Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
10–60
Ex. 264
On May 15, Holt’s Clothiers borrowed some money on a 4-month note to provide cash during the
slow season of the year. The interest rate on the note was 8%. At the time the note was due, the
amount of interest owed was $1,200.
Instructions
(a) Determine the amount borrowed by Holt’s.
(b) Assume the amount borrowed was $54,000. What was the interest rate if the amount of
interest owed was $900?
(c) Prepare the entry for the initial borrowing and the repayment for the facts in part (a).
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
Solution 264 (8 min.)
Ex. 265
In providing accounting services to small business, you encounter the following situations
pertaining to cash sales.
(1) Kushner Company rings up sales and sales taxes separately on its cash register. On April
10 the register totals are sales $40,000 and sales taxes $2,800.
(2) Grant Company does not segregate sales and sales taxes. Its register total for April 15 is
$22,260, which includes a 6% sales tax.
Instructions
Prepare the entries to record the sales transactions and related taxes for (a) Kushner Company
and (b) Grant Company.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
Reporting and Analyzing Liabilities
FOR INSTRUCTOR USE ONLY
10–61
Solution 265 (5 min.)
Ex. 266
During the month of March, Preston Company’s employees earned wages of $90,000.
Withholdings related to these wages were $6,885 for Social Security (FICA), $14,200 for federal
income tax, $6,200 for state income tax, and $600 for union dues. The company incurred no cost
related to these earnings for federal unemployment tax, but incurred $1,300, for state
unemployment tax.
Instructions
(a) Prepare the necessary March 31 journal entry to record wages expense and wages
payable. Assume that wages earned during March will be paid during April.
(b) Prepare the entry to record the company’s payroll tax expense.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
10–62
Ex. 267
Presented below are two independent situations:
(a) Morten Corporation purchased $480,000 of its bonds on June 30, 2014, at 102 and
immediately retired them. The carrying value of the bonds on the retirement date was
$431,100. The bonds pay annual interest and the interest payment due on June 30, 2014,
has been made and recorded.
(b) McEvoy, Inc., purchased $330,000 of its bonds at 96 on June 30, 2014, and immediately
retired them. The carrying value of the bonds on the retirement date was $321,000. The
bonds pay annual interest and the interest payment due on June 30, 2014, has been made
and recorded.
Instructions
For each of the independent situations, prepare the journal entry to record the retirement or
conversion of the bonds.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
Solution 267 (10-13 min.)
Ex. 268
The adjusted trial balance for Helton Corporation at the end of 2014 contained the following
accounts:
Bonds payable, 10% ……………………………………………………. $500,000
Interest payable ………………………………………………………….. 20,000
Discount on bonds payable ………………………………………….. 30,000
Notes payable, 9%, due 2016 ………………………………………. 70,000
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.
Reporting and Analyzing Liabilities
FOR INSTRUCTOR USE ONLY
10–63
Solution 268 (4-7 min.)
Ex. 269
Hensley, Inc. reports the following liabilities (in thousands) on its January 31, 2014, balance sheet
and notes to the financial statements.
Accounts payable $3,463.9
Accrued pension liability 1,215.2
Property taxes payable 1,158.1
Bonds payable 1,961.2
Current portion of long-term debt 1,992.2
Income taxes payable 235.2
Notes payable—long–term 9,246.7
Operating leases 1,641.7
Mortgage payable 435.6
Federal income taxes payable 558.1
Salaries and wages payable 2,563.6
Unused operating line of credit 3,337.6
Warranty liability— current 1,617.3
Instructions
Prepare the liabilities section of Hensley’s balance sheet as at January 31, 2014.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 269 (8 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
10–64
Solution 269 (Cont.)
Ex. 270
McDonald’s financial statements contain the following selected data (in millions).
Current assets $ 3,881.9
Total assets 29,391.7
Current liabilities 4,498.5
Total liabilities 13,611.9
Interest expense $ 410.1
Income taxes 1,237.1
Net Income 2,395.1
Instructions
(a) Compute the following values and provide a brief interpretation of each.
