Principles of Financial Accounting Exam #4

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? Assume interest is paid annually. Amortization of the premium for the first interest period will be $1,464. Amortization of the premium for the first interest period will be $613. Interest payments to bondholders each period will be $5,000. Interest payments to bondholders each period will be $6,464.

Amortization of the premium for the first interest period will be $613.

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? $120,000 $60,000 $30,000 $6,000

$60,000

How is the cash ratio calculated? Current Assets/Current Liabilities Cash Flows from Operating Activities/Current Liabilities (Cash + Marketable Securities)/Current Liabilities (Cash + Marketable Securities + Accounts Receivable)/Current Liabilities

(Cash + Marketable Securities)/Current Liabilities

Installment bonds differ from typical bonds in what way? Essentially they are the same. The entire principal balance is paid off at maturity for installment bonds. Installment bonds do not have a stated rate. A portion of each installment bond payment pays down the principal balance.

A portion of each installment bond payment pays down the principal balance.

Bonds are sold at a premium if the market rate of interest was more than the stated rate at the time of issue. market rate of interest was less than the stated rate at the time of issue. company will have to pay a premium to retire the bonds. issuing company has a better reputation than other companies in the same business.

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

When bonds are issued at a premium, the interest expense for the period is the amount of interest payment for the period minus the premium amortization for the period. plus the premium amortization for the period. plus the discount amortization for the period. minus the discount amortization for the period.

minus the premium amortization for the period.

When bonds are issued at a discount, the interest expense for the period is the amount of interest payment for the period plus the premium amortization for the period. minus the premium amortization for the period. plus the discount amortization for the period. minus the discount amortization for the period.

plus the discount amortization for the period.

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

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

Payroll taxes typically include all of the following except Social Security taxes Federal excise taxes Medicare taxes Federal unemployment taxes

Federal Excise Taxes

Bower Company sold $100,000 of 20-year bonds for $95,000. The stated rate on the bonds was 7%, and interest is paid annually on December 31. What entry would be made on December 31 when the interest is paid? (Numbers are omitted.) Interest Expense Cash Interest Expense Bonds Payable Cash Interest Expense Discount on Bonds Payable Cash Interest Expense Discount on Bonds Payable Cash

Interest Expense Discount on Bonds Payable Cash

When a liability depends on a future event, such as the outcome of a lawsuit, recognition depends on how likely the occurrence of the event is and whether a good estimate of the payment amount can be made

contingent liability

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? $800 $1,600 $3,200 $4,000

$1,600

In 2019, Drew Company issued $200,000 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 × 8% $189,640 × 6.73% $200,000 × 8% $200,000 × 6.73%

$189,640 × 6.73%

Kinsella Corporation's balance sheet showed the following amounts: current liabilities, $75,000; total liabilities, $100,000; total assets, $200,000. What is the long-term debt to equity ratio? 0.75 0.375 0.25 0.125

0.25

McLaughlin Corporation's balance sheet showed the following amounts: current liabilities, $75,000; total liabilities, $100,000; total assets, $200,000. What is the debt to total assets ratio? 2 1 0.875 0.50

0.50

What best describes the discount on bonds payable account? A liability An asset A contra liability An expense

A contra liability

How is the current ratio calculated? Current Assets/Current Liabilities Cash Flows from Operating Activities/Current Liabilities (Cash + Marketable Securities)/Current Liabilities (Cash + Marketable Securities + Accounts Receivable)/Current Liabilities

Current Assets/Current Liabilities

ABC Advisors is being sued by a former customer. ABC's lawyers say that it is possible, but not probable, that the company will lose the lawsuit and the trial should last approximately 18 more months. Should ABC lose, they will most likely have to pay approximately $750,000. How should this lawsuit be reported in the financial statements? Current liability of $750,000 and Expense of $750,000 Long-term liability of $750,000 and Expense of $750,000 No disclosure is required. No effect on the balance sheet or income statement, but described in the footnotes.

No effect on the balance sheet or income statement, but described in the footnotes.

Which of the following is true? No journal entries or footnotes are necessary if the probability of a contingent liability is remote. A contingent liability should always be recorded in the footnotes to the financial statements. A contingent liability should always be recorded within the financial statements. A company can choose to record a contingent liability either within its financial statements or in the footnotes to the financial statements.

No journal entries or footnotes are necessary if the probability of a contingent liability is remote

Which of the following transactions would cause the current ratio to increase (assuming the current ratio is currently greater than 1)? Purchased inventory on credit. Purchased property, plant, and equipment for cash. Received money from a customer related to an accounts receivable. Paid off a payable.

Paid off a payable.

Total Payment =

Principal + (Principal x Interest Rate x Period)

Which of the following statements regarding bonds payable is true? Generally, bonds are issued in denominations of $100. When an issuing company's bonds are traded in the "secondary" market, the company will receive part of the proceeds when the bonds are sold from the first purchaser to the second purchaser. The entire principal amount of most bonds mature on a single date. A debenture bond is backed by specific assets of the issuing company.

The entire principal amount of most bonds mature on a single date.

All of the following represent taxes commonly collected by businesses from customers except City sales taxes Federal excise taxes Unemployment taxes State sales taxes

Unemployment taxes

When a credit is made to federal income taxes withholding payable account related to taxes withheld from an employee, the corresponding debit is made to Wages Expense Taxes Expense Taxes Payable Cash

Wages Expense

If bonds are issued at 101.25, this means that a $1,000 bond sold for $1,012.50. a $1,000 bond sold for $101.25. the bonds sold at a discount. the bond rate of interest is 10.125% of the market rate of interest.

a $1,000 bond sold for $1,012.50.

When should a contingent liability be recognized? When a reasonable estimation can be made When the contingent liability is probable neither a nor b a and b

a and b

The result of using the effective interest method of amortization of the discount on bonds is that the cash interest payment is greater than the interest expense. the amount of interest expense decreases each period. the interest expense for each amortization period is constant. a constant interest rate is charged against the debt carrying value

a constant interest rate is charged against the debt carrying value

To record warranties, the adjusting journal entry would be a debit to Warranty Liability and a credit to Warranty Expense. a debit to Warranty Expense and a credit to Warranty Liability. a debit to Warranty Expense and a debit to Cash. a debit to Warranty Liability and a credit to Cash.

a debit to Warranty Expense and a credit to Warranty Liability.

The premium on bonds payable account is shown on the balance sheet as a contra asset. a reduction of an expense. an addition to a long-term liability. a subtraction from a long-term liability.

an addition to a long-term liability.

Bonds are a popular source of financing because a company having cash flow problems can postpone payment of interest to bondholders. financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of stock. bond interest expense is deductible for tax purposes, while dividends paid on stock are not. the bondholders can always convert their bonds into stock if they choose.

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

those obligations that are (1) expected to be retired with existing current assets or creation of new current liabilities and (2) due within 1 year or one operating cycle, whichever is longer

current liabilities

When bonds are issued by a company, the accounting entry typically shows an increase in liabilities and a decrease in stockholders' equity. increase in assets and an increase in stockholders' equity. increase in liabilities and an increase in stockholders' equity. increase in assets and an increase in liabilities.

increase in liabilities and an increase in stockholders' equity.

Warranty expense is recorded as it is incurred. recorded in the period of sale. capitalized as a warranty asset. none of these.

recorded in the period of sale.