County Bank agrees to lend Givens Brick Company $600,000 on January 1.
Givens Brick Company signs a $600,000, 8%, 9-month note. What is the adjusting entry
required if Givens Brick Company prepares financial statements on June 30?
a. Interest Expense ................................................................. 24,000
Interest Payable ......................................................... 24,000
b. Interest Expense ................................................................. 24,000
Cash .......................................................................... 24,000
c. Interest Payable .................................................................. 24,000
Cash .......................................................................... 24,000
d. Interest Payable .................................................................. 24,000
Interest Expense ........................................................ 24,000
74. Admire County Bank agrees to lend Givens Brick Company $600,000 on January 1.
Givens Brick Company signs a $600,000, 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 .................................................................... 636,000
Cash .......................................................................... 636,000
b. Notes Payable .................................................................... 600,000
Interest Payable .................................................................. 36,000
Cash .......................................................................... 636,000
c. Interest Expense ................................................................. 36,000
Notes Payable .................................................................... 600,000
Cash .......................................................................... 636,000
d. Interest Payable .................................................................. 24,000
Notes Payable .................................................................... 600,000
Interest Expense ................................................................. 12,000
Cash .......................................................................... 636,000
Test Bank for Financial Accounting, Ninth Edition
10 - 14
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.
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.
77. On October 1, Steve's Carpet Service borrows $350,000 from First National Bank on a 3-
month, $350,000, 8% note. What entry must Steve's Carpet Service make on December
31 before financial statements are prepared?
a. Interest Payable .................................................................. 7,000
Interest Expense ........................................................ 7,000
b. Interest Expense ................................................................. 28,000
Interest Payable ......................................................... 28,000
c. Interest Expense ................................................................. 7,000
Interest Payable ......................................................... 7,000
d. Interest Expense ................................................................. 7,000
Notes Payable ............................................................ 7,000
78. On October 1, Steve's Carpet Service borrows $350,000 from First National Bank on a 3-
month, $350,000, 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..................................................................... 357,000
Cash ........................................................................... 357,000
b. Notes Payable..................................................................... 350,000
Interest Payable .................................................................. 7,000
Cash ........................................................................... 357,000
c. Notes Payable..................................................................... 350,000
Interest Payable .................................................................. 28,000
Cash ........................................................................... 378,000
d. Notes Payable..................................................................... 350,000
Interest Expense ................................................................. 7,000
Cash ........................................................................... 357,000
Liabilities
10 - 15
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.
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
d. Notes Payable
Cash
Interest Payable
81. Sales taxes collected by a retailer are recorded by
a. crediting Sales Taxes Revenue.
b. debiting Sales Tax Expense.
c. crediting Sales Taxes Payable.
d. debiting Sales Taxes Payable.
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.
83. Sales taxes collected by the retailer are recorded as a(n)
a. revenue.
b. liability.
c. expense.
d. asset.
Test Bank for Financial Accounting, Ninth Edition
10 - 16
84. On September 1, Joe's Painting Service borrows $150,000 from National Bank on a 4-
month, $150,000, 6% note. What entry must Joe's Painting Service make on December
31 before financial statements are prepared?
a. Interest Payable .................................................................. 3,000
Interest Expense ........................................................ 3,000
b. Interest Expense ................................................................. 9,000
Interest Payable ......................................................... 9,000
c. Interest Expense ................................................................. 3,000
Interest Payable ......................................................... 3,000
d. Interest Expense ................................................................. 3,000
Notes Payable ............................................................ 3,000
85. On September 1, Joe's Painting Service borrows $150,000 from National Bank on a 4-
month, $150,000, 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..................................................................... 153,000
Cash ........................................................................... 153,000
b. Notes Payable..................................................................... 150,000
Interest Payable .................................................................. 3,000
Cash ........................................................................... 153,000
c. Notes Payable..................................................................... 150,000
Interest Payable .................................................................. 9,000
Cash ........................................................................... 159,000
d. Notes Payable..................................................................... 150,000
Interest Expense ................................................................. 3,000
Cash ........................................................................... 153,000
86. The interest charged on a $400,000, 90-day note payable, at the rate of 8%, would be
a. $32,000.
b. $17,776.
c. $8,000.
d. $2,666.
87. The interest charged on a $50,000, 60-day note payable, at the rate of 6%, would be
a. $3,000.
b. $1,667.
c. $750.
d. $500.
Liabilities
10 - 17
88. The interest charged on a $90,000, 3-month note payable, at the rate of 8%, would be
a. $7,200.
b. $3,600.
c. $1,800.
d. $1,200.
89. The interest charged on a $70,000, 2-month note payable, at the rate of 6%, would be
a. $4,200.
b. $2,100.
c. $1,050.
d. $700.
90. On October 1, 2015, Pennington Company issued a $90,000, 10%, nine-month interest-
bearing note. If the Pennington Company is preparing financial statements at December
31, 2015, the adjusting entry for accrued interest will include a:
a. credit to Notes Payable of $2,250.
b. debit to Interest Expense of $2,250
c. credit to Interest Payable of $4,500.
d. debit to Interest Expense of $3,375.
91. On October 1, 2014, Pennington Company issued a $90,000, 10%, nine-month interest-
bearing note. Assuming interest was accrued in June 30, 2015, the entry to record the
payment of the note on July 1, 2015, will include a:
a. debit to Interest Expense of $2,250.
b. credit to Cash of $90,000
c. debit to Interest Payable of $6,750.
d. debit to Notes Payable of $96,750.
92. Crawford Company has total proceeds (before segregation of sales taxes) from sales of
$7,155. If the sales tax is 6%, the amount to be credited to the account Sales Revenue is:
a. $7,155.
b. $6,726.
c. $7,584.
d. $6,750.
Test Bank for Financial Accounting, Ninth Edition
10 - 18
93. Reliable Insurance Company collected a premium of $36,000 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. $12,000.
c. $24,000.
d. $36,000.