(1) Working capital. (3) Debt to assets ratio.
(2) Current ratio. (4) Times interest earned.
(b) The notes to McDonald‘s financial statements show that subsequent to this year the
company will have future minimum lease payments under operating leases of $10,513.8
million. If these assets had been purchased with debt, assets and liabilities would rise by
approximately $9,400 million. Recompute the debt to assets ratio after adjusting for this.
Discuss your result.
Ans: N/A, LO: 7, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Business Economics
Solution 270 (10 min.)
Reporting and Analyzing Liabilities
FOR INSTRUCTOR USE ONLY
10–65
*Ex. 271
Renfro Company issued $300,000 of 8%, 10-year bonds at 102. Interest is paid annually, and the
straight-line method is used for amortization. Assume that the market rate for similar investments
is 7%. The bonds are issued on the date of the bonds.
a. What amount was received for the bonds?
b. How much interest is paid each interest period?
c. What is the premium amortization for the first interest period?
d. How much interest expense is recorded on the first interest date?
e. What is the carrying value of the bonds after the first interest date?
Ans: N/A, LO: 5,8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
*Solution 271 (10-12 min.)
*Ex. 272
On January 1, 2014, Powell Corporation issued $600,000, 5%, 5-year bonds dated January 1,
2014, at 95. The bonds pay annual interest on January 1. The company uses the straight-line
method of amortization and has a calendar year end.
Instructions
Prepare all the journal entries that Powell Corporation would make related to this bond issue
through January 1, 2015. Be sure to indicate the date on which the entries would be made.
Ans: N/A, LO: 5,8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
*Solution 272 (5 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
10–66
*Ex. 273
Grand Company issued $800,000, 10%, 20-year bonds on January 1, 2014, at 104. Interest is
payable annually on January 1. Grand uses the straight-line method of amortization and has a
calendar year end.
Instructions
Prepare all journal entries made in 2014 related to the bond issue.
Ans: N/A, LO: 5,8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
*Solution 273 (5 min.)
*Ex. 274
Garrison Company issued $2,000,000, 7%, 20-year bonds on January 1, 2014, at 105. Interest is
payable annually on January 1. Garrison uses straight-line amortization for bond premium or
discount.
Instructions
Prepare the journal entries to record the following events.
(a) The issuance of the bonds.
(b) The accrual of interest and the premium amortization on December 31, 2014.
(c) The payment of interest on January 1, 2015.
(d) The redemption of the bonds at maturity, assuming interest for the last interest period has
been paid and recorded.
Ans: N/A, LO: 5,6,8, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
*Solution 274 (7 min.)
Reporting and Analyzing Liabilities
FOR INSTRUCTOR USE ONLY
10–67
*Solution 274 (Cont.)
*Ex. 275
Shannon Company issued $1,000,000, 8%, 10-year bonds on December 31, 2013, for $960,000.
Interest is payable annually on December 31. Shannon uses the straight-line method to amortize
bond premium or discount.
Instructions
Prepare the journal entries to record the following events.
(a) The issuance of the bonds.
(b) The payment of interest and the discount amortization on December 31, 2014.
(c) The redemption of the bonds at maturity, assuming interest for the last interest period has
been paid and recorded.
Ans: N/A, LO: 5,6,8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
*Solution 275 (5 min.)
*Ex. 276
Wynne Company issued $900,000 of 10%, 5-year bonds at 108. Interest is paid annually, and the
effective interest method is used for amortization. Assume that the market rate for similar
investments is 8%. The bonds are issued on the date of the bonds.
a. What amount was received for the bonds?
b. How much interest is paid each interest period?
c. What is the premium amortization for the first interest period?
d. How much interest expense is recorded on the first interest date?
e. What is the carrying value of the bonds after the first interest date?
