Reporting and Analyzing Liabilities
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111. Tina’s Boutique has total receipts for the month of $24,255 including sales taxes. If the
sales tax rate is 5%, what are Tina’s sales for the month?
a. $23,043
b. $23,100
c. $24,255
d. It cannot be determined.
112. Dominic’s Salon has total receipts for the month of $30,210 including sales taxes. If the
sales tax rate is 6%, what are Dominic’s sales for the month?
a. $28,398.30
b. $32,023.20
c. $28,500.00
d. It cannot be determined.
113. The following totals for the month of April were taken from the payroll records of Noll
Company.
Salaries $60,000
FICA taxes withheld 4,590
Income taxes withheld 12,500
Medical insurance deductions 2,250
Federal unemployment taxes 160
State unemployment taxes 1,080
The journal entry to record the monthly payroll on April 30 would include a
a. debit to Salaries and Wages Expense for $60,000.
b. credit to Salaries and Wages Payable for $60,000.
c. debit to Salaries and Wages Payable for $60,000.
d. debit to Salaries and Wages Expense for $40,660.
114. The following totals for the month of April were taken from the payroll records of Noll
Company.
Salaries $60,000
FICA taxes withheld 4,590
Income taxes withheld 12,500
Medical insurance deductions 2,250
Federal unemployment taxes 160
State unemployment taxes 1,080
The entry to record the payment of net payroll would include a
a. debit to Salaries and Wages Payable for $39,580.
b. debit to Salaries and Wages Payable for $40,660.
c. debit to Salaries and Wages Payable for $36,070.
d. credit to Cash for $45,250.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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115. The following totals for the month of April were taken from the payroll records of Noll
Company.
Salaries $60,000
FICA taxes withheld 4,590
Income taxes withheld 12,500
Medical insurance deductions 2,250
Federal unemployment taxes 160
State unemployment taxes 1,080
The entry to record accrual of employer’s payroll taxes would include a
a. debit to Payroll Tax Expense for $1,240.
b. debit to Payroll Tax Expense for $5,830.
c. credit to FICA Taxes Payable for $9,180.
d. credit to Payroll Tax Expense for $1,240.
116. The following totals for the month of April were taken from the payroll records of Noll
Company.
Salaries $60,000
FICA taxes withheld 4,590
Income taxes withheld 12,500
Medical insurance deductions 2,250
Federal unemployment taxes 160
State unemployment taxes 1,080
The entry to record the accrual of federal unemployment tax would include a
a. credit to Federal Unemployment Taxes Payable for $160.
b. debit to Federal Unemployment Taxes Expense for $160.
c. credit to Payroll Tax Expense for $160.
d. debit to Federal Unemployment Taxes Payable for $160.
117. Keller Company issued a five-year interest-bearing note payable for $200,000 on January
1, 2013. Each January the company is required to pay $40,000 on the note. How will this
note be reported on the December 31, 2014, balance sheet?
a. Long-term debt, $200,000
b. Long-term debt, $160,000
c. Long-term debt, $120,000; Long-term Debt due within one year, $40,000
d. Long-term debt of $160,000; Long-term Debt due within one year, $40,000
Reporting and Analyzing Liabilities
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118. The following totals for the month of April were taken from the payroll records of Metz
Company.
Salaries $30,000
FICA taxes withheld 2,295
Income taxes withheld 6,600
Medical insurance deductions 1,200
Federal unemployment taxes 240
State unemployment taxes 1,500
The journal entry to record the monthly payroll on April 30 would include a
a. debit to Salaries and Wages Expense for $30,000.
b. credit to Salaries and Wages Payable for $30,000.
c. debit to Salaries and Wages Payable for $30,000.
d. debit to Salaries and Wages Expense for $19,905.
119. The following totals for the month of April were taken from the payroll records of Metz
Company.
Salaries $30,000
FICA taxes withheld 2,295
Income taxes withheld 6,600
Medical insurance deductions 1,200
Federal unemployment taxes 240
State unemployment taxes 1,500
The entry to record the payment of net payroll would include a
a. debit to Salaries and Wages Payable for $18,165.
b. debit to Salaries and Wages Payable for $19,905.
c. debit to Salaries and Wages Payable for $18,405.
d. credit to Cash for $18,405.
120. The following totals for the month of April were taken from the payroll records of Metz
Company.