94. A company receives $265, of which $15 is for sales tax. The journal entry to record the
sale would include a
a. debit to Sales Tax Expense for $15.
b. credit to Sales Taxes Payable for $15.
c. debit to Sales Revenue for $265.
d. debit to Cash for $250.
95. A company receives $371, of which $21 is for sales tax. The journal entry to record the
sale would include a
a debit to Sales Tax Expense for $21.
b. debit to Sales Taxes Payable for $21.
c. debit to Sales Revenue for $371.
d. debit to Cash for $371.
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 $630,000, what is the amount of the sales taxes owed to the taxing
agency?
a. $600,000
b. $630,000
c. $31,500
d. $30,000
97. On January 1, 2015, Howard Company, a calendar-year company, issued $900,000 of
notes payable, of which $225,000 is due on January 1 for each of the next four years. The
proper balance sheet presentation on December 31, 2015, is
a. Current Liabilities, $900,000.
b. Long-term Debt, $900,000.
c. Current Liabilities, $450,000; Long-term Debt, $450,000.
d. Current Liabilities, $225,000; Long-term Debt, $675,000.
Liabilities
10 - 19
98. On January 1, 2015, Donahue Company, a calendar-year company, issued $600,000 of
notes payable, of which $150,000 is due on January 1 for each of the next four years. The
proper balance sheet presentation on December 31, 2015, is
a. Current Liabilities, $600,000.
b. Long-term Debt , $600,000.
c. Current Liabilities, $150,000; Long-term Debt, $450,000.
d. Current Liabilities, $450,000; Long-term Debt, $150,000.
99. A cash register tape shows cash sales of $1,800 and sales taxes of $126. The journal
entry to record this information is
a. Cash ................................................................................... 1,926
Sales Revenue ........................................................... 1,926
b. Cash ................................................................................... 1,926
Sales Taxes Payable ................................................. 126
Sales Revenue ........................................................... 1,800
c. Cash ................................................................................... 1,800
Sales Tax Expense ............................................................. 126
Sales Revenue ........................................................... 1,926
d. Cash ................................................................................... 1,926
Sales Revenue ........................................................... 1,800
Sales Taxes Revenue ................................................ 126
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
Cash .......................................................................... 750
c. Sales Tax Expense ............................................................. 750
Sales Taxes Payable ................................................. 750
d. No entry required.
101. Layton Company does not ring up sales taxes separately on the cash register. Total
receipts for October amounted to $29,400. If the sales tax rate is 5%, what amount must
be remitted to the state for October's sales taxes?
a. $1,400
b. $1,470
c. $70
d. It cannot be determined.
Test Bank for Financial Accounting, Ninth Edition
10 - 20
102. Valerie's Salon has total receipts for the month of $20,670 including sales taxes. If the
sales tax rate is 6%, what are Valerie's sales for the month?
a. $19,637
b. $21,910
c. $19,500
d. It cannot be determined.
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.
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 $294,000, what is the amount of the sales taxes owed to the taxing
agency?
a. $280,000
b. $294,000
c. $14,700
d. $14,000
105. Advances from customers are classified as a(n)
a. revenue.
b. expense.
c. current asset.
d. current liability.
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.
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.
Liabilities
10 - 21
108. Sales taxes collected by a retailer are reported as
a. contingent liabilities.
b. revenues.
c. expenses.
d. current liabilities.
109. Julie's Boutique has total receipts for the month of $31,920 including sales taxes. If the
sales tax rate is 5%, what are Julie's sales for the month?
a. $30,324
b. $30,400
c. $33,516
d. It cannot be determined.
110. A cash register tape shows cash sales of $3,500 and sales taxes of $210. The journal
entry to record this information is
a. Cash ................................................................................... 3,500
Sales Revenue ........................................................... 3,500
b. Cash ................................................................................... 3,710
Sales Tax Revenue .................................................... 210
Sales Revenue ........................................................... 3,500
c. Cash ................................................................................... 3,500
Sales Tax Expense ............................................................. 210
Sales Revenue ........................................................... 3,710
d. Cash ................................................................................... 3,710
Sales Revenue ........................................................... 3,500
Sales Taxes Payable ................................................. 210
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.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 22
112. Oakley Company does not ring up sales taxes separately on the cash register. Total
receipts for February amounted to $42,800. If the sales tax rate is 7%, what amount must
be remitted to the state for February's sales taxes?
a. $2,996
b. $2,800
c. $4,280
d. It cannot be determined.
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.
114. Pickett Company typically sells subscriptions on an annual basis, and publishes six times
a year. The magazine sells 90,000 subscriptions in January at $15 each. What entry is
made in January to record the sale of the subscriptions?
a. Subscriptions Receivable .................................................... 1,350,000
Subscription Revenue ................................................ 1,350,000
b. Cash ................................................................................... 1,350,000
Unearned Subscription Revenue ................................ 1,350,000
c. Subscriptions Receivable .................................................... 225,000
Unearned Subscription Revenue ................................ 225,000
d. Prepaid Subscriptions ......................................................... 1,350,000
Cash ........................................................................... 1,350,000
115. Hilton Company issued a four-year interest-bearing note payable for $600,000 on January
1, 2014. Each January the company is required to pay $150,000 on the note. How will this
note be reported on the December 31, 2015 balance sheet?
a. Long-term debt, $600,000.
b. Long-term debt, $450,000.
c. Long-term debt, $300,000; Long-term debt due within one year, $150,000.
d. Long-term debt, $450,000; Long-term debt due within one year, $150,000.
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
Liabilities
10 - 23
MC. 116 (Cont.)
c. Prepaid Service Fees
Service Revenue
d. No entry is required when the engagement is concluded.
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
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.
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.
120. Hardy Company has current assets of $95,000, 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. $85,000 and .95:1.
b. -$5,000 and 1.95:1.
c. $5,000 and .95:1.
d. -$5,000 and .95:1.
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.
Test Bank for Financial Accounting, Ninth Edition
10 - 24
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.
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
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.
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.
