Financial Accounting Chapter 12 Review

On March 1, 2016, Hughes Services issued a 6% long-term notes payable for $18,000. It is payable over a 3-year term in $6,000 principal installments on March 1 of each year, beginning March 1, 2017. Which of the following entries needs to be made on March 1, 2016? A) Long-Term Notes Payable 6,000 Cash 6,000 B) Current Portion of Long-Term Notes Payable 18,000 Long-Term Notes Payable 18,000 C) Long-Term Notes Payable 18,000 Accounts Payable 18,000 D) Cash 18,000 Long-Term Notes Payable 18,000

Cash 18,000 Long-Term Notes Payable 18,000

Debentures are bonds that mature in installments at regular intervals.

False

The debt to equity ratio of four companies is given below Debt to equity ratio Lewis, Inc 1.30 Jackson, Inc 1.50 Jones Corp 0.88 Roberts Corp 0.92 Based on the debt to equity ratio, which of the following companies has the least financial risk? A) Lewis, Inc. B) Jackson, Inc. C) Jones Corp. D) Roberts Corp.

Jones Corp.

On January 1, 2017, Shea Landscaping borrowed $100,000 on a 15%, 10-year note with annual installment payments of $10,000 plus interest due on December 31 of each year. Prepare the journal entry for the first installment payment made on December 31, 2017.

Long-Term Notes Payable ($100,000 / 10 ) 10,000 Interest Expense ($100,000 x .15) 15,000 Cash 25,000

On December 31, 2016, Thompson Hardware Company purchases $300,000 of property by paying $50,000 in cash and signing a 10-year mortgage note at 13% for the balance. The amortization schedule shows that the company will pay $46,072 per year. Journalize the first yearly payment on December 31, 2017.

Mortgage Payable (46,072-32,500) 13,572 Interest Expense ($250,000 x .13) 32,500 Cash 46,072

After a bond is issued, investors may buy and sell it through the bond market.

True

An amortization schedule details each loan payment's allocation between principal as well as interest and the beginning and ending balances of the loan.

True

A stream of equal cash payments made at equal time intervals is called a(n) ________. A) present value B) annuity C) compound interest D) future value

annuity

complete the following table. Bond's Stated Market Interest Will the issue price Interest Rate Rate Bonds Payable be at a discount, premium, or face value? 6% 8% 10% 9% 6% 6%

discount premium face value

The reason investors buy bonds is to ________. A) earn interest B) own controlling interest in the company C) exercise voting rights in a company D) receive dividend payments

earn interest

A bond is issued at discount when a bond's stated interest rate is ________. A) equal to the market interest rate B) more than the effective interest rate C) less than the market interest rate D) more than the market interest rate

less than the market interest rate

Earning more income on borrowed money than the related interest expense is called ________. A) premium B) leverage C) annuity D) amortization

leverage

On July 1, 2017, Miniature Company has bonds with balances as shown below. Bonds Payable 70,000 credit balance Discount on Bonds Payable 3,600 debit balance If the company retires the bonds for $71,150, what will be the effect on the income statement? A) loss on retirement of $4,750 B) gain on retirement of $4,750 C) sales revenue of $66,400 D) no effect on net income

loss on retirement of $4,750

The date on which the principal amount is repaid to the bondholder is known as the ________. A) issuing date B) interest date C) maturity date D) installment date

maturity date

When a bond is issued at a price higher than the face value, the difference is known as a ________. A) premium B) discount C) maturity value D) face value

premium

Which of the following is the amount the borrower must pay back to the bondholders at maturity? A) market value B) present value C) stated interest value D) principal amount

principal amount

The amount of cash interest the borrower pays each year is based on the ________. A) market conditions on the day of payment B) market interest rate C) stated interest rate D) effective interest rate

stated interest rate

The interest rate that determines the amount of cash interest the borrower pays and the investor receives each year is called the ________. A) amortization rate B) market interest rate C) stated interest rate D) discounting rate

stated interest rate

Secured bonds give the bondholder the right to take specified assets of the issuer in the event the issuer fails to pay interest or principal.

