Intermediate Accounting, Exam 3 Adaptive Practice

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When a property with an indeterminable fair market value is exchanged for a debt instrument with no ready market,

the present value of the debt instrument must be approximated using an imputed interest rate.

On September 1, 2020, Foxtrot Tech issued a $1,800,000, 10% note payable to Elwood Bank, with three equal annual principal payments of $600,000. At the date of issue, Elwood's prime rate was 11%. Foxtrot Tech made its first interest and principal payment on September 1, 2021. How much accrued interest payable should Foxtrot Tech record on December 31, 2021?

($1,800,000 - $600,000 = $1,200,000) ($1,200,000 10% 4/12) = 40,000 => 40,000

On March 1, 2020, First National Bank agrees to lend $25,000 to JT Engineering if JT signs a $25,000, 6%, four-month note. At maturity on July 1, 2020, how much must JT pay First National?

($25,000 x 6% x 4/12 = $500) ($25,000 + $500) = 25,500 => 25,500

Premiums/Coupons Ex.: To stimulate the sales of its Alladin breakfast cereal, Cullumber Company places 1 coupon in each box. 5 coupons are redeemable for a premium consisting of a children's hand puppet. In 2021, the company purchases 42,400 puppets at $1.60 each and sells 462,500 boxes of Alladin at $3.85 a box. From its experience with other similar premium offers, the company estimates that 40% of the coupons issued will be mailed back for redemption. During 2021, 120,000 coupons are presented for redemption. Prepare the journal entries that should be recorded in 2021 relative to the premium plan. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 1,525.)

(42,400 x 1.60) = 67,840 (462,500 x 3.85) = 1,780,625 (120,000/5) x 1.60 = 38,400 ((462,500 x 40%) - 120,000) / 5 x (1.60) = 20,800 Dr. Inventory on Premiums 67,840 Cr. Cash 67,840 Dr. Cash 1,780,625 Cr. Sales Revenue 1,780,625 Dr. Premium Expense 38,400 Cr. Inventory on Premiums 38,400 Dr. Premium Expense 20,800 Cr. Premium Liability 20,800

Pina Company includes one coupon in each box of soap powder that it packs, and 10 coupons are redeemable for a premium (a kitchen utensil). In 2020, Pina Company purchased 8,500 premiums at 80 cents each and sold 118,000 boxes of soap powder at $3.10 per box; 47,600 coupons were presented for redemption in 2020. It is estimated that 60% of the coupons will eventually be presented for redemption. Prepare all the entries that would be made relative to sales of soap powder and to the premium plan in 2020. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

(8,500 x 0.80) = 6,800 Dr. Inventory on Premium 6,800 Cr. Cash 6,800 (To record the premium inventory) (118,000 x 3.10) = 365,800 Dr. Cash 365,800 Cr. Sales Revenue 365,800 (To record the sales) (47,600 x 0.1 x 0.8) = 3,808 Dr. Premium Expenses 3,808 Cr. Inventory of Premiums 3,808 (To record the expense associated with the sale) (118,000 x 60%) = 70,800 (70,800 - 47,600) = 23,200 (23,200 x 10% x 0.80) = 1,856 Dr. Premium Expense 1,856 Cr. Premium Liability 1,856 (To record the premium liability)

Compensated Absences Ex.: Headlands Incorporated began operations on January 2, 2016. Headlands employs 11 individuals who work 8-hour days and are paid hourly. Each employee earns 12 paid vacation days and 5 paid sick days annually. Vacation days may be taken after February 28 of the year in which they are earned. Sick days may be taken as soon as they are earned; unused sick days accumulate. Additional information is as follows. Actual Hourly Wage Rate 2016; 2017 $16; $18 Vacation Days Used by Each Employee 2016; 2017 2; 10 Sick Days Used by Each Employee 2016; 2017 4; 3 (a) Prepare journal entries to record transactions related to compensated absences during 2016 and 2017. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) (b) Compute the amounts of any liability for compensated absences that should be reported on the balance sheet at December 31, 2016 and 2017.