126. If a corporation issued $4,000,000 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. $4,000,000
b. $120,000
c. $400,000
d. $280,000
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.
Liabilities
10 - 25
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.
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.
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.
131. Bonds that are secured by real estate are termed
a. mortgage bonds.
b. convertible bonds.
c. debentures.
d. bearer bonds.
132. Bonds issued against the general credit of the borrower are called
a. callable bonds.
b. debenture bonds.
c. mortgage bonds.
d. a sinking fund bond.
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.
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.
Test Bank for Financial Accounting, Ninth Edition
10 - 26
135. Bonds that have specific assets of the issuer pledged as collateral are
a. secured bonds.
b. callable bonds.
c. convertible bonds.
d. debenture bonds.
136. A bond secured by specific assets set aside to redeem the bonds is called a
a. convertible bond.
b. sinking fund bond.
c. mortgage bond.
d. secured bond.
137. The interest rate investors demand for loaning funds is the
a. market interest rate.
b. stated rate.
c. contractual interest rate.
d. bond interest rate.
138. Companies with good credit ratings use _________________ bonds extensively.
a. callable bonds.
b. convertible bonds.
c. mortgage bonds.
d. debenture bonds.
139. Corporations are granted the power to issue bonds through
a. tax laws.
b. state laws.
c. federal security laws.
d. bond debentures.
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.
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.
Liabilities
10 - 27
142. All bonds will always fall into which one of the following pairs of categories?
a. Secured or unsecured
b. Mortgage or sinking fund
c. Debenture or unsecured
d. Callable or convertible
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.
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.
145. The contractual interest rate is always stated as a(n)
a. monthly rate.
b. daily rate.
c. semiannual rate.
d. annual rate.
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.
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.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 28
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
149. A $1,000 face value bond with a quoted price of 98 is selling for
a. $1,000.
b. $980.
c. $908.
d. $98.
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.
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.
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.
153. On January 1, 2015, Carter Corporation issued $5,000,000, 10-year, 8% bonds at 102.
Interest is payable semiannually on January 1 and July 1. The journal entry to record this
transaction on January 1, 2015 is
a. Cash ................................................................................... 5,000,000
Bonds Payable ........................................................... 5,000,000
b. Cash ................................................................................... 5,100,000
Bonds Payable ........................................................... 5,100,000
Liabilities
10 - 29
MC. 153 (Cont.)
c. Premium on Bonds Payable ............................................... 100,000
Cash ................................................................................... 5,000,000
Bonds Payable ........................................................... 5,100,000
d. Cash ................................................................................... 5,100,000
Bonds Payable ........................................................... 5,000,000
Premium on Bonds Payable ....................................... 100,000
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.
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.
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.
157. Hernandez Corporation issues 2,000, 10-year, 8%, $1,000 bonds dated January 1, 2015,
at 98. The journal entry to record the issuance will show a
a. debit to Cash of $2,000,000.
b. credit to Discount on Bonds Payable for $40,000.
c. credit to Bonds Payable for $2,040,000.
d. debit to Cash for $1,960,000.
158. The market interest rate is often called the
a. stated rate.
b. effective rate.
c. coupon rate.
d. contractual rate.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 30
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.
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.
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.
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.
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.
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.
165. Four thousand bonds with a face value of $1,000 each, are sold at 105. The entry to
record the issuance is
a. Cash .................................................................................. 4,200,000
Bonds Payable .......................................................... 4,200,000
b. Cash .................................................................................. 4,000,000
Premium on Bonds Payable ............................................... 200,000
Bonds Payable .......................................................... 4,200,000
Liabilities
FOR INSTRUCTOR USE ONLY
10 - 31
MC. 165 (Cont.)
c. Cash .................................................................................. 4,200,000
Premium on Bonds Payable ...................................... 200,000
Bonds Payable .......................................................... 4,000,000
d. Cash .................................................................................. 4,200,000
Discount on Bonds Payable ...................................... 200,000
Bonds Payable .......................................................... 4,000,000
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.
167. Ward Corporation issues 5,000, 10-year, 8%, $1,000 bonds dated January 1, 2015, at
103. 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 $150,000.
c. credit to Bonds Payable for $5,030,000.
d. credit to Cash for $5,150,000.
168. Lake Company received proceeds of $188,000 on 10-year, 6% bonds issued on January
1, 2015. 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 2015?
a. $11,200
b. $12,000
c. $13,200
d. $10,800
169. Beonce Company received proceeds of $188,000 on 10-year, 6% bonds issued on
January 1, 2013. 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, 2015. What amount of gain
or loss would Beonce report on its 2015 income statement?
Test Bank for Financial Accounting, Ninth Edition
10 - 32
MC. 169 (Cont.)
a. $9,600 gain
b. $11,600 gain
c. $11,600 loss
d. $9,600 loss
170. Bargain Company has $1,500,000 of bonds outstanding. The unamortized premium is
$19,600. If the company redeemed the bonds at 101, what would be the gain or loss on
the redemption?
a. $4,600 gain
b. $4,600 loss
c. $15,000 gain
d. $15,000 loss
171. The current carrying value of Kane’s $800,000 face value bonds is $797,000. If the bonds
are retired at 103, what would be the amount Kane would pay its bondholders?
a. $797,000
b. $800,000
c. $820,910
d. $824,000
172. Lark Corporation retires its $800,000 face value bonds at 104 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 $2,040 to Loss on Bond Redemption.
b. debit of $2,040 to Loss on Bond Redemption.
c. credit of $32,040 to Premium on Bonds Payable.
d. debit of $32,000 to Premium on Bonds Payable.
173. A $600,000 bond was retired at 102 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 $12,000.
b. loss on bond redemption of $10,000.
c. loss on bond redemption of $12,000.
d. gain on bond redemption of $10,000.
