ACCT Exam 4

In 2013, Drew Company issued 200000 of bonds for 189640. If the stated rate of interest was 6% and the yield was 6.73% , how would Drew calculate the interest expense for the first year on the bonds using the effective interest method?

$189640 x 6.73%

Bonds in the amount of 100,000 with a life of 10 yrs were issued by the Roundy Company. If the stated rate is 6% and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds?

$60,000

Kinsella Corporation's balance sheet showed the following amounts: current liabilities, 75000 ; total liabilities, 100000 ; total assets, 200000 . What is the long-term debt to equity ratio?

0.25 (Long term debt to equity = Long term debt/total equity)

McLaughlin Corporation's balance sheet showed the following amounts: current liabilities, 75,000; total liabilities, 100,000 ; total assets, 200000 . What is the debt to total assets ratio?

0.50 (Debt to total assets = total liabilities/total assets)

What best describes the discount on bonds payable account? A liability An asset A contra liability An expense

A contra liability

Liabilities are recognized in exchange for borrowing money. services. goods. all of these

All of these

Kinsella Seed borrowed 200000 on October 1, 2013, at 10% interest. The interest and principal are due on October 1, 2014.Refer to the information for Kinsella Seed above. What journal entry should be made with respect to the interest payment on October 1, 2014? Debit Interest Expense 15000 ; debit Interest Payable 5000 ; credit Cash 20000 . Debit Interest Expense 15000 ; credit Cash 15000 . Debit Cash 20000 ; credit Interest Expense 15000 ; credit Interest Payable 5000 . Debit Interest Expense 20000 ; credit Cash 20000 .

Debit Interest Expense 15000 ; debit Interest Payable 5000 ; credit Cash 20000 .

Kinsella Seed borrowed 200000 on October 1, 2013, at 10% interest. The interest and principal are due on October 1, 2014.Refer to the information for Kinsella Seed above. What journal entry should be recorded on December 31, 2013? Debit Interest Expense 5000 ; credit Interest Payable 5000 . Debit Interest Payable 5000 ; credit Interest Expense 5000 . Debit Interest Receivable 20000 ; credit Interest Expense 20000 . No entry is necessary.

Debit Interest Expense 5000 ; credit Interest Payable 5000 .

Bower Company sold $100000 of 20 yr bonds for 95,000 . The stated rate on the bonds was 7%, and interest is paid annually on December 31. What entry would be made on December 31 when the interest is paid? (Numbers are omitted.) Interest Expense Cash Interest Expense Bonds Payable Cash Interest Expense Discount on Bonds Payable Cash Interest Expense Discount on Bonds Payable Cash

Interest Expense Discount on Bonds Payable Cash

ABC Advisors is being sued by a former customer. ABC's lawyers say that it is possible, but not probable, that the company will lose the lawsuit and the trial should last approximately 18 more months. Should ABC lose, they will most likely have to pay approximately 750000 . How should this lawsuit be reported in the financial statements? Current liability of 750000 and Expense of 750000 Long-term liability of 750000 and Expense of 750000 No disclosure is required. No effect on the balance sheet or income statement, but described in the footnotes.

No effect on the balance sheet or income statement, but described in the footnotes.

Which of the following is true? No journal entries or footnotes are necessary if the probability of a contingent liability is remote. A contingent liability should always be recorded in the footnotes to the financial statements. A contingent liability should always be recorded within the financial statements. A company can choose to record a contingent liability either within its financial statements or in the footnotes to the financial statements.

No journal entries or footnotes are necessary if the probability of a contingent liability is remote.

Which of the following transactions would cause the current ratio to increase (assuming the current ratio is currently greater than )? Purchased inventory on credit. Purchased property, plant, and equipment for cash. Received money from a customer related to an accounts receivable. Paid off a payable.

Paid off a payable.

Which of the following statements regarding bonds payable is true? Generally, bonds are issued in denominations of $100. When an issuing company's bonds are traded in the "secondary" market, the company will receive part of the proceeds when the bonds are sold from the first purchaser to the second purchaser. The entire principal amount of most bonds mature on a single date. A debenture bond is backed by specific assets of the issuing company.

The entire principal amount of most bonds mature on a single date.

If bonds are issued at , this means that a $1000 bond sold for $1,012.50 . a $1000 bond sold for $101.25 . the bonds sold at a discount. the bond rate of interest is 10.125% of the market rate of interest.

a $1000 bond sold for $1,012.50 .

When should a contingent liability be recognized? When a reasonable estimation can be made When the contingent liability is probable neither a nor b a and b

a and b

To record warranties, the adjusting journal entry would be a debit to Warranty Liability and a credit to Warranty Expense. a debit to Warranty Expense and a credit to Warranty Liability. a debit to Warranty Expense and a debit to Cash. a debit to Warranty Liability and a credit to Cash.

a debit to Warranty Expense and a credit to Warranty Liability.

Which of the following is not an example of an accrued liability? Accounts payable Interest payable Wages payable Property taxes payable

accounts payable

Bonds are a popular source of financing because a company having cash flow problems can postpone payment of interest to bondholders. financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of stock. bond interest expense is deductible for tax purposes, while dividends paid on stock are not. the bondholders can always convert their bonds into stock if they choose.

bond interest expense is deductible for tax purposes, while dividends paid on stock are not.