Salaries $30,000
FICA taxes withheld 2,295
Income taxes withheld 6,600
Medical insurance deductions 1,200
Federal unemployment taxes 240
State unemployment taxes 1,500
The entry to record accrual of employer’s payroll taxes would include a
a. debit to Payroll Tax Expense for $4,035.
b. credit to Payroll Tax Expense for $4,035.
c. credit to FICA Taxes Payable for $1,740.
d. credit to Payroll Tax Expense for $1,740.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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121. The following totals for the month of April were taken from the payroll records of Metz
Company.
Salaries $30,000
FICA taxes withheld 2,295
Income taxes withheld 6,600
Medical insurance deductions 1,200
Federal unemployment taxes 240
State unemployment taxes 1,500
The entry to record the accrual of federal unemployment tax would include a
a. credit to Federal Unemployment Taxes Payable for $240.
b. credit to Federal Unemployment Taxes Expense for $240.
c. credit to Payroll Tax Expense for $240.
d. debit to Federal Unemployment Taxes Payable for $240.
122. The following totals for the month of March were taken from the payroll records of Kern
Company.
Salaries $54,000
FICA taxes withheld 4,131
Income taxes withheld 11,880
Medical insurance deductions 783
Federal unemployment taxes 432
State unemployment taxes 2,700
The journal entry to record the monthly payroll on March 30 would include a
a. debit to Salaries and Wages Payable for $34,074.
b. credit to Salaries and Wages Payable for $37,206.
c. debit to Salaries and Wages Expense for $54,000.
d. debit to Salaries and Wages Expense for $34,074.
123. The following totals for the month of March were taken from the payroll records of Kern
Company.
Salaries $54,000
FICA taxes withheld 4,131
Income taxes withheld 11,880
Medical insurance deductions 783
Federal unemployment taxes 432
State unemployment taxes 2,700
The entry to record the payment of net payroll would include a
a. debit to Salaries and Wages Expense for $34,074.
b. debit to Salaries and Wages Payable for $37,206.
c. debit to Salaries and Wages Payable for $34,074.
d. credit to Cash for $34,074.
Reporting and Analyzing Liabilities
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124. The following totals for the month of March were taken from the payroll records of Kern
Company.
Salaries $54,000
FICA taxes withheld 4,131
Income taxes withheld 11,880
Medical insurance deductions 783
Federal unemployment taxes 432
State unemployment taxes 2,700
The entry to record accrual of employer’s payroll taxes would include a
a. debit to Payroll Tax Expense for $7,263
b. debit to Payroll Tax Expense for $19,143
c. credit to FICA Taxes Payable for $4,131.
d. credit to Payroll Tax Expense for $7,263.
125. The following totals for the month of March were taken from the payroll records of Kern
Company.
Salaries $54,000
FICA taxes withheld 4,131
Income taxes withheld 11,880
Medical insurance deductions 783
Federal unemployment taxes 432
State unemployment taxes 2,700
The entry to record the accrual of federal unemployment tax would include a
a. credit to Federal Unemployment Taxes Payable for $432.
b. debit to Federal Unemployment Taxes Expense for $432.
c. credit to Payroll Tax Expense for $432.
d. debit to Federal Unemployment Taxes Payable for $432.
126. Two sisters operate a bed and breakfast on the coast of Maine. As customers make
reservations they are required to pay cash in advance equal to one-half of the rate for
their stay. How should the sisters account for the cash received as reservations are
made?
a. Cash
Unearned Service Revenue
b. Cash
Service Revenue
c. Unearned Service Revenue
Service Revenue
d. Cash
Sales Revenue
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127. Julie Lambert 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 Lambert account for the cash received at the end of the engagement?
a. Cash
Unearned Service Revenue
b. Cash
Unearned Service Revenue
Service Revenue
c. Prepaid Service Revenue
Service Revenue
d. No entry is required when the engagement is concluded.
