Accounting Chapter 10

Premium on bonds payable:

* Increases the carrying value of the liability.*

A $1,000 bond that sells for 104 has a selling price of:

*$1,040*

The Music House issues a contract to a new recording artist to produce a number of albums over the next five years at $1 million per album. This situation is an example of:

*A commitment which, if material, may be disclosed in a footnote.*

A bond that is not secured is also known as:

*A debenture.*

Using different accounting methods on financial statements and tax returns will create:

*A deferred tax liability*

Which of the following is an example of a loss contingency that should be disclosed in a footnote to a company's financial statements?

*A lawsuit has been brought against the company, but the company hopes to prevail in the suit and thereby avoid any liability.*

Which of the following is an example of a contingent liability?

*A lawsuit pending against a restaurant chain for improper storage of perishable food items.*

U. S. GAAP requires that convertible bonds be classified on the balance sheet as:

*A liability*

Ultimate Company is a defendant in a lawsuit alleging damages of $3 billion. The litigation is expected to continue for several years, and no reasonable estimate can be made at this time of Ultimate Company's ultimate financial responsibility. This situation is an example of:

*A loss contingency which should be disclosed in notes to Ultimate Company's financial statements.*

If a bond is selling at 103, it is selling at:

*A premium.*

Workers' compensation is:

*A state mandated insurance program.*

Which of the following is not a characteristic of current liabilities?

*All three of the above are characteristic of current liabilities.* A. They are due within one year or within the operating cycle, whichever is longer. B. They may involve estimated amounts. C. They may be replaced with a new short-term liability rather than being paid in cash.

Which of the following are factors in determining pension expense?

*All three of the above.* A. Average age, retirement age, and life expectancy of employees. B. Employee turnover rate. C. Expected rate of return to be earned by the pension fund.

Is the present value of an amount

*Always less than the future value.*

When a company sells bonds between interest dates they will pay which of the following at the first interest payment date?

*An amount equal to the stated interest rate times the principal.*

A discount on bonds payable is best described as:

*An element of future interest expense.*

Unearned revenue:

*Appears on the balance sheet as a liability.*

Commitments, such as contracts for future transactions:

*Are footnoted in financial statements, if material.*

Interest payable on a loan becomes a liability:

*As it accrues.*

Off balance sheet financing may involve either:

*Both of the above* A. An operating lease B. A special purpose entity

When a corporation has a right to redeem bonds in advance of the maturity date, the bond is considered a:

*Callable bond.*

In estimating annual pension expense, which of the following factors would not be taken into consideration?

*Current financial condition of the company.*

The amount of the present value of a future cash receipt will depend upon

*D. All of the above.* A. The length of time until the money is received. B. The amount of money to be received. C. The required rate of return. D. All of the above.

On November 1, Metro Corporation borrowed $55,000 from a bank and signed a 12%, 90-day note payable in the amount of $55,000. The November 30 adjusting entry will be: (assume 360 days in year)

*Debit Interest Expense $550 and credit Interest Payable $550.*

A capital lease is recorded in the accounting records of the lessee by an entry:

*Debiting an asset account and crediting a liability account for the present value of the future lease payments.*

The basic measure of the amount of leverage being applied within the capital structure of an organization is the:

*Debt ratio.*

Which of the following ratios and rates that measure debt-paying ability focuses on the long-term position of a company?

*Debt ratio.*

Amortizing a premium on bonds payable:

*Decreases interest expense.*

The amortization of a bond premium:

*Decreases the carrying value of a bond and decreases interest expense.*

Temple Corporation purchased a piece of real estate, paying $400,000 cash and financing $700,000 of the purchase price with a 10-year, 15% installment note. The note calls for equal monthly payments that will result in the debt being completely repaid by the end of the tenth year. In this situation:

*Each monthly payment is greater than the amount of interest accruing each month.*

Deferred taxes are classified as:

*Either an asset or liability, depending upon the situation.*

The FICA tax paid by an employer is:

*Equal to the amount paid by the employee.*

After bonds have been issued, their market value can be expected to:

*Fall if interest rates rise.*

Bonds, with the same face value, issued at a premium will:

*Have the same maturity value as a bond issued at a discount.*

Employers are required to pay all of the following on the wages paid to each employee except:

*Health insurance benefits.*

The term "junk bonds" describes bonds with:

*High risk.*

The current portion of long-term debt should be reported:

*In the current liabilities section of the balance sheet.*

A liability for deferred income taxes represents:

*Income taxes on earnings already reported in the income statement, but that will be taxed in future periods.*

Amortizing a discount on bonds payable:

*Increases interest expense.*

The amortization of a bond discount:

*Increases the carrying value of a bond and increases interest expense.*

Which of the following statistics is of more significance to a long-term creditor than to a short-term creditor?

