Ch 10 Learnsmart
Which of the following statements is true? **** a) Sea World Cruises' bonds sold at a discount because the stated rate is less than the market rate of interest b) Lilly's bonds
a)
What effect will issuing bonds have on the times interest earned ratio over time? a) It will decrease b) It will have no effect c) It will increase
a) It will decrease
A(n) ___________________ note requires the borrower to pay equal payments over the note's life to maturity with each payment consisting of interest and principal.
installment
Bond carrying value equals Bonds Payable _____________. a) plus Discount on Bonds Payable b) minus Premium on Bonds Payable c) plus Premium on Bonds Payable d) minus Discount on Bonds Payable
c) Plus Premium on Bonds Payable d) minus Discount on Bonds Payable
Bonds are financial ___________________ that outline the future payments a company promises to make in exchange for receiving a sum of money now.
instruments (455)
The entry to record the issuance of bonds at face values includes a debit to Cash and a credit to ______________ _______________.
Bonds payable - journal entry (457- bonds issued at face value)
The times interest earned ratio equals Net Income plus Interest Expense and Income Tax Expense, divided by ________________. a) Notes Payable b) Current Liabilities c) Interest Expense
Interest Expense
True or False: Companies issue bonds at a discount when the bond's stated interest rate is lower than the market interest rate.
True (558-why would companies be willing to discount a bond)
True or False: When a $1,000 bond retires at maturity, the entry is recorded with a debit to Bonds Payable and credit to Cash of $1,000 regardless of whether the bond was issued at a premium or discount.
True - Regardless of whether a bond was issued at a premium, a discount or face value, the carrying value of the bond will equal the $1,000 face value when the bond is paid off at maturity.
XYZ Warehouse operates in a state with a 6% sales tax. For convenience, XYZ Warehouse credits Sales Revenue for the total amount (selling price + sales tax) collected from each customer. What will be the effect if XYZ Warehouse fails to make an adjustment for sales tax? a) Liabilities will be understated b) Net income will be overstated c) Assets will be understated d) Net income will be understated e) Liabilities will be overstated
a) Liabilities will be understated b) Net income will be overstated
Deli Llama operates in a state with a sales tax. What will be the effect if it records a cash sale to a customer? a) Stockholders' equity will increase b) Assets will increase c) Stockholders' equity will decrease d) Assets will decrease e) Liabilities will increase f) Liabilities will decrease
a) Stockholders' equity will increase b) Assets will increase e) Liabilities will increase
Which of the following statements is true about McDonald's $1,000 bond price? a) They sold for $1,128.90 each b) They sold for $112,890 each c) They sold for $112.89 each
a) They sold for $1,128.90 each - The bond price is a percent, thus the bond price equals $1128.90 (=$1,000 x 112.89%))
The debt-to-asset ratio indicates______________. a) a higher ratio means greater financing risk b) the percentage of assets financed by debt c) a higher ratio means lower financing risk d) a higher ratio means better performance
a) a higher ratio means greater financing risk b) the percentage of assets financed by debt (464)
The discount on a bond is _______________ and ____________________ the discount each period. a) amortized; decreases b) depreciated; increases c) increased; credited to d) expensed; increases
a) amortized; decreases
The entry to record the issuance of 100, $1,000 bonds for 98.00 includes a a) credit to Bonds Payable for $100,000 b) credit to Discount on Bonds Payable for $2,000 c) debit to Discount on Bonds Payable for $2,000 d) debit to Cash for $98,000 e) debit to Bonds Payable for $100,000
a) credit to Bonds Payable for $100,000 c) debit to Discount on Bonds Payable for $2,000 d) debit to Cash for $98,000 (462)
The journal entry to record payment of salaries and wages to employees includes a _________. (select all that apply) a) credit to FICA Payable b) debit to Salaries and Wages Expense c) credit to Withheld Income Tax Payable d) debit to Withheld Income Tax Payable e) debit to FICA payable f) debit to Cash g) credit to Cash h) credit to Salaries and Wages Expense
a) credit to FICA Payable b) debit to Salaries and Wages Expense c) credit to Withheld Income Tax Payable g) credit to Cash - journal entry (449-450)
On November 1, 2018, ABC Corp. borrowed $100,000 cash on a 1-year, 6% note payable that requires ABC to pay both principal and interest on October 31, 2019. The journal entry on November 1, 2018 would include which of the following? (select all that apply) a) debit to Cash $100,000 b) credit to Note Payable $100,000 c) credit to Note Payable $106,000 d) debit to Interest Expense $6,000
