ACG 2021 Paterson FSU Ch. 10 Quiz

Hogan Company has bonds with a principal value of $1,000,000 outstanding. The unamortized premium on the bonds is $14,400. If the bonds are retired at 101, what would be the amount the company would pay its bondholders?

$1,010,000 Solution: $1,000,000 x 1.01 = $1,010,000

On January 1, Larson Company issued $750,000 of 8%, 5-year bonds at 106. Assuming straight-line amortization and annual interest payments, what is the amount of the amortization for the first year?

$9,000 Solution: $750,000 x (1.06 − 1.00)] / 5 = $9,000

Yahr Corporation issues $1,250,000 of 10-year, 9% bonds dated January 1 at 94. The journal entry to record the issuance includes

a debit to Cash for $1,175,000. Solution: Debit the Cash account for $1,175,000 Debit the Discount on Bonds Payable account for $75,000 Credit the Bonds Payable account for $1,250, the Cash account for the amount of cash collected from issuing the bonds = Face value times 94% = $1,250,000 x 94% = $1,175,000 Credit the Bonds Payable account for the face value of the bonds, $1,250,000 These bonds were issued for a discount (i.e., issue at 94 implies a 6% discount); debit the Discount on Bonds Payable account by the difference between the face value and the amount of cash collected from issuing the bonds, $75,000 = $1,250,000 - $1,175,000; alternatively: the discount (or premium) equals the face value time the difference between 100% and the issuance percentage (i.e., $1,250,000 x (100% - 94%) = $75,000

The person who purchases the bond and holds it as an investment it is called the:

bondholder

On December 1, 2017, a company issued a note payable of $50,000, of which $10,000 will be repaid each year. What is the proper classification of this note on the December 31, 2017 balance sheet?

$10,000 current liability; $40,000 long-term liability Solution Each year, there is a current maturity of $10,000; the remaining outstanding debt is long-term debt. Since no portion of the principal has been paid by the date in question, there is $50,000 that remains unpaid. This total is split as follows: $10,000 is a current liability and $40,000 is a long-term debt.

On January 1, Ozone Inc. sells bonds with a face value of $1,000,000 and a contractual interest rate of 8% for $800,000. The bonds will mature in 10 years. Using the straight-line method of amortization, how much interest expense will be recognized in the first year?

$100,000 Solution: The contractual interest is 8% x $1,000,000, which is $80,000. The annual bond amortization is $800,000 less $1,000,000 divided by 10 years, which is $20,000 per year. The annual interest expense will be $80,000 plus $20,000, which is $100,000.

On January 1, Wilson Production Corporation issued $3,750,000, 5%, 4-year bonds for $4,028,783. Interest is payable annually on January 1. The effective interest rate on the bonds is 3%. Use the effective-interest method to determine the amount of interest expense for the first year.

$120,863 Solution: Using the effective-interest method, the bond interest expense equals the effective interest rate times the bond's carrying value: 3.00% x $4,028,783 = $120,863

A corporation issues $200,000, 6%, 5-year bonds on January 1 for $190,000. Interest is paid annually on January 1. If the corporation uses the straight-line method to amortize bond premiums and discounts, the amount of bond interest expense in the first year is

$14,000 Solution: If a bond is issued at a discount, interest expense includes the interest paid in the form of cash plus the amortization of discount. If a bond is issued at a premium, interest expense includes the interest paid in the form of cash minus the amortization of premium. If a bond is issued at a discount, interest expense includes the interest paid in the form of cash minus the amortization of discount. This bond was issued for less than its face value so it was issued at a discount. Interest paid in cash = Face value times the contractual interest rate = $200,000 x 6% = $12,000 per year Straight-line amortization per year = ($200,000 - $190,000)/5 = $2,000 per year These bonds were issued at a discount: Interest expense = $12,000 + 2,000 = $14,000

On January 1, Hamlet Company issued $2,500,000, 10-year, 9% bonds for $2,650,000. Interest is to be paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discounts and premiums on bonds payable, the annual amortization amount is

$15,000 Solution: Straight-line amortization of bond premiums and discounts is similar to straight-line depreciation. Straight-line amortization and depreciation both allocate an initial equally over a period of time. This bond has a premium of $150,000 (i.e., $2,650,000 - $2,500,000). Using straight-line amortization, this amount is spread equally over the life of the bond. Annual amortization = $150,000/10 years = $15,000 per year. By the time the bond reaches maturity in 10 years, the premium will have been fully amortized (i.e., it will be equal to zero) and the bond's carrying value will equal its face value.

On January 1, $5,000,000, 10-year, 8% bonds were issued at $5,150,000. Interest is paid annually each January 1. The straight-line method of amortization is used to amortize the premium. How much premium is amortized at the end of the first year?

$15,000 Solution: The premium is amortized or is divided equally over the 10-year term of the bonds. The issue price of the bonds less the face amount of the bonds is the amount of the premium. When the premium of $150,000 is divided by the total annual interest payment periods, the result is annual amortization of $15,000.

On January 1, Anthony Corporation issued $1,000,000, 13%, 5-year bonds. The bonds sold for $1,100,596. This price resulted in an effective interest rate of 14% on the bonds. Interest is payable annually on January 1. Use the effective-interest method to determine the amount of interest expense for the first year.

$154,083 Solution: Using the effective-interest method, the bond interest expense equals the effective interest rate times the bonds carrying value. The cash paid is the contractual or stated interest rate times the face amount of the bonds. Bond interest expense for the first interest date = $1,100,596 x 14% = $154,083.

Suarez Corporation issued 10-year bonds with a face value of $300,000 and a contractual rate of interest of 6% at 101 on July 1. What is the total cost of borrowing for Suarez Corporation?