Ans: N/A, LO: 3, 9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
10–68
*Solution 276 (10-12 min.)
*Ex. 277
Moon Company issued $500,000, 10%, 5-year bonds on January 1, 2014, at 106. Interest is
payable annually on January 1. Moon uses the effective-interest method of amortization and has
a calendar year end and the bonds were issued for an effective interest rate of 8%.
Instructions
Prepare all journal entries made in 2014 related to the bond issue.
Ans: N/A, LO: 3,9, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
*Solution 277 (12-17 min.)
*Ex. 278
Perez Co. receives $2,200,000 when it issues a $2,200,000, 8%, mortgage note payable to
finance the construction of a building at December 31, 2014. The terms provide for semiannual
installment payments of $140,820 on June 30 and December 31.
Instructions
Prepare the journal entries to record the mortgage loan and the first two installment payments.
Ans: N/A, LO: 10, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
*Solution 278 (7 min.)
Reporting and Analyzing Liabilities
10–69
*Solution 278 (Cont.)
COMPLETION STATEMENTS
279. A current liability is a debt that can be expected to be paid within ____________ year(s)
or the ______________, whichever is longer.
280. Liabilities are classified on the balance sheet as being _______________ liabilities or
______________ liabilities.
281. Obligations in written form are called ______________ and usually require the borrower
to pay interest.
282. With an interest-bearing note, a borrower must pay the ________________ of the note
plus _________________ at maturity.
283. Sales taxes collected from customers are a ______________ of the business until they
are remitted to the taxing agency.
284. Payroll taxes include the employer’s share of ________________ taxes and both state
and federal ________________ taxes.
285. Bonds that mature at a single specified future date are called _________________ bonds,
whereas bonds that mature in installments are called __________________ bonds.
286. The terms of a bond issue are set forth in a formal legal document called a bond
________________.
287. Unsecured bonds that are issued against the general credit of the borrower are called
________________ bonds.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
10–70
288. The market price of bonds is obtained by computing the present value of the
________________ paid at maturity, and all ________________ payments to be made
over the term of the bond.
289. If bonds are issued at face value (par), it indicates that the ________________ rate of
interest must be equal to the ________________ rate of interest.
290. If a $1 million, 10%, 10-year bond issue was sold at 97, the cash proceeds from the
issuance of the bonds amounted to $________________.
291. If bonds were issued at a premium, then the contractual rate of interest was
_______________ than the market rate of interest.
292. Discount on Bonds Payable is ________________ (“deducted from” or “added to”) bonds
payable on the balance sheet. Premium on Bonds Payable is ________________
(“deducted from” or “added to”) bonds payable on the balance sheet.
293. The ________________ provides an indication of a company’s ability to meet interest
payments as they come due.
*294. A method of amortizing bond discount or premium that allocates an equal amount each
period is the ________________ method.
Answers to Completion Statements
Reporting and Analyzing Liabilities
FOR INSTRUCTOR USE ONLY
10–71
MATCHING
295. Match the items below by entering the appropriate code letter in the space provided.
A. Serial bonds F. Current ratio
B. Debenture bonds G. Straight-line method of amortization
C. Bond indenture H. Times interest earned
D. Market interest rate I. Callable bonds
E. Discount on bonds payable J. Maturity date
____ 1. Bonds subject to retirement at a stated dollar amount prior to maturity.
____ 2. A legal document that sets forth the terms of a bond issue.
____ 3. Bonds that mature in installments.
____ 4. A measure of a company’s short-term liquidity.
____ 5. The time that the final payment on a bond is due from the bond issuer.
____ 6. A measure of a company’s solvency.
____ 7. The rate investors demand for loaning funds to a corporation.
____ 8. Unsecured bonds issued against the general credit of the borrower.
____ 9. Occurs when the contractual rate of interest is less than the market rate of interest.
____ 10. Produces a periodic interest expense that is the same amount each interest period.
Answers to Matching
SHORT-ANSWER ESSAY QUESTIONS
S-A E 296
(a) Identify three taxes commonly paid by employers on employees’ salaries and wages.
