Chapter 10 Accounting Liabilties

Callable bonds are subject to retirement at a stated dollar amount prior to maturity at the option of the A mediator. B government regulators. C issuer. D bondholder

c

Companies benefit from ________ when they issue bonds instead of common stock. A lower earnings per share B pledging of collateral C tax savings D periodic interest payments

c

Interest expense is reported on the income statement under A : Net Sales. B : Operating Expenses. C : Other Expenses and Losses. D : Operating Income.

c

If a $150,000, 10%, 5-year bond issue was sold at 97, the cash proceeds from the issuance of the bonds amounted to A : $14,550. B : $135,000. C : $145,500. D : $15,000.

c 150,000 × .97 = $145,500

How much interest is due at maturity for a 9-month, 8%, $20,000 note payable? A $1,800 B $1,700 C $1,200 D $1,600

c (20,000 x .08 x 9/12)

How does the amount of cash received upon issuance of an interest-bearing note affect the face value of the note?

The cash received is equal to the note's face value.

Sales taxes collected by a retailer from a customer are expenses of the customers. A : True B : False

a

Karson Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at face value this indicates that: a the contractual interest rate exceeds the market interest rate. b the market interest rate exceeds the contractual interest rate. c the contractual interest rate and the market interest rate are the same. d no relationship exists between the two rates.

c

The interest charged on a $150,000 note payable, at the rate of 4%, on a six-month note would be A : $2,400. B : $3,600. C : $3,000. D : $6,000.

c

What happens to the Interest Expense account when interest is recorded on an interest-bearing note? It stays the same. B It is returned to zero balance. C It is increased. D It is decreased.

c

What is the interest due at maturity for a $20,000, 8%, 9-month note payable? A : $1,800 B : $1,600 C : $1,200 D : $1,700

c

On an interest-bearing note, as the Interest Expense account increases,

the Interest Payable account increases.

As interest is recorded on an interest-bearing note, the Interest Payable account is A increased; the Interest Expense account is increased. B increased; the Notes Payable account is increased. C decreased; the Interest Expense account is increased. D increased; the Notes Payable account is decreased.

A

Issuing bonds instead of common stock can result in tax savings. A : True B : False

A

The interest charged on a $125,000 note payable, at the rate of 3%, on a 120-day note would be A : $1,250. B : $3,750. C : $750. D : $12,500.

A

Borrowers are usually required to pay interest on A : current assets. B : notes payable. C : unearned revenues. D : lease agreements

B

Instead of accounts payable, what do companies often use to record obligations? A : net sales B : notes payable C : bonds payable D : lease liability

B

When is interest expense on an interest-bearing note recorded? A : at the time the note is issued and cash is received B : at maturity date when the note is paid C : at regular intervals as interest accrues over the life of the note D : at the end of each fiscal year

C

What are current maturities of long-term debt? A : the amount of interest on a note payable due within one year B : the amount of interest on a note payable due at maturity C : the amount of short-term debt on a note payable due within one year D : the amount of long-term debt on a note payable due within one year

D

From the standpoint of the issuing company, what is a disadvantage of using bonds as a means of long-term financing? A : Interest must be paid on a periodic basis regardless of earnings. B : Bond interest is deductible for tax purposes. C : The bondholders do not have voting rights. D : Income to stockholders may increase as a result of trading on the equity.

a

If $150,000, 12%, bonds are issued on January 1st, and pay interest annually, how much interest will be paid? A : $18,000 B : $15,000 C : $12,000 D : $16,000

a

Karson Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, this indicates that: a the contractual interest rate exceeds the market interest rate. b the market interest rate exceeds the contractual interest rate. c the contractual interest rate and the market interest rate are the same. d no relationship exists between the two rates.

a

The face value of a bond is the amount of principal due at the maturity date. A : True B : False

a

The interest charged on a $50,000 note payable, at the rate of 4.5%, on a 60-day note would be A $375. B $750. C $1,875. D $3,750.

a

Which of the following is reported as a current liability by retailers? A : sales taxes B : shares of stock C : debts payable in two years D : sales revenue

a

Which of the following statements is true? A : The amount of sales tax collected by a retail store when making sales is a current liability. B : The amount of sales tax collected by a retail store when making sales is recorded as an operating expense. C : Sales taxes collected by a retail store are miscellaneous revenue for the store. D : Sales taxes collected by a retail store when making sales is not recorded because it is a tax paid by the customer.

