Accounting 201 Chapter 10 Wiley Quiz

T/F: The market interest rate is the rate used to determine the amount of cash interest the borrower pays.

False - The rate of interest used to determine the amount of cash interest the borrower pays is the contractual or stated interest rate ("Issuing Procedures").

All of the following are long-term liabilities except:

All of these options are long-term liabilities - bonds payable, mortgage payable, and lease liabilities are all long-term liabilities

The amortization of the bond premium decreases:

both interest expense and bond carrying value

If bonds have been issued at a discount, over the life of the bonds, the:

carrying value of the bonds will increase

All of the following are advantages of bond financing over common stock except:

higher net income

Companies report current liabilities on the balance sheet in:

order of magnitude

Karson Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, this indicates that:

the contractual interest rate exceeds the market interest rate

Both the straight-line method and the effective-interest method of amortization will always result in:

the same amount of interest expense being recognized over the term of the bonds

The debt to total assets ratio is computed by dividing:

total debt by total assets

If a corporation issued $2,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?

$140,000 - $2,000,000 X 10% X 70% after-tax rate = $140,000 annual net cash cost of borrowing.

Maggie Sharrer Company borrows $88,500 on September 1, 2012, from Sandwich State Bank by signing an $88,500, 12%, one-year note. What is the accrued interest at December 31, 2012?

$3,540

T/F: Companies report any balance in an unearned revenue account as a current liability in the balance sheet.

True

T/F: Determining the payroll involves computing gross earnings, payroll deductions, and net pay.

True

T/F: If the market rate of interest is lower than the contractual interest rate, the bonds will sell at a premium.

True

T/F: Payroll tax expense for businesses consists of FICA tax, federal unemployment tax, and state unemployment tax.

True

T/F: The interest on a mortgage note decreases each period, while the portion applied to the loan principal increases.

True

T/F: The times interest earned ratio provides an indication of the company's ability to meet interest payments as they come due.

True

T/F: When the issuing company records a conversion of bonds into common stock, no gain or loss is recognized.

True

The interest rate investors demand for loaning funds to a corporation is the:

market interest rate

The present value of a bond is also known as its:

market price

When the issuing company records a conversion of bonds into common stock:

the company transfers the carrying value of the bonds to paid-in capital accounts

John Jansen, an employee of Redwood Company, had gross earnings for the month of May of $4,000. FICA taxes are 8% of gross earnings (all earnings are subject), federal income taxes amount to $675 for the month, state income taxes are 3% of gross earnings, and Jansen authorized voluntary deductions of $5 per month to the United Way. What is the net pay for John Jansen?

$2,880 - The correct net pay = gross earnings ($4,000) - FICA tax ($4,000 x 8%) - federal income tax ($675) - state income tax ($4,000 x 3%) - United Way ($5) = $2,880.

Buffon Electronics Company issues an $800,000, 10%, 20-year mortgage note on January 1. The terms provide for semiannual installment payments, exclusive of real estate taxes and insurance, of $46,621. After the first installment payment, the principal balance is:

$793,379 - The payment of $46,621 includes interest expense of $40,000 ($800,000 X 10% X .5), therefore the principal reduction is $6,621. The new principal balance is $800,000 - $6,621 = $793,379.

The market price of a bond is dependent on:

all of these - dependent on the payments amounts, the length of time until the amounts are paid, and the interest rate

All of the following are current liabilities except:

all of these options are current liabilities - sales taxes payable, unearned rental revenue, and current maturities of long-term debt are all current liabilities

The current ratio is:

current assets divided by current liabilities

Hoffman Corporation retires its bonds at 106 on January 1, following the payment of semiannual interest. The face value of the bonds is $400,000. The carrying value of the bonds at the redemption date is $419,800. The entry to record the redemption will include a:

debit of $19,800 to Premium on Bonds Payable - The journal entry includes a debit to Bonds Payable for $400,000, a debit to Premium on Bonds Payable for $19,800, a debit to Loss on Bond Redemption for $4,200, and a credit to Cash for $424,000.

Modern Magazine sells annual subscriptions to its magazine for $18. Subscribers receive a magazine each month. The current news stand price is $2 per monthly magazine. For the current year, Modern Magazine sold 1,000 annual subscriptions. The monthly adjusting entry to record the revenue earned would be a:

debit to Unearned Subscription Revenue, $1,500, and a credit to Subscription Revenue, $1,500

The major disadvantages resulting from the use of bonds are that:

interest must be paid and the principal must be repaid

Andrews Inc. issues a $497,000, 10% 3-year mortgage note on January 1. The note will be paid in three annual installments of $200,000, each payable at the end of the year. What is the amount of interest expense that should be recognized by Andrews Inc. in the second year?

