Final Review

A discount on bonds payable is best described as: a) An element of future interest expense b) A bonus paid by the bondholders to the issuing corporation because of the unusually high interest rate stated in the bonds c) The present value of the future interest payments of bond interest and principal d) An amount below par that the bondholders may be called upon to make good

a) An element of future interest expense

Which of the following payroll taxes do not stop once an employee reaches a certain level of income: a) Medicare taxes b) Social security taxes c) unemployment taxes d) Medicare, social security and unemployment taxes

a) Medicare taxes

A $1,000 bond that sells for 104 has a selling price of: a) $1,004 b) $1,040 c) $1,400 d) $1,000

b) $1,040 1000 x 1.04 = 1,040

On November 1 of the current year, Garcia Company borrowed $50,000 by issuing a 9%, six-month note payable, all due at maturity date. Interest expense on this not to be recognized during the current year amounts to: a) $500 b) $750 c) $1,500 d) $4,500

b) $750 $50,000 x .09 x (2/12) = $750

The basic measure of the amount of leverage being applied within the capital structure of an organization is the: a) Interest coverage ratio b) Debt ratio c) Return on assets d) Return on equity

b) Debt ratio

Choose the statement that correctly summarizes the tax advantage of raising money by issuing bonds instead of common stock: a) The amount paid by the corporation to redeem bonds at maturity date is deductible in computing income subject to corporate income tax b) Interest payments are deductible in determining income subject to corporate income tax; dividends are not deductible c) A corporation must pay tax on the sales price of stock issued, but is not taxed on the amount received when bonds are issued d) Both interest and dividends paid are deductible in computing taxable income, but since interest must be paid annually, the corporation usually gets a larger tax deduction over the life of the bonds payable

b) Interest payments are deductible in determining income subject to corporate income tax; dividends are not deductible

Sinking funds usually appear on the balance sheet as: a) current assets b) long-term investments c) current liabilities d) appropriation of retained earnings

b) long-term investments

A measure of a company's liquidity is: a) total assets divided by total equity b) the current ratio c) the dollar amount of liabilities that bear interest d) the dollar amount of assets used as collateral for a loan

b) the current ratio

When a company sell bonds between interest dates they will pay which of the following at the first interest payment date? a) An amount less than the stated interest rate times the principal b) An amount more than the stated interest rate times the principal c) An amount equal to the stated interest rate times the principal d) The company may skip the first interest payment date since the appropriate time has not passed

c) An amount equal to the stated interest rate times the principal

The Social Security tax paid by an employer is: a) Greater than the amount paid by the employee b) Less than the amount paid by the employee c) Equal to the amount paid by the employee d) The employer does not pay Social Security tax, only the employee pays the tax

c) Equal to the amount paid by the employee

Which of the following payroll costs are shared equally by the employer and the employee? a) State unemployment taxes b) Workers' compensation c) Social security d) Federal unemployment taxes

c) Social security

Which of the following is not a characteristic of an estimated liability? a) The liability is known to exist b) The precise dollar amount cannot be determined until a later date c) The liability should not be recorded in the accounting records until future events have determined the exact amount d) The liability stems from past transactions

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

Bonds, with the same face value, issued at a premium will: a) have a greater maturity value than a bond issued at a discount b) have a lesser maturity value than a bond issued at a discount c) have the same maturity value as a bond issued at a discount d) have a different maturity value than a bond issued at a discount, depending upon the interest rate and maturity date

c) have the same maturity value as a bond issued at a discount

The Music House issues a contract to a new recording artist to produce a number of albums over the next five years at $1 million per album. This situation is an example of: a) A contingent liability that should be recorded in the accounting records b) A contingent liability requiring footnote disclosure c) An estimated liability since the number of albums to be produced is not yet determine d) A commitment that, i f material, may be disclosed in a footnote

d) A commitment that, i f material, may be disclosed in a footnote

The term "junk bonds" describes bonds with: a) low interest rates b) indefinite maturity dates c) low maturity values d) high risk

d) high risk