5102 chap 13 & 14 quiz

On January 1, 2020, Ann Price loaned $187,825 to Joe Kiger. A zero-interest-bearing note (face amount, $250,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2022. The prevailing rate of interest for a loan of this type is 10%. The present value of $250,000 at 10% for three years is $187,825. What amount of interest income should Ms. Price recognize in 2020? a. $18,783. b. $25,000. c. $75,000. d. $56,350.

a. $18,783.

On January 1, 2020, Ellison Co. issued eight-year bonds with a face value of $6,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 8 periods at 6%........................................... .627 Present value of 1 for 8 periods at 8%........................................... .540 Present value of 1 for 16 periods at 3%......................................... .623 Present value of 1 for 16 periods at 4%......................................... .534 Present value of annuity for 8 periods at 6%................................. 6.210 Present value of annuity for 8 periods at 8%................................. 5.747 Present value of annuity for 16 periods at 3%............................... 12.561 Present value of annuity for 16 periods at 4%............................... 11.652 The present value of the principle is: a. $3,204,000. b. $3,240,000. c. $3,738,000. d. $3,762,000.

a. $3,204,000.

In the recent year Hill Corporation had net income of $210,000, interest expense of $50,000, and tax expense of $90,000. What was Hill Corporation's times interest earned for the year? a. 7.0 b. 6.0 c. 5.2 d. 4.2

a. 7.0

Which of the following does not allow a company to exclude a short-term obligation from current liabilities? a. Management indicated that they are going to refinance the obligation. b. Actually refinance the obligation. c. The liability is contractually due more than one year after the balance sheet date. d. Have a contractual right to defer settlement of the liability for at least one year after the balance sheet date.

a. Management indicated that they are going to refinance the obligation.

Which of the following is an example of a contingent liability? a. Obligations related to product warranties. b. Possible receipt from a litigation settlement. c. Pending court case with a probable favorable outcome. d. Tax loss carryforwards.

a. Obligations related to product warranties.

An example of an item which is not a liability is: a. dividends payable in stock. b. advances from customers on contracts. c. accrued estimated warranty costs. d. the portion of long-term debt due within one year.

a. dividends payable in stock.

A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2021. Historically, 10% of customers mail in the rebate form. During 2021, 3,750,000 packages of light bulbs are sold, and 200,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2021 financial statements dated December 31? a. $375,000; $375,000 b. $375,000; $175,000 c. $175,000; $175,000 d. $200,000; $175,000

b. $375,000; $175,000

Overton Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2020. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Overton recall all cans of this paint sold in the last six months. The management of Overton estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation? a. Appropriation of retained earnings of $800,000 b. Operating expense of $800,000 and liability of $800,000 c. Note disclosure only d. No recognition

b. Operating expense of $800,000 and liability of $800,000

Why is the liability section of the balance sheet of primary importance to bankers? a. To evaluate the entity's credit quality. b. To assist in understanding the entity's liquidity. c. To better understand sources of repayment. d. To evaluate operating efficiency.

b. To assist in understanding the entity's liquidity.

The face value of bonds is also called each of the following except: a. maturity value. b. stated value. c. par value. d. principal.

b. stated value.

Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from the date of issue. If the bonds were issued at a premium, this indicates that: a. the effective yield or market rate of interest exceeded the stated (nominal) rate. b. the nominal rate of interest exceeded the market rate. c. the market and nominal rates coincided. d. no necessary relationship exists between the two rates.

b. the nominal rate of interest exceeded the market rate.

Presented below is information available for Marley Company. Current Assets Cash: 4,000 Short-term investments: 55,000 Accounts receivable: 61,000 Inventory: 110,000 Prepaid expenses: 30,000 Total current assets: 260,000 Total current liabilities are $100,000. The acid-test ratio for Marley is: a. 2.60 to 1 b. 2.30 to 1 c. 1.20 to 1 d. 0.59 to 1

c. 1.20 to 1

In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, a. a loss should be recognized by the debtor. b. a gain should be recognized by the debtor. c. a new effective-interest rate must be computed. d. no interest expense or revenue should be recognized in the future.

c. a new effective-interest rate must be computed.

When a company enters into what is referred to as off-balance-sheet financing, the company: a. is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet. b. wishes to confine all information related to the debt to the income statement and the statement of cash flow. c. can enhance the quality of the balance sheet and permits credit to be obtained more readily and at less cost. d. is in violation of generally accepted accounting principles.

c. can enhance the quality of the balance sheet and permits credit to be obtained more readily and at less cost.

If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a: a. debit to Interest Payable. b. credit to Interest Receivable. c. credit to Interest Expense. d. credit to Unearned Interest.

c. credit to Interest Expense.

Bond interest paid is equal to the: a. carrying value of the bonds multiplied by the effective-interest rate. b. carrying value of the bonds multiplied by the stated interest rate. c. face amount of the bonds multiplied by the stated interest rate. d. face amount of the bonds multiplied by the effective-interest rate.

c. face amount of the bonds multiplied by the stated interest rate.

The times interest earned is computed by dividing: a. net income by interest expense. b. income before taxes by interest expense. c. income before income taxes and interest expense by interest expense. d. net income and interest expense by interest expense.

c. income before income taxes and interest expense by interest expense.

Of the following items, the only one which should not be classified as a current liability is: a. current maturities of long-term debt. b. sales taxes payable. c. short-term obligations expected to be refinanced on a long-term basis. d. unearned revenues.

c. short-term obligations expected to be refinanced on a long-term basis.

Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty: a. should be reported as long-term. b. should be reported as current. c. should be reported as part current and part long-term. d. need not be disclosed.

c. should be reported as part current and part long-term.

The debt to assets ratio is computed by dividing: a. current liabilities by total assets. b. long-term liabilities by total assets. c. total liabilities by total assets. d. total assets by total liabilities.

c. total liabilities by total assets.

The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2021, contained the following accounts. 5-year Bonds Payable 8% $3,000,000 Interest Payable 50,000 Premium on Bonds Payable 100,000 Notes Payable (3 months.) 40,000 Notes Payable (5 yr.) 165,000 Mortgage Payable ($15,000 due currently) 200,000 Salaries and Wages Payable 18,000 Income Taxes Payable (due 3/15 of 2022) 25,000 The total long-term liabilities reported on the balance sheet are : a. $3,365,000. b. $3,350,000. c. $3,465,000. d. $3,450,000.

d. $3,450,000.

A troubled debt restructuring will generally result in a: a. loss by the debtor and a gain by the creditor. b. loss by both the debtor and the creditor. c. gain by both the debtor and the creditor. d. gain by the debtor and a loss by the creditor.

d. gain by the debtor and a loss by the creditor.

Each of the following are included in both the current ratio and the acid-test ratio except: a. cash. b. short-term investments. c. net receivables. d. inventory.

d. inventory.

The currently maturing portion of long-term debt should be classified as a current liability if: a. the debt is to be converted into common stock. b. the debt is to be refinanced on a long-term basis. c. funds used to liquidate it are currently classified as a long-term asset. d. the portion so classified will be liquidated within one year using current assets.

d. the portion so classified will be liquidated within one year using current assets.