Accounting Test 6

4. On September 1, Jurasic Pork Company borrowed $50,000 on a 6%, 9-month note payable to XYZ National Bank. Given no previous adjusting entries have been recorded, Jurasic Pork's adjusting entry at December 31 would include a ______. (Select all that apply.)

$1,000 debit to Interest Expense $1,000 credit to Interest Payable

17. On January 1, Year 1, Sew What, Inc., issued $100,000 of 9%, 10-year bonds for $106,710 when the market rate of interest was 8%. The bonds pay interest annually on December 31. Record the amounts (rounded to the nearest $1) in the Bonds Payable, net T-account below for the year ended December 31, Year 1, given this information:

0. 106710 463. 0 0. 106247

8. On January 1, Year 1, Novel Tea, Inc., issued a $20,000, 8%, 10-year mortgage note. The note requires annual payments of $2,717 on December 31. Record the amounts in the Notes Payable T-account below for Year 1 given this information: Notes Payable

0. 20000 1117. 0 0. 18883

15. On January 1, Year 1, Sew What, Inc., issued $100,000 of 9%, 10-year bonds for $93,376 when the market rate of interest was 10%. The bonds pay interest annually on December 31. Record the amounts (rounded to the nearest $1) in the Bonds Payable, net T-account below for the year ended December 31, Year 1, given this information:

0. 93376 0. 338 0. 93714

16. On January 1, Hindenburger, Inc., issued $500,000 of 7% bonds at 87.000 when the market rate of interest is 11%. Interest is paid annually on December 31. By what amount should Cash be credited when recording the second annual interest payment?

35,000

15. On January 1, Lettuce Eat, Inc., issued $300,000 of 6% bonds at 87.000 when the market rate of interest is 11%. Interest is paid annually on December 31. By what amount should Cash be credited when recording the first annual interest payment?

18,000

3. Show the effect of the issuance of the note. Assets Liabilities Shareholders' Equity Borrowed $11,620 at an annual interest rate of 6% by signing a 12-month installment note. $______ $______ $______

Assets: 11,620 Cash Liabilities: 11,620 Note Payable SE: No effect

20. Callable bonds can be called for early retirement at the choice of the ______.

Bond Issuer

1. Identify each as a Current Liability, Long-term Liability or Neither.

Deferred Revenue: Current Liability Common Stock: Neither Interest Payable: Current Liability 5-Year Notes Payable: Long Term Accounts Receivable: Neither

Bonds that are backed by collateral are ______.

Secured

13. A Bond with a 6% stated interest rate was issued when the market rate of interest was 7%. This bond was issued at ______.

a discount

13. If the bond's contract (stated) rate of interest is less than the market rate of interest, the bonds will sell at _______.

a discount

17. If a bond sells at a premium, when recording interest payments, the debit to Interest Expense is ________ the credit to cash.

less than

17. On January 1, Year 1, Bottoms Up, Inc., issued $1,000,000 of 6%, 20-year bonds when the market rate of interest was 5%. The bonds pay interest annually on December 31. On its income statement for the year ended December 31, Year 1, Bottoms Up will show Interest Expense of ________.

less than $60,000

15. Peace A Pizza issued $200,000 10%, 15-year bonds on January 1, Year 1, for $180,000. The market interest rate when the bonds were issued was 12%. Interest is paid annually on December 31. The journal entry to record the first interest payment will include a ______.

credit to Bonds Payable, Net of $1,600

How to calculate Payment

face value* stated rate

13. If a bond sells at a discount, when recording interest payments, the debit to Interest Expense is _________ the credit to cash.

greater than

6. On November 1, Year 1, Pans on Fire, Inc., borrowed $100,000 cash on an 1-year, 6% note payable that requires Pan's on Fire to pay both principal and interest on October 31, Year 2. The last adjusting journal entry was made on December 31, Year 1, its year end. The entry to record the payment on October 31, Year 2 would include a ______. (Select all that apply.)

debit to Interest Expense of $5,000 debit to Note Payable of $100,000 debit to Interest Payable of $1,000 credit to Cash of $106,000

A financing activity that involves issuing stock is referred to as financing. A financing activity that involves borrowing from creditors is referred to as financing.

equity debt

6. On September 1, Jurasic Pork Company borrowed $50,000 on a 6%, 6-month note payable to XYZ National Bank. Jurasic Pork recorded an adjusting entry at December 31, its year end. On March 1, the due date, Jurasic Pork recorded its payment of the note and interest. This entry includes a ______.

$1,000 debit to Interest Payable $500 debit to Interest Expense $50,000 debit to Notes Payable $51,500 credit to Cash

12. On the maturity date, the bondholders of $1,000,000 of bonds that pay 10% annually that were issued at $990,000 will be paid ______.

