accounting test 4

In 2012, Park Company issued $200,000 of bonds for $189,640. If the face rate of interest was 8% and the effective rate of interest was 6.73%, how would Park calculate the interest expense for the first year on the bonds using the effective interest method?

$189,640 x 6.73%

Premium on Bonds Payable is a balance sheet item for Generic Products Company. How would it most likely be classified on the balance sheet?

An increase to a long-term liability

Micro Company wishes to issue $400,000 of 5-year, 6% bonds, with interest paid annually at the end of the year. The market rate of interest is currently 5%. What information is needed in order to determine the selling price?

The face amount of the bonds, the stated rate of interest, the market rate of interest, and the bond life.

When will bonds sell at a discount?

The face rate of interest is less than the market rate of interest at the time of issue.

The Discount on Bonds Payable account is shown on the balance sheet as

a contra long-term liability.

A decreasing long-term liability account is presented on the statement of cash flows as

a decrease in cash in the Financing Activities category

If a company borrows money from its bank and the bank deducts the interest in advance, the company would record the amount of the interest deduction as

a discount

The Premium on Bonds Payable account is shown on the balance sheet as

an addition to a long-term liability.

Interest payable on a loan becomes a liability:

as it accures

Bonds are a popular source of financing because

bond interest expense is deductible for tax purposes, while dividends paid on stock are not.

The current portion of long-term debt is a balance sheet item for Generic Products Company. How would it most likely be classified on the balance sheet?

current liability

The payment of accounts payable results in a(n)

decrease in liabilities and a decrease in assets.

Amortization of bond discount results in a(n)

decrease of stockholders' equity.

If a company wishes to accumulate $500,000 in 20 years at 5% by making equal yearly deposits into an account, calculation of the deposits is an application of the`

future value of annuity

An example of a current liability that must be accrued is

income tax payable

Assume the current ratio is 2 to 1. Payment on accrued salaries payable would cause the current ratio to

increase

Assume the current ratio is 3 to 4. Purchases of inventory on account would cause the current ratio to

increase

If bonds were initially issued at a discount, the interest expense on the bonds calculated using the effective interest method will

increase as the bonds approach their maturity date

Bonds are sold at a premium if the

market rate of interest was less than the face rate at the time of issue.

Almost all current liabilities affect the operating category of the statement of cash flows, but one that does not affect cash provided by operating activities is

notes payable

The bond issue price is determined by calculating the

present value of the stream of interest payments and the present value of the maturity amount.

A gain on bond redemption

should be treated as part of operating income.

A convertible bond is one where

the holder can convert the bond into common stock at a future time.

If a company's bonds are callable,

the issuing company is likely to retire the bonds before maturity if the bonds are paying 9% interest while the market rate of interest is 6%.

Convertible bonds are attractive to investors because

they can be converted into stock at the issuer's option.

With the effective interest method of amortization, the amortization of bond discount results in a(n)

increase in interest expense.

To determine whether a lottery winner would prefer to receive the money in a single lump sum immediately or receive an equal amount over a period of years, you would use which type of time value of money calculation?

present value of annuity

Discount on Bonds Payable is a balance sheet item for Generic Products Company. How would it most likely be classified on the balance sheet?

Contra-liability

With the effective interest method of amortization, the amortization of bond premium results in a(n)

decrease in interest expense.

Assume the current ratio is 3 to 1. Estimating the warranties expense on the period's sales would cause the current ratio to

decrease

If bonds were initially issued at a premium, the carrying value of the bonds on the issuer's books will

decrease as the bonds approach their maturity date

Amortization of bond premium results in a(n)

decrease of the carrying value of bonds.

The result of using the effective interest method of amortization of discount on bonds is that the

effective interest rate for each amortization period is constant.

When bonds are sold for less than the face amount, this means that the

face rate of interest is less than the market rate of interest.

When bonds are issued by a company, the effect of the transaction on the accounting equation is to:

increase assets and increase liabilities.

Under the effective interest method, the cash paid on each interest payment date will

remain constant regardless of the issuance price.