How is the current ratio calculated?

current assets/current liabilities

Payroll taxes typically include all of the following except Social Security taxes Federal excise taxes Medicare taxes Federal unemployment taxes

federal excise taxes

Bonds are sold at a premium if the market rate of interest was more than the stated rate at the time of issue. market rate of interest was less than the stated rate at the time of issue. company will have to pay a premium to retire the bonds. 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.

When bonds are issued at a premium, the interest expense for the period is the amount of interest payment for the period minus the premium amortization for the period. plus the premium amortization for the period. plus the discount amortization for the period. minus the discount amortization for the period.

minus the premium amortization for the period.

When bonds are issued at a discount, the interest expense for the period is the amount of interest payment for the period plus the premium amortization for the period. minus the premium amortization for the period. plus the discount amortization for the period. minus the discount amortization for the period.

plus the discount amortization for the period.

All of the following represent taxes commonly collected by businesses from customers except City sales taxes Federal excise taxes Unemployment taxes State sales taxes

unemployment taxes

When a credit is made to the income taxes payable account related to taxes withheld from an employee, the corresponding debit is made to Wages Expense Taxes Expense Taxes Payable Cash

wages expense

Serenity Company issued 100000 of 6%, 10yr bonds when the market rate of interest was 5% . The proceeds from this bond issue were 107,732 . Using the effective interest method of amortization, which of the following statements is true? Assume interest is paid annually. Amortization of the premium for the first interest period will be 1464 . Amortization of the premium for the first interest period will be 613 . Interest payments to bondholders each period will be 5000 . Interest payments to bondholders each period will be 6464

Amortization of the premium for the first interest period will be 613 .

How is the cash ratio calculated?

(Cash + Marketable Securities)/current liabilities

Installment bonds differ from typical bonds in what way? Essentially they are the same. The entire principal balance is paid off at maturity for installment bonds. Installment bonds do not have a stated rate. A portion of each installment bond payment pays down the principal balance.

A portion of each installment bond payment pays down the principal balance.

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

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

Which of the following statements regarding leases is false? If a lease is classified as a capital lease, the lessee 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. Accounting recognizes two types of leases—operating and capital leases. Lease agreements are a popular form of financing the purchase of assets because leases do not require a large initial outlay of cash.

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

Sean Corp. issued a $40,000 , 10 yr bond, with a stated rate of 8% , paid semiannually. How much cash will the bond investors receive at the end of the first interest period?

$1600

Willow Corporation's balance sheet showed the following amounts: current liabilities, 5000 ; bonds payable, 1500 ; lease obligations, . Total stockholders' equity was 2300 . The debt to equity ratio is 6000. The debt to equity ratio is

1.47 (debt to equity = total liabilities/total equity)

Which of the following is not a current liability? Accounts payable Unearned revenue Sales taxes payable Bonds payable due in 5 yrs

Bonds payable due in 5 yrs

Kramerica Inc. sold 350 oil drums to Thompson Manufacturing for $75 each. In addition to the $75 sale price per drum, there is a $1 per drum federal excise tax and a 7% state sales tax. What journal entry should be made to record this sale?

Debit Accounts Receivable 28438 ; credit Excise Taxes Payable (Federal) 350 ; credit Sales Taxes Payable (State) 1838 ; credit Sales Revenue 26250 .

On January 2, 2013, Sylvester Metals Co. leased a mining machine from EDH Leasing Corp. The lease qualifies as an operating lease. The annual payments are 4000 paid at the end of each year, and the life of the lease is 10 yrs . What entry would Sylvester make when the machine is delivered by EDH?

No entry is necessary.

When reporting liabilities on a balance sheet, in theory, what measurement should be used? Present value of the present outflow Present value of the future outflow Future value of the present outflow Future value of the future outflow

Present Value of the future outflow

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 lease term is 70% of the property's economic life. The fair market value of the property at the inception of the lease is 18000 ; the present value of the minimum lease payments is 15977 . The lessee can purchase the property for at the end of the lease term.

The lessee can purchase the property for at the end of the lease term.

WVA Mining Company has leased a machine from Franklin Machinery Company. The annual payments are 6000 , and the life of the lease is 8 yrs . It is estimated that the useful life of the machine is 9 yrs . How would WVA record the acquisition of the machine?

The machine would be recorded as an asset, at the present value of 6000 for 8 yrs.

The result of using the effective interest method of amortization of the discount on bonds is that the cash interest payment is greater than the interest expense. the amount of interest expense decreases each period. the interest expense for each amortization period is constant. a constant interest rate is charged against the debt carrying value.

a constant interest rate is charged against the debt carrying value.

The premium on bonds payable account is shown on the balance sheet as a contra asset. a reduction of an expense. an addition to a long-term liability. a subtraction from a long-term liability.

an addition to a long-term liability.

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

increase in assets and an increase in liabilities.

Warranty expense is recorded as it is incurred. recorded in the period of sale. capitalized as a warranty asset. none of these.

recorded in the period of sale