$34,670 - In the first year, Andrews will recognize $49,700 of interest expense ($497,000 X 10%). After the first payment is made, the amount remaining on the note will be $346,700 [$497,000 principal - ($200,000 payment - $49,700 interest)]. The remaining balance ($346,700) is multiplied by the interest rate (10%) to compute the interest expense to be recognized for the second year--$34,670 ($346,700 X 10%).

Becky Sherrick Company has total proceeds from sales of $4,515. If the proceeds include sales taxes of 5%, the amount to be credited to Sales is:

$4,300 - Dividing the total proceeds ($4,515) by one plus the sales tax rate (1.05) will result in the amount of sales to be credited to the Sales account. $4,515/1.05 = $4,300.

On January 1, Hurley Corporation issues $500,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. Assuming straight line amortization of bond discount, what is the carrying value of the bonds at the end of the third interest period?

$486,000 - When bonds are issued at a discount, the carrying value increases by the amount of the periodic discount amortization. Since the straight-line method is used, the discount amortization is $2,000 each period. Three interest periods result in total discount amortization of $6,000 ($2,000 x 3 periods). This amount is added to the initial carrying value ($480,000) to arrive at $486,000, the carrying value at the end of the third interest period

On January 1, Besalius Inc. issued $1,000,000, 9% bonds for $939,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Besalius uses the effective-interest method of amortizing bond discount. At the end of the first year, Besalius should report unamortized bond discount of:

$57,100 - The beginning balance of unamortized discount is $61,000 ($1,000,000 - $939,000). The discount amortization is $3,900, the difference between the cash interest payment of $90,000 ($1,000,000 x 9%) and the interest expense recorded of $93,900 ($939,000 x 10%). The discount amortization of $3,900 is subtracted from the beginning balance of unamortized discount of $61,000, to arrive at a balance of $57,100 at the end of the first year.

Colson Inc. converts $600,000 of bonds sold at face value into 10,000 shares of common stock, par value $1. Both the bonds and the stock have a market value of $760,000. What amount should be credited to Paid-in Capital in Excess of Par-Common Stock as a result of the conversion?

$590,000 - First, the market value in this transaction is ignored. The bonds will be debited for $600,000; Common Stock will be credited for $10,000 since this account is always credited for shares issued (10,000) times par value ($1). The remaining amount, $590,000 ($600,000 - $10,000) is credited to Paid-in Capital in Excess of Par-Common Stock.

Comly Communications issues a $600,000, 10%, 20-year mortgage note on January 1. The terms provide for semiannual installment payments of $34,966, exclusive of real estate taxes and insurance. After the first installment payment, the principal balance is:

$595,034 - The correct computation of the reduction of principal, $4,966 = $34,966 (cash payment) - $30,000 (interest expense = $600,000 x 10% x 1/2). $600,000 (principal) - $4,966 (reduction in principal) = $595,034 (principal balance after first installment).

A retail store did not ring up sales tax separately. If the sales tax rate is 5% and the total receipts amounted to $126,000, what is the amount of the sales taxes owed to the taxing agency?

$6,000 - The $126,000 includes both the sales and the sales tax. $126,000/1.05 = $120,000 of sales. Therefore, the sales tax = $126,000 - $120,000 = $6,000.

Andy Manion earns $14 per hour for a 40-hour week and $21 per hour for any overtime work. If Manion works 45 hours in a week, gross earnings are:

$665 - Gross earnings are computed as follows: (40 hours X $14 per hour) + (5 hours X $21 per hour) = $665

T/F: A current liability is a debt that the company reasonably expects to pay from existing current assets.

False - A current liability is a debt that the company reasonably expects to pay from existing current assets within one year or the operating cycle, whichever is longer.

The amount of sales tax collected by a retailer is recorded in the:

Sales Taxes Payable account

Which of the following statements concerning current liabilities is incorrect?

current liabilities include prepaid expenses - Prepaid expenses are current assets, not current liabilities

The term used for bonds that are unsecured is:

debenture bonds

The entry to record the issuance of an interest-bearing note includes a credit to Notes Payable for the note's:

face value

Employer payroll taxes do not include:

federal income taxes

Discount on Bonds Payable:

is a contra account

Premium on Bonds Payable:

is considered to be a reduction in the cost of borrowing

Payroll deductions include all of the following except:

unemployment taxes

The relationship between current liabilities and current assets is:

useful in evaluating a company's liquidity