(a) 2016: 11 x 12 x 8 x 16 = 16,896 Dr. Salaries and Wages Expense 16,896 Cr. Salaries and Wages Payable 16,896 11 x 5 x 8 x 16 = 7,040 Dr. Salaries and Wages Expense 7,040 Cr. Salaries and Wages Payable 7,040 11 x 16 x 8 x 2 days = 2,816 Dr. Salaries and Wages Payable 2,816 Cr. Cash 2,816 11 x 16 x 8 x 4 days = 5,632 Dr. Salaries and Wages Payable 5,632 Cr. Cash 5,632 2017: 11 x 12 x 8 x 18 = 19,008 Dr. Salaries and Wages Expense 19,008 Cr. Salaries and Wages Payable 19,008 11 x 5 x 8 x 18 = 7,920 Dr. Salaries and Wages Expense 7,920 Cr. Salaries and Wages Payable 7,920 11 x 16 x 8 x 10 = 14,080 11 x 18 x 8 x 10 = 15,840 Dr. Salaries and Wages Expense 1,760 Dr. Salaries and Wages Payable 14,080 Cr. Cash 15,840 11 x 18 x 8 x (5 - 3 days) = 3,168 11 x 16 x 8 x (5 - 4 days) = 1,408 => 3,168 + 1,408 = 4,576 Dr. Salaries and Wages Expense 176 Dr. Salaries and Wages Payable 4,576 Cr. Cash 4,752 (b) 2016 Vacation Wages Payable: 0 + 16,896 - 2,816 = 14,080 2017 Vacation Wages Payable: 14,080 + 19,008 - 14,080 = 19,008 2016 Sick Pay Wages Payable: 0 + 7,040 - 5,632 = 1,408 2017 Sick Pay Wages Payable: 1,408 + 7,920 - 4,576 = 4,752

RL Enterprise's current asset information for the last four years is shown below. RL maintained a constant $320,000 of current liabilities throughout these years. Based on the current ratio, in which year was JT most liquid? CURRENT ASSETS; 2018; 2019; 2020; 2021 Cash; $18,000; $16,500; $19,200; $17,400 Short-term Investments; 92,000; 85,000; 79,000; 80,000 Accounts Receivable; 96,000; 91,500; 94,300; 95,000 Inventory; 115,000; 112,000; 122,000; 118,500 Prepaid Expenses; 40,000; 41,500; 40,100; 41,400 TOTAL CURRENT ASSETS; $361,000; $346,500; $354,600; $352,300

2018

On the December 31, 2020 balance sheet, Broome Agency reported assets of $3,288,000 and liabilities of $1,293,000. In 2021, Broome increased assets by $512,000 and increased liabilities by $249,000. How would this change affect their ability to repay their maturing debts in 2022?

2020 debt to assets ratio is $1,293,000/$3,288,000 = 39.3%.2021, debt to assets ratio is calculated as follows:($249,000 + $1,293,000) / ($512,000 + $3,288,000) = $1,542,000/$3,800,000 = 40.6%. As the debt to assets ratio increases, a company's ability to repay their maturing debts decreases. Their ability to repay maturing debts would decrease.

You have just purchased a corporate bond with a maturity date of January 1, 2025. Despite the stated maturity, you know that the bond may be retired prior to that date. What type of bond did you purchase?

A bond arises from a contract known as a bond indenture. Callable bonds give the issuer the right to call and redeem the bonds prior to maturity.Serial bonds mature in installments.Bearer bonds are not recorded in the name of the owner and may be transferred. => Callable bond

As of December 31, JT Engineering has a note payable totaling $160,000 with First National Bank. This is an interest-bearing, four-month note. How should the note be classified on JT's balance sheet?

A current liability is an obligation that must be repaid within the current period or operating cycle. In this case, a short-term loan such as this four-month note or the portion of a long-term debt that will become due in the next 12 months. => As a current liability

Amador Incorporated signed a long-term mortgage note to provide funds to build a new building. The note was secured by the title to the building. If Amador is expected to pay the bank $90,000 per year for 10 years to repay the loan, which of the following relationships can you expect to apply to the situation? a) The amount of interest expense will remain constant over the 10-year period. b) The balance of Mortgage Payable will remain a constant amount over the 10-year period. c) The balance of Mortgage Payable at a given balance sheet date will be reported as a long-term liability. d) The balance of Mortgage Payable will decrease over the 10-year period.

A mortgage note payable is a promissory note secured by a document called a mortgage that pledges title to property as security for the loan. If it is payable in installments, the current installments due are considered current liabilities and the Mortgage Payable account will decrease each year by the mortgage note term. => d) The balance of Mortgage Payable will decrease over the 10-year period.

What is needed to allow short-term obligations expected to be refinanced to be reported on a long-term basis?

A valid contract

JT Engineering purchases 16,000 gadgets in May 2020. The gadgets are delivered in June 2020, and are paid for with a bank loan issued at present value. The loan will come due in September 2020. Which type of note is used to pay for these gadgets?

A zero-interest-bearing note does not explicitly state an interest rate on the face of the note. JT Engineering received in cash from the Bank the present value of the note and purchased the gadgets. In September 2020, the Bank was repaid the face value of the note at maturity. Zero-interest-bearing note

T/F: Short-term obligations are debts scheduled to mature within one year after the date of a company's balance sheet or within its operating cycle, whichever is shorter.