Liabilities
10 - 33
174. If sixty $1,000 convertible bonds with a carrying value of $70,000 are converted into 9,000
shares of $5 par value common stock, the journal entry to record the conversion is
a. Bonds Payable .................................................................. 70,000
Common Stock ......................................................... 70,000
b. Bonds Payable .................................................................. 60,000
Premium on Bonds Payable .............................................. 10,000
Common Stock ......................................................... 70,000
c. Bonds Payable .................................................................. 60,000
Premium on Bonds Payable .............................................. 10,000
Common Stock ......................................................... 45,000
Paid-in Capital in Excess of Par ................................ 25,000
d. Bonds Payable .................................................................. 70,000
Discount on Bonds Payable ...................................... 10,000
Common Stock ......................................................... 45,000
Paid-in Capital in Excess of Par ................................ 15,000
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.
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.
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.
Test Bank for Financial Accounting, Ninth Edition
10 - 34
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.
179. If bonds with a face value of $140,000 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 $140,000.
b. Bonds Payable for $135,000.
c. Discount on Bonds Payable for $5,000.
d. Bonds Payable equal to the market price of the bonds on the date of conversion.
180. A $600,000 bond was retired at 98 when the carrying value of the bond was $590,000.
The entry to record the retirement would include a
a. gain on bond redemption of $10,000.
b. loss on bond redemption of $10,000.
c. loss on bond redemption of $2,000.
d. gain on bond redemption of $2,000.
181. Thirty $1,000 bonds with a carrying value of $39,600 are converted into 4,000 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 .......................................................... 20,000
Paid-in Capital in Excess of Par ................................. 19,600
b. Bonds Payable ................................................................... 30,000
Premium on Bonds Payable ............................................... 9,600
Common Stock .......................................................... 30,000
Paid-in Capital in Excess of Par ................................ 3,600
c. Bonds Payable ................................................................... 30,000
Premium on Bonds Payable ............................................... 9,600
Common Stock .......................................................... 20,000
Paid-in Capital in Excess of Par ................................. 19,600
d. Bonds Payable ................................................................... 39,600
Common Stock .......................................................... 36,000
Paid-in Capital in Excess of Par ................................. 3,600
Liabilities
10 - 35
182. On March 31, 2015, $6,000,000 of 6%, 10-year bonds payable, dated December 31,
2014, 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 $6,072,000. 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, 2015, is
$360,000.
c. The amount of cash paid to bondholders on the next interest date, June 30, 2015, is
$60,000.
d. The bonds were issued at a discount.
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 $20 million of these bonds it will report:
a. A $1,400,000 gain.
b. A $800,000 loss.
c. An unrealized gain.
d. Neither gains nor losses are recognized on early retirements of debt.
184. On December 1, 2014, Crawley Corporation incurs a 15-year $600,000 mortgage liability
in conjunction with the acquisition of an office building. This mortgage is payable in
monthly installments of $7,200, which include interest computed at the rate of 12% per
year. The first monthly payment is made on December 31, 2014. The portion of the
second monthly payment made on January 31, 2015, which represents repayment of
principal is:
a. $1,200.
b. $1,212.
c. $7,200.
d. $5,988.
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
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.
Test Bank for Financial Accounting, Ninth Edition
10 - 36
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
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
189. Winter Company purchased a building on January 2 by signing a long-term $630,000
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 $5,250.
c. debit to the Interest Expense account for $5,250.
d. credit to the Mortgage Payable account for $5,400.
190. Horton Company purchased a building on January 2 by signing a long-term $480,000
mortgage with monthly payments of $4,500. 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. $479,500.
c. $476,000.
d. $475,500.
Liabilities
10 - 37
191. Farris Company borrowed $800,000 from BankTwo on January 1, 2014 in order to expand
its mining capabilities. The five-year note required annual payments of $208,349 and
carried an annual interest rate of 8.5%. What is the amount of expense Farris must
recognize on its 2015 income statement?
a. $68,000.
b. $56,070.
c. $43,127.
d. $50,290.
192. Farris Company borrowed $800,000 from BankTwo on January 1, 2014 in order to expand
its mining capabilities. The five-year note required annual payments of $208,349 and
carried an annual interest rate of 8.5%. What is the balance in the notes payable account
at January 1, 2016?
a. $800,000
b. $507,372
c. $659,651
d. $664,000
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.
194. The times interest earned 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.
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
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 38
196. In a recent year Joey Corporation had net income of $150,000, interest expense of
$40,000, and tax expense of $20,000. What was Joey Corporation’s times interest earned
for the year?
a. 5.25
b. 4.75
c. 3.75
d. 4.25
197. In a recent year Cold Corporation had net income of $250,000, interest expense of
$50,000, and a times interest earned of 10. What was Cold Corporation’s income before
taxes for the year?
a. $550,000
b. $500,000
c. $450,000
d. None of the answers are correct.
198. The adjusted trial balance for Lamar Corp. at the end of the current year, 2015, contained
the following accounts.
5-year Bonds Payable 8% $1,500,000
Interest Payable 50,000
Premium on Bonds Payable 150,000
Notes Payable (3 mo.) 40,000
Notes Payable (5 yr.) 145,000
Mortgage Payable ($10,000 due currently) 300,000
Salaries and Wages Payable 18,000
Taxes Payable (due 3/15 of 2016) 25,000
The total long-term liabilities reported on the balance sheet are
a. $1,945,000.
b. $1,935,000.
c. $2,095,000.
d. $2,085,000.
199. The 2015 financial statements of Marker Co. contain the following selected data (in
millions).
Current Assets $ 75
Total Assets 140
Current Liabilities 40
Total Liabilities 90
Cash 8
Liabilities
10 - 39
MC. 199 (Cont.)
The debt to assets ratio is
a. 64.3%.
b. 53.3%.
c. 28.6%.
d. 147.4%.
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 assets
ratio if Greyson issues an additional $8 million in stock to finance its expansion?
a. The debt to assets ratio will decrease from .1(4/40) to .083 (4/48) after the additional
stock sale.
b. The debt to assets ratio will decrease from 4/36 before to 4/44 after the additional
stock sale.
c. The debt to assets 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 assets ratio.
