Chapter 10

On April 1, year 1, Aladdin Corporation issues $60 million of 10%, 20-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1. With respect to this bond issue, Aladdin's balance sheet at December 31, Year 1, will include?

Bonds payable of $60 million, as well as interest payable of $1,500,000.

A bond that is not secured is also known as?

A debenture.

After bonds have been issued, their market value can be expected to?

Fall if interest rates rise

Amortizing a discount on bonds payable?

Increases interest expense.

The present value

Will always be less than the future value.

On April 1, year 1, Beta Corporation issues $20 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

$1,200,000

On April 1, year 1, Beta Corporation issues $20 million of 12%, 10-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1. Interest expense on this bond issue reported in Beta's year 1, income statement is?

$1,800,000

A $1,000 bond that sells for 102 has a cost of?

$1020

Hyde Corporation has 25 employees and incurs total wages and salaries expense of $900,000 per year. The above table shows various payroll amounts as a percentage of this annual wage and salaries expense: In addition, Hyde provides group health insurance for its entire workforce. The cost of this insurance is $200 per month for each employee. Some of the payroll-related expenses incurred by Hyde Corporation are mandated by law, rather than negotiated with employees. During the current year, these mandated amounts increased Hyde's payroll-related expenses by approximately?

$131,850.

On November 1, Year 1, Dale Co. borrowed $50,000 from Town Bank and signed a 12%, six-month note payable, all due at maturity. The interest on this loan is stated separately. How much interest expense will Dale recognize on this note in Year 2?

$2,000

Sunrise Corporation issues $3,000,000 of 12%, 10-year bonds, dated December 31, Year 1. The bonds are issued on April 30, Year 2, at a price of 100 plus accrued interest. Interest on the bonds is payable semiannually each June 30 and December 31. The amount of Sunrise's interest expense on this bond issue during year 2 amounts to?

$240,000.

Sunrise Corporation issues $3,000,000 of 12%, 10-year bonds, dated December 31, Year 1. The bonds are issued on April 30, Year 2, at a price of 100 plus accrued interest. Interest on the bonds is payable semiannually each June 30 and December 31. The total amount of cash received by Sunrise Corporation upon issuance of the bonds on April 30, Year 2, is

$3,120,000.

On September 1, 2005, Jack Company purchased a building from Jill Corporation by paying $100,000 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, 2005, balance sheet, Jack correctly presented the note and interest payable as above: What is the amount of the interest expense Jack will recognize on this note in 2006?

$30,000

On September 1, 2006, Holden Company borrowed $300,000 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 Holden Company's balance sheet at December 31, 2006, is?

$312,000.

On December 1, Year 1, Seaford Corporation incurs a 15-year $400,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $4,800, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, Year 1. The total liability related to this mortgage reported in Seaford's balance sheet at December 31, Year 1, is:

$399,200.

On December 1, Year 1, Seaford Corporation incurs a 15-year $400,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $4,800, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, Year 1. How much of the first payment made on December 31, Year 1, represents interest expense?

$4,000

On December 1, Year 1, Seaford Corporation incurs a 15-year $400,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $4,800, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, Year 1. Over the 15-year life of the mortgage, the total amount Seaford will pay for interest charges is:

$464,000.

The current balance sheet of ComTrix reports total assets of $20 million, total liabilities of $2 million, and owners' equity of $18 million. ComTrix is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others. What is the maximum amount ComTrix can borrow and not exceed a debt ratio of .3?

$5,500,000.

On November 1, Year 1, Dale Co. borrowed $50,000 from Town Bank and signed a 12%, six-month note payable, all due at maturity. The interest on this loan is stated separately. How much must Dale pay Town Bank on May 1, Year 2, when the note matures?

$53,000.

On September 1, 2005, Jack Company purchased a building from Jill Corporation by paying $100,000 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, 2005, balance sheet, Jack correctly presented the note and interest payable as above: How much must Jack pay Jill Corporation on September 1, 2006, when the note matures?

$545,000.

On April 1, year 1, Aladdin Corporation issues $60 million of 10%, 20-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1. In Year 2, Aladdin's income statement will report interest expense arising from this bond issue of?

$6,000,000.