$1,000,000 plus the last year's interest of $100,000

14. $1,000 bond selling at 102.000 $1,000 bond selling at 100.000 $1,000 bond selling at 98.000

$1,020; Premium $1,000; Par $980; Discount

18. Robbin, Inc., issued $200,000 of 9%, 10-year bonds for $213,419 given a market rate of interest of 8%. How much principal will Robbin, Inc., pay to the bond holders at the end of the tenth year?

$200,000

14. Calculate the proceeds for each of the following bond issues, and show if the bonds sell at a premium, at a discount, or at par:

$300,000 worth of bonds at 101.00: $303,000; Premium $1,000 bond selling at 100.000: $1,000; Par $200,000 worth of bonds at 97.000: $194,000; Discount

9. Interest Expense Notes Payable CPFI Payment of NPP

(7000) Income Statement 92762 Balance Sheet (7000) Statement of Cash Flows- operating activities (7238) Statement of Cash Flows- financing activities

12. On January 1, Lettuce Eat, Inc., issued $800,000 of 6% bonds at 100.000. Interest is paid semiannually on June 30 and December 31. By what amount should Cash be credited when recording the first interest payment?

24,000 PRT

16. On January 1, Luna Sea Sushi, Inc., issued $400,000 of 5% bonds at 88.000 when the market rate of interest is 7%. Interest is paid annually on December 31. By what amount should Interest Expense be debited when recording the second annual interest payment?

24,965

4. On September 1, Year 1, Nim Com Soup, Inc., borrowed $30,000 by issuing a 13-month note at 9%. Interest Payable at December 31, Year 1, equals ______ (round to the nearest whole dollar).

30,000*.09*4/12= 900

10. On January 1, Year 1, Pasta Disasta, Inc., issued a $400,000, 11%, 4-year installment note. On December 31, Year 2, Pasta Disasta made its second annual installment payment of $163,686. The journal entry to record the second installment payment includes:

Cash: Credit $163,686 Interest Expense: debit $30,835 Notes Payable: debit $132,851

20. ______ bonds are retired when the bondholder exchanges them for the issuing company's stock.

Convertible

9. On January 1, Year 1, Needham, Inc., borrowed $10,000 at 6% for four years. The note requires annual payments of $2,886 on December 31 of each year. For each item, select the amount as of or for the Year Ended December 31, Year 1, in the column of the one financial statement where the amount is found.

IE:(600); Income Statement NP: 7,714; Balance Sheet CPfI: (600); Statement of Cash Flows - Operating Activities PoNPP: (2,286); Statement of Cash Flows - Financing Activities

8. On January 1, Year 1, Wok of Fame, Inc., borrowed $700,000 at 5%. The loan will be repaid with equal annual installment payments of $50,000 made on the last day of each year, which is the company's yearend. The first installment payment journal entry on December 31, Year 1 will include a ______.

debit to Notes Payable of $15,000

A common reason for calling in a callable bond before its maturity date is that _____.

market interest rates decreased

11. On January 1, Year 1, Wok of Fame, Inc., borrowed $700,000 at 5%. The loan will be repaid with equal annual installment payments of $50,000 made on the last day of each year, which is the company's yearend. The second installment payment journal entry will include a larger ______ than in the first installment payment journal entry.

debit to Notes Payable

11. On January 1, Year 1, Clean Dirt, Inc., signed a $10,000,000, 6%, 10-year mortgage note to finance the purchase of an excavator. The note will be repaid in 10 equal annual installments of $1,358,679. Over the 10-year period, as each installment payment is made, the amount that Clean Dirt will show on its balance sheet for Notes Payable will ________.

decrease

11. On January 1, Year 1, Faux Sure, Inc., borrowed $40,000 on a five-year, 7% note. The loan will be repaid in 5 equal installments of $9,756 each year, beginning on December 31, Year 1. Interest Expense for the year ended December 31, Year 2, will be _____ Interest Expense for Year 1.

lower than

12. If the market interest rates increase during the life of a bond, the issuer will ______ on this bond.

not change the amount of interest paid

16. If a bond is sold at a discount, Cash Paid for Interest reported on the Statement of Cash Flows in subsequent years ________.

stays the same each year

18. If a bond is sold at a premium, Cash Paid for Interest reported on the Statement of Cash Flows in subsequent years __________.

stays the same each year

5. If Lawn & Order, Inc., had borrowed $20,000 by issuing an 8-month note at 6% on October 1, instead of a 4-month note at 6%, Interest Expense for the month ended October 31 would have been _______.

the same

5. On August 1, Year 1, Luna Sea Motel, Inc., issued a 9%, 8-month, $10,000 note and a 9%, 10-month, $10,000 note. The interest payable on the 9%, 8-month note will be _____ the interest on the 10-month note as of December 31.

the same as

15. On January 1, Luna Sea Sushi, Inc., issued $300,000 of 5% bonds at 87.000 when the market rate of interest is 7%. Interest is paid annually on December 31. What is the balance of Bonds Payable, Net at December 31 after the first annual interest payment?