False

In the event that a short-term obligation is refinanced on a long-term basis prior to the issuance of the financial statements but after the balance sheet date, how much of the short-term obligation can be excluded from current liabilities in the financial statements?

An amount not exceeding the proceeds from the new obligation

Yankee Industries uses the fair value option to value its bonds payable. Last year, Yankee experienced a slight decline in its creditworthiness. During that same period, overall interest rates remained constant. Given this information, which of the following entries would you expect to see recorded in Yankee's books? a) A credit to the Bonds Payable account b) A debit to the Gain on Restructuring of Debt account c) A credit to the Unrealized Holding Gain or Loss—Income account d) A debit to the Net Income account

An unrealized holding gain or loss is the net change in the fair value of the liability from one period. If the value of the bonds declined, this decline leads to a reduction in the bond liability and a resulting unrealized holding gain, which is reported as part of net income with a debit to the liability and a credit to the gain or loss. => c) A credit to the Unrealized Holding Gain or Loss—Income account

How should a company report a liability's major characteristics such as maturity date and interest rate?

As a disclosure in the notes to the financial statements

How should a large anticipated insurance recovery be reported?

As a disclosure only

How should long-term debt be reported if it will be converted into stock within the next year?

As a non-current liability and accompanied with a note explaining the method to be used in its liquidation.

Anderson Power recently closed a nuclear facility. As part of the closure, Anderson decomissioned the facility and tore down two reactors. How should Anderson recognize the liability created by this process?

As an adjustment to its ARO

How should stock dividends distributable be classified?

As an item of stockholders' equity on the balance sheet

As of December 31, 2020, RL Enterprises has $4,000,000 in short-term notes payable due on February 14, 2021. RL arranged a line of credit with Elwood bank on January 10, 2021 that would enable it to borrow up to $3,000,000 at prime + 1 for three years. On February 2, 2021, RL borrowed $2,400,000 from Elwood and used $1,000,000 in additional cash to liquidate $3,400,000 of its short-term notes payable. How much of RL's short-term notes payable should be reported as current liabilities on its December 31, 2020 balance sheet if that balance sheet is issued on March 5, 2021?

As of the December 31, 2020 balance sheet date, RL had not yet arranged the line of credit. Thus, the March 5, 2021 statement must reflect the entire $4,000,000 obligation as a current liability. => $4,000,000

Wyatt Industries intends to retire $2,500,000 in short-term debt using proceeds from the sale of 85,000 shares of common stock. The stock sells for $20 per share. How much of its short-term debt can Wyatt exclude from current liabilities if the stock sale took place after the balance sheet date but before short-term debt is due or the balance sheet is issued?

As of the balance sheet date, refinancing had not occurred. => 0

After issuing its 2020 financial statements, JT Engineering enters into a financing agreement with Elwood Bank. This agreement, made on February 10, 2021, allows JT to borrow up to $6,000,000 at any time through 2022. Under the agreement, funds are borrowed at prime +2 and mature two years from the loan date. The agreement also requires JT to maintain a working capital level of $9,000,000 and prohibits payment of dividends on common stock without prior approval by Elwood. JT currently has $2,250,000 of notes payable with Scecina Bank, maturing March 15, 2021. JT intends to borrow $3,750,000 under the agreement with Elwood to liquidate these notes payable. Based on this information, how much short-term debt does JT have as of its December 31, 2020 balance sheet?

As of the balance sheet date, refinancing had not occurred. Thus, the 2020 statement must reflect the entire $2,250,000 obligation as a current liability. => 2,250,000

JT Engineering has $960,000 of short-term debt. JT issues 10,000 shares of common stock prior to the issuance of the financial statements. JT's net proceeds from the sale are $900,000. If JT uses all of the proceeds to liquidate its short-term debt after the balance sheet date, how much of the debt can be excluded from current liabilities?

At the balance sheet date, refinancing had not occurred; therefore, all the debt must be classified as a current liability. => $0

As of December 31, 2020, Red Technologies liability account balances included the following: - $250,000, 7% note payable issued October 1, 2020 maturing September 30, 2021 - $600,000, 8% note payable issued April 1, 2020 payable in four equal annual principal installments of $150,000. Red's December 31, 2020 financial statements are issued on March 31, 2021. On January 15, 2021, Red refinanced the entire $600,000 balance of the 8% note by issuing a long-term obligation payable in a lump sum. On March 10, 2021, Red also consummated a non-cancelable agreement with the lender to refinance the 7%, $250,000 note on a long-term basis, using readily determinable terms that have not yet been implemented. Based on this information, what amount of notes payable should Red classify as current on its December 31, 2020 balance sheet?

