ACCT Chap 10 Adaptive Study Plan

Omega Corporation issued a three-year, $1,000 bond with a nominal interest rate of 9%. At the time, the market rate of interest was 9%. What is the issuance price of the bond?

$1,000 When the market rate is the same as the face rate, bonds are issued at face value.

Omega Corporation issued a four-year, $1,000 bond with a nominal interest rate of 8%. At the time, the market rate of interest was 6%. What is the bond issuance price?

$1,069 Interest annuity: $80 x 3.46511 (factor from Table 9-4 for 4 periods, 6%)=$277 Principal: $1,000 x 0.79209 (factor from Table 9-2 for 4 periods, 6%)=$792 Issue price: $1,069

A company sold bonds with a face value of $100,000. The unamortized discount on these bonds is $4,500. The company retired these bonds at 97. What amount would be the gain or loss on this retirement?

$1,500 loss Carrying value: ($100,000 - $4,500)=$95,500 Less redemption price: ($100,000 x97)=$97,000 Loss: ($1,500)

GLC Corp. had the following information available on its year-end balance sheet. What will the total of long-term liabilities be? Accounts payable: $10,000 Salaries payable: $5,000 Bonds payable: $100,000 Notes Payable due in 3 years: $20,000

$120,000 Bonds and Notes due after one year are considered long-term. $100,000 + $20,000 = $120,000

Tidal Corporation has a tax rate of 35%. It has one machine that cost $30,000 with a 4-year life and no salvage value. Tidal is using an accelerated depreciation method for tax purposes and depreciation expense is $8,060. What is the deferred tax amount?

$196 Calculate the temporary difference and apply the tax: Tax depreciation expense - Book depreciation expense x tax rate: ($8,060 - ($30,000/4) x 35% = $196

Rolo Co. sold bonds with a par value of $100,000. The unamortized premium on these bonds is $2,700. If the company retired these bonds at 99, the gain or loss on this retirement is:

$3,700 gain a. Carrying value: ($100,000 + $2,700)=$95,500 b. Less redemption price: ($100,000 x 99)=$99,000 c. Gain=$3,700

Assume that Viola Company Firm begins business on January 1. During the year the firm has sales of $8,000 and has no expenses other than depreciation and income tax at the rate of 30%. Viola Company has depreciation on only one asset. That asset was purchased on January 1, for $10,000 and has a four-year life. Viola Company has decided to use the straight-line depreciation method for financial reporting purposes. Viola's accountants have chosen to use MACRS for tax purposes, however, resulting in $4,000 depreciation. At what amount will Viola record as deferred tax at December 31, Year1?

$450 Calculate the temporary difference and apply the tax rate to determine the deferred tax: Depreciation expense tax - depreciation expense book x tax rate: ($4,000 - ($10,000/4) x 30% = $450. Alternatively, compare income tax expense per books to income tax expense per tax. Taxable income: $8,000 - $4,000 = $4,000; Taxes payable: $4,000 X .30 = $1,200. Book income: $8,000 - $2,500 = $5,500; Tax expense: $5,500 x .30 = $1,650; Deferred tax: $1,650 - $1,200 = $450

Assume Dagger Corp. had the following information regarding one of its bond issuances: -Face amount: $600,000 -Date of issuance: January 1, Year 1 -Life of bonds: 20 years -Stated rate: 10% -Market rate at issuance: 8% -Premium on Bond at Issuance: $117,819 With the information provided and using the Effective Interest Method of Amortization, what amount would the carrying value of the bonds be at December 31, Year 1?