a) debit to Cash $100,000 b) credit to Note Payable $100,000 - journal entry (450-451)
A liability is first recorded at the amount of cash a creditor would accept to immediately settle the liability, which _________ interest. a) excludes b) includes
a) excludes - Because interest arises only when time passes, so no interest is recorded on the day the company purchases an item on account or the day the company receives a loan
Market rates of interest _______________. a) fluctuate due to changes in economic events b) equal the stated rate of interest at the time of issuance c) equal the bond's face value time the stated rate of interest d) are set by the company and written on the face of the bonds
a) fluctuate due to changes in economic events
A bond's issue price is the amount of money that a lender pays (and the company receives) when a bond is __________________. a) issued b) in default c) repaid d) sold from one investor to another investor
a) issued - (456)
XYZ borrowed $50,000 on December 31, 2018. Half of the loan will be repaid in 2019 and the remainder will be paid the following year, which is longer than XYZ's operating cycle. On its balance sheet at the end of this year, XYZ will show________. (select all that apply) a) long-term debt of $25,000 b) long-term debt of $50,000 c) current portion of long-term debt of $50,000 d) current portion of long-term debt of $25,000
a) long-term debt of $25,000 d) current portion of long-term debt of $25,000 (454)
When a company records a debit to Bonds Payable and a credit to Cash, it is the bonds' ____________________. a) maturity date b) issuance date c) stated date d) market date
a) maturity date
Liabilities are classified as current if they ___________. a) will be paid within the company's operating cycle or within 1 year, whichever is longer b) are less than the current assets c) will be paid using non-current assets d) are greater than the current assets
a) will be paid within the company's operating cycle or within 1 year, whichever is longer
Whether a bond is issued at par, premium or discount, when the bond matures the amount paid equals the ________________ value.
face
The debt-to-asset ratio is calculated by dividing total liabilities by total ___________________.
assets
The entry to record the cash sale of a $100 pair of jeans in a state that requires charging a 5% sales tax will include a __________________________. a) $5 debit to Sales Tax Expense b) $100 credit to Sales Revenue c) $105 credit to Sales Revenue d) $5 credit to Sales Tax Payable e) $5 debit to Sales Tax Payable f) $105 debit to Cash g) $100 debit to Cash
b) $100 credit to Sales Revenue d) $5 credit to Sales Tax Payable f) $105 debit to Cash
On the maturity date, the bondholders of $100,000 of bonds that were issued at a $90,000 will received ______________. a) $90,000 in cash plus interest owed b) $100,000 in cash plus interest owed c) nothing since there is no transaction on the maturity date
b) $100,000 in cash plus the interest owed
Gross earnings for the pay period are $100,000. Required payroll deductions are: Social Security $6,700; Medicare $1,450; Federal Income Tax $18,000 and State income tax $3,850. What is the net pay to employees? a) $130,000 b) $70,000 c) $61,850 d) $100,000 e) $78,150
b) $70,000 - Payroll deductions are amounts subtracted from employees' gross earnings to determine their net pay. Gross earnings are computed by multiplying time worked by pay rate. Certain payroll deductions are subtracted, for items such as income tax, FICA tax, and charitable donations. Net pay = gross earnings - payroll deductions. (444???-payroll deductions)
Which of the following statements is true about Lilly's $1,000 bond price? a) Lilly's $1,000 bonds sold for $107,260 each. b) Lilly's $1,000 bonds sold for $1072.60 each c) Lilly's $1,000 bonds sold for $107.26 each
b) Lilly's $1,000 bonds sold for $1,072.60 each ( the bond price is a percent, thus the bond price equals $1,072.60 (= $1,000 x 107.26%))
What factors are needed to determine the amount of installment payments. a) Present Value Factor b) Number of Years c) Frequency of Payments d) Future Value Factor e) Original Principal f) Interest Rate
b) Number of Years c) Frequency of Payments e) Original Principal f) Interest Rate
Each installment payment on an installment note consists of ____________________. a) interest only b) interest and principal c) varying amounts of cash d) principal only
b) interest and principal
Employee's gross earnings differ from their net pay because of ___________. a) Accounts Payable b) Payroll Deductions c) Sales Tax d) Unemployment Taxes e) Corporate Income Tax
b) Payroll Deductions - Payroll deductions are either required by law or voluntarily requested by employees. The law requires that employers deduct federal income tax (and possibly state, country, and city income tax) from each employee's gross earnings. (449???)
