ACG2021 Ch 10 Graded Quiz
On November 1, 2017, a company issued a note payable of $100,000, of which $10,000 will be repaid each year. What is the proper classification of this note on the December 31, 2018 balance sheet?
$10,000 current liability; $80,000 long-term liability Solution: each year, there is a current maturity of $10,000; the remaining outstanding debt is long-term debt. Since $10,000 of the principal has been paid by the date in question, there is $90,000 that remains unpaid. This total is split as follows: $10000 is a current liability and $80,000 is a long-term debt
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. Which of the following amounts should be shown in cell (i)
$10,000 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 - premium amortization = $10,000 - $1000 = $9,000 (iii) premium amortization = premium/amortization period = $10,000/10 yrs = $1,000 per year (iv) unamortized premium = $10,000 - 1000 = $9000
On January 1, Anthony Corp. issued $1,000,000, 14%, 5yr bonds. The bonds sold for $1,072,096. This price resulted in an effective interest rate of 12% on the bonds. Interest is payable annually January 1. Use the effective interest method to determine the amount of interest expense for the first year.
$128,652 Solution: Using the effective-interest method the bond interest expense = effective interest rate X bonds carrying value. The cash paid is the contractual or stated interest rate X the face amount of the bonds. Bond interest expense for the 1st interest date = $1,072,096 X 12% = $128,652
On January 1, Blick Corp. issues $250,000 of 10-year, 8% bonds at 96. Assume interest is paid annually each January 1. What is the total cost of borrowing associated with this bond?
$210,000 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 ( 250000 x 8% = $20,000). These 10 yr bonds pay $20,000 in each of the 5 yrs (i.e. $20,000 x 10 years = $200,000). These bonds were issued at 96 meaning they were issued for 96% of their face value. So, the discount is $10,000 ($250,000 x (100%-96%) = $10,000). The discount increases the total cost of borrowing. Over the course of 5 yrs, these bonds have a total cost of $210,000 (i.e. $200,000 + $10,000 = $210,000) the issuer will incur $210,000 of interest expense
Hogan Company has bonds with a principal value of $500,000 outstanding. The unamortized premium on the bonds is $12000. The company redeemed the bonds at 103. What is the company's gain or loss on the redemption?
$3000 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 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 + unamortized premium = $500,000 + $12,000 = $512,000 The company can redeem this bond at 103 which means it can redeem this bond by paying the bond holder 103% of the bond's principal value. Cash paid to redeem the bonds = $500,000 x 1.03 = $515,000 Determine 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 is more than their carrying value The cash paid to redeem the bond 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 $515,000 - $512,000 = $3000
On January 1, pierce corporation issues $500,000, 5-yr, 12% bonds at 96 with interest payable on January 1. What is the carrying value of bonds at the end of the 3rd interest period if amortization is $4000 per year using the straight-line amortization method?
$492,000 Solution: after 3 interest periods, the carrying value of the bonds will have increased by 3 times the annual discount amortization of $4000, or a total of $12,000 (4000 X 3). The original carrying value of $480,000 (500,000 X (100%-96%) = $20,000 (500,000-20,000 = 480,000). plus the 3 yrs of discount amortization amounts to $492,000 as the carrying value at the end of the 3rd interest period ($480,000 + $12,000).
Andre Company doesn't segregate sales and sales taxes when it charges customers at the register. It's 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?
$5400 and $324 Solution: The amount of sales can be computed by dividing total cash received by one plus the sales tax rate. $5274/(1+0.6) = $5400 The sales tax payable is the difference between what was charged to the customer and the amount recorded as sales revenue: $5724-$5400=$324
Bonds with a face value of $600,000 and a quoted price of 103 1/2 have a selling price of
$621,000 Solution: proceeds from the sale of bonds with a face value of $600,000 at 103 1/2 equals 600,000 x 1.0350 or $621,000 Equivalently, 600,000 x 103.50% = $621,000
A corporation issues $100,000, 8%. 10-yr bonds on January 1 for $106,000. 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
$7400 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. Interest paid in cash = face value x contractual interest rate = $100,000 x 8% = $8000 per year Straight-line amortization per year = (106,000 - 100,000)/10 = $600 per year These bonds were issued at a premium: interest expense = $8000 - $600 = $7,400
Sensible Insurance company collected a premium of $18000 for a 1-year insurance policy on June 1. What amount should Sensible report as a current liability for Unearned Insurance Premiums at December 31?
