Chapter 7 Smartbook Accounting

A company experienced an event that caused assets, liabilities and cash flow from financing activities to increase, but had no affect on net income. This could be due to ______.

issuing a bond with a 20 year term

A business has a debt that is due in May, Year 2. At December 31, Year 1 the company does not plan to use any of its current assets to repay this debt. This debt should be classified as ______ on the December 31, Year 1 balance sheet.

long-term

Bond obligations normally have ______ terms when compared to notes issued to bank.

longer

The seller of a bond is called the:

Borrower

When bonds are issued at a discount, they sell for ______ face value.

less

When a bond is issued at face value, the cash interest payment ______ interest expense.

equals

Loans that provide flexible borrowing and repayment options are called ______.

lines of credit

Bond interest rates are generally ______ than interest rates charged by bank.

lower

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

more than

When a company recognizes a cash revenue event that is subject to state sales tax, the balance in the Cash account increases by ______ the amount of revenue.

more than

The carrying value of a bond issued at a premium is equal to that face value of the bond ______.

plus the premium

On January 1, Year 1, Dixon Company issued 10-year, 8% bonds with a $50,000 face value at 96. As a result on this, the Bonds Payable account increases by ______.

Bonds payable account increased by $50,000

Which of the following statements regarding contingent liabilities is true? (Select all that apply.) a. Contingent liabilities represent losses; the contingency is about the amount. b. For reporting purposes, contingent liabilities are sorted into three categories depending on the likelihood of their becoming actual liabilities. c. The amount or existence of a contingent liability depends on some future event. d. A contingent liability is a potential obligation arising from a past event.

b. For reporting purposes, contingent liabilities are sorted into three categories depending on the likelihood of their becoming actual liabilities. c. The amount or existence of a contingent liability depends on some future event. d. A contingent liability is a potential obligation arising from a past event.

Semiannual interest means that interest is paid ______.

two times per year

The buyer of a bond is called the:

Lender

Current assets include ______. -supplies -equipment -inventory -cash -accounts payable -accounts receivable

-supplies -inventory -cash -accounts receivable

A $10,000 face value bond that sells for 95 1/4 will yield cash proceeds of ______.

$10,000 x 0.9525 9,525

On January 1, Year 1, Dixon Company issued 10-year, 8% bonds with a $50,000 face value at 104. Recognizing the bond issue, causes the Bonds Payable account to increase by $ ______.

$50,000

On January 1, Year 1, Hector Inc. issued bonds with a face value of $120,000, a stated rate of interest of 8% and a five-year term. The effective rate of interest at the time of issue was 7%, so the bonds sold for $124,920. Assuming Hector uses the effective interest rate method to amortize the bond premium, calculate the premium amortization for Year 1.

$856 ???????

On January 1, Year 1, Hector Inc. issued bonds with a face value of $120,000, a stated rate of interest of 8% and a five-year term. The effective rate of interest at the time of issue was 7%, so the bonds sold for $124,920. Assuming Hector uses the effective interest rate method to amortize the bond premium, calculate the amount of cash paid for interest in Year 1.

$9,600 ??????

Issuing a note to borrow money affects the ______.

-Statement of cash flows -Balance sheet

Borrowing money by issuing a bond increases ______. -cash flow from operating activities -cash -net income -bonds payable

-cash -bonds payable

On January 1, Year 1, Dixon Company issued 10-year, 8% bonds with a $50,000 face value at 96. Immediately after the issue, the carrying value of the bond liability was:

48,000 ??????

Assume that a $1,000 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 ______.

9.0% Total annual interest = ($1,000 × 6.2%) + ($200 ÷ 20) discount = $72. Effective interest rate = $72 annual interest ÷ $800 amount borrowed =.09 or 9%.

A potential obligation arising from a past event is called a(n):

Contingent liability

Bond premiums reduce the _______ interest rate.

Effective interest rate

True or false: When a bond is issued, the stated interest rate is determined by current market conditions.

FALSE

True or false: When bonds are issued at a premium, GAAP requires the premium to be classified as a cash inflow from operating activities.

FALSE

The average time it takes a business to convert cash to inventory, inventory to accounts receivable, and accounts receivable back to cash is commonly called the ______ cycle:

Operating cycle

The average time it takes a business to convert cash to inventory, inventory to accounts receivable, and accounts receivable back to cash is commonly called the:

Operating cycle

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

Restrictive covenants

In practice, bonds normally pay interest ______.

Semiannually

True or false: Bond prices are normally expressed as a percentage of the face value.