128. Madson Company typically sells subscriptions on an annual basis, and publishes six times
a year. The magazine sells 75,000 subscriptions in January at $10 each. What entry is
made in January to record the sale of the subscriptions?
a. Subscriptions Receivable ……………………………………… 750,000
Subscription Revenue ……………………………………………. 750,000
b. Cash ……………………………………………………………….. 750,000
Unearned Subscription Revenue …………………………….. 750,000
c. Subscriptions Receivable ……………………………………… 125,000
Unearned Subscription Revenue …………………………….. 125,000
d. Prepaid Subscriptions …………………………………………… 750,000
Cash ……………………………………………………………………. 750,000
129. Mohling Company typically sells subscriptions on an annual basis, and publishes eight
times a year. The magazine sells 45,000 subscriptions in January at $10 each. What entry
is made in January to record the sale of the subscriptions?
a. Subscriptions Receivable ……………………………………… 450,000
Subscription Revenue ……………………………………………. 450,000
b. Cash ……………………………………………………………….. 450,000
Unearned Subscription Revenue …………………………….. 450,000
c. Subscriptions Receivable ………………………………………. 56,250
Unearned Subscription Revenue …………………………….. 56,250
d. Prepaid Subscriptions …………………………………………… 450,000
Cash ……………………………………………………………………. 450,000
130. 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.
Reporting and Analyzing Liabilities
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131. If a corporation issued $8,000,000 in bonds which pay 5% 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
132. Secured bonds are bonds that
a. are in the possession of a bank.
b. can be converted into common stock.
c. have specific assets of the issuer pledged as collateral.
d. mature in installments.
133. A legal document that indicates the name of the issuer, the face value of the bond and
such other data is called
a. a bond certificate.
b. a bond debenture.
c. trading on the equity.
d. a convertible bond.
134. 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.
135. 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. Tax savings result
d. Each of these answer choices is an advantage.
136. Bonds that are secured by real estate are termed
a. mortgage bonds.
b. serial bonds.
c. debentures.
d. convertible bonds.
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137. 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.
138. 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.
139. Bonds that are issued against the general credit of the borrower are called
a. callable bonds.
b. debenture bonds.
c. secured bonds.
d. term bonds.
140. Corporations are granted the power to issue bonds through
a. tax laws.
b. state laws.
c. federal security laws.
d. bond debentures.
141. Bonds are not always categorized as
a. callable or convertible.
b. term or serial.
c. secured or unsecured.
d. secured or debenture.
142. 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.
143. The contractual rate of interest is usually stated as a(n)
a. monthly rate.
b. daily rate.
c. semiannual rate.
d. annual rate.
Reporting and Analyzing Liabilities
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144. 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.
145. Bonds with a face value of $300,000 and a quoted price of 102¼ have a selling price of
a. $360,675.
b. $306,075.
c. $300,675.
d. $306,750.
146. Bonds with a face value of $300,000 and a quoted price of 97¼ have a selling price of
a. $291,750.
b. $291,075.
c. $291,006.
d. $292,500.
147. Bonds with a face value of $400,000 and a quoted price of 104¼ have a selling price of
a. $417,000.
b. $416,100.
c. $401,700.
d. $416,000.
148. Bonds with a face value of $400,000 and a quoted price of 98½ have a selling price of
a. $393,000.
b. $392,200.
c. $392,020.
d. $394,000.
149. The present value of a bond is also known as its
a. face value.
b. market price.
c. future value.
d. deferred value.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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150. All of the following statements regarding convertible bonds are true except
a. if the market price of common stock increases substantially, bondholders with
convertible bonds benefit.
b. convertible bonds can be converted into common stock at the option of the issuing
company.
c. bondholders with convertible bonds receive interest on the bonds until conversion.
d. convertible bonds sell at a higher price and pay a low rate of interest than those
without the conversion option.
151. The contractual interest rate on a bond is often referred to as the
a. callable rate.
b. the maturity rate.
c. market rate.
d. stated rate.
152. If the market interest rate for a bond is higher than the stated interest rate, the bond will
sell at
a. a premium.
b. a discount.
c. par.
d. either a discount or premium.
153. If the market rate of interest is greater than the contractual rate of interest, bonds will sell
a. at a premium.
b. at face value.
c. at a discount.
d. only after the stated rate of interest is increased.
154. The interest expense recorded on an interest payment date is increased
a. by the amortization of premium on bonds payable.
b. by the amortization of discount on bonds payable.
c. only if the bonds were sold at face value.
d. only if the market rate of interest is less than the stated rate of interest on that date.
155. On January 1, 2014, $2,000,000, 10-year, 10% bonds, were issued for $1,940,000.
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. $19,400.
b. $6,000.
c. $1,616.
d. $500.
Reporting and Analyzing Liabilities
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156. A corporation issues $200,000, 10%, 5-year bonds on January 1, 2014, for $191,600.
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, 2014’s adjusting entry is
a. $21,680.
b. $20,000.
c. $18,320.
d. $1,680.
157. If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest
annually 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.