$715,245 The carrying value is the amount received for the bond adjusted for the amortized discount or premium. Under the effective interest method, the amount of amortization is the difference between the interest paid and the interest expense at the effective rate of interest: $717,819 - ($60,000* - $57,426**) = $715,245; *Interest paid: $600,000 x .10 = $60,000; **Effective interest: $717,819 x .08 = $57,425.52

Wong Corporation's balance sheet showed the following amounts: Current Liabilities, $5,000; Bonds Payable, $1,500; Lease Obligations, $2,000, and Deferred Income Taxes, $300. Total stockholders' equity was $6,000. The debt-to-equity ratio is:

1.47 Debt-to-equity ratio = total liabilities / total stockholders' equity; ($5,000 + $1,500 + $2,000 + $300) / $6,000; $8,800 / $6,000 = 1.466 rounded to 1.47

The Sky Umbrella Co. had the following items reported on its financial statements -Cash: $20,000 -Temporary investments: $25,000 -Accounts receivable: $10,000 -Inventory: $55,000 -Total assets: $400,000 -Current liabilities: $66,000 -Total liabilities: $150,000 -Total stockholders' equity: $250,000 -Net sales: $752,000 -Interest expense: $40,000 -Depreciation expense: $125,000 -Income Before Interest and Tax: $300,000 -Net income: $220,000 What is the Times-Interest-Earned-Ratio?

7.5 Times-Interest Earned Ratio = Income Before Interest and Tax / Interest Expense; $300,000 / $40,000 = 7.5

When a company uses the straight-line depreciation method for financial reporting purposes and an accelerated depreciation method for tax purposes, what is the result?

A deferred tax

How does an investor view the times interest earned ratio of a company?

A high value is generally viewed favorably.

How does an investor view the debt-to-equity ratio of a company?

A low value is generally viewed favorably.

Which is not considered a long-term liability? a. Bonds payable b. Accounts payable c. Deferred taxes d. Leases

Accounts payable

What is the impact on the financial statements when bonds are sold at a discount?

Activity: Financing; Increase Cash; Increase Bonds Payable; Increase Discount on Bonds Payable

What is the impact on the financial statements when bonds are sold at a premium?

Activity: Financing; Increase Cash; Increase Bonds Payable; Increase Premium on Bonds Payable

How is the effective interest rate calculated?

Annual Interest Expense/Carrying Value

Where does a decrease in a long-term liability appear on the statement of cash flows?

As a decrease in the Financing Activities category

Where does an increase in a long-term liability appear on the statement of cash flows?

As an increase in the Financing Activities category

On January 1, Year 1, the long-term liability section of AMG Company's balance sheet showed a balance of $35,000 in the bonds payable account. On December 31, Year 1, the balance in that same account was $45,000. Where would this change appear on the statement of cash flows for the year ended December 31, Year 1?

As an increase of $10,000 in the financing activities category

How are capitalized lease transactions shown in the financial statements?

Balance Sheet: Increase Leased Asset; Increase Lease Obligation; for the present value of the lease payments when the asset is recorded. Income Statement: Depreciation Expense; Balance Sheet: Accumulated Depreciation; when depreciation is recorded over the life of the asset. Balance Sheet: Decrease Cash; Decrease Lease Obligation; Income Statement: Increase Interest Expense; when lease payments are made.

Which of the following is likely to appear in the Long-term Liabilities category of the balance sheet? a. Warranty liability b. Accounts payable c. Unearned revenue d. Bonds payable

Bonds payable

How do deferred income taxes arise?

Companies may use accounting methods that minimize income for tax purposes and other methods that maximize income for reporting to shareholders.

Discount on Bonds Payable is what type of account?

Contra-liability

Which bond is not backed by collateral? a. Term bond b. Secured bond c. Sub-prime bond d. Debenture bond

Debenture bond

A company sold bonds with a face value of $100,000. The unamortized discount on these bonds is $4,500. The company retired these bonds at 97. What is the impact on the financial statements when bonds are retired?

Decrease Cash $97,000; Decrease Bonds Payable $100,000; Decrease Discount on Bonds Payable $4,500; Increase Loss on Retirement of Bonds $1,500

Which of the following statements regarding leases is not true? a. Accounting recognizes two types of leases; operating and capital leases. b. Lease agreements are a popular form of financing the purchase of assets because leases do not require a large initial outlay of cash. c. If a lease is classified as an operating lease, the lessee records a lease liability on its balance sheet. d. If a lessor classifies a lease as a capital lease, then the lessor records a lease liability on its balance sheet.