$177,000 Solution: The total cost is the sum of the interest payments and the difference between the cash received from bondholders and the maturity value of the bonds. Principal at maturity = $300,000 Interest payments = $300,000 × 6% × 10 years = $180,000 Total cash paid to bondholders = $480,000

A $500,000 bond is redeemed at 97 when the carrying value of the bond is $483,000. Which of the following is one effect of recording the bond redemption?

$2,000 of loss Solution: The excess of the cash used to redeem the bonds and the carrying value is a loss on redemption. If the carrying value exceeds the cash necessary to redeem the bonds, a gain on redemption occurs. The difference between the carrying value and the cash used to redeem the bonds is a gain or loss on redemption. Since the bonds were redeemed for $485,000 ($500,000 x 97%) and the carrying value is $483,000, the company should record a loss of $2,000.

In a recent year, Lehigh Corporation has a times interest earned ratio of 9.00. Its interest expense is $30,000 and its tax expense is $20,000. What was the company's net income?

$220,000 Solution: Times interest earned = Income before interest and taxes divided by interest expense Times interest earned = (Net income + interest expense + tax expense)/Interest expense Substitute what is known: 9.00 = (Net income + 30,000 + 20,000)/30,000 Solve for net income :9.00 x 30,000 = Net income + 30,000 + 20,000 270,000 = Net income + 30,000 + 20,000 Net income = 270,000 - 30,000 - 20,000 = 220,000

Hogan Company has bonds with a principal value of $1,000,000 outstanding. The unamortized discount on the bonds is $14,000. The company redeemed the bonds at 101. What is the company's gain or loss on the redemption?

$24,000 loss Solution: When a company retires bonds before maturity, it is necessary to: 1. Eliminate the carrying value of the bonds at the redemption date, 2. Record the cash paid to redeem the bonds, and 3. Recognize the gain or loss on redemption for the difference between 1 and 2.In this case, the bond was issued at a discount so the carrying value equals the bond's principal minus unamortized discount. Carrying value = Principal minus unamortized discount = $1,000,000 - 14,000 = $986,000The company can redeem this bond at 101 which means it can redeem this bond by paying the bondholder 101% of the bond's principal value. Cash paid to redeem the bonds = $1,000,000 x 1.01 = $1,010,000 Determining the gain or loss on the redemption of bonds: 1. Recognize gain if the cash paid to redeem bonds is less than their carrying value. 2. Recognize loss if the cash paid to redeem bonds in more than their carrying value. The cash paid to redeem the bonds is more than the carrying value of bonds redeemed so recognize a loss. The loss equals the excess of the cash paid over the carrying value (i.e., $1,010,000 - 986,000 = $24,000).

A $500,000 bond is redemption at 96 when the carrying value of the bond is $483,000. Which of the following is one effect of recording the redemption?

$3,000 of gain Solution: The excess of the cash used to redeem the bonds and the carrying value is a loss on redemption. If the carrying value exceeds the cash necessary to redeem the bonds, a gain on redemption occurs. The difference between the carrying value and the cash used to redeem the bonds is a gain or loss on redemption. Since the bonds were redemption for $480,000 ($500,000 x 96%) and the carrying value is $483,000, the company should record a gain of $3,000.

Andre Company does not segregate sales and sales taxes when it charges customers at the register. Its register total for a given day is $3,250, which includes a 4% sales tax. How much should be recognized as sales revenue and sales taxes payable, respectively?

$3,125 and $125 Solution: The amount of sales can be computed by dividing total cash received by one plus the sales tax rate. The computation is as follows: $3,250/(1 + .04) = $3,125.The sales tax payable is the difference between what was charged the customer and the amount recorded as sales revenue: $3,250 - 3,125 = $125.

Bittner Company borrows $92,500 on September 1, from Harrington State Bank by signing an $92,500, 11%, 18-month note. How much interest expense should Bittner Company record on December 31 if the company uses a calendar year-end and records adjusting entries only at year-end?

$3,392 Solution: Interest is calculated by multiplying the principal times the annual interest rate times the time period the note is outstanding. Remember—all interest rates are annual interest rates unless designated otherwise. This note generates 12% interest if it were outstanding the entire year. At December 31, two months of interest has accrued and should be recognized as interest expense and interest payable. December 31: $92,500 x 11% x 4/12 = $3,392.

On January 1, Forever Ceramics issued $1,000,000, 9% bonds for $960,000. This price resulted in an effective interest rate of 10% on the bonds. Interest is payable annually on January 1. The company uses the effective-interest method of amortizing bond discount. At the end of the first year, how much should Forever Ceramics report as unamortized bond discount?

$34,000 Solution: Using the effective-interest method, the bond interest expense equals the effective interest rate times the bonds' carrying value. The cash paid is the coupon or stated interest rate times the face amount of the bonds. The difference is the amount amortized for one year. The original discount is $40,000 ($1,000,000 - $960,000). The amortization for the first year is equal to the difference between the cash interest to be paid ($1,000,000 x 9% = $90,000) and interest expense ($960,000 x 10% = $96,000), or $6,000. The amortization of $6,000 is subtracted from the original discount of $40,000 to arrive at the unamortized bond discount at the end of the first year of $34,000.

Hogan Company has bonds with a principal value of $1,000,000 outstanding. The unamortized discount on the bonds is $14,000. The company redeemed the bonds at 102. What is the company's gain or loss on the redemption?