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.
a
202. $4 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. $320,000 received for 10 periods must be calculated.
b. $4 million received in 10 periods must be calculated.
c. $4 million received in 20 periods must be calculated.
d. $160,000 received for 10 periods must be calculated.
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.
Test Bank for Financial Accounting, Ninth Edition
10 - 40
a
204. A corporation issued $600,000, 10%, 7-year bonds on January 1, 2015 for $648,666,
which reflects an effective-interest rate of 7%. 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, 2015, is
a. $30,000.
b. $21,000.
c. $32,434.
d. $22,703.
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
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.
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.
a
208. Silk Company issued $500,000 of 7%, 10-year bonds on one of its interest dates for
$431,850 to yield an effective annual rate of 9%. 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. $4,770
b. $6,133
c. $7,732
d. $3,867
Liabilities
10 - 41
a
209. Silk Company issued $500,000 of 7%, 10-year bonds on one of its interest dates for
$431,850 to yield an effective annual rate of 9%. 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 $35,000.
b. credit to Cash for $38,867.
c. credit to Discount on Bonds Payable for $3,867.
d. debit to Interest Expense for $45,000.
a
210. Silk Company issued $500,000 of 7%, 10-year bonds on one of its interest dates for
$431,850 to yield an effective annual rate of 9%. 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. $30,229
b. $38,867
c. $45,000
d. $35,000
a
211. On January 1, Greene Inc. issued $5,000,000, 9% bonds for $4,685,000. 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. $283,500.
b. $296,500.
c. $286,650.
d. $255,650.
a
212. On January 1, Dade Corporation issued $3,000,000, 7%, 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 6%. On the first interest date, using the effective-interest method, the
debit entry to Interest Expense is for
a. $180,000.
b. $225,140.
c. $192,977.
d. $210,000.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 42
a
213. On January 1, Jorge Inc. issued $3,000,000, 8% bonds for $2,817,000. The market rate of
interest for these bonds is 9%. 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. $169,470.
c. $157,467.
d. $153,000.
a
214. On January 1, Runner Corporation issued $2,000,000, 13%, 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 11%. On the first interest date, using the effective-interest
method, the debit entry to Interest Expense is for:
a. $130,000.
b. $142,810.
c. $120,839.
d. $241,679.
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.
a
216. On January 1, Gage Corporation issues $1,000,000, 5-year, 12% bonds at 95 with
interest payable on July 1 and January 1. The carrying value of the bonds, using straight-
line amortization, at the end of the third interest period is:
a. $965,000.
b. $970,000.
c. $930,000.
d. $938,000.
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.
Liabilities
FOR INSTRUCTOR USE ONLY
10 - 43
MC. 217 (Cont.)
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.
a 218. Presented here is a partial amortization schedule for Roseland Company who sold
$300,000, five year 10% bonds on January 1, 2014 for $312,000 and uses annual
straight-line amortization.
BOND AMORTIZATION SCHEDULE
Interest Period
Interest
Paid
Interest
Expense
Premium
Amortization
Unamortized
Premium
Bond Carrying
Value
January 1, 2014
$12,000
$312,000
January 1, 2015
(i)
(ii)
(iii)
(iv)
(v)
Which of the following amounts should be shown in cell (i)?
a. $31,200
b. $32,400
c. $30,000
d. $6,000
a 219. Presented here is a partial amortization schedule for Roseland Company who sold
$300,000, five year 10% bonds on January 1, 2014 for $312,000 and uses annual
straight-line amortization.
BOND AMORTIZATION SCHEDULE
Interest Period
Interest
Paid
Interest
Expense
Premium
Amortization
Unamortized
Premium
Bond Carrying
Value
January 1, 2014
$12,000
$312,000
January 1, 2015
(i)
(ii)
(iii)
(iv)
(v)
Which of the following amounts should be shown in cell (ii)?
a. $32,400
b. $27,600
c. $31,200
d. $28,800
a 220. Presented here is a partial amortization schedule for Roseland Company who sold
$3000,000, five year 10% bonds on January 1, 2014 for $318,000 and uses annual
straight-line amortization.
BOND AMORTIZATION SCHEDULE
Interest Period
Interest
Paid
Interest
Expense
Premium
Amortization
Unamortized
Premium
Bond Carrying
Value
January 1, 2014
$18,000
$318,000
January 1, 2015
(i)
(ii)
(iii)
(iv)
(v)
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 44
MC. 220 (Cont.)
Which of the following amounts should be shown in cell (iii)?
a. $9,000.
b. $18,000.
c. $3,600.
d. $1,800.
a 221. Presented here is a partial amortization schedule for Roseland Company who sold
$300,000, five year 10% bonds on January 1, 2014 for $318,000 and uses annual
straight-line amortization.
BOND AMORTIZATION SCHEDULE
Interest Period
Interest
Paid
Interest
Expense
Premium
Amortization
Unamortized
Premium
Bond Carrying
Value
January 1, 2014
$18,000
$318,000
January 1, 2015
(i)
(ii)
(iii)
(iv)
(v)
Which of the following amounts should be shown in cell (iv)?
a. $16,200.
b. $10,800.
c. $21,600.
d. $14,400.
a 222. Presented here is a partial amortization schedule for Roseland Company who sold
$300,000, five year 10% bonds on January 1, 2014 for $312,000 and uses annual
straight-line amortization.
BOND AMORTIZATION SCHEDULE
Interest Period
Interest
Paid
Interest
Expense
Premium
Amortization
Unamortized
Premium
Bond Carrying
Value
January 1, 2014
$12,000
$312,000
January 1, 2015
(i)
(ii)
(iii)
(iv)
(v)
Which of the following amounts should be shown in cell (v)?
a. $314,400
b. $313,200
c. $309,600
d. $310,800
Liabilities
10 - 45
a
223. On January 1, Health Corporation issues $3,000,000, 5-year, 8% 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, $120,000.
b. debit to Interest Expense, $240,000.
c. credit to Discount on Bonds Payable, $12,000.
d. credit to Discount on Bonds Payable, $24,000.