158. On January 1, 2014, $2,000,000, 5-year, 10% bonds, were issued for $2,120,000. Interest
is paid annually on January 1. If the issuing corporation uses the straight-line method to
amortize premium on bonds payable, the monthly amortization amount is
a. $17,666.
b. $24,000.
c. $2,400.
d. $2,000.
159. A corporation issues $200,000, 8%, 5-year bonds on January 1, 2014, for $208,400.
Interest is paid annually on January 1. If the corporation uses the straight-line method of
amortization of bond premium, the amount of bond interest expense to be recognized in
December 31, 2014’s adjusting entry is
a. $14,320.
b. $16,000.
c. $17,680.
d. $1,680.
160. If the market rate of interest is lower than the contractual interest rate, the bonds will sell
at
a. face value.
b. a premium.
c. a discount.
d. an unknown amount.
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161. If bonds are issued at a premium, the stated interest rate is
a. higher than the market rate of interest.
b. lower than the market rate of interest.
c. too low to attract investors.
d. adjusted to a higher rate of interest.
162. The present value of a $10,000, 5-year bond, will be less than $10,000 if the
a. contractual rate of interest is less than the market rate of interest.
b. contractual rate of interest is greater than the market rate of interest.
c. bond is convertible.
d. contractual rate of interest is equal to the market rate of interest.
163. 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. maturity date.
c. market interest rate.
d. type of bonds.
164. Gomez Corporation issues 600, 10-year, 8%, $1,000 bonds dated January 1, 2014, at 96.
The journal entry to record the issuance will show a
a. debit to Cash of $600,000.
b. credit to Discount on Bonds Payable for $24,000.
c. credit to Bonds Payable for $576,000.
d. debit to Cash for $576,000.
165. Yanik Corporation issues 4,000, 10-year, 8%, $1,000 bonds dated January 1, 2014, at 97.
The journal entry to record the issuance will show a
a. debit to Cash of $4,000,000.
b. debit to Discount on Bonds Payable for $120,000.
c. credit to Bonds Payable for $3,880,000.
d. credit to Cash for $3,880,000.
166. Molina Corporation issues 4,000, 10-year, 8%, $1,000 bonds dated January 1, 2014, at
103. The journal entry to record the issuance will show a
a. debit to Cash of $4,000,000.
b. debit to Premium on Bonds Payable for $120,000.
c. credit to Bonds Payable for $4,000,000.
d. credit to Cash for $4,120,000.
Reporting and Analyzing Liabilities
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167. The market rate of interest is often called the
a. stated rate.
b. effective rate.
c. coupon rate.
d. contractual rate.
168. 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 rate of interest.
169. Selling the bonds at a premium has the effect of
a. causing the total cost of borrowing to be higher than the bond interest paid.
b. causing the total cost of borrowing to be lower than the bond interest paid.
c. raising the effective interest rate above the state interest rate.
d. increasing the amount of cash paid for interest each 6 months.
170. When bonds are issued at a premium, the total interest cost of the bonds over the life of
the bonds is equal to the amount of
a. interest paid over the life of the bond.
b. interest paid over the life of the bond plus the amount of premium at sale point.
c. interest paid over the life of the bond minus the amount of premium at sale point.
d. premium at sale point.
171. The statement “Bond prices vary inversely with changes in the market rate of interest”
means that if the
a. market rate of interest increases, the contractual interest rate will decrease.
b. contractual interest rate increases, then bond prices will go down.
c. market rate of interest decreases, then bond prices will go up.
d. contractual interest rate increases, the market rate of interest will decrease.
172. 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.
173. 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.
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174. 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.
175. 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.
176. In the balance sheet, the account Discount 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.
177. Bond discount should be amortized to comply with
a. the historical cost principle.
b. the expense recognition principle.
c. the revenue recognition principle.
d. conservatism.