If a lease is classified as an operating lease, the lessee records a lease liability on its balance sheet.

Which is true of an unsecured bond? a .It is referred to as a callable bond. b. It is backed by specific assets of the corporation. c. It is backed solely by the general credit of the corporation. d. It is convertible to stock.

It is backed solely by the general credit of the corporation.

Select the term for an obligation that will not be satisfied within one year or the current operating cycle. a. Current asset b. Current liability c. Long-term liability d. Accrued liability

Long-term liability

What generally occurs when bonds are retired or repaid at their due date?

No gain or loss is realized.

What criteria must be met for the lease to be classified as a capital lease?

One or more of these: Title to the leased asset passes to the lessee at the end of the lease, the lease includes a bargain-purchase option, the lease term is 75% or more of the property's economic life, or the present value of the minimum lease payments is 90% or more of the fair market value of the property at the inception of the lease.

Which statement is true of permanent differences between book accounting and tax reporting? a. Permanent differences are items that have been excluded from both tax and financial statement calculation. b. Permanent differences should be reflected on the balance sheet as deferred tax. c. Permanent differences should not be reflected on the balance sheet as deferred tax. d. Permanent differences occur when expenses are recognized in different periods for book and tax.

Permanent differences should not be reflected on the balance sheet as deferred tax.

Which of the following is included in financing activities on the statement of cash flows? a. Capital purchases b. Proceeds from issuing bonds c. Net income d. Increases and decreases in current liabilities

Proceeds from issuing bonds

Omega Corporation issued a four-year, $1,000 bond with a nominal interest rate of 8%. At the time, the market rate of interest was 10%. Select the correct statement. a. The bonds would have been issued at face value. b. The bonds would have been issued at a premium. c. The bonds would have been issued at a discount. d. There would have been 2% accrued interest at the time of issuance.

The bonds would have been issued at a discount.

Omega Corporation issued a four-year, $1,000 bond with a nominal interest rate of 8%. At the time, the market rate of interest was 6%.Select the correct statement. a. The bonds would have been issued at face value. b. The bonds would have been issued at a discount. c. The bonds would have been issued at a premium. d. There would have been 1% accrued interest at the time of issuance.

The bonds would have been issued at a premium.

If bonds are sold at a premium, what is true of the carrying value of the bonds?

The carrying value decreases over the life of the bond.

Which statement is true of the interest expense each year when a bond is issued at a discount? a. The interest expense is greater than the cash payment for interest. b. The interest expense decreases over time using the effective interest method. c. The interest expense is less than the cash payment for interest. d. The interest expense equals the cash payment for interest.

The interest expense is greater than the cash payment for interest.

Which statement is not true of the bond issue price? a. The issue price of a bond should be calculated using the market rate of interest. b. The issue price of a bond is the present value of the repayment of principal and the present value of the interest receipts. c. The issue price of a bond is determined by the present value of its cash flows. d. The issue price of a bond is the face value times the rate times the number of periods.

The issue price of a bond is the face value times the rate times the number of periods.

What is the ratio of income before interest and taxes to interest expense?

The times interest earned ratio

How is deferred tax calculated?

Timing differences x Tax rate

Which statement is true of the relationship between interest rates, present value, and bond prices? a. When interest rates decrease, present values decrease. b. When interest rates increase, present values decrease. c. When interest rates increase, bond prices increase. d. When interest rates decrease, bond prices decrease.

When interest rates increase, present values decrease.

If bonds are retired early, when is a gain recorded by the issuer?

When redemption price is less than the carrying value

Which statement is true of serial bonds? a. When serial bonds are issued, the lender repays the interest only. b. When serial bonds are issued, the bonds all come due on the same date. c. When serial bonds are issued, the interest is paid as a series of monthly payments. d. When serial bonds are issued, not all of the bonds come due on the same date.

When serial bonds are issued, not all of the bonds come due on the same date.