$34,000 loss Solution: When a company retires bonds before maturity, it is necessary to: 1. Eliminate the carrying value of the bonds at the redemption date, 2. Record the cash paid to redeem the bonds, and 3. Recognize the gain or loss on redemption for the difference between 1 and 2. In this case, the bond was issued at a discount so the carrying value equals the bond's principal minus unamortized discount. Carrying value = Principal minus unamortized discount = $1,000,000 - 14,000 = $986,000 The company can redeem this bond at 102 which means it can redeem this bond by paying the bondholder 102% of the bond's principal value. Cash paid to redeem the bonds = $1,000,000 x 1.02 = $1,020,000 Determining the gain or loss on the redemption of bonds: 1. Recognize gain if the cash paid to redeem bonds is less than their carrying value. 2. Recognize loss if the cash paid to redeem bonds in more than their carrying value. The cash paid to redeem the bonds is more than the carrying value of bonds redeemed so recognize a loss. The loss equals the excess of the cash paid over the carrying value (i.e., $1,020,000 - 986,000 = $34,000).

Hogan Company has bonds with a principal value of $500,000 outstanding. The unamortized premium on the bonds is $14,000. The company redeemed the bonds at 102. What is the company's gain or loss on the redemption?

$4,000 gain Solution: When a company retires bonds before maturity, it is necessary to: 1. Eliminate the carrying value of the bonds at the redemption date, 2. Record the cash paid to redeem the bonds, and 3. Recognize the gain or loss on redemption for the difference between 1 and 2.In this case, the bond was issued at a premium so the carrying value equals the bond's principal plus unamortized premium. *Carrying value = Principal plus unamortized premium* = $500,000 + 14,000 = $514,000 The company can redeem this bond at 102 which means it can redeem this bond by paying the bondholder 102% of the bond's principal value. *Cash paid to redeem the bonds* = $500,000 x 1.02 = $510,000 Determining the gain or loss on the redemption of bonds: 1. Recognize gain if the cash paid to redeem bonds is less than their carrying value. 2. Recognize loss if the cash paid to redeem bonds in more than their carrying value. The cash paid to redeem the bonds is less than the carrying value of bonds redeemed so recognize a gain. *The gain equals the excess of the carrying value over the cash paid* (i.e., $514,000 - 510,000 = $4,000).

Glass Company received proceeds of $460,000 on 10-year, 10% bonds issued on January 1, 2016. The bonds had a face value of $400,000, pay interest annually on December 31st, and have a call price of 101. Glass uses the straight-line method of amortization. What is the carrying value of the bonds on January 1, 2019?

$442,000 Solution: Amortization per year = ($460,000 - 400,000)/10 years = $6,000 per year Remaining premium after three years = $60,000 - (6,000 x 3) = $42,000Carrying value of bonds = Face value of bonds + premium on bonds - discount on bonds Carrying value after three years = $400,000 + 42,000 = $442,000

On January 1, Pierce Corporation issues $500,000, 5-year, 12% bonds at 96 with interest payable on January 1. What is the carrying value of the bonds at the end of the third interest period if amortization is $4,000 per year using the straight-line amortization method?

$492,000 Solution: After three interest periods, the carrying value of the bonds will have increased by three times the annual discount amortization of $4,000, or a total of $12,000. The original carrying value of $480,000 ($5,00,000 x 0.96) plus the three years of discount amortization amounts to $492,000 as the carrying value at the end of the third interest period.

On January 1, $1,000,000, 10-year, 8% bonds, were issued for $1,050,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discounts and premiums on bonds payable, the annual amortization amount is

$5,000 Solution: Straight-line amortization of bond premiums and/or bond discounts allocate the initial premium or discount over a period of time. This bond was issued (or sold) for more than its face value so it was issued at a premium of $50,000 (i.e., $1,050,000 - $1,000,000). Compared to issuing a bond at its face value, issuing a bond at a premium decreases the issuer's cost. Straight-line amortization of premium spreads this cost savings equally over the life of the bond. Annual amortization pf bond premium equals the premium divided by the life of the bond ($50,000/10 years = $5,000 per year). By the time the bond reaches maturity in 10 years, the discount will have been fully amortized (i.e., it will have been reduced to zero) and the bond's carrying value will equal its face value.

Andre Company does not segregate sales and sales taxes when it charges customers at the register. Its register total for a given day is $5,724, which includes a 6% sales tax. How much should be recognized as sales revenue and sales taxes payable, respectively?

$5,400 and $324 Solution: The amount of sales can be computed by dividing total cash received by one plus the sales tax rate. The computation is as follows: $5,724/(1 + .06) = $5,400.The sales tax payable is the difference between what was charged the customer and the amount recorded as sales revenue: $5,724 - 5,400 = $324.

Hogan Company has bonds with a principal value of $1,000,000 outstanding. The unamortized discount on the bonds is $14,000. The company redeemed the bonds at 104. What is the company's gain or loss on the redemption?

$54,000 loss Solution: When a company retires bonds before maturity, it is necessary to: 1. Eliminate the carrying value of the bonds at the redemption date, 2. Record the cash paid to redeem the bonds, and 3. Recognize the gain or loss on redemption for the difference between 1 and 2.In this case, the bond was issued at a discount so the carrying value equals the bond's principal minus unamortized discount. *Carrying value = Principal minus unamortized discount* = $1,000,000 - 14,000 = $986,000 The company can redeem this bond at 104 which means it can redeem this bond by paying the bondholder 104% of the bond's principal value. *Cash paid to redeem the bonds* = $1,000,000 x 1.04 = $1,040,000Determining the gain or loss on the redemption of bonds: *1. Recognize gain if the cash paid to redeem bonds is less than their carrying value.* *2. Recognize loss if the cash paid to redeem bonds in more than their carrying value. * cash paid to redeem the bonds is more than the carrying value of bonds redeemed so recognize a loss. The loss equals the excess of the cash paid over the carrying value (i.e., $1,040,000 - 986,000 = $54,000).

