Ch 10 Quiz

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On April 1, year 1, Cricket Corporation issues $60 million of 12%, 10-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1. The adjustment necessary at December 31, Year 1 (if any), related to this bond issue involves:

$90,900. $90,000 + ($90,000 × 12% × 1 ÷ 12) = $90,900

On April 1, year 1, Cricket Corporation issues $60 million of 12%, 10-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1. The amount of cash paid to bondholders for interest during Year 1, is:

3,600,000 $60,000,000 × 0.06 = $3,600,000

On September 1, 2018, Able Company purchased a building from Regal Corporation by paying $200,000 cash and issuing a one-year note payable for the balance of the purchase price. Interest on the note is stated at an annual rate of 9% and is paid at maturity. In its December 31, 2018, balance sheet, Able correctly presented the note and interest payable as follows: Interest payable$18,000Notes payable, 9%, due September 1, 2019$600,000​What is the amount of the interest expense Able will recognize on this note in 2019?

36,000 $600,000 × 0.09 × (8 ÷ 12) = $36,000

On September 1, 2018, Select Company borrowed $600,000 from a bank and signed a 12%, six-month note payable, with interest on the note due at maturity. The total amount of the current liability (including interest payable) for this loan that appears in Select Company's balance sheet at December 31, 2018, is:

624,000

On September 1, 2018, Able Company purchased a building from Regal Corporation by paying $200,000 cash and issuing a one-year note payable for the balance of the purchase price. Interest on the note is stated at an annual rate of 9% and is paid at maturity. In its December 31, 2018, balance sheet, Able correctly presented the note and interest payable as follows: Interest payable$18,000Notes payable, 9%, due September 1, 2019$600,000​How much must Able pay Regal Corporation on September 1, 2019, when the note matures?

654,000 $600,000 + ($600,000 × 0.09) = $654,000

On November 1, Year 1, Noble Co. borrowed $80,000 from South Bank and signed a 12%, six-month note payable, all due at maturity. The interest on this loan is stated separately. At December 31, Year 1, Noble Co.'s overall liability for this loan amounts to:

81,600 $80,000 + ($80,000 × 12% × 2 ÷ 12) = $81,600

Which of the following is an example of a contingent liability?

A lawsuit pending against a restaurant chain for improper storage of perishable food items.

Ultimate Company is a defendant in a lawsuit alleging damages of $3 billion. The litigation is expected to continue for several years, and no reasonable estimate can be made at this time of Ultimate Company's ultimate financial responsibility. This situation is an example of:

A loss contingency that should be disclosed in notes to Ultimate Company's financial statements.

Assets that have been pledged as security for a loan:

Are disclosed in the notes to the financial statements.

Interest payable on a loan becomes a liability:

As it accrues

On April 1, year 1, Cricket Corporation issues $60 million of 12%, 10-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1. With respect to this bond issue, Cricket Corporation's balance sheet at December 31, Year 1, will include:

Bonds payable of $60 million, as well as interest payable of $1,800,000.

On November 1, Metro Corporation borrowed $55,000 from a bank and signed a 12%, 90-day note payable in the amount of $55,000. The November 30 adjusting entry will be (assume 360 days in year):

Debit Interest Expense $550 and credit Interest Payable $550.

The two basic characteristics of estimated liabilities are:

Known to exist and amount unable to be determined until a later date.

On September 1, 2018, Select Company borrowed $600,000 from a bank and signed a 12%, six-month note payable, with interest on the note due at maturity. Assume Select made no adjusting entry with respect to this note before preparing the financial statements at December 31, 2018. What is the effect of this error on the financial statements for 2018?

Net income is overstated.

On April 1, year 1, Cricket Corporation issues $60 million of 12%, 10-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1. The adjustment necessary at December 31, Year 1 (if any), related to this bond issue involves:

Recognition of interest expense of $1,800,000.

Which of the following is not a characteristic of an estimated liability?

The liability should not be recorded in the accounting records until future events have determined the exact amount.

If a business ceases operations and liquidates, which of the following will be paid last?

owners


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