$7500 Solution: the portion of the premiums not yet earned should be recognized as a liability by Sensible. Since there are 5 months remaining on the insurance policy, the remaining liability is 5/12 of $18000 or $7500 | $18000 x 5/12 = $7500
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 yrs. 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 $1,200,00 less $1,000,000 divided by 10 yrs which is $20,000. The annual interest expense will be $100,000 - $20,000 debit of $80,000
Green Tree Inc. sells 10%, 10 yr bonds with a face value of $100,000 for $102,000. Using the effective-interest amortization method, how much is the interest expense for the 1st year if the effective interest rate is 9.47%?
$9659 Solution: using the effective-interest method, the bond interest expense = the effective interest rate X the bond's carying value 9.47% X $102,000 = $9659.40
Black Tires Inc. issues a $1,000,000, 11%, 20 yr mortgage note. The terms provide for semiannual installment payments of $62,320. What is the remaining unpaid principal balance of the mortgage payable account after the second semiannual payment?
$985,360 Solution: The 1st semiannual interest would be (11% / 2) 5.5% X $1,000,000 (the outstanding mortgage principal as of the beginning of the semiannual period (5.5% X $1,000,000 = $55,000). The mortgage principal is reduced by the difference between the $62,320 payment and the interest componenet ($55,000), resulting in a principal reduciton of $7320 (62,320 - 55,000 = 7320). Thus, the 1st semiannual mortgage payment reduces the outstanding mortgage principal balance by $7320 from $1,000,000 to $992,680. The second semiannual payment's interest is 5.5% of the outstaindng mortgage principal of $992,680, or $54,597. The 2nd semiannual payment of $62,320 is allocated as $54,597 paid towards interst and the reaming $7,723 allocated towards the payment of outstanding mortgage principal. Thus, the outstanding mortgage principal after the 2nd semiannual payment is ($992,680 - $7723) $984,957.
Among Pima Company's records, it has the following selected accounts after posting adjusting entries: Accounts payable - $14,000 6-month, 8% note payable - $44,000 Income tax payable - $5,000 Salaries and wages expense - $23,000 3-yr, 10% note payable - $200,000 Salaries and wages payable - $8,000 Mortgage payable ($20,000 due next year) - $1,000,000 Rent payable - $6,000 Current assets are $256,000 at year-end. How much is Pima's current ratio at year-end?
2.64 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, income tax payable, salaries and wages payable, the portion of mortgage payable due next year, and rent payable. Current liabilities = 14,000 + 44,000 + 5,000 + 8,000 + 20,000 + 6,000 = $97,000 Current ratio=current assets/current liabilities= $256,000/$97,000 = 2.64
In a recent year, Sherwood Day Corporation had sales of $500,000, net income of $200,000, interest expense of $40,000 and tax expense of $30,000. What was Day corporation's times interest earned for the year?