On January 1, Thompson Corporation issued $5,300,000, 13%, 6-year bonds for $6,251,015. Interest is payable annually on January 1. The effective interest rate on the bonds is 9%. Use the effective-interest method to determine the amount of interest expense for the first year.

$562,591 Solution: Using the effective-interest method, the bond interest expense equals the effective interest rate times the bond's carrying value: 9.00% x $6,251,015 = $562,591

On January 1, Forever Ceramics issued $1,000,000, 9% bonds for $939,000. This price resulted in an effective interest rate of 10% on the bonds. Interest is payable annually on January 1. The company uses the effective-interest method of amortizing bond discount. At the end of the first year, how much should Forever Ceramics report as unamortized bond discount?

$57,100 Solution: Using the effective-interest method, the bond interest expense equals the effective interest rate times the bonds' carrying value. The cash paid is the contractual or stated interest rate times the face amount of the bonds. The difference is the amount of premium or discount amortized for the year. The original discount is $61,000 ($1,000,000 - $939,000). The amortization for the first year is equal to the difference between the cash interest to be paid ($1,000,000 x 9% = $90,000) and interest expense ($939,000 x 10% = $93,900), or $3,900. The amortization of $3,900 is subtracted from the original discount of $61,000 to arrive at the unamortized bond discount at the end of the first year of $57,100.

The current carrying value of Kennett's $600,000 face value bonds is $597,750. If the bonds are retired at 102, what would be the amount Kennett would pay its bondholders?

$612,000 Solution: $600,000 x 1.02 = $612,000

On January 1, Hannibal Company sold $500,000, 5-year, 6% bonds for $465,000. Interest is to be paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discounts and premiums on bonds payable, the annual amortization amount is

$7,000 Solution: Straight-line amortization of bond premiums and discounts is similar to straight-line depreciation. Straight-line amortization and depreciation both allocate an initial equally over a period of time. This bond has a discount of $35,000 (i.e., $500,000 - $465,000). Using straight-line amortization, this amount is spread equally over the life of the bond. Annual amortization = $35,000/5 years = $7,000 per year. By the time the bond reaches maturity in 5 years, the discount will have been fully amortized (i.e., it will be equal to zero) and the bond's carrying value will equal its face value.

Green Box Inc. issues a $750,000, 10%, 15-year mortgage note. The terms provide for annual installment payments of $82,626. What is the remaining unpaid principal balance of the mortgage payable account after the first annual payment?

$742,374 Solution: Since interest accrues annually, the first year's interest would be $75,000 (i.e., 10% x $750,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $82,626 payment and the interest component ($75,000), resulting in a principal reduction of $7,626. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $7,626 from $750,000 to $742,374. The second annual payment's interest is 10% of the outstanding mortgage principal of $742,374, or $74,237. The second annual payment of $82,626 is allocated as $74,237 paid towards interest and the remaining $8,389 allocated towards the payment of outstanding mortgage principal. Thus, the outstanding mortgage principal after the second annual payment is $733,985. Learning objective 10: Describe the accounting for long-term notes payable.

Green Box Inc. issues a $750,000, 11%, 15-year mortgage note. The terms provide for annual installment payments of $89,025. What is the remaining unpaid principal balance of the mortgage payable account after the first annual payment?

$743,475 Solution: Since interest accrues annually, the first year's interest would be $82,500 (i.e., 11% x $750,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $89,025 payment and the interest component ($82,500), resulting in a principal reduction of $6,525. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $6,525 from $750,000 to $743,475.

On January 1, Blick Corp. issues $200,000 of 5-year, 7% bonds at 97. Assume interest is paid annually each January 1. What is the total cost of borrowing associated with this bond?

$76,000 Solution: The total cost of borrowing for a given bond issuance includes the interest payments plus any discount associated with issuing the bonds minus any premium associated with issuing the bonds. When interest is paid annually, each interest payment equal the bonds' face value multiplied by the contractual interest rate (i.e., $200,000 x 7% = $14,000). These five-year bonds pay $14,000 in each of the five years (i.e., $14,000 x 5 years = $70,000). These bonds were issued at 98 meaning they were issued for 97% of their face value. So, the discount is $6,000 (i.e., $200,000 x [100% - 97%] = $6,000). The discount increases the total cost of borrowing. Over the course of five years, these bonds have a total cost of $76,000 (i.e., $70,000 + 6,000 = $76,000); the issuer will incur $76,000 of interest expense.

Brazen Inc. sells bonds with a face value of $1,000,000 and a contractual interest rate of 10% for $1,200,000. The bonds will mature in 10 years. Using the straight-line method of amortization, how much interest expense will be recognized in year 1?

$80,000 Solution: The contractual interest rate is 10% x $1,000,000, which is $100,000. The annual bond amortization is $1,200,000 less $1,000,000 divided by 10 years, which is $20,000. The annual interest expense will be $100,000 less $20,000, which results in a debit of $80,000.

Red Box Inc. issues a $900,000, 8%, 25-year mortgage note. The terms provide for annual installment payments of $84,311. What is the remaining unpaid principal balance of the mortgage payable account after the first annual payment?

$887,689 Solution: Since interest accrues annually, the first year's interest would be $72,000 (i.e., 8% x $900,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $84,311 payment and the interest component ($72,000), resulting in a principal reduction of $12,311. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $12,311 from $900,000 to $887,689. The second annual payment's interest is 8% of the outstanding mortgage principal of $887,689, or $71,015. The second annual payment of $84,311 is allocated as $71,015 paid towards interest and the remaining $13,296 allocated towards the payment of outstanding mortgage principal. Thus, the outstanding mortgage principal after the second annual payment is $874,393.