True

When bonds are retired at maturity ________. A) the bondholders are paid the the face value plus the unamortized premium or less the unamortized discount B) the carrying value equals the face value plus the unamortized premium or less the unamortized discount C) the carrying value always equals the face value D) the entry to retire the bonds may include a gain or loss on retirement of bonds

the carrying value always equals the face value

On June 1, 2017, Smith & Beecham Services issued $33,000 of 10% bonds that mature in five years. They were issued at par. The bonds pay semiannual interest payments on June 30 and December 31 of each year. On December 31, 2017, what is the total amount paid to bondholders? A) $1,650 B) $3,300 C) $825 D) $1,100

$1,650

If bonds with a face value of $209,000 are issued at 93, the amount of cash proceeds is ________. A) $208,907 B) $209,000 C) $194,370 D) $179,740

$194,370

On June 1, 2017, Zander Services issued $39,000 of 15% bonds that mature in five years for $64,000. The bonds pay semiannual interest payments on June 30 and December 31 of each year. On December 31, 2017, what is the total amount paid to bondholders? A) $2,925 B) $5,850 C) $4,800 D) $9,600

$2,925

If bonds with a face value of $204,000 are issued at par, the amount of cash proceeds is ________. A) $203,890 B) $204,000 C) $224,400 D) $244,800

$204,000

The balance in the Bonds Payable account is a credit of $67,000. The balance in the Discount on Bonds Payable account is a debit of $3,350. What is the bond's carrying amount? A) $3,350 B) $70,350 C) $67,000 D) $63,650

$63,650

The face value of a bond is $71,000, its stated rate is 7%, and the term of the bond is five years. The bond pays interest semiannually. At the time of issue, the market rate is 8%. Determine the present value of the bonds at issuance. Present value of $1: 4% 5% 6% 7% 8% 5 0.822 0.784 0.747 0.713 0.681 6 0.790 0.746 0.705 0.666 0.630 7 0.760 0.711 0.665 0.623 0.583 8 0.731 0.677 0.627 0.582 0.540 9 0.703 0.645 0.592 0.544 0.500 10 0.676 0.614 0.558 0.508 0.463 Present value of annuity of $1: 4% 5% 6% 7% 8% 5 4.452 4.329 4.212 4.100 3.993 6 5.242 5.076 4.917 4.767 4.623 7 6.002 5.786 5.582 5.389 5.206 8 6.733 6.463 6.210 5.971 5.747 9 7.435 7.108 6.802 6.515 6.247 10 8.111 7.722 7.360 7.024 6.710 A) $50,844 B) $20,156 C) $68,152 D) $71,000

$68,152

The balance in the Bonds Payable is a credit of $74,000. The balance in the Premium on Bonds Payable is a credit of $1,600. What is the bond carrying amount? A) $1,600 B) $75,600 C) $74,000 D) $72,400

$75,600

Compute the present value of an ordinary annuity that pays $13,000 per year for 15 years at 10% Present value of annuity of $1: 7% 8% 9% 10% 12% 11 7.499 7.139 6.805 6.495 5.938 12 7.943 7.536 7.161 6.814 6.194 13 8.358 7.904 7.487 7.103 6.424 14 8.745 8.244 7.786 7.367 6.628 15 9.108 8.559 8.061 7.606 6.811 A) $98,878 B) $99,745 C) $97,578 D) $100,178

$98,878

On December 31, 2017, Clark Sales has 10-year Bonds Payable of $89,000 and Discount on Bonds Payable of $2,350. How will this be shown on the December 31, 2016 Balance Sheet? A) Bonds Payable $89,000 less Discount on Bonds Payable $2,350 for a carrying amount of $86,650 B) Bonds Payable $89,000 plus Discount on Bonds Payable for a carrying amount of $91,350 C) Bonds Payable $89,000 D) Bonds Payable $89,000 less one-tenth of $2,350 for a carrying amount of $88,765

Bonds Payable $89,000 Less: Discount on Bonds Payable 2,350 Bond Carrying Amount $86,650

On January 1, 2017, Damron Services issued $20,000 of 8% bonds that mature in five years. The bonds were issued for $19,000. Prepare the journal entry to issue bonds.

Cash 19,000 Discount on Bonds Payable 1,000 Bonds Payable 20,000

On January 1, 2017, Davie Services issued $20,000 of 8% bonds that mature in five years. The bonds were issued at par. Prepare the journal entry to issue bonds.

Cash 20,000 Bonds Payable 20,000

Which of the following statements is true of a bond that is issued at a premium? A) The bond will be issued at an amount above face value. B) The stated interest rate is lower than the prevailing market interest rate. C) At maturity, the bond will repay an amount that is greater than the face value. D) The bond will be issued at par.

The bond will be issued at an amount above face value.

Which of the following statements is true if a bond's stated interest rate is the same as the market rate? A) The bond will be issued at a premium. B) The bond will be issued at par. C) The bond will be issued at a discount. D) The bond will be issued for an amount lower than the maturity value.

The bond will be issued at par.

Which of the following statements is true of a bond that is issued at a discount? A) The bond will be issued at par. B) The stated interest rate is higher than the prevailing market interest rate. C) At maturity, the bond will repay an amount that is less than the face value. D) The bond will be issued for an amount less than the face value.

The bond will be issued for an amount less than the face value.