(b) Where in the financial statements does the employer report taxes withheld from employees’
pay?
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
10–72
Solution 296
S-A E 297
(a) What is a convertible bond?
(b) Discuss the advantages of a convertible bond from the standpoint of the bondholders and
of the issuing corporation.
S-A E 298
When determining the value of a bond using present value, what are the two components used in
the calculation?
S-A E 299
When a bond sells at a discount, what is probably true about the market interest rate versus the
stated interest rate? Discuss.
S-A E 300
Bonds are frequently issued at amounts greater or less than face value. Describe how the market
rate of interest, relative to the contractual rate of interest, affects the selling price of bonds.
Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement,
AICPA PC: Communications, IMA: Business Economics
Reporting and Analyzing Liabilities
FOR INSTRUCTOR USE ONLY
10–73
Solution 300
S-A E 301
Bonds may be redeemed (retired) before maturity by the issuing corporation. Explain why a
company would decide to retire bonds before maturity and the necessary steps to record the
redemption.
Ans: N/A, LO: 6, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement,
AICPA PC: Communications, IMA: Business Economics
Solution 301
S-A E 302
(a) In general, what are the requirements for the financial statement presentation of long-term
liabilities?
(b) What ratios may be computed to evaluate a company’s liquidity and solvency?
Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA
PC: Communications, IMA: Reporting
Solution 302
S-A E 303
Maria Gomez is discussing the advantages of the effective-interest method of bond amortization
with her accounting staff. What do you think Maria is saying?
Ans: N/A, LO: 9, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement,
AICPA PC: Communications, IMA: Business Economics
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
10–74
Solution 303
S-A E 304 (Ethics)
Wishbone Company maintains two separate accounts payable computer systems. One is known
to all the users, and is used to process payments to vendors. Employees enter the vendor code,
or the name and address of new vendors, the amount, the account, and so on. The other system
is a secret one. It is used to cross-check the vendors against an approved vendor list. If a vendor
is not listed as approved, the payment process is halted. Internal audit employees seek to verify
the existence of a bona fide claim by the vendor. All inquiries are made at the top management
level, and very discreetly. No one but top management, the internal audit staff, and the Board of
Directors of the company is even aware of the second system.
Required:
Is it ethical for a company to have a secret system like the one described? Explain.
Ans: N/A, LO: 1, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC:
Communications, IMA: Internal Controls
Solution 304
S-A E 305 (Communication)
Susan Jones works for Trend Press, a fairly large book publishing firm. Her best friend and rival,
Diane Nilson, works for Lifeline Books, a smaller publisher. Both companies issue $100,000 in
bonds on July 1. Trend’s bonds were issued at a discount, while Lifeline’s were issued at a
premium. Diane sent Susan a fax the next day. She told Susan that it was obvious who the better
publisher was and the market had shown its preference! She reminded Susan again of her recent
increase in salary as further proof of the superiority of Lifeline Books.
Required:
Draft a short note for Susan to send to Diane. Explain how such a result could occur.
Reporting and Analyzing Liabilities
FOR INSTRUCTOR USE ONLY
10–75
Solution 305
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
10–76
IFRS QUESTIONS
1. Wittebury Corporation retires its £3,000,000 face value bonds at 105 on January 1,
following the payment of annual interest. The carrying value of the bonds at the
redemption date is $3,112,350. The entry to record the redemption will include
a. a credit of £37,650 to Gain on Bond Redemption.
b. a debit of £37,650 to Loss on Bond Redemption.
c. a credit of £15,000 to Bonds Payable.
d. a credit of £37,650 to Bonds Payable.