The following partial amortization schedule is available for Cox Company which sold $100,000, ten-year, 10% bonds on January 1, 2016 for $110,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE Interest Periods Interest to be paid Interest expense Premium Amortization Unamortized Premium Bond Carrying Value January 1, 2016 ... ... ... $10,000 $110,000 January 1, 2017 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (ii)?

$9,000 Solution: (i) Interest to be paid = Face value x bond's stated interest rate = $100,000 x 10% = $10,000(ii) Interest expense = Interest to be paid minus premium amortization (see below) = $10,000 - 1,000 = $9,000(iii) Premium amortization = Premium/Amortization period = $10,000/10 years = $1,000 per year(iv) Unamortized premium = $10,000 - 1,000 = $9,000

Brown Box Inc. issues a $1,000,000, 10%, 20-year mortgage note. The terms provide for annual installment payments of $117,460. What is the remaining unpaid principal balance of the mortgage payable account after the second annual payment?

$963,334 Solution: Since interest accrues annually, the first year's interest would be $100,000 (i.e., 10% x $1,000,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $117,460 payment and the interest component ($100,000), resulting in a principal reduction of $17,460. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $17,460 from $1,000,000 to $982,540. The second annual payment's interest is 10% of the outstanding mortgage principal of $982,540, or $98,254. The second annual payment of $117,460 is allocated as $98,254 paid towards interest and the remaining $19,206 allocated towards the payment of outstanding mortgage principal. Thus, the outstanding mortgage principal after the second annual payment is $963,334 (i.e., $982,540 - $19,206 = $963,334).

Brown Box Inc. issues a $1,000,000, 11%, 20-year mortgage note. The terms provide for annual installment payments of $125,576. What is the remaining unpaid principal balance of the mortgage payable account after the second annual payment?

$967,135 Solution: Since interest accrues annually, the first year's interest would be $110,000 (i.e., 11% x $1,000,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $125,576 payment and the interest component ($110,000), resulting in a principal reduction of $15,576. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $15,576 from $1,000,000 to $984,424. The second annual payment's interest is 11% of the outstanding mortgage principal of $984,424, or $108,287. The second annual payment of $125,576 is allocated as $108,287 paid towards interest and the remaining $17,289 allocated towards the payment of outstanding mortgage principal. Thus, the outstanding mortgage principal after the second annual payment is $967,135 (i.e., $984,424 - $17,289 = $967,135).

Brown Box Inc. issues a $1,000,000, 12%, 20-year mortgage note. The terms provide for annual installment payments of $133,879. What is the remaining unpaid principal balance of the mortgage payable account after the second annual payment?

$970,577 Solution: Since interest accrues annually, the first year's interest would be $120,000 (i.e., 12% x $1,000,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $133,879 payment and the interest component ($120,000), resulting in a principal reduction of $13,879. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $13,879 from $1,000,000 to $986,121. The second annual payment's interest is 12% of the outstanding mortgage principal of $986,121, or $118,335. The second annual payment of $133,879 is allocated as $118,335 paid towards interest and the remaining $15,544 allocated towards the payment of outstanding mortgage principal. Thus, the outstanding mortgage principal after the second annual payment is $970,577 (i.e., $986,121 - $15,544 = $970,577).

Brown Box Inc. issues a $1,000,000, 12%, 20-year mortgage note. The terms provide for annual installment payments of $133,879. What is the remaining unpaid principal balance of the mortgage payable account after the first annual payment?

$986,121 Solution: Since interest accrues annually, the first year's interest would be $120,000 (i.e., 12% x $1,000,000) which equals the *annual interest rate times outstanding mortgage principal as of the beginning of the first annual period*. The mortgage principal is reduced by the difference between the $133,879 payment and the interest component ($120,000), resulting in a *principal reduction* of $13,879. Thus, *the first annual mortgage payment reduces the outstanding mortgage principal balance* by $13,879 from $1,000,000 to $986,121.

Among Pima Company's records, it has the following selected accounts after posting adjusting entries: Accounts payable, $16,000 9-month, 8%, note payable, $46,000 Income tax expense, $5,000 Salaries and wages expense, $23,000 3-year, 10% note payable, $200,000 Salaries and wages payable, $10,000 Mortgage payable ($22,000 due next year), $1,000,000 Rent payable, $8,000 Current assets are $210,000 at year-end. How much is Pima's current ratio at year-end?

2.06 Solution: Liabilities are classified as current if they will be paid with current assets within one year or the current operating cycle, whichever is longer. Examples of current liabilities include accounts payable, notes payable due in 12 months or less months, income tax payable, salaries and wages payable, the portion of mortgage payable due next year, and rent payable. Current liabilities = $16,000 + 46,000 + 10,000 + 22,000 + 8,000 = $102,000

Among Pima Company's records, it has the following selected accounts after posting adjusting entries: Accounts payable, $12,00010-month, 8%, note payable, $42,000Income tax expense, $5,000Salaries and wages expense, $23,0003-year, 10% note payable, $200,000Salaries and wages payable, $6,000Mortgage payable ($18,000 due next year), $1,000,000Rent payable, $4,000 Current assets are $265,000 at year-end. How much is Pima's current ratio at year-end?

3.23 Solution: Liabilities are classified as current if they will be paid with current assets within one year or the current operating cycle, whichever is longer. Examples of current liabilities include accounts payable, notes payable due in 12 months or less months, income tax payable, salaries and wages payable, the portion of mortgage payable due next year, and rent payable. Current liabilities = $12,000 + 42,000 + 6,000 + 18,000 + 4,000 = $82,000

In a recent year Hough Corporation had net income of $90,000, interest expense of $15,000, and tax expense of $18,000. What was the company's times interest earned for the year?