6.75 Solution: times interest earned is computed by dividing income before interest and taxes by interest expense Times interest earned = ($200,000 + $40,000 + $30,000)/$40,000 = 6.75
Handel Enterprises issued 1,500 bonds with a face value of $1000 each at 99. The journal entry to record the issuance includes
A credit to bonds payable for $1,500,000 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. 1,500 bonds x $1000 face value per bond x 99% = $1,485,000) The issuing company will also credit Bonds Payable for the face value of the bonds issued (i.e. 1,500 bonds with a face value of $1000 per bond equals $1,500,000). Note that the company issued $1,500,000 face value of bonds but it received less cash than this amount when it issued the bonds. The company issued these bonds at a discount, so the issuing company will need to debit the Discount on bonds Payable account for the difference between the face value of the bonds issued and the cash collected from issuing them (Discount = $1,500,000 - $1,485,000 = $15,000). Increase the Discount on Bonds Payable by debiting it. The issuer debits Discounts on Bonds Payable by $15,000 when issuing these bonds
Tanner issued a 9%, 5-year, $100,000 bond when the market rate of interest was 7%. The bond sells at
A premium Solution: since the contractual interest rate is more than the market interest rate; the bond will sell at a premium. bonds will set at face value, aka par, when the market and contractual interest rates are the same. When the contractual interest rate is less than the market interest rate, the bond will set at a discount
The Laramie company operates a consulting practice. New clients are required to pay the firm in 2 transactions. First, clients must pay $200 before receiving consulting services. Second, clients must pay $1800 once the consulting firm finishes providing services to the client. How does the Laramie Company account for the 2nd transaction?
Debit the Cash account for $1800, debit the unearned revenue account for $200, and credit the Service Revenue account for $2000 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 $1800, debit unearned revenue for $200 Credit service revenue for $2000
Jay John Inc. recently paid a $40,000 installment on its 20yr mortgage. Out of the $40,000 total payment, $12,000 went towards reducing the principal, and the balance went towards interest. The journal entry to record this payment includes a
Debit to interest expense for $28,000 Solution: when an installment payment is made on a mortgage note, the interest is a debit to interest expense and the reduction in princiapl is a debit to Mortgage payable. Out of the $40,000 total payment, $12000 reduces the mortgage payable for principal paid and the balance of $40,000 (i.e. $28000) was for interest expense. Credit cash for the $40,000 total payment
The following totals for the month of June were taken from the payroll records of Seminole Company: Salaries - $100,000 FICA taxes withheld - $6,650 Income taxes withheld - $18,000 Medical insurance deductions - $5,500 Federal unemployment taxes - $550 State unemployment taxes - $3,100 The entry to record accrual of employer's payroll taxes would include a
Debit to payroll tax expense for $10,300 Solution: When recording payroll for employee's salaries and wages, the company records the employee's FICA taxes pa table, the employee's federal income taxes Pablo, the employee's state income taxes payable, and any other employee payroll deduction in addition to the amount owed to the employee for the employee's salaries and wages after reductions for the payroll withholdings mentioned above. However, this question asks for the employer's payroll taxes. The employer's payroll tax deduction includes the employer's portion of FICA taxes payable, federal unemployment taxes payable, and state unemployment taxes payable The employer's payroll taxes = FICA taxes + Federal unemployment taxes + State unemployment taxes The employer's payroll taxes = 6650 + 550 + 3100 = $10,300
Which of the following is 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, which is shorter III. It is a debt that has been owed for less than one year
I Solution: liabilites 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
What term is used for bonds that have specific assets pledged as collateral?
Secured bonds Solution: there are several types of bonds, and each type has different features. 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 bond holder. Discount bonds is not a term that is generally used when describing bonds.
What is the effect of amortizing a bond discount?
It increases the carrying value of the bonds Solution: for bonds issued at a discount, carrying value i the bond payable (in the amount of the principal) minus the discount on the bond payable. The amortization of a bond discount reduces the discount so amortization of a discount increases the carrying value of the bond.
Bonds payable with a face value of $200,000 and a carrying value of $197,000 are redeemed prior to maturity at 99. Which of the following will result?
Loss on redemption of $1000 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. The company had to pay $198,000 (200000 x 99%) for bonds with a carrying value of $197,000. The difference between the $198,000 and $197,000 is a loss on redemption for $1000.
Russ Company borrowed $70,000 on March 1 by issuing an 18-month, 12% note. Both the note and the interest will be paid when the note matures. Which statement is true at December 31?
The company has $7000 of interest payable that is a current 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 as of December 31 and the note payable are expected to be paid within one year, they both will be considered current liabilities. Interest payable = $70,000 x 12% x 10/12 = $7000