At the balance sheet date, refinancing had not occurred; therefore, both the $250,000 of the 7% note and $150,000 of the installment note would be considered short-term. => 250,000 + 150,000 = 400,000

Why are bankers particularly interested in the liability section of the balance sheet?

Because it helps them understand an entity's liquidity.

Why are accumulated but undeclared dividends on cumulative preferred stock not recognized as a liability?

Because they are not considered an obligation until payment is authorized

Why are dividends payable in the form of additional shares of stock not recognized as a liability?

Because they do not require the future outlay of assets or services

How are accrued liabilities disclosed in financial statements?

By appropriately classifying them as regular liabilities in the balance sheet

How are commissions, legal fees, and printing fees associated with a bond issue accounted for?

By recording them as a reduction to the issue amount of the bond payable and then amortizing into expense over the life of the bond, through an adjustment to the effective interest rate.

JT Engineering's current asset information is shown below. If JT's current liabilities are $300,000, what is JT's current ratio and what is its acid-test ratio? (Round each ratio to two decimal places.) CURRENT ASSETS Cash; $9,000 Short-term Investments; $89,000 Accounts Receivable; $76,000 Inventory; $130,000 Prepaid Expenses; $40,000 TOTAL CURRENT ASSETS; $344,000

Calculation of Current Ratio:- Current Ratio = Current Assets / Current Liabilities = $344000 / $300000 = 1.15 Calculation of Acid Test Ratio:- Acid Test Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities = ($344000 - $130000 - $40000) / $300000 = $174000 / $300000 = 0.58 => The current ratio is 1.15 times and the acid-test ratio is 0.58 times.

In 2020, Paolo Tech is involved in a suit alleging it sold faulty motherboards during 2019. Paolo's attorney believes there is a 40% possibility the company will lose the case. In the event Paolo loses, the attorney further estimates the company could pay $500,000 in damages. How should Paolo journalize the pending litigation?

Companies must consider the following factors in determining whether to record a liability with respect to pending litigation. 1. The time period the underlying cause of action occurred. 2. The probability of an unfavorable outcome. 3. The ability to make a reasonable estimate of the amount of loss. Since there is not a high possibility the company will lose the case, no journal entry is required. => No journal entry is required

Anderson Petroleum is involved in a lawsuit over the removal of underground gasoline storage tanks at the former site of one of its filling stations. Anderson's attorneys believe it is probable the outcome of the suit will be unfavorable, but can only estimate the loss within the range of $4 million to $8 million, with the minimum of $4 million being the most probable outcome. How should Anderson record this environmental liability?

Companies should accrue an estimated loss from a loss contingency such as a lawsuit when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The attorneys for Anderson determined its probable that the minimum amount of $4 million may be a loss and liability. => As a loss and liability of $4 million.

If bonds are issued between interest dates, which of the following could be included on the entry on the books of the issuing corporation?

Companies usually make bond interest payments semiannually, on dates specified in the bond indenture. When companies issue bonds on dates other than the interest payment dates, buyers of the bonds will pay the seller the interest accrued from the last interest payment date to the date of issue. Consequently, when a company issues bonds between interest dates, it records the bond issuance plus accrued interest, with a credit to Interest Expense. => Credit to Interest Expense

Which approach has become more accepted to determine evidence required when short-term obligations are expected to be refinanced on a long-term basis?

Contractual approach

In May, Shannon's Shoes offers a $10 off coupon that can be used on any purchase. The coupon expires September 30. How should Shannon's charge the costs associated with the coupon? Assume the store uses one-month accounting periods.

Coupons are loss contingencies that satisfy the conditions necessary for a liability. The expense recognition principle requires that companies report the related expense in the period in which the expense in incurred. Shannon Shoes issued the coupons in May and therefore should charge the cost to expense in May. => Shannon's should charge the costs to expense for May.

RL Enterprise's current asset information is shown below. If RL's current liabilities are $170,000, what is RL's current ratio and what is its acid-test ratio? Round each ratio to two decimal places. CURRENT ASSETS Cash; $4,000 Short-term investments; 61,000 Accounts receivable; 54,000 Inventory; 28,000 Prepaid expenses; 35,000 TOTAL CURRENT ASSETS; $182,000

Current Ratio = Current Assets/ Current Liabilities Current assets = $182000 Current Liabilities = $170000 Current Ratio = $182000 / $170000 = 1.07 times Acid-Test Ratio = (Current Assets-Inventory-Prepaid Expenses) / Current Liabilities = ($182000-$28000-$35000) / $170000 = 0.70 times => The current ratio is 1.07 times and the acid-test ratio is 0.70 times.

Why are current liabilities usually recorded and reported at their full maturity value on financial statements?

Current liabilities involve short periods and the difference in their present and maturity value is so small that it is immaterial.