Callaway Corporation borrowed $60,000 by issuing a 12%, six-month note payable, all due at the maturity date. After one month, the company's total liability for this loan amounts to?

$60,600.

Madison Company issues $5,000,000 face value, 12%, 5-year bonds payable on December 31, 2005. Interest is paid semiannually each June 30 and December 31. The bonds sell at a price of 97; Madison uses the straight-line method of amortizing bond discount or premium. The amount of bond interest expense recognized by Madison Company in 2006 with respect to these bonds is?

$630,000.

On September 1, 2005, Jack Company purchased a building from Jill Corporation by paying $100,000 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, 2005, balance sheet, Jack correctly presented the note and interest payable as above: What is the total cash paid for the building purchased by Jack?

$645,000.

On December 1, Year 1, Seaford Corporation incurs a 15-year $400,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $4,800, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, Year 1. The portion of the second monthly payment made on January 31, Year 2, which represents repayment of principle is

$808

On December 1, Year 1, Seaford Corporation incurs a 15-year $400,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $4,800, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, Year 1. Compute the total amount to be paid by Seaford over the 15-year life of the mortgage.

$864,000.

The current balance sheet of ComTrix reports total assets of $20 million, total liabilities of $2 million, and owners' equity of $18 million. ComTrix is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others. Assume ComTrix borrows $2 million to finance its expansion. ComTrix's debt ratio immediately after the borrowing will be?

.18.

Willow Co. has outstanding $100 million of 5% bonds, due in 7 years, and callable at 103. The bonds were issued at par and are selling today at a market price of 93. If Willow Co. calls $10 million of these bonds it will report?

A $300,000 loss.

Willow Co. has outstanding $100 million of 5% bonds, due in 7 years, and callable at 103. The bonds were issued at par and are selling today at a market price of 93. If Willow Co. retires $10 million of these bonds by purchasing them from bondholders at current market price, the company will report?

A $9.3 million cash payment for financing activities.

Sunrise Corporation issues $3,000,000 of 12%, 10-year bonds, dated December 31, Year 1. The bonds are issued on April 30, Year 2, at a price of 100 plus accrued interest. Interest on the bonds is payable semiannually each June 30 and December 31. The entry to record the issuance of bonds payable on April 30, Year 2, includes?

A credit to Bond Interest Payable of $120,000.

On April 1, year 1, Aladdin Corporation issues $60 million of 10%, 20-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1. On April 1, Year 1, the journal entry to record issuance of the bonds will include?

A debit to Cash of $60,000,000.

On September 1, 2005, Jack Company purchased a building from Jill Corporation by paying $100,000 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, 2005, balance sheet, Jack correctly presented the note and interest payable as above: The adjusting entry at December 31, 2005, with respect to this note included?

A debit to Interest Expense for $15,000.

On April 1, year 1, Aladdin Corporation issues $60 million of 10%, 20-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1. The journal entry to record the first cash payment to bondholders on October 1, year 1, will include?

A debit to Interest Expense of $3,000,000.

Using different accounting methods on financial statements and tax returns will create?

A deferred tax liability.

Which of the following is an example of a loss contingency that should be disclosed in a footnote to a company's financial statements?

A lawsuit has been brought against the company, but the company hopes to prevail in the suit and thereby avoid any liability

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.

Lex Company is a defendant in a lawsuit alleging damages of $4 billion. The litigation is expected to continue for several years, and no reasonable estimate can be made at this time of Lex Company's ultimate financial responsibility. This situation is an example of:

A loss contingency which should be disclosed in notes to Lex Company's financial statements.

If a bond is selling at 102, it is selling at:

A premium.

Workers' compensation is

A state mandated insurance program.

Willow Co. has outstanding $100 million of 5% bonds, due in 7 years, and callable at 103. The bonds were issued at par and are selling today at a market price of 93. If Willow Co. retires $10 million of these bonds by purchasing them from bondholders at current market price, the company will report?

An $700,000 gain

When a company sells bonds between interest dates they will pay which of the following at the first interest payment date?

An amount equal to the stated interest.

A discount on bonds payable is best described as

An element of future interest expense.

Unearned revenue

Appears on the balance sheet as a liability.

