BA 211 Ch9

36. What are the three main ways to finance operations?

(1) by retained earnings, (2) by issuing equity (stock), and (3) by issuing bonds (or notes) payable

Refer to Question 2. The entry to record the semiannual interest payment is: A. Interest Expense D15,000 Cash C15,000 B. Interest Expense D30,000 Cash C30,000 C. Interest Expense D30,000 Interest Payable C30,000 D. Interest Expense D15,000 Interest Payable C15,000

A

Which of the following statements is TRUE regarding pension liabilities? A. If the plan assets exceed the pension liability, the asset and obligation amounts are reported only in the notes to the financial statements. B. If the market value of the plan assets exceeds the amount of the pension obligation, that excess is reported as a liability. C. Every business is required by law to provide retirement compensation for its employees. D. All of the above are true.

A

35. What is a convertible bond?

A convertible bond is one that may be converted into the issuing company's stock at the investor's option.

15. Which of the following would you find on a bond certificate? Circle all that apply. A. Principal amount B. Maturity date C. Issuing corporation D. Annual interest rate E. Interest payment dates

A, B, C, D, E

47. Which of the following would be included in the financing activities section of the statement of cash flows? Circle all that apply. A. Repurchase of common stock B. Proceeds from issuance of long-term debt C. Increase in current assets D. Payments of cash dividends E. Sale of investments

A, B, D

2. Current liabilities of known amounts include which of the following? Circle all that apply. A. Accounts payable B. Estimated warranty payable C. Accrued liabilities D. Payroll liabilities E. Unearned revenue

A, C, D, E

28. The journal entry to pay interest expense and to amortize a bond discount would include which of the following? A. Debit to Interest Expense B. Debit to Discount on Bond Payable C. Credit to Premium on Bond Payable D. Credit to Interest Payable

A. Debit to Interest Expense

37. What is the single most important statistic for evaluating companies? A. Earnings per share (EPS) B. The leverage ratio C. Times-interest earned D. Current ratio

A. Earnings per share (EPS)

17. Define the following terms. A. Stated interest rate: B. Market interest rate:

A. The interest rate printed on the bond certificate. The stated interest rate determines the amount of cash interest the borrower pays - and the investor receives - each year. B. The rate that investors demand for loaning their money. The market interest rate varies by the minute.

5. A(n) _______________ _______________ usually results from an expense that the business has incurred but not yet paid.

Accrued liability

38. What is the formula to calculate the leverage ratio? What does the leverage ratio show?

Average total assets / Average common stockholders' equity The leverage ratio shows a company's average total assets per dollar of average common stockholder equity.

Lei Company is considering financing with debt or stock. Which one of these facts is true for the company? A. The principal amount must be repaid at the maturity of the stock. B. Earnings per share will generally be higher when a company is financed with debt rather than stock. C. "Trading on the equity" means that the business earns less by investing borrowed funds than it pays in interest expense on bonds. D. Dividends are tax-deductible while interest expense is not tax-deductible.

B

On January 1st, JK Company issued $400,000, 5-year, 4% bonds. The market rate at the time of the sale was greater than 4% so the bonds were sold at 93. Interest is payable June 30th and December 31st. The entry to record the sale of the bonds would include a: A. Debit to Cash for $400,000. B. Debit to Discount on Bonds Payable for $28,000. C. Credit to Cash for $372,000. D. Credit to Bonds Payable for $372,000.

B

On July 1, 2017, a company issued $200,000, 8-year, 4% bonds payable for $186,944, when the market rate of interest was 5%. Interest payment dates are June 30 and December 31. Using the effective interest method of amortization, the December 31, 2017, carrying amount of the bonds (rounded to the closest dollar) will be: A. $186,270 B. $187,618 C. $199,326 D. $200,000

B

The Fuller Company issued a $500,000, 5-year, 6% bond at par. It is a semiannual bond with interest paid on June 30th and December 31st. The entry to record the sale of the bond would include a: A. $500,000 credit to Cash. B. $500,000 credit to Bonds Payable. C. $30,000 debit to Interest Expense. D. $500,000 debit to Accounts Payable.

B

24. The entry to record the payment of interest expense and to amortize a bond premium would include with of the following? A. Debit to Cash B. Debit to Premium on Bonds Payable C. Credit to Interest Expense D. Credit to Discount on Bonds Payable

B. Debit to Premium on Bonds Payable

10. What is an example of an estimated liability account that a company may have? A. Accounts Payable B. Estimated Warranty Payable C. Estimated InventoryD. Sales Tax Payable

B. Estimated Warranty Payable

12. Match the following terms to describe FASB's guidelines on how to account for contingent liabilities. a. Accrue b. Disclose c. No need to report ___ Reasonably possible ___ Unlikely to occur ___ Probable and reasonably estimable

B. Reasonably possible C. Unlikely to occur A. Probable and reasonably estimable

14. _____________ __________________ are groups of debt securities issued to multiple lenders, called bondholders.

Bonds payable

Refer to Question 7. If the JK Company uses the straight-line method to amortize discount on the bonds, the entry to record the first interest payment would include: A. Credit to Cash for $10,800. B. Debit to Interest Expense for 8,000. C. Debit to Interest Expense for $10,800. D. Debit to Discount on Bonds Payable for $2,800.