What are they key events for the issuer of notes payable? (select all that apply) a) Recording interest received b) Recording interest paid c) Establishing the note d) Recording the use of the funds e) Recording the principal paid f) Accruing interest incurred but not paid
b) Recording interest paid c) Establishing the note e) Recording the principal paid f) Accruing interest incurred but not paid - (1) establishing the note, (2) accruing interest incurred but not paid, (3) recording interest paid, and (4) recording principal paid. (450 - 451- N/P)
A bond with an issue price of $10,100 and a face value of $10,000 was issued at __________. a) face value b) a premium c) a discount
b) a premium
The entry to record the early retirement of bonds when the cash paid is less than the bonds' carrying value will include a ________________. a) debit to a Loss on Early Retirement b) credit to a Gain on Early Retirement c) credit to a Loss on Early Retirement d) debit to a Gain on Early Retirement
b) credit to a Gain on Early Retirement
Accounts (or trade) Payable is a ____________ and increases when ___________ and decreases when _________. a) current asset; bills are paid; purchases are made on credit b) current liability; purchases are made on credit; bills are paid c) current liability; bills are paid; purchases are made on credit d) current asset; purchases are made on credit; bills are paid
b) current liability; purchases are made on credit; bills are paid
The entry to record the payment of 6-months of interest on a note in which 2 months of interest was recorded as an adjusting entry in the prior accounting period includes __________. a) credit Cash for 4 months of Interest b) debit Interest Payable for 2 months of interest c) credit Interest Expense for 4 months of interest d) debit Interest Expense for 6 months of interest e) credit Cash for 6 month's of interest f) debit Cash for 6 months of interest g) debit Interest Expense for 4 months of interest h) credit Interest Expense for 6 months of interest i) credit Interest Payable for 2 months of interest
b) debit Interest Payable for 2 months of interest g) credit Cash for 6 month's of interest e) debit Interest Expense for 4 months of interest
On the maturity date, the journal entry to record the payment of $1,000,000 of bonds payable that were issued at a $70,000 discount includes a ____________________. a) credit to Cash of $1,070,000 b) debit to Bonds Payable of $1,000,000 c) debit to Discount on Bonds Payable of $70,000
b) debit to Bonds Payable of $1,000,000
A bond that was issued at a premium will have a carrying value that __________________ with each interest payment. a) remains the same b) decreases c) increases
b) decreases
Current portion of Long-Term Debt reports the amount of __________________________ and is reported on the _________________. a) debt borrowed in the current year that is not due within the year; Balance Sheet b) long-term debt that is reclassified because it is due within the year; Balance Sheet c) debt borrowed in the current year that is not due within the year; Income Statement d) long-term debt that is reclassified because it is due within the year; Income Statement
b) long-term debt that is reclassified because it is due within the year; Balance Sheet - if a company borrows money with the promise to pay in two years, the loan is classified as long-term debt. The company reports only the accrued interest on the loan as a current liability in the balance sheet.
