accounting test four

If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount: less than face value. equal to the face value. greater than face value. that cannot be determined.

greater than face value.

Which of the following statements regarding amortization is true? Amortization of the premium causes the Premium on Bonds Payable account to increase. Amortization of the premium causes the amount of interest expense to increase. Cash interest payments on bonds equals interest expense on the income statement when there is amortization of bond premium. Amortization of a premium continues over the life of the bond until the balance in the account is reduced to zero.

Amortization of a premium continues over the life of the bond until the balance in the account is reduced to zero.

If bonds were initially issued at a discount, the interest expense on the bonds calculated using the effective interest method will: decrease as the bonds approach their maturity date. increase as the bonds approach their maturity date. remain constant throughout the bonds' life. fluctuate throughout the bonds' life

increase as the bonds approach their maturity date.

Long-term liabilities generally include: liabilities related to long-term assets. accounts payable, because they are interest-bearing. obligations that extend beyond one year. accrued expenses.

obligations that extend beyond one year.

Which of the following statements regarding contingent liabilities is true? If they are probable and estimable, then they must be recorded even before the outcome of the future event. If they are probable and estimable, then they should be disclosed in the notes to the financial statements. The accounting principle that determines whether a contingent liability is to be recorded is that of historical cost. Contingencies that are not estimable should not be recorded or disclosed in the financial statements even if they are probable.

If they are probable and estimable, then they must be recorded even before the outcome of the future event.

Banister Company wishes to issue $600,000 of 10-year, 7% bonds, with interest paid annually at the end of the year. The market rate of interest is currently 5%. What information is needed in order to determine the issue price of the bond? The market rate of interest, the stated rate of interest, the bond rating, and the bond life. The face value of the bonds, the stated rate of interest, the market rate of interest, and the bond life. The life of the bonds, the market rate of interest, the bond rating, and the face value of the bonds. The face value of the bonds, the market rate of interest, the purpose of the issue, and the bond life.

The face value of the bonds, the stated rate of interest, the market rate of interest, and the bond life.

Bonds are sold at a premium if the: issuing company has a better reputation than other companies in the same business. market rate of interest was less than the stated rate at the time of issue. market rate of interest was more than the stated rate at the time of issue. market rate of interest was same as the stated rate at the time of issue.

market rate of interest was less than the stated rate at the time of issue.

Under the effective interest method, the cash paid on each interest payment date will: decrease if bonds are issued at a premium. increase if bonds are issued at a premium. remain constant regardless of the issuance price. increase if bonds are issued at a discount.

remain constant regardless of the issuance price.

Current liabilities are: due, but not receivable for more than one year. due, but not payable for more than one year. due and receivable within one year. due and payable within one year.

due, but not receivable for more than one year.

On January 1, 2012, Action Inc. issued $1,000,000 of 10% bonds at face value. These bonds are due in 10 years with interest payable semi-annually on June 30 and December 31. What is the amount of interest paid in 2012? $ 10,000 $100,000 $ 25,000 $ 50,000

$100,000

IBD Corporation has Current Assets of $200,000, Long Term Assets of $300,000, Current Liabilities of $100,000, Long Term Liabilities of $200,000, Paid in Capital of $150,000, and Retained Earnings of $50,000. Calculate IBD's debt to assets ratio? .40 .60 .20 .90

.60

The interest charged by the bank, at the rate of 9%, on a 3-month, discounted note payable for $100,000 is: $9,000. $2,250. $750. $1,000.

$2,250.

Which of the following would most likely be classified as a current liability? Two-year notes payable Bonds payable Mortgage payable Portion of long-term debt due within one year

Portion of long-term debt due within one year

Which of the following would describe a callable bond? Borrower has the right to pay off the bonds prior to due date. Borrower has the right to issue more bonds prior to due date. Borrower has the right to call off the interest payments on the bonds. Investor has the right to call off the interest payments on the bonds.

Borrower has the right to pay off the bonds prior to due date.

When bonds are issued by a company, the accounting entry shows an: increase in liabilities and a decrease in equity. increase in liabilities and an increase in equity. increase in assets and an increase in liabilities. increase in assets and an increase in equity.

increase in assets and an increase in liabilities.

With the effective interest method of amortization, the amortization of a bond discount results in a(n): increase in stockholders' equity. decrease in liabilities. increase in interest expense. decrease in interest expense.

increase in interest expense.

If a company's bonds are callable: the bondholder has the right to sell an option on the bond. the issuing company is likely to retire the bonds before maturity if the bonds are paying 8% interest while the market rate of interest is 4%. the bonds are never allowed to remain outstanding until the maturity date. the investor never knows what the redemption price will be until the bonds are actually called.

the issuing company is likely to retire the bonds before maturity if the bonds are paying 8% interest while the market rate of interest is 4%.

International Corporation leased a building from Domestic Company. The 10-year lease is recorded as a capital lease. The annual payments are $10,000 and the recorded cost of the asset is $67,100. The straight-line method is used to calculate depreciation. Which of the following statements is true? Depreciation expense of $6,710 will be recorded each year by International Corporation. Depreciation expense of $10,000 will be recorded each year by International Corporation. No depreciation expense will be recorded by International Corporation. No rent expense will be recorded by International Corporation.

Depreciation expense of $6,710 will be recorded each year by International Corporation.