C

Which of the following is true about a contingent liability: A. Depends on future outcome of future events. B. Should not be disclosed in a footnote. C. Must be disclosed if it is reasonably possible. D. None of the above

C

44. Do companies prefer operating or capital leases? Why? A. Capital - they don't affect the debt ratio B. Capital - they decrease the debt ratio C. Operating - they don't affect the debt ratio D. Operating - they increase the debt ratio

C. Operating - they don't affect the debt ratio

6. Compensation (payroll) is the major expense for what type of organizations? A. Manufacturing B. Merchandising C. Service D. Industrial

C. Service

43. A _______________ lease is a long-term, noncancelable debt.

Capital

30. What is the journal entry to record the issuance of bonds at a premium?

Cash $$$ Bonds Payable $$$ Premium on Bonds Payable $$$

19. What journal entry would a company make if it issued $100,000 worth of bonds payable at par?

Cash 100,000 Bonds Payable100,000

1. _____________ ________________ are obligations due within one year or within the company's normal operating cycle if longer than a year.

Current liabilities

Hector Sales Co. began operations early this year, selling a product that carries a 1-year warranty; any defective units will be replaced within that time. The product has a cost to Hector Sales of $55 and a selling price of $107. Hector estimates that approximately 1% of the units will be defective. During the year, 62,000 units were sold and 274 units were returned for replacement. What is the balance in Warranty Payable at the end of the current year? A. $34,100 B. $15,070 C. $53,130 D. $19,030

D

Which of the following current liabilities is/are a known amount? A. Unearned Revenue B. Accounts Payable C. Payroll Liabilities D. All of the above are known amounts.

D

20. Which account would a company debit if it issued bonds payable at a discount? A. Cash B. Discount on Bonds Payable C. Bonds Payable D. Both A and B

D. Both A and B

13. Failing to report a large liability on you balance sheet would result in which of the following? A. Understate your liabilities and debt ratio B. Overstate your assets C. Likely overstate your net income D. Both A and C.

D. Both A and C

34. A bond that the issuer may pay off at a prearranged price whenever the issuer chooses, is what type of bond? A. Serial B. Convertible C. Secured D. Callable

D. Callable

32. Through amortization, the premium _______________ interest expense each period over the term of the bonds.

Decreases

27. When bonds are issued at a discount, the _________________ is allocated to _______________ ___________________ through amortization over the term of the bonds.

Discount; interest expense

26. The __________________-____________________ method is the most theoretically correct method of amortizing bond discount and premium because it recognizes the impact of the ______________ _______________ _____________ ____________________ on interest expense recognized each interest payment period.

Effective-interest; time value of money

7. List three payroll liabilities that salary expense may create.

Employee Income Tax Payable, FICA Tax Payable, and Salary Payable

46. Generally accepted accounting principles require companies to report the ______________ _______________ of their long-term debt.

Fair value

31. Issuing bonds at a premium is more common than at a discount. True or false?

False - issuing bonds at a premium is rare because few companies issue their bonds to pay cash interest above the market interest rate.

45. Pensions are one of the most straightforward areas of accounting. True or false?

False - pensions are one of the most complex areas of accounting.

9. The current portion of long-term debt is the amount of the principle that is payable within five years. True or false?

False - the current portion of long-term debt is the amount due within one year.

29. To accrue interest for a partial-period, you simply use the interest expense amount from the amortization table that you created. True or false?

False - you must multiply the interest expense amount by the fraction of the period that you are accruing interest for.

4. Suppose a company purchased inventory using a short-term note payable. What is the journal entry to record this transaction? What is the entry to record the accrual of interest expense on this note?

Inventory D$$$ Note payable, Short-term C$$$ Interest Expense D$$$ Interest Payable C$$$

40. A _______________ is a rental agreement in which the tenant (_______________) agrees to make rent payments to the property owner (_________________) in exchange for use of the asset.

Lease; lessee; lessor

39. How is the times-interest-earned ratio calculated?

Operating income / Interest expense

16. A bond issued at a price above its face value is said to be issued at a ______________, and a bond issued at a price below face value has a __________________.

Premium; discount

23. As a premium is amortized, it ____________________ the amount of interest expense recognized each period because the issuing price was greater than the _____________ ____________ of the bonds.

Reduces; face value

41. What is the journal entry to account for an operating lease?

Rent Expense (or Lease Expense)$$$ Cash $$$

22. The _____________-_____________ ________________ method divides a bond discount into equal amounts over the bond's term, resulting in the same amount of interest expense for each interest period

Straight-line amortization

11. In your own words, explain what a contingent liability is

Student answers will vary. A contingent liability is an amount that a company may owe in the future depending on the outcome of some future event or events. It is not an actual liability. Contingent liabilities may depend on the outcome of lawsuits, tax disputes, or allegations of environment protect law violations.

3. What does the accounts payable turnover measure?

The number of times per year a company is able to pay its accounts payable

33. What is the main reason a company would retire bonds early?

To relieve the pressure of making high interest payments

21. Discount on Bonds Payable is a contra account to Bonds Payable. True or false?

True

42. Operating leases are an example of "off-balance-sheet financing." True or false?

True

8. For all ______________ __________________, the business has received cash from customers before earning the revenue.

Unearned revenue