178. Four thousand bonds with a face value of $1,000 each, are sold at 102. The entry to
record the issuance is
a. Cash …………………………………………………………….. 4,080,000
Bonds Payable ……………………………………………………… 4,080,000
b. Cash …………………………………………………………….. 4,000,000
Premium on Bonds Payable ……………………………………. 80,000
Bonds Payable ……………………………………………………… 4,080,000
c. Cash …………………………………………………………….. 4,080,000
Premium on Bonds Payable …………………………………… 80,000
Bonds Payable ……………………………………………………… 4,000,000
d. Cash …………………………………………………………….. 4,080,000
Discount on Bonds Payable ……………………………………. 80,000
Bonds Payable ……………………………………………………… 4,000,000
Reporting and Analyzing Liabilities
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179. Four thousand bonds with a face value of $1,000 each, are sold at 97. The entry to record
the issuance is
a. Cash ……………………………………………………………… 3,880,000
Bonds Payable ……………………………………………………… 3,880,000
b. Cash ……………………………………………………………… 3,880,000
Discount on Bonds Payable …………………………………… 120,000
Bonds Payable ……………………………………………………… 4,000,000
c. Cash ……………………………………………………………… 3,880,000
Premium on Bonds Payable ……………………………………. 120,000
Bonds Payable ……………………………………………………… 4,000,000
d. Cash ……………………………………………………………… 4,000,000
Discount on Bonds Payable …………………………..……….. 120,000
Bonds Payable ……………………………………………………… 3,880,000
180. The journal entry to record the issuance of bonds at a discount will include a
a. debit to Cash for the face amount of the bonds.
b. debit to Cash for the face amount of the bonds plus the amount of the discount.
c. debit to Cash for the face amount of the bonds minus the amount of the discount.
d. credit to Cash for the face amount of the bonds.
181. If bonds have been issued at a discount, then 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.
182. Winrow Company received proceeds of $565,500 on 10-year, 8% bonds issued on
January 1, 2013. The bonds had a face value of $600,000, pay interest annually on
December 31st, and have a call price of 101. Winrow uses the straight-line method of
amortization. What is the amount of interest Winrow must pay the bondholders in 2013?
a. $45,240
b. $48,000
c. $51,450
d. $44,550
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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*183. Winrow Company received proceeds of $565,500 on 10-year, 8% bonds issued on
January 1, 2013. The bonds had a face value of $600,000, pay interest annually on
December 31st, and have a call price of 101. Winrow uses the straight-line method of
amortization. What is the amount of interest expense Winrow will show with relation to
these bonds for the year ended December 31, 2014?
a. $48,000
b. $45,240
c. $51,450
d. $44,550
*184. Winrow Company received proceeds of $565,500 on 10-year, 8% bonds issued on
January 1, 2013. The bonds had a face value of $400,000, pay interest annually on
December 31st, and have a call price of 101. Winrow uses the straight-line method of
amortization. What is the carrying value of the bonds on January 1, 2015?
a. $600,000
b. $572,400
c. $593,100
d. $568,950
185. Winrow Company received proceeds of $565,500 on 10-year, 8% bonds issued on
January 1, 2013. The bonds had a face value of $600,000, pay interest annually on
December 31st, and have a call price of 101. Winrow uses the straight-line method of
amortization. Winrow Company decided to redeem the bonds on January 1, 2015. What
amount of gain or loss would Winrow report on its 2015 income statement?
a. $27,600 gain
b. $33,600 gain
c. $33,600 loss
d. $27,600 loss
186. Sparks Company received proceeds of $423,000 on 10-year, 8% bonds issued on
January 1, 2013. The bonds had a face value of $400,000, pay interest annually on
December 31st, and have a call price of 102. Sparks uses the straight-line method of
amortization. What is the amount of interest Sparks must pay the bondholders in 2013?
a. $33,840
b. $32,000
c. $32,640
d. $3,384
Reporting and Analyzing Liabilities
10–37
*187. Sparks Company received proceeds of $423,000 on 10-year, 8% bonds issued on
January 1, 2013. The bonds had a face value of $400,000, pay interest annually on
December 31st, and have a call price of 102. Sparks uses the straight-line method of
amortization. What is the amount of interest expense Sparks will show with relation to
these bonds for the year ended December 31, 2014?
a. $32,000
b. $33,840
c. $29,700
d. $25,100
*188. Sparks Company received proceeds of $423,000 on 10-year, 8% bonds issued on
January 1, 2013. The bonds had a face value of $400,000, pay interest annually on
December 31st, and have a call price of 102. Sparks uses the straight-line method of
amortization. What is the carrying value of the bonds on January 1, 2015?
a. $400,000
b. $418,400
c. $381,600
d. $420,700
189. Sparks Company received proceeds of $423,000 on 10-year, 8% bonds issued on
January 1, 2013. The bonds had a face value of $400,000, pay interest annually on
December 31st, and have a call price of 102. Sparks uses the straight-line method of
amortization. Sparks Company decided to redeem the bonds on January 1, 2015. What
amount of gain or loss would Sparks report on their 2015 income statement?