224. On January 1, 2015, $2,000,000, 10-year, 10% bonds, were issued for $1,946,000.
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. $19,460.
b. $5,400.
c. $1,454.
d. $450.
225. A corporation issues $500,000, 8%, 5-year bonds on January 1, 2015, 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, 2015’s adjusting entry is
a. $44,200.
b. $40,000.
c. $35,800.
d. $4,200.
a
226. Stable Company issued $500,000 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. $150,000
b. $160,000
c. $145,000
d. $140,000
a
227. Pakota Company issued $700,000 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. $686,000
b. $683,200
c. $688,800
d. $697,200
Test Bank for Financial Accounting, Ninth Edition
10 - 46
a
228. Trendy Company issued $600,000 of 8%, 5-year bonds at 105. Assuming straight-line
amortization and annual interest payments, how much bond interest expense is recorded
on the next interest date?
a. $48,000
b. $54,000
c. $42,000
d. $6,000
a
229. Dart Company issued $600,000 of 8%, 5-year bonds at 105, with interest paid annually.
Assuming straight-line amortization, what is the carrying value of the bonds after one
year?
a. $630,000
b. $627,000
c. $624,000
d. $633,000
a
230. On January 1, 2015, $3,000,000, 5-year, 10% bonds, were issued for $2,916,000. 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. $14,000.
b. $16,800.
c. $700.
d. $1,400.
a
231. A corporation issues $500,000, 8%, 5-year bonds on January 1, 2015 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, 2015 is
a. $42,100.
b. $20,000.
c. $22,100.
d. $17,900.
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.
Liabilities
10 - 47
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.
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.
a 235. Hooke Company received proceeds of $377,000 on 10-year, 8% bonds issued on January
1, 2014. The bonds had a face value of $400,000, 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, 2015?
a. $32,000
b. $30,160
c. $34,300
d. $29,700
a 236. Jarmin Company received proceeds of $377,000 on 10-year, 8% bonds issued on
January 1, 2013. The bonds had a face value of $400,000, 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, 2015?
a. $400,000
b. $381,600
c. $395,400
d. $379,300
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.
Test Bank for Financial Accounting, Ninth Edition
10 - 48
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.
239. On August 1, 2014, 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, 2015. How will
the note payable and the related interest be classified in the December 31, 2014, 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
240. Companies report current liabilities on the balance sheet in
a. alphabetical order.
b. order of maturity.
c. random order.
d. order of magnitude.
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.
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.
Liabilities
10 - 49
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.
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.
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 $800,000. The carrying value of the bonds
at the redemption date is $842,000. The entry to record the redemption will include a
a. credit of $42,000 to Loss on Bond Redemption.
b. debit of $48,000 to Premium on Bonds Payable.
c. credit of $7,000 to Gain on Bond Redemption.
d. debit of $42,000 to Premium on Bonds Payable.
246. Each payment on a mortgage note payable consists of
a. interest on the original balance of the loan only.
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.
247. The debt to assets ratio is computed by dividing
a. long-term liabilities by total assets.
b. total liabilities by total assets.
c. total assets by total liabilities.
d. total assets by long-term liabilities.
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.
Test Bank for Financial Accounting, Ninth Edition
10 - 50
249. 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.
250. 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.
251. Which of the following statements about liabilities in incorrect?
Under IFRS, 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.
252. 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.
253. 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.
254. 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.
Liabilities
FOR INSTRUCTOR USE ONLY
10 - 51
Answers to Multiple Choice Questions
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
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Item
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Item
Ans.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 52
BRIEF EXERCISES
BE 255
Kingery Sales Company has the following selected accounts after posting adjusting entries:
Accounts Payable $ 62,000
Notes Payable, 3-month 50,000
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.
BE 256
Identify which of the following would be classified as current liabilities as of December 31, 2014:
1. Salaries and Wages Payable
2. Bonds Payable, maturing in 2019
3. Interest Payable, due July 1, 2015
4. Sales Taxes Payable
5. Notes Payable, due January 30, 2016
BE 257
On December 1, Gilman Corporation borrowed $20,000 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
Liabilities
FOR INSTRUCTOR USE ONLY
10 - 53
BE 258
During December 2014, Markowitz Publishing sold 4,500 12-month annual magazine
subscriptions at a rate of $20 each. The first issues were mailed in February 2015. Prepare the
entries on Markowitz’s books to record the sale of the subscriptions and the mailing of the first
issues.
BE 259
Putman Company had cash sales of $75,950 (including taxes) for the month of June. Sales are
subject to 8.5% sales tax. Prepare the entry to record the sale.
BE 260
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.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 54
BE 260 (Cont.)
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 _________ _________
BE 261
On January 1, 2015, Morris Enterprises issued 9%, 5-year bonds with a face amount of $900,000
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.
BE 262
On January 1, 2015, Bose Company issued bonds with a face value of $600,000. The bonds
carry a stated interest of 7% payable each January 1 and July 1.
Liabilities
FOR INSTRUCTOR USE ONLY
10 - 55
BE 262 (Cont.)
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.
BE 263
On July 1, 2015, Frog Corporation issued $800,000, 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 2015.
BE 264
On January 1, 2014, Zappa Enterprises sold 8%, 20-year bonds with a face amount of
$1,200,000 for $1,140,000. Interest is payable semiannually on July 1 and January 1.
Instructions
Calculate the carrying value of the bond at December 31, 2014 and 2015.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 56
BE 265
Queen Company issued bonds with a face amount of $2,000,000 in 2012. As of January 1, 2015,
the balance in Discount on Bonds Payable is $6,000. At that time, Queen redeemed the bonds at
102.
Instructions
Assuming that no interest is payable, make the entry to record the redemption.
BE 266
Roxy Inc. issues a $1,500,000, 10%, 10-year mortgage note on December 31, 2015, to obtain
financing for a new building. The terms provide for semiannual installment payments of $122,643.
Instructions
Prepare the entry to record the mortgage loan on December 31, 2015, and the first installment
payment.