Commitments, such as contracts for future transactions?

Are footnoted in financial statements, if material.

Which of the following are factors in determining pension expense?

Average age, retirement age, and life expectancy of employees. Employee turnover rate. Expected rate of return to be earned by the pension fund.

A company issues $40 million of bonds at par on January 1, 2005. The bonds pay 10% interest semi-annually on 12/31 and 6/30 and mature in 20 years. The journal entry when the bonds are sold is?

Cash 40,000,000 Bonds Payable 40,000,000

In estimating annual pension expense, which of the following factors would NOT be taken into consideration?

Current financial condition of the company.

Choose the statement that correctly summarizes the tax advantage of raising money by issuing bonds instead of common stock?

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

An operating lease:

Is a form of off-balance sheet financing.

Sinking funds usually appear on the balance sheet as?

Long-term investment.

On December 1, Creative Corporation borrowed $45,000 from a bank and signed a 10%, 90-day note payable in the amount of $45,000. The December 31 adjusting entry will be?

Debit Interest Expense $375 and credit Interest Payable $375.

Madison Company issues $5,000,000 face value, 12%, 5-year bonds payable on December 31, 2005. Interest is paid semiannually each June 30 and December 31. The bonds sell at a price of 97; Madison uses the straight-line method of amortizing bond discount or premium. Madison's entry at June 30, 2006, to record the first semiannual payment of interest and amortization of discount on the bonds includes a?

Debit to Bond Interest Expense of $315,000

A capital lease is recorded in the accounting records of the lessee by an entry?

Debiting an asset account and crediting a liability account for the present value of the future lease payments.

The basic measure of the amount of leverage being applied within the capital structure of an organization is the?

Debt ratio.

Which of the following ratios and rates that measure debt-paying ability focuses on the long-term position of a company?

Debt ratio.

Amortizing a premium on bonds payable?

Decreases interest expense.

The amortization of a bond premium?

Decreases the carrying value of a bond and decreases interest expense.

Eagle Corporation purchased a piece of real estate, paying $100,000 cash and financing $400,000 of the purchase price with a 10-year, 15% installment note. The note calls for equal monthly payments that will result in the debt being completely repaid by the end of the tenth year. In this situation

Each monthly payment is greater than the amount of interest accruing each month.

Deferred taxes are classified as?

Either an asset or liability, depending upon the situation

The FICA tax paid by an employer is?

Equal to the amount paid by the employee.

Losses on the early retirement of bonds are classified as:

Extraordinary losses

The average employee of Magnum Corporation earns gross pay of $60,000 per year. The above table shows the relative size of various payroll amounts by expressing each as a percentage of total wages and salaries expense (gross pay): In addition, Magnum pays $225 per month per employee for group health insurance. Which of the following represents the second largest payroll related expense incurred by Magnum?

Group health insurance premiums.

Bonds, with the same face value, issued at a premium will:

Have the same maturity value as a bond issued at a discount.

Employers are required to pay all of the following on the wages paid to each employee except?

Health insurance benefits

The term "junk bonds" describes bonds with?

High risk.

The current portion of long-term debt should be reported?

In the current liabilities section of the balance sheet.

A liability for deferred income taxes represents:

Income taxes on earnings already reported in the income statement, but that will be taxed in future periods.

Hyde Corporation has 25 employees and incurs total wages and salaries expense of $900,000 per year. The above table shows various payroll amounts as a percentage of this annual wage and salaries expense: In addition, Hyde provides group health insurance for its entire workforce. The cost of this insurance is $200 per month for each employee. Assume that the federal government implements an 10% payroll tax upon employers to finance health insurance for all citizens and residents. Hyde will pay this tax instead of purchasing group health insurance. This will cause Hyde's total annual payroll-related expenses to?

Increase by $30,000.

Premium on bonds payable:

Increases the carrying value of the liability.

Which of the following statistics is of more significance to a long-term creditor than to a short-term creditor?

Interest coverage ratio.

One advantage to issuing bonds instead of stock is that:

Interest is tax deductible whereas dividends are not.