264,270

8. On January 1, Year 1, Scores or Oars, Inc., borrowed $200,000 at 7%. The loan will be repaid with equal annual installment payments of $50,000 made on the last day of each year, which is the company's yearend. The first payment will include a debit to Notes Payable of $______.

36000

14. On March 31, Nim Com Soup, Inc., issued $500,000 of 10-year, 9% bonds at 90. The bonds pay interest annually on March 31. How much cash did Nim Com Soup receive when the bonds were issued?

450000

14. On March 31, Nim Com Soup, Inc., issued $500,000 of 10-year, 9% bonds at 91. The bonds pay interest annually on March 31. How much cash did Nim Com Soup receive when the bonds were issued?

455,000

16. On January 1, Hindenburger, Inc., issued $100,000 of 6% bonds at 87.000 when the market rate of interest is 11%. Interest is paid annually on December 31. By what amount should Cash be credited when recording the second annual interest payment?

6,000

14. Microhard, Inc., issued a $61,000, 10-year, 10% bonds dated January 1, at 104.000. By what amount should the Cash account be debited when the bonds are issued?

63,440

1. Which of the following are typical events related to debt financing?

Adjust for interest incurred Issue a note Repayment of principal at the maturity date

7. Drain Surgeons, Inc., needed some long-term financing and arranged for a 10-year, $100,000, 7% mortgage loan on January 1, Year 1. Annual payments of $14,238 will be made on December 31 each year. Show the effect on the accounting equation of the first annual payment. Round to the nearest dollar.

Assets: (14,238) Cash Liabilities: (7,238) Notes Payable SE: (7,000) Interest Expense

10. Reid & Wright Learning Center needed some long-term financing and arranged for a 10-year, $100,000, 7% mortgage loan on January 1, Year 1. Annual payments of $14,238 will be made on December 31 each year. Show the effect on the accounting equation of the second annual payment. Round to the nearest dollar.

Assets: (14,238) Cash Liabilities: (7,745) Notes Payable SE: (6,493) Interest Expense

7. On January 1, Year 1, Needham, Inc., borrowed $10,000 at 6% for four years. On December 31, Year 1, Needham made its first installment payment of $2,886. Show the effect of the first installment payment on the accounting equation. Round the amounts to the nearest dollar.

Assets:(2,886) Cash L:(2,286) Notes Payable SE: (600) Interest Expense

3. On January 1, Year 1, Eatie Gourmet, Inc., borrowed $10,000 at 6% due in four years. Record the January 1, Year 1, journal entry.

Debit: Cash $10,000 Credit: Notes Payable $10,000

3. On August 1, Year 1, Luna Sea Motel, Inc., issued a 9%, 8-month, $10,000 note. Record the August 1, Year 1, journal entry.

Debit: Cash 10,000 Credit: Notes. Payable 10,000

13. Doolittle & Dalley issued $200,000 worth of bonds with a stated interest rate of 7% when the market rate of interest for similar investments was 8%. Bank, Rupp, & Baroque, Inc., issued $100,000 worth of callable bonds with a stated rate of 9% when the market rate of interest for similar investments was 8%. Wok N Roll, Inc., issued $200,000 worth of bonds with a stated interest rate of 9% when the market rate of interest for similar investments was 9%.

Discount Premium Par

2. On November 1, Year 1, Needham, Inc., borrowed $10,000 at 6% with interest and principal due in three months. Show the effect of this note on Needham's financial statements as of and for the year ended December 31, Year 1.f

Income Statement: Interest Expense $100 Statement of Cash Flows:Issuance of Notes Payable $10,000 Balance Sheet: Interest Payable $100 and Notes Payable $10,000

19. On June 30, Year 1, Cashews, Inc., issued $200,000 worth of 8% bonds at 100.000. Interest will be paid annually on June 30. For each item listed below, select the correct dollar amount and December 31, Year 2 financial statement for each line item:

Interest Expense: (16,000); Income Statement Interest Paid: 16,000); Statement of Cash Flows Bonds Payable: 200,000; Balance Sheet Interest Payable: 8,000; Balance Sheet

9. Up-a-Creek, Inc., needed some long-term financing and arranged for a 6-year, $60,000, 12% mortgage loan on January 1, Year 1. Annual payments of $14,594 will be made on December 31 each year. For each item, select the amount as of or for the Year Ended December 31, Year 1, in the column of the one financial statement where each amount is found.

Notes Payable: $52,606; Balance Sheet Interest Expense: $(7,200); Income Statement Payment of Notes Payable: $(7,394); Statement of Cash Flows (financing activities section) Payment of Interest: (7,200); Statement of Cash Flows (operating activities section)

20. Debentures Callable Bonds Secured Bonds Convertible Bonds

Unsecured Bonds The bond issuer can pay off the bonds at any time Gives the bondholder a claim to a specific asset if the issuer defaults on the loan Allows the bondholder to exchange the bond for stock