Chapter 7 practice

The accrued Interest Payable account will appear on which of the following financial statements?

Balance sheet

Issuing a note to borrow money will affect which of the following financial statements?

Statement of cash flows; Balance sheet;

Fran Company recognized accrued expense. How would this event affect Fran Company's financial statements?

Stockholders' equity decreases; Total liabilities increase

Bonds that do not pay high enough interest to attract buyers may be discounted in order to make them more attractive.

True

With respect to a bond liability the lender is called the _____________, while the borrower is called the ________________.

bondholder; issuer;

In practice, bonds normally pay interest

semiannually

warranties normally:

cover a specific time period; are based in estimates; guarantee repair or replacement;

The primary purpose of classified balance sheets is to distinguish between

current and long-term assets; current and non-current liabilities;

On January 1, Year 1, Dixon Company issued bonds with a 50,000 face value at 96. The bonds has a 10 year term and an 8% stated rate of interest. Based on this information,

the statement of cash flows would show a 48,000 cash inflow from FA.

When a company recognizes a cash payment of interest expense on a bond that was issued at a premium

total assets decrease; net income decrease;

When a company increase the amount borrowed on a line of credit, the amount of

total assets increase; total liabilities increase;

When a company makes a cash payment for interest on a bond that was issued at face value

total liabilities is not affected; total assets decrease;

Jack Company issued a 12000 note payable on September 1, Year 1 for a one year term. Assume that the company's balance sheet date is 31st December every year. Interest was set at 5% per year. In Year 2, Jack would recognize:

A csh outflow from financial activities of 12,000; 400 of interest expense; a cash outflow from operating activities of 600;

The retirement of bonds on the maturity date will

not affect stockholders' equity; decrease assets;

Agreements that restrict additional borrowing, limit dividend payments, or restrict salary increase are examples of _________________ covenants.

restrictive

Recognizing a cash revenue event that is subject to state sales tax would

affect the income statement; affect the statement of changes in stockholders' equity;

On January 1, Year 1, Dixon Company issued bonds with a 50,000 face value at 96. The bonds has a 10 year term and an 8% stated rate of interest. Recognizing the bond issue would cause the Bonds Payable account to

increase by 50,000

When a company makes a cash payment for interest due on a line of credit, the amount of:

net income decrease; cash flow from operating activities decrease;

When a company recognizes a cash payment for interest expense on a bond that was issued at a discount:

net income decrease; total assets decrease;

The rate of interest written in the bond certificates is called the stated rate of interest, while the rate of interest a company actually pays on the bond is called the _________________ rate of interest.

effective

When a bond is issued a premium, the stated rate of interest is higher than the ____________ rate of interest.

effective

Simms Accountants charged a client 2000 cash plus tax for services provided in a state where the service sales tax rate is 6%. As a result of this event, Simms would recognize:

2000 of Service Revenue; a 2120 increase in total assets; a 120 liability on the Balance sheet;

A warranty is an obligation that:

is reasonably likely to occur; has an estimable amount; has to be reported as a liability in the balance sheet; does not have to be disclosed in the notes to the statements;

The maker of a promissory note is sometimes called the _____________.

issuer

loans that provide flexible borrowing and repayment options are called

lines of credit

When a company issues a bond at a premium, the amount of cash collected from the issue is

more than the face value of the bond

when company increases the amount borrowed on a line of credit, the amount of

net income is not affected; net cash flow from operating activities increase;

The average time it takes a business to convert cash to inventory, inventory to accounts receivable, and accounts receivable back to cash is known as

operating cycle

Classified balance sheets report current assets only.

False

Borrowing funds through a line of credit is an

asset source transaction

How would issuing a bond to borrow money affect a company's financial statements?

assets increase; liabilities increase;

On January 1, Year 1, Dixon Company issued bonds with a 50,000 face value at 104. The bonds has a 10 year term and an 8% stated rate of interest. Based on this information, the

balance in the stockholders' equity account would not be affect; carrying value of the bond liability immediately after the issue is 52,000.

On January 1, Year 1, Dixon Company issued bonds with a 50,000 face value at 104. The bonds has a 10 year term and an 8% stated rate of interest. Based on this information, the statement of cash flows would

show a 52000 cash inflow from financial activities.

When a company recognizes a warranty expense:

stockholders' equity decreases; the statements of cash flows is not affected;

when a company recognizes a cash revenue event that is subject to state sales tax, the balance in the Cash account increase by:

the amount of the revenue earned plus the amount of tax due to the state; more than the amount of revenue;

which type of interest rate fluctuates up or down during the loan period?

variable

which of the following statements is true?

Bond obligations normally have longer terms to maturity than bank notes; Bond obligations normally carry lower interest rates than bank charge;

Jack Company issued a 12000 note payable on September 1, Year 1 for a one year term. Assume that the company's balance sheet date is 31st December every year. Interest was set at 5% per year. In Year 2, Jack would recognize cash flow from operating activities amounting to

600 of interest expense;

Assume that a 1000 face value bond sells at a 200 discount. If the bond has a 6.2% stated rate of interest and a 20 year term to maturity, the effective rate of interest is approximately

9% -> Total annual interest = (1000 * 6.2%) + (200 / 20) discount = 72. Effective interest rate = 72 / 800 = 0.09 or 9%

Paying off a sales tax liability would affect which of the following financial statements

Balance sheet; Statement of cash flows;

Paying off the principle balance of a note payable affects which of the following financial statements?

Balance sheet; Statement of cash flows;

On January 1, Year 1, Dixon Company issued bonds with a 50,000 face value at 104. The bonds has a 10 year term and an 8% stated rate of interest. Interest is payable in cash on December 31 of each ayer. Assuming straight-line amortization, which of the following statements regarding the recognition of interest expense on December 31, Year is true?

Interest expense shown on the income statement is 3800; The carry value of the bond liability decrease by 200;

Fran Company recognized accrued interest expense. How would this event affect Fran Company's financial statements?

Net income decrease; Cash flow from operating activities is not affected;

If the likelihood of a future obligation arising is remote

No liability is shown in the financial statement or related notes;

A company experienced an event that caused total assets and liabilities to decrease and caused a cash outflow to appear on the statement of cash flows. Which of the following events could have caused these effects?

Paying off an accrued interest payable; Paying off the principal balance of a loan;

In a note containing the term of a lending transaction, the party borrowing the money may be called the:

borrower; maker of the note; issuer of the note;

On January 1, Year 1, Dixon Company issued bonds with a 50,000 face value at 104. The bonds has a 10 year term and an 8% stated rate of interest. On December 31, Year 10, after the last cash payment for interest has been made, the entry to retire the bonds will

cause assets to decrease by 50,000.

A payment on an installment loan _______________ the amount of total assets, _______________ the amount of net income, and ___________ the amount of cash flow from financial and operating activties.

decreases; decreases; decreases;

When the market rate of interest is higher than the stated of interest, bonds will sell at an _______________, thereby increasing the effective rate of interest.

discount

If a bond sells at a discount, the effective rate of interest will be

higher than the stated rate of interest

Payments on installment loans

include a payment for interest; include a repayment of portion of the principal balance;

When Grey Company borrowed money by issuing bonds, the balance in the Bonds Payable account ________________ and the balance in the Cash account _________________.

increased; increased;

loans that require payments of principal and interest at regular intervals are called

installment loans