On May 15, 2020, RL Enterprises issues a $312,000, six-month, zero-interest-bearing note to Federal Bank. The present value of the note is $300,000. Which of the following must be recorded as part of this transaction? a) A debit to cash of $312,000 b) A credit to Notes Payable of $300,000 c) A credit to Discount on Notes Payable of $12,000 d) A debit to Discount on Notes Payable of $12,000

Discount on Notes Payable is a contra account to Notes Payable. In this entry, RL Enterprises credits the Notes Payable account for the face value of the zero-interest-bearing note, which is $12,000 more than the cash received. Cash is debited for $300,000. Also it debits the difference between cash received and the face value of the note to Discount on Notes Payable. => d) A debit to Discount on Notes Payable of $12,000

Wells Enterprises introduced a new machine in January 2020. The machine carries a two-year warranty, and estimated warranty costs are 2% of sales within the first 12 months and 3% of sales within the second 12 months. 2020 sales were $700,000 and its 2021 sales were $900,000. Warranty expenditures in these two years were $10,500 and $31,500, respectively. Assuming Wells uses the assurance warranty method, what should it report as estimated warranty expense for 2021?

During 2021, Wells would estimate $45,000 in warranty costs for sales made in 2021 (2% + 3%) x $900,000 = $45,000. => 45,000

Why is it necessary for a company to amortize all premiums or discounts over the bond's life to maturity?

Early redemption is not a certainty.

Which approach has become more accepted to determine evidence required when short-term obligations are expected to be refinanced on a long-term basis? a) Long-term approach b) Any preferred approach of the company c) Contractual approach d) Short-term approach

FASB concluded that applying a principle based on the terms and conditions of a contract (i.e., a contractual approach) is more appropriate to determine evidence required when short-term obligations are expected to be refinanced on a long-term basis. => c) Contractual approach

Why is the contractual approach the most appropriate to determine applicable evidence for short-term obligations expected to be refinanced?

FASB concluded that applying a principle based on the terms and conditions of a contract (i.e., a contractual approach) is more appropriate. This is because the contractual evidence is more objective than the evidence provided by management expectations. => It is more objective

T/F: A short-term obligation can be included with current liabilities if the company intends to refinance it and can demonstrate the ability to consummate the refinancing.

False

The Rose Company issues $20,000,000 face value of bonds at 96 on January 1, 2020. The bonds are dated January 1, 2020, pay interest semiannually at 8% on June 30 and December 31, and mature in 10 years. Straight-line amortization is used for discounts and premiums. On September 1, 2023, $12,000,000 of the bonds are called at 102, plus accrued interest. The gain or loss that will be recognized on the called bonds on September 1, 2023, is

First, calculate how much money the company received when issuing the bonds, $20,000,000 X 0.96 = $19,200,000. Second, subtract the issue price from the face value: $20,000,000 - $19,200,000 = $800,000, this is the discount. The overall amount amortized is $800,000; to calculate the amount per period, divide the number by the number of periods: $800,000/ 20 =$40,000, amortization per period. This bond has been through 3 years and 8 months, which is 7 2/6 periods, $40,000 X 7 2/6 = $293,333. Then add this number to the amount received at the time of issuance: $19,200,000 + $293,333 = $19,493,333 carrying value. To find the net value for the amount repurchased, multiply this number by 12/20 (the fraction of the bond repurchased): $19,493,333 X 12/20 =$11,696,000. Next find the repurchase price: $12,000,000 X 1.02 = $12,240,000, and subtract this from the net value repurchased: $11,696,000 - $12,240,000 = $544,000 loss on extinguishment. => 544,000 loss

On January 1, 2020, Sarg Corporation issued $9,000,000 of 10% ten-year bonds at 103. The bonds are callable at the option of Sarg at 105. Sarg has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective-interest method). On December 31, 2026, when the fair value of the bonds was 96, Sarg repurchased $2,000,000 of the bonds in the open market at 96. Sarg has recorded interest and amortization for 2026. Ignoring income taxes and assuming that the gain is material, Sarg Corporation should report this reacquisition as which of the following? a) A loss of $122,000. b) A gain of $98,000. c) A loss of $98,000. d) A gain of $122,000.