TRUE

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

TRUE

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

VARIABLE interest rate

A company recorded an event that caused assets, liabilities and cash flow from financing activities to increase, but had no affect on net income. This event could have been due to ______.

borrowing money with a two year term to maturity

On January 1, Year 1, Dixon Company issued 10-year, 8% bonds with a $50,000 face value at 96. Interest is payable in cash on December 31 of each year. Assuming straight-line amortization, the annual interest payment ______.

decreases assets by $4,000 ?????

On January 1, Year 1, Dixon Company issued 10-year, 8% bonds with a $50,000 face value at 96. As a result on this, the statement of cash flows shows a cash flow from ______ activities of _______.

financing, $48,000 Reason:The carrying value of the bonds is equal to the $50,000 of Bonds Payable minus the $2,000 discount. The statement of cash flows would show a $48,000 cash inflow from financing activities.

On January 1, Year 1, Dixon Company issued 10-year, 8% bonds with a $50,000 face value at 96. Interest is payable in cash on December 31 of each year. Assuming straight-line amortization, the carrying value of the bond liability will ______ at each interest payment.

increase by $200 ????

Loans that require payments of principal and interest at regular intervals are called ______.

installment notes

James Company borrowed $40,000 on a one-year notes payable at 8%. Interest and principal are to be repaid at the end of the note term. If the note was issued on October 1 of Year 1, the amount of accrued interest on the December 31, Year 1 financial statements is ______.

$40,000 x 0.08(3/12) The accrued interest rate is $800

Current liabilities include: -5 year bonds due in 2 years. -10 years bonds due in 5 months. -interest receivable. -wages payable. -accounts payable.

-10 years bonds due in 5 months. -wages payable. -accounts payable.

Which of the following statements are true? -The bondholder is the seller or issuer of a bond. -Cash interest payments are based on the stated interest rate. -The amount due at bond maturity is called the face value of the bond. -A bond certificate describes the company's obligation to pay interest and repay the principal.

-Cash interest payments are based on the stated interest rate. -The amount due at bond maturity is called the face value of the bond. -A bond certificate describes the company's obligation to pay interest and repay the principal.

Which of the following statements are true? -Creditors may demand executives to pledge personal assets as well as business assets as security for loans. -Assets like accounts receivable, inventory, equipment, buildings, land may be pledged as collateral for business loans. -Restrictive covenants are used to require executives to pledge personal assets as collateral for business loans. -Executives of major corporations are more likely to be asked to pledge personal assets as collateral than are owners of small businesses.

-Creditors may demand executives to pledge personal assets as well as business assets as security for loans. -Assets like accounts receivable, inventory, equipment, buildings, land may be pledged as collateral for business loans.

Warranty obligations ______. -are not considered liabilities -only require footnote disclosure -are reported in financial statements -have uncertain timing and amounts

-are reported in financial statements -have uncertain timing and amounts

When a company makes a cash payment for interest on a bond that was issued at face value, ______ decreases. -cash -cash flow from investing activities -cash flow from operating activities -retained earnings -bonds payable

-cash -cash flow from operating activities -retained earnings

Simms Accountants charged a client $2,000 cash plus tax for services provided in a state where the service sales tax rate is 6%. As a result of this event, the ______.

-cash account increases by $2,120 $2,000 plus $120 -sales tax liability account increases by $120 $2,000 divided by 0.06%

Payments on installment loans ______. -are made only on the maturity date -normally have fluctuating interest rates -include a repayment of a portion of the principal balance -include a payment for interest

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

Recognizing accrued interest expense ______. -is a claims exchange transaction -has no effect on total liabilities -decreases net income -decreases total assets

-is a claims exchange transaction -decreases net income

A line of credit ______. -is repaid only on the maturity date -is normally renewable on a one year term -normally has fluctuating interest rates. -is generally classified as a long-term liability

-is normally renewable on a one year term -normally has fluctuating interest rates.

Warranties normally: -represent liabilities. -cover a specific time period. -have indefinite lives. -guarantee repair or replacement.

-represent liabilities. -cover a specific time period. -guarantee repair or replacement.

When a company recognizes a cash payment for interest expense on a bond that was issued at a discount: -total assets decrease. -the statement of cash flows shows a cash outflow for financing activities. -the carrying value of the bond liability increases. -the cash payment is less than the interest expense. -the balance of the Bonds Payable account decreases.

-total assets decrease. -the carrying value of the bond liability increases. -the cash payment is less than the interest expense.

Assume that a $1,000 face value bond sells at a $100 discount. If the bond has a 7% stated rate of interest and a 5 year term to maturity, the effective rate of interest is approximately ______.

10%

What type of interest rate remains constant during the term of the loan?

FIXED interest rate

The effective rate of interest investors are willing to accept for a particular bond equals the __________ rate of interest for other investments of similar risk.

Market