2. Chang Company retired bonds with a face amount of ¥60,000,000 at 98 when the carrying
value of the bond was ¥59,780,000. The entry to record the retirement would include a
a. gain on bond redemption of ¥980,000.
b. loss on bond redemption of ¥980,000.
c. loss on bond redemption of ¥1,200,000.
d. gain on bond redemption of ¥1,420,000.
3. Herman Company received proceeds of ₤471,250 on 10-year, 8% bonds issued on
January 1, 2012. The bonds had a face value of ₤500,000, pay interest semi-annually on
June 30 and December 31, and have a call price of 101. Herman uses the straight-line
method of amortization.
Herman Company decided to redeem the bonds on January 1, 2014. What amount of
gain or loss would Herman report on its 2014 income statement?
a. ₤23,000 gain
b. ₤28,000 gain
c. ₤28,000 loss
d. ₤23,000 loss
4. Finney Company borrowed €1,600,000 from BankTwo on January 1, 2013 in order to
expand its mining capabilities. The five–year note required annual payments of €416,698
and carried an annual interest rate of 9.5%. What is the balance in the notes payable
account at December 31, 2014?
a. €1,600,000
b. €1,045,458
c. €1,335,302
d. €1,296,000
5. On January 1, 2014, Michelin Company, a calendar-year company, is issued €9,000,000
of mortgage notes payable, of which €3,000,000 is due on January 1 for each of the next
three years. The proper statement of financial position presentation on December 31,
2014, is
a. Current liabilities, €9,000,000.
b. Long-term Debt, €9,000,000.
c. Current liabilities, €4,500,000; Long-term Debt, €4,500,000.
d. Current liabilities, €3,000,000; Long-term Debt, €6,000,000.
Reporting and Analyzing Liabilities
10–77
6. Whitmore Corporation Issues a £1,800,000, 10%, 10-year mortgage on December 31,
2014. The terms call for semi-annual installment payments of £144,435.The entry to
record the first installment payment will include
a. a debit to Interest Payment of £144,435.
b. a debit to Mortgage Notes Payable of £54,435.
c. a debit to Interest Expense of £180,000.
d. a credit to cash of £144,435.
7. The adjusted trial balance for Beneteau Corporation at the end of the 2014 included the
following accounts:
5-year Bonds Payable 8% €6,620,000
Bond Interest Payable 240,000
Notes Payable (3 mo.) 50,000
Notes Payable (5 yr.) 1,650,000
Mortgage Payable (€150,000 due currently) 2,000,000
Salaries and Wages Payable 68,000
Taxes Payable (due 3/15 of next year) 85,000
The total non-current liabilities reported on the statement of financial position at December
31, 2014 are
a. €9,880,000
b. €10,030,000
c. €10,120,000
d. €10,360,000
8. Selected data from 2014 financial statements of Xi Corporation include the following
(amount in millions):
Current assets ¥ 759
Total assets 1,200
Current liabilities 400
Total liabilities 750
Cash 80
Interest expense 50
income taxes 100
Net income 160
The debt to assets ratio is
a. 62.5%.
b. 52.7%.
c. 1.60%.
d. 6.2 times.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
10–78
a
9. ¥2 billion, 8%, 10-year bonds are issued at face value. Interest will be paid semi-annually.
When calculating the market price of the bond, the present value of
a. ¥160,000,000 received for 10 periods must be calculated.
b. ¥2 billion received in 10 periods must be calculated.
c. ¥2 billion received in 20 periods must be calculated.
d. ¥80,000,000 received for 10 periods must be calculated.
a
10. On January 1, 2014, Asianic Inc. issued 10-year bonds with a face amount of ¥25,000,000
and a contract rate of 8% payable annually on January 1. The effective-interest rate on
the bonds is 10%. Present value factors are as follows:
At 8% At 10%
PV of 1 for 10 periods 0.463 0.386
PV of an ordinary annuity if 1 for 10 periods 6.710 6.145
Total issue price of the bonds was
a. ¥25,000,000.
b. ¥24,500,000.
c. ¥23,000,000.
d. ¥21,940,000.