First, find how much money the company received when issuing the bonds: multiplying the issue price by 1.03 ($9,000,000 X 1.03 = $9,270,000). Second, subtract the face value from the issue price just calculated: $9,270,000 - $9,000,000 = $270,000, This amount represents the premium on the bonds and is the overall amount amortized, Third, find the amount per year by dividing the number by the life of the bond: $270,000/ 10 =$27,000. This particular bond has accrued over a period of seven years, so $27,000 X 7 = $189,000. Next, subtract this number from the amount received at the time of issuance: $9,270,000 - $189,000 = $9,081,000. To find the net value for the amount repurchased, multiply this number by 2/9 (the fraction of the bond repurchased): $9,081,000 X 2/9 = $2,018,000. Lastly, find the repurchase price: $2,000,000 X 0.96 = $1,920,000, and subtract this from the net value repurchased: $2,018,000 - $1,920,000 = $98,000 gain. => A gain of $98,000

The 10% bonds payable of Yano Company had a net carrying amount of $950,000 on December 31, 2020. The bonds, which had a face value of $1,000,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On July 2, 2021, several years before their maturity, Yano retired the bonds at 102. The interest payment on July 1, 2021, was made as scheduled. Ignoring taxes, the loss that Yano should record on the early retirement of the bonds on July 2, 2021, would be

First, take the carrying value of the bonds at the market interest rate (bond interest expense) and subtract bond interest paid to find the amortized amount: carrying amount is $950,000 with an effective interest rate of 12%. However, interest is paid semiannually, so all interest rates should be adjusted for semiannual payments: the bond interest expense is $950,000 X 12% x 1/2 = $57,000. The bond interest paid is the face value x stated interest rate x time period or ($1,000,000 x 10% x 1/2) or $50,000. The amortized amount is $7,000 ($57,000 - $50,000). The new carrying amount is then $950,000 + $7,000 = $957,000.Then find the repurchase price $1,000,000 X 1.02 = $1,020,000. Finally, subtract the purchase price from the carrying amount: $1,020,000 - $957,000 = $63,000 loss on retirement of bonds.

The 12% bonds payable of Tegan Industries had a carrying amount of $3,120,000 on December 31, 2020. The bonds, which had a face value of $3,000,000, were issued at a premium to yield 10%. Tegan uses the effective-interest method of amortization. Interest is paid on June 30 and December 31. On June 30, 2021, several years before their maturity, Tegan retired the bonds at 104 plus accrued interest. Ignoring taxes, which of the following is the loss on retirement?

First, take the carrying value of the bonds at the market interest rate (bond interest expense) and subtract bond interest paid to find the amortized amount:the carrying amount is $3,120,000 with an effective interest rate of 10%, since interest is paid semiannually, all interest rates need to be adjusted for semiannual payments: $180,000 ($3,000,000 X 12% x 1/2)The bond interest expense for at June 30 would be computed as follows: $3,120,000 x 10% x ½ = $156,000.The amortized amount is $24,000 ($180,000 - $156,000). The new carrying amount is then $3,120,000 - $24,000 = $3,096,000. Next, find the repurchase price $3,000,000 X 1.04 = $3,120,000. Finally, subtract the purchase price from the carrying amount: $3,120,000 - $3,096,000 = $24,000 loss on retirement.

The following appeared in the notes of JT Engineering's December 31, 2019, financial statements. In Q1, a U.S. District Court in Chicago, IL, awarded JT a $1 million judgment against RL Enterprises related to RL's failure to uphold its warehousing agreement with JT. JT has recorded no income relating to this judgment because RL has filed an appeal. This is an example of a disclosure of a(n):

Gain contingencies are not recorded. Instead, they are disclosed in the notes only when the probabilities are high that a gain contingency will occur. => gain contingency.

What is the correlation of the market rate to the stated rate if a bond is sold at 97?

Greater than the stated rate

What is a typical benefit afforded to a company from analysts and investors when its management engages with prudent management decisions?

Higher stock price

A ten-year bond was issued in 2020 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2022, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2022 should have equaled which of the following? a) The face amount less unamortized discount b) The call price less unamortized discount c) The face amount plus unamortized discount d) The call price

If a bond issuer exercises a call provision, the amount of bond liability would have been the face amount of the bond, less the unamortized discount. The issuer of callable bonds must generally exercise the call on an interest date. Therefore, the amortization of any discount or premium will be up to date, and there will be no accrued interest. => a) The face amount less unamortized discount

Under what circumstance can the current portion of long-term debt be classified as current?

If agreement to refinance on a long-term basis is completed before the date of the financial statements.

Which of the following factors would not be included in a company's evaluation of whether to record a liability for pending litigation? a) The time period in which the underlying cause of action occurred. b) The probability of an unfavorable outcome. c) The type of litigation involved. d) The ability to make a reasonable estimate of the amount of the loss.

In accounting, litigation is litigation and the type of litigation is irrelevant when evaluating whether to record a liability. What is important is whether the loss is probable and if the amount can be reasonably estimated. c) The type of litigation involved.