BE 267
Fresh Corporation reports the following selected financial statement information at December 31,
2015: 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 assets and times interest earned ratios.
Liabilities
FOR INSTRUCTOR USE ONLY
10 - 57
Solution 267 (4 min.)
BE 268
On January 1, 2015, Tape Enterprises issued 9%, 10-year bonds with a face amount of $700,000
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.
BE 269
On January 1, 2015, Hogan Enterprises issued 8%, 20-year bonds with a face amount of
$3,000,000 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.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 58
EXERCISES
Ex. 270
Howell Company has the following selected accounts after posting adjusting entries:
Accounts Payable $ 55,000
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 34,000
Payroll Tax Expense 6,000
Interest Payable 3,000
Mortgage Payable 200,000
Sales Taxes Payable 16,000
Instructions
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.)
Ex. 271
Prepare the necessary journal entries for the following transactions:
(a) On September 1, Cole Company borrowed $300,000 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).
Liabilities
FOR INSTRUCTOR USE ONLY
10 - 59
Ex. 272
On March 1, Jordan Company borrows $240,000 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.
Ex. 273
Wellington Company had the following transactions involving notes payable.
Nov. 1, 2014 Borrows $180,000 from Olathe State Bank by signing a 3-month, 10% note.
Dec. 31, 2014 Prepares the adjusting entry.
Feb. 1, 2015 Pays principal and interest to Olathe State Bank.
Instructions
Prepare journal entries for each of the transactions.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 60
Ex. 274
Flores Company publishes a monthly sports magazine, Hunting Preview. Subscriptions to the
magazine cost $25 per year. During October 2014, Flores sells 30,000 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
Subscription Revenue and Subscription Revenue.
Instructions
(a) Prepare the entry in October for the receipt of the subscriptions.
(b) Prepare the adjusting entry at December 31, 2014, to record subscription revenue earned in
December 2014.
(c) Prepare the adjusting entry at March 31, 2015, to record subscription revenue earned in the
first quarter of 2015.
Ex. 275
English Company billed its customers a total of $1,785,000 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.
Liabilities
FOR INSTRUCTOR USE ONLY
10 - 61
Ex. 276
Hibbett Company does not segregate sales and sales taxes on its cash register. Its register total
for the month is $312,700, which includes a 6% sales tax.
Instructions
Compute sales taxes payable, and make the entry to record sales and sales taxes payable.
Ex. 277
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
Ex. 278
Mehring's 2015 financial statements contained the following data (in millions).
Current assets $17,890 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.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 62
Ex. 279
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 2014, Golf Pro Publications sells 12,000 copies of the golf magazine at newsstands
and receives payment for 25,000 subscriptions for 2015. Financial statements are prepared
monthly.
Instructions
(a) Prepare the December 2014 journal entries to record the newsstand sales and subscriptions
received.
(b) Prepare the necessary adjusting entry on January 31, 2015. The January 2015 issue has
been mailed to subscribers.
Ex. 280
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 7%, 10-year bonds at par ($4,000,000).
Income before interest and taxes is expected to be $3,500,000. 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.
Liabilities
10 - 63
Ex. 281
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.
Ex. 282
Slotkin Health is considering two alternatives for the financing of some high technology medical
equipment. These two alternatives are:
1. Issue 60,000 shares of $10 par value common stock at $50 per share.
2. Issue $3,000,000, 8%, 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.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 64
Ex. 283
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.
Ex. 284
Korean Corporation issued $2 million, 10-year, 6% bonds on January 1, 2015.
Instructions
Prepare the entry to record the sale of these bonds, assuming they were issued at
(a) 98.
(b) 103.
Liabilities
FOR INSTRUCTOR USE ONLY
10 - 65
Solution 284 (5–7 min.)
Ex. 285
On January 1, 2015, Lost Corporation issued $900,000, 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 2015.
Ex. 286
On January 1, Focus Corporation issued $600,000, 6%, 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.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
10 - 66
Ex. 287
The following section is taken from Blue Corp’s balance sheet at December 31, 2014.
Current liabilities
Interest Payable ......................................................... $ 90,000
Long-term liabilities
Bonds Payable, 9%, due January 1, 2019 ................. 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, 2015.
(b) Assume that on January 1, 2015, after paying interest, Blue calls bonds having a face value
of $600,000. The call price is 106. Record the redemption of the bonds.
(c) Prepare the entry to record the payment of interest on July 1, 2015, assuming no previous
accrual of interest on the remaining bonds.
Ex. 288
Niebuhr Company issued $400,000 of bonds on January 1, 2015.
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 $4,000.
(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.
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Solution 288 (9–12 min.)
Ex. 289
Casey Company retired $500,000 face value, 9% bonds on June 30, 2015 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.
Ex. 290
Presented below are three independent situations:
(a) Strike Corporation purchased $380,000 of its bonds on June 30, 2015, at 102 and
immediately retired them. The carrying value of the bonds on the retirement date was
$371,500. The bonds pay semiannual interest and the interest payment due on June 30,
2015, has been made and recorded.
(b) Worton, Inc. purchased $400,000 of its bonds at 96 on June 30, 2015, and immediately
retired them. The carrying value of the bonds on the retirement date was $395,000. The
bonds pay semiannual interest and the interest payment due on June 30, 2015, 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 $4 par value common stock for
each $1,000 par value bond. On December 31, 2015, after the bond interest has been paid,
$30,000 par value of bonds were converted. The market value of Mountain’s common stock
was $38 per share on December 31, 2013.
Test Bank for Financial Accounting, Ninth Edition
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Instructions
For each of the independent situations, prepare the journal entry to record the retirement or
conversion of the bonds.
Ex. 291
Douglas Company issued a $4,500,000, 10%, 10-year mortgage note payable to finance the
construction of a building at December 31, 2015. The terms provide for semiannual installment
payments of $257,924.
Instructions
Prepare the entry to record:
(a) the mortgage loan on December 31, 2015.
(b) the first installment payment.