8.2 Solution: ($90,000 + $15,000 + $18,000) / $15,000 = 8.2

In a recent year Cey Corporation had net income of $120,000, interest expense of $20,000, and tax expense of $25,000. What was the company's times interest earned for the year?

8.25 Solution: ($120,000 + $20,000 + $25,000) / $20,000 = 8.25

On January 1, Pierce Corporation issues $500,000, 5-year, 8% bonds at 102 with interest payable on January 1. Which of the following is one part of the entry on December 31 to record accrued bond interest and the amortization of the bond premium using the straight-line method?

A debit to Interest Expense for $38,000 Solution: When a discount is amortized, the debit to interest expense is the sum of the cash to be paid ($500,000 x 8% = $40,000) minus the amount of premium amortization [($500,000 + ($500,000 x 102%))/5 = $2,000]. In this case, the debit to interest expense should be for $40,000 minus $2,000, or a total of $38,000. The entry to record accrued bond interest and the premium amortization includes a debit to interest expense for $38,000, a debit to premium on bond payable for $2,000 and a credit to interest payable for $40,000. Payment occurs the next day on January 1.

Madison Company typically sells subscriptions on an annual basis, and publishes six times a year. The company sells 75,000 subscriptions in January at $10 each. The entry made in January to record the sale of the subscriptions should include

A debit to the Cash account for $750,000 and credit an unearned revenue account for $750,000. Solution: Selling 75,000 subscriptions for $10 per subscription involves collecting $750,000 of cash from customers and the creation of a $750,000 obligation to provide magazines during the subscription period. Debit cash for $750,000 and credit unearned revenue for $750,000.

Bonds with a $4,000,000 face value are issued by Handel Enterprises at 97. Handel's journal entry to record the issuance is

Cash....................................................... 3,880,000 Discount on Bonds Payable.......................120,000 Bonds Payable.......................................4,000,000 Solution: Cash proceeds from issuing bonds = Bond face value x Issue price as a percentage of face value Cash proceeds from issuing bonds = $4,000,000 x 97% = $3,880,000

The Russell Painting Company issues a $200,000, 8%, 9-month note on September 1. It has a December 31 year-end. The entry made by the Russell Painting Company on September 1 to record the issuance of the note is

Cash............................................................................... 200,000 Notes Payable................................................ 200,000 Solution: When issuing a $200,000 note, the company records the following journal-entry: Debit: Cash for $200,000 Credit: Notes Payable for $200,000

The cash register tape indicates sales are $1,500 and sales taxes are $100. What journal entry is needed to record this information?

Debit the Cash account for $1,600, credit the Sales account for $1,500, and credit the Sales Taxes Payable for $100. Solution: The sales taxes obligation must be recognized separately as sales taxes payable because they are paid by the buyer of the product or service (i.e., the customer) and they must be submitted by the retailer to the governmental agency imposing them. Sales taxes are not additional revenues earned by the retailer. Here's a summary of the journal entry. Debit: Cash for $1,600 Credit: Sales account $1,500 Credit: Sales Taxes Payable for $100

The Lambert Company operates a consulting practice. New clients are required to pay the firm in two transactions. First, clients must pay $250 before receiving consulting services. Second, clients must pay $750 once the consulting firm finishes providing services to the client. How does The Lambert Company account for the first transaction?

Debit the Cash account for $250 and credit the Unearned Revenue account for $250. Solution: First, record the initial payment received from the customer: Debit: Cash for $250 Credit: Unearned Revenue for $250 Second, record the remaining payment from the customer, eliminate the liability for unearned revenue, and record the full amount as earned: Debit: Cash for $750 Debit: Unearned Revenue for $250 Credit: Service Revenue for $1,000

The Laramie Company operates a consulting practice. New clients are required to pay the firm in two transactions. First, clients must pay $200 before receiving consulting services. Second, clients must pay $800 once the consulting firm finishes providing services to the client. How does The Laramie Cojmpany account for the second transaction?

Debit the Cash account for $800, debit the Unearned Revenue account for $200, and credit the Service Revenue account for $1,000. Solution: First, record the initial payment received from the customer: Debit: Cash for $200 Credit: Unearned Revenue for $200 Second, record the remaining payment from the customer, eliminate the liability for unearned revenue, and record the full amount as earned: Debit: Cash for $800 Debit: Unearned Revenue for $200 Credit: Service Revenue for $1,000

The Laramie Company operates a consulting practice. New clients are required to pay the firm in two transactions. First, clients must pay $100 before receiving consulting services. Second, clients must pay $900 once the consulting firm finishes providing services to the client. How does The Laramie Company account for the second transaction?

Debit the Cash account for $900, debit the Unearned Revenue account for $100, and credit the Service Revenue account for $1,000. Solution: First, record the initial payment received from the customer: Debit: Cash for $100 Credit: Unearned Revenue for $100 Second, record the remaining payment from the customer, eliminate the liability for unearned revenue, and record the full amount as earned: Debit: Cash for $900 Debit: Unearned Revenue for $100 Credit: Service Revenue for $1,000

Which of the following is a true with regards to the classification of a liability as a current liability? I. It is a debt that the company expects to pay from existing current assets or through the creation of other current liabilities. II. It is a debt that the company expects to pay within one year or the operating cycle, whichever is shorter. III. It is a debt that has been owed for less than one year.

I Solution: Liabilities are classified as current if they are expected to be paid (1) from existing current assets or through the creation of other current liabilities, and (2) within one year or the operating cycle, whichever is longer.