a. $18,400 gain
b. $10,400 gain
c. $10,400 loss
d. $18,400 loss
190. Hogan Company has $1,000,000 of bonds outstanding. The unamortized premium is
$14,400. If the company redeemed the bonds at 101, what would be the gain or loss on
the redemption?
a. $4,400 gain
b. $4,400 loss
c. $10,000 gain
d. $10,000 loss
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191. The current carrying value of Kennett’s $600,000 face value bonds is $597,750. If the
bonds are retired at 102, what would be the amount Kennett would pay its bondholders?
a. $597,750
b. $600,000
c. $603,000
d. $612,000
192. Ervay Company has $875,000 of bonds outstanding. The unamortized premium is
$12,600. If the company redeemed the bonds at 101, what would be the gain or loss on
the redemption?
a. $3,850 gain
b. $3,850 loss
c. $8,750 gain
d. $8,750 loss
193. The current carrying value of Pierce’s $900,000 face value bonds is $896,600. If the
bonds are retired at 102, what would be the amount Pierce would pay its bondholders?
a. $896,600
b. $900,000
c. $902,000
d. $918,000
194. Hulse Corporation retires its $600,000 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
$622,470. The entry to record the redemption will include a
a. credit of $22,470 to Loss on Bond Redemption.
b. debit of $22,470 to Premium on Bonds Payable.
c. credit of $7,530 to Gain on Bond Redemption.
d. debit of $30,000 to Premium on Bonds Payable.
195. When bonds are retired before maturity,
a. only a loss on redemption can be recorded.
b. only a gain on redemption can be recorded.
c. either a gain or a loss on redemption can be recorded.
d. neither a gain nor a loss on redemption can be recorded.
Reporting and Analyzing Liabilities
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196. A $900,000 bond was retired at 98 when the carrying value of the bond was $888,000.
The entry to record the retirement would include a
a. gain on bond redemption of $12,000.
b. loss on bond redemption of $6,000.
c. loss on bond redemption of $12,000.
d. gain on bond redemption of $6,000.
197. A $750,000 bond was retired at 103 when the carrying value of the bond was $777,500.
The entry to record the retirement would include a
a. gain on bond redemption of $22,500.
b. loss on bond redemption of $5,000.
c. loss on bond redemption of $22,500.
d. gain on bond redemption of $5,000.
198. A $600,000 bond was retired at 98 when the carrying value of the bond was $618,000.
The entry to record the retirement would include a
a. gain on bond redemption of $18,000.
b. loss on bond redemption of $18,000.
c. loss on bond redemption of $30,000.
d. gain on bond redemption of $30,000.
199. Restoration Company issued bonds that had the following data associated with them:
Interest to be paid is $40,000.
Interest expense to be recorded is $45,000.
Which of the following characteristics is true?
a. The bonds are sold at a premium.
b. After recording the interest expense, the amortization will decrease the bond carrying
value.
c. The difference between the interest expense and the interest to be paid is the bond’s
par value.
d. After recording the interest expense, the amortization will increase the bond carrying
value.
200. All of the following are true regarding financial statement analysis ratios associated with
liabilities except
a. a high times interest earned ratio indicates that a company is more likely to meet
interest payments as scheduled.
b. high liquidity ratios mean that lines of credit should be high to compensate.
c. if a company’s current ratio is lower than the industry average, then it may lack
liquidity.
d. unrecorded obligations causing sizeable differences between liquidity and solvency
ratios can be ignored.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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201. From an accounting standpoint, all of the following are contingencies that must be
evaluated for off-balance sheet purposes except
a. product warranties.
b. general business risks.
c. money-back guarantees for products.
d. environmental cleanup obligations.
202. A measure of a company’s solvency is the
a. acid-test ratio.
b. current ratio.
c. times interest earned.
d. asset turnover ratio.
203. 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 interest expense and income taxes by interest expense.
204. In a recent year Garvey Corporation had net income of $100,000, interest expense of
$20,000, and tax expense of $30,000. What was Garvey Corporation’s times interest
earned for the year?
a. 5.00
b. 6.00
c. 6.50
d. 7.50
205. Liquidity ratios measure a company’s
a. operating cycle.
b. revenue-producing ability.
c. short-term debt paying ability.
d. long-range solvency.
206. The relationship between current assets and current liabilities 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.