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Ex. 292
Adams Corporation issues a $9,000,000, 5%, 20-year mortgage note payable on December 31,
2015, to obtain needed financing for the construction of a building addition. The terms provide for
semiannual installment payments of $289,409 on June 30 and December 31.
Instructions
(a) Prepare the journal entries to record the mortgage loan on December 31, 2015, 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?
Ex. 293
Lucky Company borrowed $1,000,000 on January 1, 2015, by issuing $1,000,000, 8% mortgage
note payable. The terms call for semiannual installment payments of $75,000 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, 2015.
Test Bank for Financial Accounting, Ninth Edition
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Solution 293 (Cont.)
Ex. 294
The adjusted trial balance for Perry Corporation at the end of 2015 contained the following
accounts:
Bonds payable, 10% ........................................................... $800,000
Interest payable .................................................................. 20,000
Discount on bonds payable ................................................. 40,000
Mortgage notes payable, 9%, due 2017 .............................. 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.
Ex. 295
Ranger Corporation reports the following amounts in their 2015 financial statements:
At December 31, 2015 For the Year 2015
Total assets $2,000,000
Total liabilities 1,310,000
Total stockholders’ equity ?
Interest expense $25,000
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 assets ratio at December 31, 2015.
(c) Compute times interest earned for 2015.
Liabilities
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Solution 295 (4–7 min.)
a
Ex. 296
Boxer Corporation is issuing $800,000 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.
a
Ex. 297
On January 1, 2015, Plank Corporation issued $800,000, 6%, 5-year bonds for $735,110. The
bonds were sold to yield an effective-interest rate of 8%. 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, 2015, related to the bond issue.
Test Bank for Financial Accounting, Ninth Edition
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a
Ex. 298
On June 30, 2015, Upton, Inc. sold $3,000,000 (face value) of bonds. The bonds are dated June
30, 2015, pay interest semiannually on December 31 and June 30, and will mature on June 30,
2018. The following schedule was prepared by the accountant for 2015.
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 2,936,625
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, 2015.
5. Prepare the journal entry to record the payment of interest and amortization on December 31,
2015.
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a
Ex. 299
On January 1, 2015, Sunrise Corporation issued $4,000,000, 8%, 5-year bonds dated January 1,
2015, at 95. 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, 2016. Be sure to indicate the date on which the entries would be made.
Test Bank for Financial Accounting, Ninth Edition
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a
Ex. 300
Venture Company issued $900,000, 10%, 20-year bonds on January 1, 2015, 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 2015 related to the bond issue.
a
Ex. 301
Magic Company issued $500,000, 8%, 10-year bonds on December 31, 2014, for $470,000.
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, 2014.
(b) June 30, 2015.
Liabilities
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COMPLETION STATEMENTS
302. A current liability is a debt that can be expected to be paid within ______________ year or
the ______________, whichever is longer.
303. Liabilities are classified on the balance sheet as being _______________ liabilities or
______________ liabilities.
304. Obligations in written form are called ______________ and usually require the borrower
to pay interest.
305. With an interest-bearing note, a borrower must pay the ________________ of the note
plus _________________ at maturity.
306. Sales taxes collected from customers are a ______________ of the business until they
are remitted to the taxing agency.
307. The current ratio is current assets divided by ______________.
308. Bonds that the issuing company can redeem at a stated dollar amount prior to maturity
are ________________ bonds.
309. The terms of a bond issue are set forth in a formal legal document called a bond
________________.
310. Unsecured bonds that are issued against the general credit of the borrower are called
________________ bonds.
311. If bonds were issued at a premium, then the contractual interest rate was _____________
than the market interest rate.
312. 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.
Test Bank for Financial Accounting, Ninth Edition
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313. If bonds are issued at face value (par), it indicates that the ________________ interest
rate must be equal to the ________________ interest rate.
314. If a $1 million, 10%, 10-year bond issue was sold at 97, the cash proceeds from the
issuance of the bonds amounted to $________________.
315. When bonds are converted into common stock and the conversion is recorded, the
________________ of the bonds is transferred to paid-in capital accounts.
a
316. 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.
a
317. When there is a ________________ difference between the straight-line and effective-
interest methods of amortization, the ________________ method is required under
GAAP.
a
318. A method of amortizing bond discount or premium that allocates an equal amount each
period is the ________________ method.
a319. The straight-line method of amortization allocates the same amount to _______________
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
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MATCHING
320. 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 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.
Test Bank for Financial Accounting, Ninth Edition
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SHORT-ANSWER ESSAY QUESTIONS
S-A E 321
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.
S-A E 322
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 323
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.
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aS-A E 324
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.
aS-A E 325
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?
S-A E 326 (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.
Test Bank for Financial Accounting, Ninth Edition
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S-A E 327 (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.
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CHALLENGE EXERCISES
CE 1
Wilkinson Company had the following transactions involving notes payable.
Aug. 1, 2014 Borrows $80,000 from City National Bank by signing a 9-month, 9% note.
Dec. 1, 2014 Borrows $90,000 from Admire State Bank by signing a 3-month, 10% note.
Dec. 31, 2014 Prepare adjusting entries.
Mar. 1, 2015 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 2014 income statement?
Test Bank for Financial Accounting, Ninth Edition
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CE 2
Queen Company publishes a monthly fashion magazine, Tiara. Subscriptions to the magazine
cost $30 per year. During October 2015, 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, 2015, to record subscription revenue earned in
2015.
(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 12/31/15 financial statement,
including the amount.
CE 3
The following section is taken from Gordon Corp. 's balance sheet at December 31, 2014.
Current liabilities
Interest payable $ 120,000
Long-term liabilities
Bonds payable, 6%, due January 1, 2019 4,000,000
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, 2015.
(b) Assume that on January 1, 2015, after paying interest, Gordon calls bonds having a face
value of $1,600,000. The call price is 98. Record the redemption of the bonds.
(c) Prepare the entry to record the payment of interest on July 1, 2015, 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, 2015
for a cash payment of $1,220,000.
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