Which statement describes the market interest rate? It is listed in the bond indenture. All of these It is the contractual interest rate used to determine the amount of cash interest paid by the borrower. It is the rate investors' demand for loaning funds. It is the coupon rate stated on the bond certificate that determines the period interest payments.

It is the rate investors' demand for loaning funds. Solution: The market interest rate is the rate investors' demand for loaning funds to the corporation. The market interest rate is likely to be different from the contractual interest rate. The contractual interest rate is the rate used to determine the period cash payments for interest. The contractual interest rate (or contract rate) is the rate listed or stated in the bond indenture; it is often called the stated rate.

Which of the following is true with regards to bond discounts?

Reporting a bond discount on the balance sheet decreases the bond's carrying value. Solution: For bonds issued at a discount, carrying value is the bond payable (in the amount of the principle) minus the discount on the bond payable. For bonds issued at a premium, carrying value is the bond payable (in the amount of the principle) plus the premium on the bond payable.

Which of the following statements regarding the amortization of discounts and premiums on bonds is false? When the straight-line and effective interest methods of amortization result in interest that is materially different, GAAP requires use of the effective interest method. None of these statements is false. The effective interest method applies a constant percentage to the bond carrying value to compute interest expense. The amount of interest expense decreases each period over the life of a discounted bond issue when the effective interest method is used. Over the life of the bond, the carrying value increases for discounted bonds when using the effective interest method.

The amount of interest expense decreases each period over the life of a discounted bond issue when the effective interest method is used. Solution: Two methods exist for amortizing discounts and premiums on bonds: (1) straight-line amortization and (2) effective interest amortization. GAAP require the effective interest method if it results in materially different interest expense than the straight-line method because the effective interest method adheres to the recognition principle. It computes interest as a constant percentage multiplied against the bond carrying value. As discount is amortized, carrying value increases causing periodic interest to increase.

Which of the following is true for bonds that have been issued at a premium? Interest expense will not be affected by the amortization of the premium. The carrying value of the bonds will decrease over the life of the bonds. The unamortized premium will increase over the life of the bond. The premium indicates that the cost of the bonds is higher than the bond interest paid. None of these.

The carrying value of the bonds will decrease over the life of the bonds. Solution: Bonds may be issued either (i) at their face value, (ii) at a discount, or (iii) at a premium. When bonds are issued at a premium, they have been issued (i.e., sold) for more than their face value. This occurs because the bond's stated interest rate is higher than the market interest rate. The carrying value of bonds issued at a premium equals the bond's face value plus the premium. As times passes, the premium will be amortized (and interest expense is decreased). As it is amortized, the balance on the premium on bonds payable decreases and the carrying value of the bond decreases.

Russ Company borrowed $700,000 on December 1 by issuing a 24-month, 11% note. Both the note and the interest will be paid when the note matures. Which statement is true at December 31?

The company has $6,417 of interest payable that is a long-term liability. Solution: A current liability is a debt the company reasonably expects to pay (1) from existing current assets or through the creation of other current liabilities, and (2) within the next year or the operating cycle, whichever is longer. Since both the interest payable and the note payable are expected to be paid in 23 months (i.e., 24-month note issued one month before year-end), they will be considered long-term liabilities. Interest payable = $700,000 x .11 x 1/12 = $6,417

York Corporation issues $3,500,000 of 20-year, 6% bonds dated January 1 at 107. The journal entry to record the issuance will include

a credit to Bonds Payable for $3,500,000. Solution: Debit the Cash account for $3,745,000 Debit the Discount on Bonds Payable account for $245,000 Credit the Bonds Payable account for $3,500,000 Debit the Cash account for the amount of cash collected from issuing the bonds = Face value times 107% = $3,500,000 x 107% = $3,745,000 Credit the Bonds Payable account for the face value of the bonds, $3,500,000 These bonds were issued for a discount (i.e., issue at 107 implies a 7% premium); credit the Premium on Bonds Payable account by the difference between the face value and the amount of cash collected from issuing the bonds, $245,000 = $3,745,000 - $3,500,000; alternatively: the discount (or premium) equals the face value time the difference between 100% and the issuance percentage (i.e., $3,500,000 x (107% - 100%) = $245,000

Yogi Corporation issues $500,000 of 20-year, 7% bonds dated January 1 at 95. The journal entry to record the issuance will include

a credit to Bonds Payable for $500,000. Solution: Debit the Cash account for $475,000 Debit the Discount on Bonds Payable account for $25,000 Credit the Bonds Payable account for $500,000 Debit the Cash account for the amount of cash collected from issuing the bonds = Face value times 95% = $500,000 x 95% = $475,000 Credit the Bonds Payable account for the face value of the bonds, $500,000These bonds were issued for a discount (i.e., issue at 95 implies a 5% discount); debit the Discount on Bonds Payable account by the difference between the face value and the amount of cash collected from issuing the bonds, $25,000 = $500,000 - $475,000; alternatively: the discount (or premium) equals the face value time the difference between 100% and the issuance percentage (i.e., $500,000 x (100% - 95%) = $25,000

Handel Enterprises issued 2,000 bonds with a face value of $1,000 each at 102. The journal entry to record the issuance includes

a credit to Premiums on Bonds Payable for $40,000. Solution: The company issuing bonds is borrowing money and it is issuing bonds as evidence of the loan. The company that issues the bonds will debit Cash for the amount of cash received in exchange for issuing the bonds (i.e., 2,000 bonds x $1,000 face value per bond x 102% = $2,040,000). The issuing company will also credit Bonds Payable for the face value of the bonds issued (i.e., 2,000 bonds with a face value of $1,000 per bond equals $2,000,000). Note that the company issued $2,000,000 face value of bonds but it received more cash than this amount when it issued the bonds. The company issued these bonds at a premium, so the issuing company will need to credit the Premium on Bonds Payable account for the difference between the face value of the bonds issued and the cash collected from issuing them (i.e., Premium = $2,040,000 - $2,000,000 = $40,000). Increase the Premium on Bonds Payable account by crediting it. The issuer credits Premium on Bonds Payable by $40,000.