When the times the interest earned ratio is less than 1.0, a company is _____________. a) unlikely to experience financial distress b) not generating enough income to cover its interest expense c) generating enough income to cover its interest expense
b) not generating enough income to cover its interest expense (465)
A bond that was issued at face value will have a carrying value that ________ with each interest payment. a) increases b) remains the same c) decreases
b) remains the same ( 459)
The state rate ___________. a) equals the present value of the future interest payments b) remains the same throughout the life of the bonds c) fluctuates depending on the perceived risk of the bonds
b) remains the same throughout the life of the bonds -(456)
On November 30, Burrows Inc. issued 2 notes payable at 6% per year for $10,000 each. One is a 3-month, 6% note and the other is a 6-month, 6% note. The amount of interest owed at December 31 will be_______. a) greater for the 6-month note b) the same amount for both notes c) greater for the 3-month note
b) the same amount for both notes - Exhibit 10.4 (450-451)
As of December 31, 2018, $110 of interest has been accrued on a 12%, 1-year, $1,000 note payable. On January 31, 2019, the entry to record the payment of the note's principal and interest requires a __________________________. a) $120 debit to Interest Expense b) $110 credit to Interest Payable c) $110 debit to Interest Payable d) $1,120 credit to Cash e) $1,000 debit to Notes Payable f) $10 debit to Interest Expense
c) $110 debit to Interest Payable d) $1,120 credit to Cash e) $1,000 debit to Notes Payable f) $10 debit to Interest Expense
John Smith works 40 hours for ABC Corp. for $15 per hour. Required payroll deductions are: Social Security $37.20; Medicare $8.70; Federal Income Tax $58; and State Income Tax $10. Assuming that John gets paid in cash and payroll deductions will be paid the following month, how would ABC record his gross pay? a) Salaries and Wages Payable increases $600 b) Cash decreases $600 c) Salaries and Wages Expense increases $600. d) Cash increases $600
c) Salaries and Wages Expense increases $600 - journal entries (449-450)
ABC Airlines collects $300 for a round-trip ticket from Chicago to LA. The flights will not occur until the next accounting period. How should ABC Airlines record the $300 collected in advance. a) a debit to Cash of $300 and a credit to Revenue of $300 b) a debit to Revenue of $300 and a credit to Cash of $300 c) a debit to Cash of $300 and a credit to Deferred Revenue of $300 d) a debit to Deferred Revenue of $300 and a credit to Cash of $300
c) a debit to Cash of $300 and a credit to Deferred Revenue of $300
When bonds are issued a premium, the bond issuer receives more cash on the issue date than it repays at maturity. The difference, a premium, is a reduction in the cost of borrowing, which has to be _______________. a) ignored b) depreciated c) amortized d) capitalized
c) amortized - The premium represents the additional cash over the face value that was received at the time the bond was issued. It represents a reduced cost of borrowing, so it is amortized each period, resulting in interest expense that is less than the interest paid each period.
Premium on Bonds Payable will be _________________ with each interest payment causing the Premium on Bonds Payable balance to ______________ when the bonds mature. a) increase; increase so that the carrying value equals the face value plus the premium b) amortized; increase so that the carrying value equals the face value plus the premium c) amortized; decrease to a $0 balance d) increased; increase so that the carrying value equals the face value minus the premium
c) amortized; decrease to a $0 balance - the premium represents the additional cash over the face value that was received at the time the bond was issued. It represents a reduced cost of borrowing, so it is amortized each period, resulting in a decrease to the premium and carrying value each period. When the bond matures, the premium will equal $0 resulting in a carrying value equal to the face value.
The entry to record the payment of previous purchases made on account includes a _________. (select all that apply) a) credit to Accounts Payable b) debit to Cash c) debit to Accounts Payable d) debit to Inventory e) credit to Accounts Receivable f) debit to Accounts Receivable g) credit to Cash
c) debit to Accounts Payable g) credit to Cash - because when a company receives goods or services on credit (Accounts Payable) and it is decreased (debited) when the company pays on its account. (444-A/P)
ABC Company issues a bond with a face value of $100,000 at par on January 1. The bond carries a stated annual interest rate of 6% payable in cash on December 31 of each year. If ABC issues monthly financial statements, it must make an adjusting entry on January 31 that includes a _________________. a) debit to Interest Expense of $6,000 b) credit to Cash of $6,000 c) debit to Interest Expense of $500 d) credit to Cash of $500 e) credit to Interest Payable of $500
c) debit to Interest Expense of $500 e) credit to Interest Payable of $500
The entry to record the early retirement of bonds when the cash is paid is more than the bonds' carrying value will include a ___________. a) debit to a Gain on Early Retirement b) credit to a Gain on Early Retirement c) debit to a Loss on Early Retirement d) credit to a Loss on Early Retirement
c) debit to a Loss on Early Retirement
If a bond's stated rate is 4% and the market rate is 4%, this bond will at _____________________. a) a discount b) a premium c) face value
c) face value