Wilburn Enterprises issued a 9%, year over year, $230,000 note payable to Grubb Resources at a price of $218,630. This note was issued at a(n)

In this case, because the present value of the note is less than the face value, the note is issued at a discount. => discount

Bravo Industries intends to retire $950,000 in short-term debt using proceeds from the sale of 30,000 shares of common stock. The stock sells for $25 per share. How much of its short-term debt can Bravo exclude from current liabilities if the sale occurs after the balance sheet date but before the balance sheet issue?

Intention to refinance supports the exclusion of short term obligations in current liablities. => 0

Over the past year, the value of Bridge Technology's bonds payable has dropped from $1,000,000 to $950,000. How does this decline affect Bridge's stockholders?

It is beneficial to the firm's stockholders, because it means the firm's bond liability has decreased.

JT Engineering issues a $12,600, four-month, zero-interest-bearing note to First National Bank. If the present value of the note is $12,000, how should JT record the note?

It should credit $12,600 to Notes Payable and debit $600 to Discount on Notes Payable.

If bonds are issued initially at a premium and the effective-interest method of amortization is used, which of the following will be true of interest expense in the earlier years? a) It will be greater than the amount of the interest payments. b) It will be greater than if the straight-line method were used. c) It will be less than if the straight-line method were used. d) It will be the same as if the straight-line method were used.

It will be greater than if the straight-line method were used.

DeHart Tools reported assets of $5,647,000 and liabilities of $3,472,000 on their December 31, 2020, balance sheet. DeHart increased assets by $1,486,000 and decreased liabilities by $183,000 in 2021. In 2022, DeHart would likely

be more able to repay their maturing debts.

Which is a criterion for a company to classify short-term debt expected to be refinanced as noncurrent?

Liability is contractually due to be settled more than one year (or operating cycle, if longer) after the balance sheet date.

Which of the following most accurately describes the relationship between a company's current liabilities and its operating cycle? a) Current liabilities are the result of operating transactions that have occurred within the current operating cycle. b) There is no relationship between a company's current liabilities and operating cycle. c) Liquidation of current liabilities is reasonably expected within the company's operating cycle. d) Current liabilities cannot exceed the amount of expenses incurred in one operating cycle.

Liquidation of current liabilities is reasonably expected within the company's operating cycle.

Under normal circumstances, are losses related to receivable collections and losses related to warranties accrued?

Losses related to receivable collections and losses related to warranties are both accrued.

What is a typical benefit afforded to a company when its management engages with prudent management decisions?

Lower debt service costs

In order to combat off-balance-sheet financing, which of the following organizations increased disclosure requirements for financial statements? a) SEC b) FASB c) IFRS d) FDIC

Off-balance-sheet financing is an attempt to borrow money in such a way to prevent recording the obligations. It has become an issue of extreme importance; as a response to off-balance-sheet financing arrangements, the FASB has increased disclosure (note) requirements. The IFRS and the FDIC do not have such requirements, and the SEC only requires companies to provide related information in their management discussion and analysis sections. => b) FASB

An unacceptable treatment for the presentation of current liabilities is:

Offsetting current liabilities against assets that are to be applied to their liquidation.

How does present value relate to the concept of liability?

Present values are used to measure certain liabilities.

JT Engineering's current asset information for all four quarters of 2020 is shown below. JT maintained a constant $250,000 of current liabilities throughout the year. Based on the current ratio, in which quarter was JT least liquid? CURRENT ASSETS; Q1; Q2; Q3; Q4 Cash; $10,000; $8,500; $9,200; $9,000 Short-term Investments; 72,000; 75,000; 69,000; 70,000 Accounts Receivable; 66,000; 61,500; 64,300; 65,000 Inventory; 110,000; 112,000; 112,000; 111,500 Prepaid Expenses; 20,000; 21,500; 20,100; 21,400 TOTAL CURRENT ASSETS; $278,000; $278,500; 276,600; 276,900

RL Enterprises issued a 90-day zero-interest-bearing note with a present value of $2,855 and a face value of $3,000. Which of the following should be included in the journal entry that records the issuance of this note? a) A credit to Discount on Notes Payable for $145 b) A debit to Cash for $2,855 c) A debit to Interest Expense for $145 d) A credit to Notes Payable for $2,855

RL Enterprises credits the Notes Payable account for the $3,000 face value of the note. It debits Cash for present value of $2,855 and the $145 difference between the cash received and the face value of the note to Discount on Notes Payable. Dr. Cash 2855 Dr. Discount on Note Payable 145 Cr. Note Payable 3000 => b) A debit to Cash for $2,855

___________________ is the replacement of an existing bond with a new one.

Refunding

______________________ is the replacement of an existing bond with a new one.

Refunding

Rose Corp. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. Which of the following is a step in calculating the issue price of the bonds?