Which of the following statements is true if a bond is issued for an amount equal to its face value? A) The bond's stated rate is lower than the prevailing market rate at the time of the sale. B) The bond's stated rate is higher than the prevailing market rate at the time of sale. C) The bond's related rate is the same as the prevailing market rate at the time of sale. D) The bond is not secured by specific assets of the issuer.

The bond's related rate is the same as the prevailing market rate at the time of sale.

Term bonds all mature at the same specified time.

True

The current portion of notes payable is reported on the balance sheet under current liabilities.

True

The debt to equity ratio measures the portion of total liabilities relative to the toal equity.

True

The fact that invested cash earns interest over time is called the time value of money.

True

Unlike cash dividends, which are optional payments to stockholders, the interest payment on bonds is required.

True

when bonds are retired at maturity, assuming the last interest payment has already been recorded, the journal entry includes a debit to the Bonds Payable account and a credit to the Cash account.

True

On January 1, 2017, Killion Sales issued $22,000 in bonds for $17,700. These are six-year bonds with a stated interest rate of 11% that pay semiannual interest. Killion Sales uses the straight-line method to amortize the Bond Discount. Immediately after the issue of the bonds, the ledger balances appeared as follows: Bonds Payable 22,000 credit balance Discount on Bonds Payable 4,300 debit balance After the first interest payment on June 30, 2017, what is the balance of Discount on Bonds Payable? A) debit of $3,942 B) debit of $4,300 C) debit of $4,658 D) credit of $358

debit of $3,942

On July 1, 2017, Adams Company has bonds with balances as shown below. Bonds Payable 71,000 credit balance Premium on Bonds Payable 3,800 credit balance If the company retires the bonds for $74,150, what will be the effect on the income statement? A) gain on retirement of $6,950 B) loss on retirement of $6,950 C) gain on retirement of $650 D) loss on retirement of $650

gain on retirement of $650

A bond is issued at premium ________. A) when a bond's stated interest rate is equal to the market interest rate B) when a bond's stated interest rate is less than the effective interest rate C) when a bond's stated interest rate is less than the market interest rate D) when a bond's stated interest rate is higher than the market interest rate

when a bond's stated interest rate is higher than the market interest rate

If $30,000 is invested for one year at an annual interest rate of 13%, it will grow in value to ________. A) $33,900 B) $36,208 C) $3,900 D) $32,308

$33,900

Alexander Corp. has the following balances as of December 31, 2017 Total Assets $110,000 Total Liabilities 67,000 Total Equity 43,000 Calculate the debt to equity ratio. (Round your answer to two decimal points.) A) 0.64 B) 0.92 C) 1.56 D) 2.56

1.56

If bonds with a face value of $205,000 are issued at 110, the amount of cash proceeds is ________. A) $225,390 B) $205,000 C) $186,364 D) $225,500

225,500

On March 21, 2017, the bond accounts of Urban Sales showed the following balances. Bonds payable 65,000 credit balance Premium on Bonds Payable 3,250 credit balance Urban Sales retires the bonds for $66,150. Prepare the journal entry to record the retirement of the bonds.

Bonds Payable 65,000 Premium on Bonds Payable 3,250 Gain on Retirement of Bonds Payable 2,100 Cash 66,150

Siminski Flooring Company buys a building for $115,000, paying $30,000 cash and signing a 30-year mortgage note for $85,000 at 11% annual interest. The payment will be made in equal monthly installments of $809. Prepare the journal entry for the first monthly payment.

Mortgage payable (808-779) $30 Interest expense (85,000 x .11 x 1/12) $779 Cash $809

Which of the following statements is true if a bond is issued for an amount less than its face value? A) The bond's stated rate is lower than the prevailing market rate at the time of the sale. B) The bond's stated rate is higher than the prevailing market rate at the time of sale. C) The bond's related rate is the same as the prevailing market rate at the time of sale. D) The bond is not secured by specific assets of the issuer.

The bond's stated rate is lower than the prevailing market rate at the time of the sale.

Which of the following statements is true of the debt to equity ratio? A) The higher the debt to equity ratio, the lower the company's financial risk. B) The higher the debt to equity ratio, the greater the company's financial risk. C) If the debt to equity ratio is greater than 1, the company is financing more assets with equity than with debt. D) If the debt to equity ratio is less than 1, the company is financing more assets with debt than with equity.

The higher the debt to equity ratio, the greater the company's financial risk.

Money earns income over time, a fact called the time of money value.

True

Present value is the amount a person would invest now to receive a greater amount in the future.

True

The Current Portion of Long-Term Notes Payable would normally be shown on the balance sheet under current liabilities.

