Practice test
In 2013, Drew Company issues $220,000 of bonds for $189,640. If the stated rate of interest was 6% and the yield was 6.73%, how would Drew calculate the interest expense for the first year on the bonds using the effective interest method?
$189,640 X 6.73%
To record warranties, the adjusting journal entry would be
a debit to warranty expense and a credit to warranty liability
Account payable
arises when a business purchases goods or services on credit
Unearned revenue
liability created when customers pay for goods or services in advance
Which of the following is true?
no journal entries or footnotes are necessary if the probability of a contingent liability is remote
liabilities
probable future sacrifices of economic benefits
Sean Corp. issued a $40,000, 10-year bond, with a stated rate of 8%, paid semiannually. How much cash will the bond investors receive at the end of the first interest period?
$1,600
During 2013, Going, Going, Gone sold 100 hot air balloons for $4,000 each. The balloons carry a 5 year warranty for defects. Estimates indicate that repaid costs will average 4% of the total selling price. At the beginning of the year, the balance in the warranty account was $42,000. During the year, $11,000 in claims were incurred and paid. What was the balance in the estimated warranty liability at the end of the year?
$47,000
Bonds in the amount of $100,000 with a life of 10 years were issued by the Roundy Company. If the stated rate is 6% and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds?
$60,000
When should a contingent liability be recognized?
-when a reasonable estimation can be made -when the contingent liability is probable
A company has total assets of $350,000 consisting of current asserts of $115,000, property plant and equipment of $200,000 and other assets of $35,000. The company has total liabilities of $100,000, consisting of current liabilities of $65,000 and other liabilities of $35,00.What is the current ration?
1.77
Serenity Company issued $100,000 of 6%, 10-year bonds when the market rate of interest was 5%. The proceeds from this bond issue were $107,732. Using the effective interest method of amortization, which of the following statements is true?
Amortization of the premium for the first interest period will be $613
Kinsella Seed borrowed $200,000 on October 1, 2013, at 10% interest. The interest and principal are due onOctober 1, 2014. What journal entry should be recorded on December 31, 2013?
Debit interest expense 5,000; credit interest payable 5,000
When will bonds sell at premium?
The stated rate of of interest is more than the market rate at the time of issue
If bonds are issued at 101.25, this means that
a $1,000 bond sold for $1,012.50
The result of using the effective interest method of amortization of the discount on bonds is that
a constant interest rate is charged against the debt carrying value
What best describes the discount on bonds payable account?
a contra liability
contingent liability
an obligation whose amount, timing, or recipient depends on future events
note payable
arises when a business borrows money or purchases goods or services from a company that requires a formal agreement of contract
The portion of long-term debt due within one year should
be reclassified as a current liability
How is the current ratio calculated
current assets/ current liabilities
Kramerica Inc. sold 350 oil drums to Thompson Manufacturing for $75 each. In addition to the $75 sale price per drum, there is a $1 per drum federal excise tax and a 7% state sales tax. What journal entry should be made to record this sale?
debit accounts receivable 28,438; credit excise taxes payable 350; credit sales taxes payable 1,838; credit sales revenue 26,250
The journal entry to record the issuance of a note for the purpose of borrowing funds is
debit cash; credit notes payable
Kinsella seed borrowed $200,000 on October 1, 2013, at 10% interest. The interest and principal are due on October 1, 2014. What journal entry should be made with respect to the interest payment on October 1, 2014?
debit interest expense 15,000; debit interest payable 5,000; credit cash 20,000
Grayson Bank agree to lend BJC corp. $100,000 on January 1st. BJC signs a $100,000,12%, 9 month note. What entry will be BJC make to PAY OFF the note and interest at maturity assuming that interest has been accrued to September 30th?
debit notes payable $100,000; debit interest payable $9,000; credit cash $109,000
If bonds were initially issued at a discount, the carrying value of the bonds in the issuer's books will
increase as the bonds approach their maturity date
Which of the following is NOT classified as a current liability?
note payable, due within 2 years
current liabilities
obligations that require the firm to pay cash or another current asset, create a new liability, or provide goods or services within the longer of 1 year or one operating cycle
When bonds are issued at a discount, the interest expense for the period is the amount of interest payment for the period
plus the discount amortization for the period
Accrued liabilities
recognized by adjusting entries and usually represents the completed portion of activities that are in process at the end of the period
warranty
usually guarantees the repair or replacement of defective goods during a period following the sale