Chapter 7 Exercise

Borrowing money by issuing a bond increases ______.

cash bonds payable

Current assets include ______.

cash inventory supplies accounts receivable

When a company makes a cash payment for interest on a bond that was issued at face value, ______ decreases

cash retained earnings cash flow from operating activities

Balance sheets that distinguish between current and noncurrent items are called ______ balance sheets.

classified

A potential obligation arising from a past event is called a(n) liability.

contingent

Warranties normally ______.

cover a specific time period are based on estimates guarantee repair or replacement

Remitting sales tax (paying cash to the tax authorities),

does not affect the income statement affects the statement of cash flows

Remitting sales tax (paying cash to the tax authorities), ______.

does not affect the income statementaffects the statement of cash flows

Loans that require payments of principal and interest at regular intervals are called ______.

installment notes

A line of credit ______.

is normally renewable on a one year term normally has fluctuating interest rates

When a company increases the amount borrowed on a line of credit, net income ______ and net cash flow from ______ activities increases.

is not affected, financing

The maker of a promissory note is sometimes called the ________

issuer

In a note containing the terms of a lending transaction, the party borrowing the money may be called the

issuer maker

A company experienced an event that caused assets, liabilities and cash flow from financing activities to increase, but had no affect on net income. This could be due to ______. Multiple choice question.

issuing a bond with a 20 year term

Loans that provide flexible borrowing and repayment options are called ______. Multiple choice question.

lines of credit

A business has a debt that is due in May, Year 2. At December 31, Year 1 the company does not plan to use any of its current assets to repay this debt. This debt should be classified as ______ on the December 31, Year 1 balance sheet.

long-term

Bond obligations normally have ______ terms when compared to notes issued to bank.

longer

Bond interest rates are generally ______ than interest rates charged by bank.

lower

When a company recognizes a cash revenue event that is subject to state sales tax, the balance in the Cash account increases by ______ the amount of revenue.

more than the amount of revenue-the amount of the revenue earned plus the amount of the tax due to the state

If the likelihood of a future obligation arising is remote, ______. Multiple choice question.

no liability is shown in the financial statements or related notes

A payment on an installment loan will be shown in the ______ activities sections of the statement of cash flows.

operating financing

A company experienced an event that caused total assets and liabilities to decrease and a cash outflow to appear on the statement of cash flows. This event could have been

paying off an accrued interest payable paying off the principal balance of a loan

When a company makes a cash payment for interest on a bond that was issued at face value, ______ decreases.

retained earnings cash flow from operating activities cash

Simms Accountants charged a client $2,000 cash plus tax for services provided in a state where the service sales tax rate is 6%. As a result of this event, the

sales tax liability account increases by $120 cash account increases by $2,120

In practice, bonds normally pay interest ______.

semiannually

Issuing a note to borrow money affects the

statement of cash flows balance sheet

Paying a warranty claim affects the ______.

statement of cash flows balance sheet

Paying off a sales tax liability affects the

statement of cash flows balance sheet

General uncertainties include potential ______.

storm damage decline in earnings due to competition

Semiannual interest means that interest is paid ______. Multiple choice question.

two times per year

What type of interest rate fluctuates up or down during the loan period?

variable

Borrowing funds through a line of credit is a(n) ______ transaction. Multiple choice question.

asset source

Issuing a bond to borrow money is a(n) ______ transaction.

asset source

Repaying funds through a line of credit is a(n) ______ transaction.

asset use

Repaying the face value of a bond liability that was issued at face value is a(n) ______ transaction.

asset use

A payment on an installment loan ______.

affects the income statement. affects the balance sheet.

A payment on an installment loan ______

affects the income statement.affects the balance sheet.

On January 1, Year 1, Zoe Company issued a $200,000, 9%, 5 year term installment loan. The loan required a $51,419 annual cash payment on December 31 of each year. Based on this information, the principal balance of the loan on January 1, Year 2 was ______. Multiple choice question.

$166,581 Reason: $51,419 annual payment - $18,000 interest expense for Year 1 ($200,000 ×.09) = $33,419 principal payment. $200,000 - $33,419 = $166,581.

James Company borrowed $40,000 on a one-year notes payable at 8%. Interest and principal are to be repaid at the end of the note term. If the note was issued on October 1 of Year 1, the amount of accrued interest on the December 31, Year 1 financial statements is

$800

Current liabilities include ______.

10 years bonds due in 5 months wages payable accounts payable

Warranty obligations ______.

are reported in financial statementshave uncertain timing and amounts

Which of the following statements regarding contingent liabilities is true? (Select all that apply.)

A contingent liability is a potential obligation arising from a past event. For reporting purposes, contingent liabilities are sorted into three categories depending on the likelihood of their becoming actual liabilities. The amount or existence of a contingent liability depends on some future event.

The seller of a bond is called the _______, while the buyer of a bond is called the _________

Blank 1: borrower or issuer Blank 2: lender, bondholder, or bond holder

A potential obligation arising from a past event is called a(n) _________liability.

Blank 1: contingent

The cash outflow for repaying the face value of a bond liability is reported in the)_______ activities section of the statement of cash flows.

Blank 1: financing

The average time it takes a business to convert cash to inventory, inventory to accounts receivable, and accounts receivable back to cash is commonly called the cycle.(

Blank 1: operating

The cash outflow for interest payments on bonds is reported in the __________activities section of the statement of cash flows

Blank 1: operating

True or false: A company sold merchandise under warranty in Year 1. The merchandise was returned for a warranty repair in Year 2. The company recognized warranty expense for this item in both years.

False

True or false: Classified balance sheets report current assets only.

False

Which of the following statements are true?

The amount due at bond maturity is called the face value of the bond. A bond certificate describes the company's obligation to repay the principal. Cash interest payments are based on the stated interest rate.

What distinguishes contingent liabilities from general uncertainties?

Whether the event stems from a past event

If the likelihood of a future obligation arising is probable (likely) and its amount can be reasonably estimated

a liability must be recognized in the financial statements

Recognizing a warranty expense affects the

balance sheet income statement

Paying off a sales tax liability affects the ______.

balance sheet statement of cash flows

Paying off the principal balance of a note payable affects the

balance sheet statement of cash flows

Paying a warranty claim affects the ______.

balance sheet, socf

Paying a warranty claim affects the ______.

balance sheet, statement of cash flows

Recognizing accrued interest expense affects the

balance sheetincome statement

A company recorded an event that caused assets, liabilities and cash flow from financing activities to increase, but had no affect on net income. This event could have been due to

borrowing money with a two year term to maturity

When a bond is issued at face value, the cash interest payment ______ interest expense.

equals

When a company sells merchandise with a warranty, ______.

financial statement users must be informed of the obligation

A payment on an installment loan will be shown in the ______ activities sections of the statement of cash flows

financing operating

What type of interest rate remains constant during the term of the loan?

fixed

Payments on installment loans ______.

include a payment for interest include a repayment of a portion of the principal balance

Recognizing a warranty expense affects the ______.

income statement, balance sheet