On October 1, Banner Company borrowed $50,000 from the City Bank for four months at 8%. Interest was properly accrued on December 31. The journal entry needed to record the payment of the note and interest on the due date includes

a debit to Interest Payable for $1,000. Solution: Interest is calculated by multiplying the loan's principal multiplied by the annual interest rate multiplied by the time period during which interest accrued. Remember—all interest rates are annual interest rates unless designated otherwise. This note generates 8% interest only if it is outstanding the entire year. On December 31, three months of interest was properly accrued; an adjusting entry was recorded for (i) Interest Expense and (ii) Interest Payable for accrued interest: $50,000 x 8% x 3/12 = $1,000. On the due date (i.e., one month after the start of the next year), an additional one month of interest expense would need to be recognized and paid: $50,000 x 8% x 1/12 = $333.Both the interest payable that was accrued on December 31 and the interest expense that accrued during the first month of the second calendar year need to be paid when the note is due. Likewise, the note's principal must also be paid. Here's a summary of the journal-entry for the date of payment: Debit: Notes Payable for $50,000 Debit: Interest Payable for $1,000 Debit: Interest Expense for $333 Credit: Cash for $51,333

The effective-interest method of amortization of bond premiums and discounts is considered superior to the straight-line method because it results in a(n)

constant rate of interest Solution: Two methods exist for amortizing discounts and premiums on bonds: (1) straight-line amortization and (2) effective interest amortization. GAAP require the effective interest method if it results in materially different interest expense than the straight-line method because the effective interest method adheres to the recognition principle. It computes interest as a constant percentage multiplied against the bond carrying value. Interest expense as a percentage of carrying value should not change over the life of the bond.

On January 1, Sewell Corporation issues $2,000,000, 5-year, 12% bonds at 96 with interest payable on January 1. The year-end adjusting entry to record accrued bond interest and the amortization of bond discount using the straight-line method will include a

credit to Discount on Bonds Payable, $16,000. Solution: [$2,000,000 x (1.00 − .96)] / 5 = $16,000

Dawson Company's cash register tape shows cash sales of $12,000 not including sales tax. The sales tax rate is 5% of sales. The journal entry to record the cash sales with sales tax includes a

credit to the Sales Tax Payable account for $600. Solution: Sales tax is computed by multiplying sales by the sales tax rate. The computation is as follows: $12,000 x 5% = $600.The journal-entry to record the sale, including sales taxes is as follows: Debit: Cash for $12,600 Credit: Sales for $12,000 Credit: Sales Taxes Payable for $600

Dawson Company's cash register tape shows cash sales of $12,000 not including sales tax. The sales tax rate is 5% of sales. The journal entry to record the cash sales with sales tax includes a

credit to the Sales Tax Payable account for $600. Solution: Sales tax is computed by multiplying sales by the sales tax rate. The computation is as follows: $12,000 x 5% = $600.The journal-entry to record the sale, including sales taxes is as follows: Debit: Cash for $12,600 Credit: Sales for $12,000 Credit: Sales Taxes Payable for $600

On January 1, Slick Corp. issues $100,000 of 5-year, 8% bonds at face value. Which one of the following is one effect of the entry to record the issuance of the bonds?

debit to Cash for 100,000 Solution: The journal entry for the issuance of bonds issued at face value includes a debit to cash for the proceeds collected (i.e., $200,000) and a credit to obligation associated with the bonds (i.e., Bonds Payable for $200,000). Since the bonds were issued at face value, neither a premium nor a discount would be recorded. No interest is recognized or due on the bonds at the issue date.

The year-end balance of the Discount on Bonds Payable is

deducted from Bonds Payable on the balance sheet. Solution: Bonds may be issued either (i) at their face value, (ii) at a discount, or (iii) at a premium. When bonds are issued at a discount, they have been issued (i.e., sold) for less than their face value. This occurs because the bond's stated interest rate is lower than the market interest rate. The carrying value of bonds issued at a discounting equals the bond's face value minus the discount.

In order for a liability to be classified as a current liability, it must be a debt that the company

expects to pay from existing current assets or through the creation of other current liabilities. Solution: Liabilities are classified as current if they are expected to be paid (1) from existing current assets or through the creation of other current liabilities, and (2) within one year or the operating cycle, whichever is longer.

The statement "Bond prices vary inversely with changes in the market rate of interest" means that if the

market rate of interest decreases, then bond prices will go up. Solution: The statement "Bond prices vary inversely with changes in the market rate of interest" means that if the market rate of interest decreases, then bond prices will go up. Recall that if a bond's stated interest rate is higher than the market rate of interest then the bond is issued (i.e., sold) for a premium. So, if the market rate of interest were lowered further then the price of the bond would further increase.

What term is used for bonds that have specific assets pledged as collateral?

secured bonds Solution: There are several different types of bonds, and each type has different features or characteristics. Secured bonds are those that have specific assets of the issuer pledged as collateral. Callable bonds can be retired or paid off at the discretion of the issuer at a specified price prior to the maturity date. Convertible bonds can be converted into common stock at the discretion of the bondholder. Discount bonds is not a term that is generally used when describing bonds.