a

Callable bonds can be A converted into common stock at the bondholder's option. B bought back by the issuing company at the stated dollar amount prior to maturity. C sold back to the issuer at any time by the bondholder. D turned in by the bondholder for bonds yielding higher interest.

b

If $150,000 face value bonds are issued at 102, the proceeds received will be A : $200,000. B : $153,000. C : $156,000. D : $102,000.

b

If a $20,000, 9-month note payable was issued at 8%, then what will the interest payment be at maturity? A $1,700 B $1,200 C $1,800 D $1,600

b

Karson Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a discount, this indicates that: a the contractual interest rate exceeds the market interest rate. b the market interest rate exceeds the contractual interest rate. c the contractual interest rate and the market interest rate are the same. d no relationship exists between the two rates.

b

Stockholders of a company may be reluctant to finance expansion through issuing more equity because leveraging with debt is always a better idea. A : True B : False

b

What are bonds that mature at a single specified future date called? A serial bonds B term bonds C coupon bonds D debentures

b

will equal the market price on the date of issuance. A : The total of the periodic interest payments B : The carrying value of bonds C : The contractual interest rate D : The face value of bonds

b

Sparks Company received proceeds of $474,000 on 5-year, 10% bonds issued on January 1st, 2013. The bonds had a face value of $450,000, pay interest annually on December 31st, and have a call price of 102. Sparks uses the straight-line method of amortization. What is the amount of interest Sparks must pay the bondholders in 2013? A : $4,740 B : $45,000 C : $47,400 D : $50,000

b $450,000 × .10 = $45,000

Superbus Corporation issues 4,000, 10-year, 8%, $5,000 bonds dated January 1st, 2014, at 99. The journal entry to record the issuance will show a A credit to Bonds Payable for $1,980,000. B debit to Discount on Bonds Payable for $200,000. C credit to Cash for $1,980,000. D debit to Cash of $20,000,000.

b (4,000 × $5,000) × (1 - .99) = $200,000

A corporation issues $200,000, 10%, 5-year bonds on January 1st, 2014, for $179,600. Interest is paid annually on January 1st. If the corporation uses the straight-line method of amortization of bond discount, the amount of bond interest expense to be recognized in December 31st, 2014's adjusting entry is A $17,960. B $24,080. C $20,000. D $20,400.

b [($200,000 - $179,600) ÷ 5] + ($200,000 × .10) = $24,080

A is a legal document that indicates the name of the issuer, the face value of the bond, and such other data.

bond certificate

A is a form of interest-bearing note.

bond

A corporation issues $100,000, 12%, 10-year bonds on January 1st, 2014, for $108,400. Interest is paid annually on January 1st. If the corporation uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized in December 31st, 2014's adjusting entry is A $9,400. B $10,000. C $13,008. D $11,160.

d

Aircraft Supply issued a six-year interest-bearing note payable for $300,000 on January 1st, 2013. Each January the company is required to pay $50,000 on the note. How will this note be reported on the December 31st, 2014, balance sheet? A : Long-term debt, $100,000 B : Long-term debt, $60,000 C : Long-term debt, $20,000; Long-term Debt due within one year, $40,000 D : Long-term debt, $200,000; Long-term Debt due within one year, $50,000

d

An unsecured bond is one that is issued against the A : common stock at the bondholder's option. B : specific assets of the issuer pledged as collateral for the bonds. C : stated dollar amount prior to maturity. D : general credit of the borrower.

d

Which of the following statements is true? A : The current portion of long-term debt should be paid immediately. B : The current portion of long-term debt should not be separated from the long-term portion of debt. C : The current portion of long-term debt should be classified as a long-term liability. D : The current portion of long-term debt should be reclassified as a current liability.

d

Bloomfield Company received proceeds of $155,000 on 5-year, 10% bonds issued on January 1st, 2013. The bonds had a face value of $125,000, pay interest annually on December 31st, and have a call price of 101. Sparks uses the straight-line method of amortization. What is the amount of interest Sparks must pay the bondholders in 2013? $20,000 B $1,250 C $15,500 D $12,500

d 125,000 x .10

If the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date, this indicates that the bonds were issued at a

premium