Kims Corporation plans to invest $100 million to earn about 20% before income taxes. The company is considering whether it should raise the $100 million by issuing 10% bonds payable or capital stock. If the company issues the bonds, it will probably report

Lower net income and lower income taxes expense than if it issues capital stock.

Suppose investors decide to sell their holdings of capital stock in order to purchase outstanding bonds payable. As a result, the prices of bonds payable increase. What would be the likely impact on market interest rates?

Market interest rates will fall.

The interest coverage ratio?

Measures the number of times the annual interest expense could be covered by annual income from operations.

Which of the following payroll taxes do not stop once an employee reaches a certain level of income?

Medicare taxes.

Which of the following is NOT true about post retirement benefits?

Most corporations have fully funded their post retirement benefits.

On September 1, 2006, Holden Company borrowed $300,000 from a bank and signed a 12%, six-month note payable, with interest on the note due at maturity. Assume Holden made no adjusting entry with respect to this note before preparing the financial statements at December 31, 2006. What is the effect of this error on the financial statements for 2006?

Net income is overstated.

Which of the following is NOT an accurate statement regarding the distinction between debt and equity?

Only equity is considered a source of financing for operations of the business, since debt must be repaid at a specified maturity date.

In a statement of cash flows, most interest payments are classified as?

Operating activities.

The interest coverage ratio is computed by dividing?

Operating income by interest expense.

An employer's total payroll-related costs always exceed the wages and salaries earned by employees by

Payroll taxes and mandated programs such as workers' compensation insurance.

Which one of the following is NOT a condition to capitalize a lease?

Present value of minimum lease payments is less than 90% of the fair market value of the asset.

In relation to a bond issue, the role of the underwriter is to?

Purchase the entire bond issue from the issuing corporation and then sell the bonds to the public.

On April 1, year 1, Beta Corporation issues $20 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 $600,000.

A company with a fully funded pension plan:

Reports no long-term liability for future pension payments.

The amounts that a business withholds as taxes from an employee's earnings:

Represent current liabilities to the employer.

Which of the following payroll costs are shared equally by the employer and the employee?

Social security

If a bond is issued at par and between interest dates?

The cash received by the corporation will be greater than the face value of the bond.

Each of the following must be disclosed in the financial statements, except?

The company's debt ratio and interest coverage ratio for the current year.

The current balance sheet of ComTrix reports total assets of $20 million, total liabilities of $2 million, and owners' equity of $18 million. ComTrix is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others. What will be the effect on ComTrix's debt ratio if ComTrix's owner invests an additional $2 million to finance its expansion?

The debt ratio will decrease from .1 (2/20) before to .0909 (2/22) after the additional investment.

When an installment note is structured as a "fully amortizing" loan with equal monthly payments (such as a traditional mortgage)?

The difference between the sum of all monthly payments and the principal amount of the note constitutes interest.

The amount of the present value of a future cash receipt will depend upon?

The length of time until the money is received. The amount of money to be received The required rate of return

In preparing an amortization table, it is necessary to include?

The original amount of the liability, the amount of periodic payments and the interest rate.

Management has both the intent and the ability to refinance liability maturing in four months by taking out a new loan at the due date which would not be due for several years. How would this situation be reported in financial statements prepared as of today's date?

The original liability is classified as long-term; the new loan is not included in liabilities at this date.

Pension expense is?

The present value of the estimated future pension benefits earned by employees as a result of their services during the period.

The pension expense of the current period is equal to?

The present value of the estimated future pension benefits earned by today's workers during the current period.

Which of the following does NOT affect the market price of an outstanding bond issue?

The price at which the bonds were originally issued.

At the end of 2005, it is discovered that the accountant for Gregory Company failed to record $50,000 of interest payable which had accrued since the last interest payment date. The current ratio, quick ratio and debt ratio, as well as the financial statements, had already been computed using the erroneous data. Correction of the accounting records will have which of the following effects?

The quick ratio as formerly computed will decrease as a result of the correction.

The principal amount of a bond is?

The unpaid balance exclusive of any interest charges.

Which of the following is NOT a characteristic of current liabilities?

They are due within one year or within the operating cycle, whichever is longer. They may involve estimated amounts. They may be replaced with a new short-term liability rather than being paid in cash.