True

Which of the following describes a secured bond? A) a bond that matures in installments at regular intervals B) a bond that is backed by issuer's specific assets C) a bond that matures at one specified time D) a bond that is not backed by specific assets

a bond that is backed by issuer's specific assets

Which of the following describes a serial bond? A) a bond that matures in installments at regular intervals B) a bond that gives the bondholder a claim for specific assets C) a bond that matures at one specified time D) a bond that is not backed by specific assets

a bond that matures in installments at regular intervals

Compute the present value of 46,000, invested for six years at 8%. Present value of $1: 5% 6% 7% 8% 9% 3 0.864 0.840 0.816 0.794 0.772 4 0.823 0.792 0.763 0.735 0.708 5 0.784 0.747 0.713 0.681 0.650 6 0.746 0.705 0.666 0.630 0.596 7 0.711 0.665 0.623 0.583 0.547 A) $36,647 B) $25,300 C) $32,660 D) $28,980

$28,980

On January 1, 2017, Carter Sales issued $38,000 in bonds for $16,700 These are six-year bonds with a stated interest rate of 11%, and pay semiannual interest. Carter Sales uses the straight-line method to amortize the Bond Discount. What amount is debited to Interest Expense on June 30, 2017? A) $2,090 B) $3,865 C) $1,775 D) $43,297

$3,865

Accounts Payable $22,000 Employee Health Insurance Payable 1,450 Employee Income Tax Payable 400 Estimated Warranty Payable 1,200 Long-Term Notes Payable (Due 2021 ) 37,000 FICA-OASDI Taxes Payable 1,560 Sales Tax Payable 1,270 Mortgage Payable (Due 2022 ) 7,000 Bonds Payable (Due 2023 ) 53,000 Current Portion of Long-Term Notes Payable 7,500 What is the total amount of current liabilities? A) $35,380 B) $27,880 C) $27,480 D) $26,280

$35,380

On November 1, 2016, EZ Products borrowed $64,000 on a 5%, 5-year note with annual installment payments of $12,800 plus interest due on November 1 of each succeeding year. On November 1, 2018, what is the balance of the Long-Term Notes Payable account? (Round your answer to nearest whole number.) A) $38,400 B) $64,000 C) $51,200 D) $12,800

$38,400

On March 1, 2016, Mandau Services issued a 3% long-term notes payable for $15,000. It is payable over a 3-year term in $5,000 principal installments on March 1 of each year, beginning March 1, 2017. Each yearly installment will include both principal repayment of $5,000 and interest payment for the preceding one-year period. What is the amount of total cash payment that Mandau will make on March 1, 2017? A) $5,000 B) $5,450 C) $15,000 D) $5,225

$5,450

On November 1, 2017, Archangel Services issued $313,000 of eight-year bonds with a stated rate of 12% at par. Interest payments occur each April 30 and October 31. On December 31, 2017, Archangel made an adjusting entry to accrue interest at year-end. What is the amount of Interest Expense that will be recorded on December 31, 2017? A) $37,560 B) $6,260 C) $18,780 D) $783

$6,260

On March 1, 2016, Baker Services issued a 5% long-term notes payable for $21,000. It is payable over a 3-year term in $7,000 annual principal payments on March 1 of each year plus interest, beginning March 1, 2017. How will the notes payable be shown on the balance sheet dated December 31, 2016? A) $21,000 shown as current liability only B) $7,000 shown as current liability and $21,000 shown as long-term liability C) $7,000 shown as current liability and $14,000 shown as long-term liability D) the entire $21,000 shown as long-term liability

$7,000 shown as current liability and $14,000 shown as long-term liability

The face value is $82,000, the stated rate is 10%, and the term of the bond is eight years The bond pays interest semiannually. At the time of issue, the market rate is 8%. What is the present value of the bond at the market rate? Present value of $1: 4% 5% 6% 7% 8% 15 0.555 0.481 0.417 0.362 0.315 16 0.534 0.458 0.394 0.339 0.292 17 0.513 0.436 0.371 0.317 0.270 18 0.494 0.416 0.350 0.296 0.250 19 0.475 0.396 0.331 0.277 0.232 Present value of annuity of $1: 4% 5% 6% 7% 8% 15 11.118 10.380 9.712 9.108 8.559 16 11.652 10.838 10.106 9.447 8.851 17 12.166 11.274 10.477 9.763 9.122 18 12.659 11.690 10.828 10.059 9.372 19 13.134 12.085 11.158 10.336 9.604 A) $91,561 B) $47,773 C) $43,673 D) $84,788

$91,561

Hernandez Carpets Company buys a building for $115,000, paying $30,000 cash and signing a 30-year mortgage note for $85,000 at 11%. Prepare the journal entry for the purchase.

Building 115,000 Mortgage Payable 85,000 Cash 30,000