*Interest coverage ratio.*

One advantage of issuing bonds instead of stock is that:

*Interest is tax deductible whereas dividends are not.*

Choose the statement that correctly summarizes the tax advantage of raising money by issuing bonds instead of common stock:

*Interest payments are deductible in determining income subject to corporate income tax; dividends are not deductible.*

An operating lease:

*Is a form of off-balance sheet financing.*

On October 1, 2009, Master's Co. borrows $500,000 from its bank for five years at an annual interest rate of 10%. According to the terms of the loan, the principal amount will not be due for five years. Interest is to be paid monthly on the first day of each month, beginning November 1, 2009. With respect to this borrowing, Master's December 31, 2009, balance sheet included only a long-term note payable of $500,000. As a result:

*Liabilities are understated by $4,167 accrued interest payable.*

Sinking funds usually appear on the balance sheet as:

*Long-term investment.*

Elm Corporation plans to invest $300 million to earn about 15% before income taxes. The company is considering whether it should raise the $300 million by issuing 10% bonds payable or capital stock. If the company issues the bonds, it will probably report:

*Lower net income and lower income taxes expense than if it issues capital stock.*

Suppose investors decided to sell their holdings of capital stock in order to purchase outstanding bonds payable and as a result, the prices of bonds payable increased. What would be the likely impact on market interest rates?

*Market interest rates will fall.*

The interest coverage ratio:

*Measures the number of times the annual interest expense could be covered by annual income from operations.*

Which of the following payroll taxes do not stop once an employee reaches a certain level of income:

*Medicare taxes.*

Which of the following is not true about post retirement benefits?

*Most corporations have fully funded their post retirement benefits.*

Which of the following is not an accurate statement regarding the distinction between debt and equity?

*Only equity is considered a source of financing for operations of the business, since debt must be repaid at a specified maturity date.*

In a statement of cash flows, most interest payments are classified as:

*Operating activities.*

The interest coverage ratio is computed by dividing:

*Operating income by interest expense.*

International accounting standards require that convertible bonds be classified on the balance sheet as:

*Part liability, part equity*

An employer's total payroll-related costs always exceed the wages and salaries earned by employees by:

*Payroll taxes and mandated programs such as workers' compensation insurance.*

Does a call provision on a bond

*Permit the corporation to redeem the bonds at a specified price.*

The price at which a bond sells is equal to the:

*Present value to investors of the future principal and interest payments.*

In relation to a bond issue, the role of the underwriter is to:

*Purchase the entire bond issue from the issuing corporation and then sell the bonds to the public.*

A company with a fully funded pension plan:

*Reports no long-term liability for future pension payments.*

The amounts that a business withholds as taxes from an employee's earnings:

*Represent current liabilities to the employer.*

Which of the following payroll costs are shared equally by the employer and the employee?

*Social security.*

On February 28, 2009, $5,000,000 of 6%, 10-year bonds payable, dated December 31, 2008, are issued. Interest on the bonds is payable semiannually each June 30 and December 31. If the total amount received (including accrued interest) by the issuing corporation is $5,060,000, which of the following is correct?

*The bonds were issued at a premium.*

If a bond is issued at par and between interest dates:

*The cash received by the corporation will be greater than the face value of the bond.*

Each of the following must be disclosed in the financial statements, except:

*The company's debt ratio and interest coverage ratio for the current year.*

When an installment note is structured as a "fully amortizing" loan with equal monthly payments (such as a traditional mortgage):

*The difference between the sum of all monthly payments and the principal amount of the note constitutes interest.*

Which of the following is not a characteristic of an estimated liability?

*The liability should not be recorded in the accounting records until future events have determined the exact amount.*

In preparing an amortization table, it is necessary to include:

*The original amount of the liability, the amount of periodic payments and the interest rate.*

Management has both the intent and the ability to refinance a liability maturing in four months by taking out a new loan at the due date which would not be due for several years. How would this situation be reported in financial statements prepared as of today's date?

*The original liability is classified as long-term; the new loan is not included in liabilities at this date.*

Which one of the following is not considered a criteria to capitalize a lease?

*The present value of minimum lease payments is less than 90% of the fair market value of the asset.*

Pension expense is:

*The present value of the estimated future pension benefits earned by employees as a result of their services during the period.*

The pension expense of the current period is equal to:

*The present value of the estimated future pension benefits earned by today's workers during the current period.*

Which of the following does not affect the market price of an outstanding bond issue?

*The price at which the bonds were originally issued.*

At the end of 2010 it is discovered that the accountant for Gower Company failed to record $60,000 of interest payable which had accrued since the last interest payment date. The current ratio, quick ratio and debt ratio, as well as the financial statements, had already been computed using the erroneous data. Correction of the accounting records will have which of the following effects?

*The quick ratio as formerly computed will decrease as a result of the correction.*

The principal amount of a bond is:

*The unpaid balance exclusive of any interest charges.*