A bond's maturity date is the date on which the ________. a) issuance price of the bonds is paid b) bond are issued c) face value of the bonds are paid
c) face value of bonds are paid -(456)
If total assets increase but total liabilities remain the same, what is the impact on the debt-to-assets ratio? a) it remains the same b) it increases c) it decreases d) it cannot be determined without additional information
c) it decreases
Net pay is calculated by ______________. a) adding payroll deductions to gross pay b) adding payroll deductions and employer's payroll taxes to gross pay c) subtracting payroll deductions from gross pay d) subtracting payroll deductions and employer's payroll taxes from gross pay
c) subtracting payroll deductions from gross pay (448)
Today's Fashions has a debt that has been properly reported as a long-term liability before this year. Part of this debt is due this year. If Today's Fashions continues to report the current position of the debt as a long-term liability, then ________. a) net income will be overstated b) total liabilities will be understated c) the current ratio will be overstated d) Interest Expense will be understated
c) the current ratio will be overstated - if a company borrows money with the promise to repay it in 2 years, the loan is classified as long-term debt...After a year has passed however, the loan becomes a current liability..... should be reclassified to current liabilities. Thus current liabilities are understated which makes the current ratio (= current assets/ current liabilities) overstated (455-456)
Which of the following are long-term liabilities? (select all that apply) a) Common Stock b) Wages Payable c) Note Payable due in 3 months d) 20-year Mortgage Payable e) Note Payable due in 3 years
d) 20-year Mortgage Payable e) Note Payable due in 3 years
Under US GAAP, if a company violates loan covenants on long-term debt but renegotiates the loan before releasing its financial statements, the debt remains classified as long-term. Under IFRS, the company must reclassify that long-term debt as a(n) ___________________ liability
current
Calculate the amount of Interest Expense for the 2nd installment payment on a $10,000 installment note with a 6% interest fully repaid in 4 annual installments of $2,886. a) $427 b) $600 c) $173 d) $463
d) $463 - The 1st payment of $2,886 paid for $600 of interest (=$10,000 x 6%) and $2,286 repayment of the principal (=$2,886 - 600). The Note Payable balance after the payment was reduced to $7,714 (=$10,000 - 2,286). Thus, Interest Expense in the 2nd payment is less and equals $462 (=$7,714 x 6%)
At the beginning of the year, a firm had $120,000 in total assets and a debt-to-assets ratio of 0.5 or 50%. During the year, the firm's assets increased by $40,000, and its liabilities increased by $36,000. What is the debt-to-assets ratio at the end of the year? a) 1.7 or 170% b) there is not enough information to determine the debt-to-assets ratio c) o.9 or 90% d) o.6 or 60% e) o.4 or 40%
d) 0.6 or 60% - Beginning liabilities equal $60,000 or $120,000 x 0.5. Ending liabilities equal $96,000 or $60,000 + $36,000. Debt-to-assets equals 0.6 or $96,000/($120,000???????$40,000)
ABC, Inc., issued $100,000 of 10%, 5-year bonds on January 1, 2018, for $92,280. Interest is paid annually on December 31. When ABC records the first interest payment, which will be greater the debit to Interest Expense or the credit to Cash? a) The debit to Interest Expense will be greater because the market rate is less than the stated interest rate b) The debit to Interest Expense will be lower because the market rate is less than the stated interest rate c) The debit to Interest Expense will be less because the market rate is greater than the stated interest rate. d) The debit to Interest Expense will be greater because the market rate is greater than the stated interest rate
d) The debit to Interest Expense will be greater because the market rate is greater than the stated interest rate. - The bond sold at a discount because the stated rate of 10% is lower than the market rate of interest. The debit to Interest Expense will be greater because it is based on the market rate. The credit to Cash will be less because it is based on the lower stated interest rate.
A company recorded the issuance of its bonds with a debit to Cash for $107,260 and a credit to Bonds Payable for $100,000 and a ___________ on Bonds payable for $7,260. a) debit to premium b) credit to discount c) debit to discount d) credit to Premium
d) credit to Premium - journal entry (457)
ABC Airlines collected $300 for a round-trip ticket from Chicago to LA in advance. The entry to record after the flight occurs includes a debit to _________________ for $300. a) Cash and a credit to Service Revenue b) Cash and a credit to Deferred Revenue c) Deferred Revenue and a credit to Cash d) Revenue and a credit to Cash e) Deferred Revenue and a credit to Service Revenue
e) Deferred Revenue and a credit to Service Revenue - When the cash was received in advance in Cash (A) was debited and Deferred Revenue (L) was credited. Now that the service has been provided, Deferred Revenue (-L) is debited and Service Revenue (+SE) is credited.
The premium on a bond is ______________ and ________________ each period. a) expensed; increases b) depreciated; increases c) amortized; increases d) increased; credited e) amortized; decreases
e) amortized; decreases
Long-term liabilities are accounted for in the same way as short-term liabilities, except that long-term liabilities are on the books for more than one _______.
year - (455-456 - Long-Term Liabilities)