Which of the following accounts would not appear on the balance sheet of a lessee company recording a capital lease? Accumulated depreciation on the leased asset. Capital lease liability in the current liability section. Capital lease liability in the long-term liability section. Rent expense on the leased asset.

Rent expense on the leased asset.

The Discount on Bonds Payable account is shown on the balance sheet as: an asset. an expense. a contra-liability. as a reduction in equity for the discount provided.

a contra-liability.

Which of the following statements about bond accounting under the effective interest method is correct? The cash interest paid is calculated as the bond face value the market rate. The interest expense is calculated as the carrying value the market rate. The difference between the cash interest paid and the interest expense is added to the carrying value of bonds sold at a premium. The difference between the interest expense and the interest paid is deducted from the carrying value of bonds sold at a discount.

The interest expense is calculated as the carrying value the market rate.

Which of the following lease conditions would result in a capital lease to the lessee? The lessee will return the property to the lessor at the end of the lease term. The lessee obtains enough rights to use the asset and is in substance the owner. The leased asset is not capitalized on the balance sheet. The lease term is 70% of the property's economic life.

The lessee obtains enough rights to use the asset and is in substance the owner.

When will bonds sell at a discount? The credit standing of the issuing company is not as good as other companies in a similar line of business. The stated rate of interest is less than the market rate of interest at the time of issue. The stated rate of interest is more than the market rate of interest at the time of issue. The stated rate of interest is same as the market rate of interest at the time of issue.

The stated rate of interest is less than the market rate of interest at the time of issue.

When determining the amount of interest to be paid on a bond, which of the following information is necessary? The market value of the bonds after one year. The selling price of the bonds. The stated rate of interest on the bonds. The effective rate of interest on the bonds.

The stated rate of interest on the bonds.

If bonds are issued at 101.25, this means that: a $1,000 bond sold for $101.25. the bonds sold at a discount. a $1,000 bond sold for $1,012.50. the bond rate of interest is 10.125% of the market rate of interest.

a $1,000 bond sold for $1,012.50.

The Premium on Bonds Payable account is shown on the balance sheet as: a contra asset. a reduction of an expense. as an increase in equity for the premium provided. an addition to a long-term liability.

an addition to a long-term liability.

The following question(s) are based on items that might appear on the balance sheet of a company like the Creative Products Company. Identify how each item would be most likely classified on its balance sheet.Refer to the information provided for Creative Products Company. Premium on Bonds Payable will appear as: an addition to a long-term liability. a revenue. a long-term asset. a contra-liability.

an addition to a long-term liability.

The portion of long-term debt due within one year should: be classified as a long-term liability. not be separated from the long-term portion of debt. be paid immediately. be reclassified as a current liability.

be reclassified as a current liability.

The amount of federal income taxes withheld from an employee's gross pay is recorded as a: payroll expense. contra account. current asset. current liability.

current liability.

The following question(s) are based on items that might appear on the balance sheet of a company like the Creative Products Company. Identify how each item would be most likely classified on its balance sheet.Refer to the information provided for Creative Products Company. Current portion of long-term debt will appear as a: current liability. long-term liability. current asset. long-term asset.

current liability.

The journal entry to record the issuance of a note for the purpose of borrowing funds is: debit Accounts Payable; credit Notes Payable. debit Cash; credit Notes Payable. debit Notes Payable; credit Cash. debit Cash and Interest Expense; credit Notes Payable.

debit Cash; credit Notes Payable.

The journal entry to record the payment of an ordinary note is: debit Cash; credit Notes Payable. debit Cash; credit Accounts Payable. debit Notes Payable and Interest Expense; credit Cash. debit Notes Payable and Interest Receivable; credit Cash.

debit Notes Payable and Interest Expense; credit Cash.

Victor Corporation issues $1,000,000, 10-year, 8% bonds at 96. The journal entry to record the issuance will show a: debit to Cash of $1,000,000. credit to Discount on Bonds Payable for $40,000. credit to Bonds Payable for $960,000. debit to Cash for $960,000.

debit to Cash for $960,000.

The Miracle Corporation issues $1,000,000, 10-year, 8% bonds at 96. The journal entry to record the issuance will show a: debit to Discount on Bonds Payable for $40,000. debit to Cash of $1,000,000. credit to Bonds Payable for $960,000. credit to Cash for $960,000.

debit to Discount on Bonds Payable for $40,000.

If bonds were initially issued at a premium, the carrying value of the bonds on the issuer's books will: decrease as the bonds approach their maturity date. increase as the bonds approach their maturity date. remain constant throughout the bonds' life. fluctuate throughout the bonds' life.

decrease as the bonds approach their maturity date.

With the effective interest method of amortization, the amortization of a bond premium results in a(n) increase in liabilities. decrease of stockholders' equity. increase in interest expense. decrease in interest expense

decrease in interest expense

The bond issue price is determined by calculating the: present value of the stream of interest payments and the future value of the maturity amount. future value of the stream of interest payments and the future value of the maturity amount. future value of the stream of interest payments and the present value of the maturity amount. present value of the stream of interest payments and the present value of the maturity amount.

present value of the stream of interest payments and the present value of the maturity amount.

When bonds are sold for less than the face amount, this means that the: maturity value will be less than the face amount. maturity value will be greater than the face amount. bonds are sold at a premium. stated rate of interest is less than the market rate of interest.

stated rate of interest is less than the market rate of interest.