Semiannual interest payment = $100,000 * .10 * 6/12 = $5,000 You would need to multiply $5,000 by the table value for 20 periods (10 years * 2) and 4% (8% / 2) from the present value of an annuity table to calculate the issue price of the bonds. => Multiply $5,000 by the table value for 20 periods and 4% from the present value of an annuity table

When do companies generally make bond interest payments?

Semiannually

On August 31, Jackson Enterprises issued bonds with a par value of $750,000 and a stated interest rate of 8%. Interest is payable semiannually on June 30 and December 31. If the proceeds from the issue amounted to $760,000, the bonds were most likely

Start by figuring out the accrued interest amount, $750,000 x 8% = $60,000∕12 = $5,000 monthly interest. Since the issue amount, $750,000 plus $10,000 (accrued interest for July and August) = $760,000, the bonds were issued at par plus accrued interest. => issued at par plus accrued interest.

Which of the following companies exhibits the lowest ability to pay their interest expenses? a) Wicker Baskets has net income of $437,000, income tax of $235,000, and interest expense of $192,000. b) Thorn Enterprises has net income of $618,000, income tax of $333,000, and interest expense of $468,000. c) Easton Restaurants has net income of $942,000, income tax of $507,000, and interest expense of $694,000. d) Latimer Industries has net income of $346,000, income tax of $186,000, and interest expense of $321,000.

The Times Interest Earned ratio formula is (Net Income + Interest Expense + Income Tax Expense) / Interest Expense. The lower the ratio, the more likely an entity is unable to pay its interest expense. Therefore, Latimer Industries shows the lowest ability to pay their interest expenses since it has the lowest ratio.Latimer Industries has a times interest earned ratio of ($346,000 + $186,000 + $321,000)/$321,000 = 2.66. Thorn Enterprises has a times interest earned ratio of ($618,000 + $333,000 + $468,000)/$468,000 = 3.03. Easton Restaurants has a times interest earned ratio of ($942,000 + $507,000 + $694,000)/$694,000 = 3.09. Wicker Baskets has a times interest earned ratio of ($437,000 + $235,000 + $192,000)/$192,000 = 4.5. => d) Latimer Industries has net income of $346,000, income tax of $186,000, and interest expense of $321,000.

When long-term debt and sinking fund requirements are present in the financial statements, what must be disclosed?

The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.

Which of the following statements about the use of the assurance warranty method in accounting for product warranty costs is true?

The assurance warranty method represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.

On January 1, 2020, Joyce Ladd loaned $112,695 cash to Daniel Faust in the form of a zero-interest-bearing note (face amount $150,000). The note is to be repaid on December 31, 2022. The prevailing rate of interest for a loan of this type is 10%, and the present value of $150,000 at 10% for three years is $112,695. What amount of interest income should Ms. Ladd recognize in 2020?

The carrying amount of the note in 2017 is $112,695. At a 10% interest rate, the first year would carry an interest expense of $11,270 ($112,695 * 0.1, then rounded to the nearest dollar). => $11,270.

The Silvio Company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using effective-interest amortization, the interest expense to be recognized in 2020 is

The carrying value of the bonds is $9,802,072 with an effective interest rate of 8%, paid twice yearly. On June 30, the company will pay $10,000,000 * 7.8% x 1/2 = $390,000 in interest, however, the bond interest expense is $9,802,072 * 8% x 1/2 = $392,083. Therefore, they amortize $392,083 - $390,000 = $2,083 onto the carrying value of the bond. On December 31, the company will again pay $10,000,000 * 7.8% x 1/2 = $390,000 in interest, however, the bond interest expense is ($9,802,072 + $2,083) * 8% x 1/2 = $392,166. Therefore, they amortize $392,166 - $390,000 = $2,166 onto the carrying value of the bond. The June 30 bond interest expense of $392,083 is added to the December 31 bond interest expense of $392,166. Therefore, their total interest expense is $784,249 ($392,083 + $391,166).

Emily has been asked to calculate a company's debt to assets ratio. The company has assets of $817,000, current liabilities of $143,000, noncurrent liabilities of $285,000, and stockholders' equity of $389,000. Emily should calculate a debt to assets ratio of

The debt to assets ratio is calculated by total liabilities divided by total assets. Therefore, ($143,000 + $285,000) / $817,000 = 52.4%. => 52.4%

On their 2020 balance sheet, Wenger Corporation reported assets of $4,370,000, current liabilities of $589,000, noncurrent liabilities of $1,286,000, and stockholders' equity of $2,495,000. Based on this, their debt to assets ratio is

The debt to assets ratio is calculated by total liabilities divided by total assets. Therefore, ($589,000 + $1,286,000) / $4,370,000 = 42.9%.

Marion Company issued a $350,000, zero-interest-bearing, 5-year note in exchange for land with a fair market value of $287,000 from Palma Real Estate. If the present value of the note at an appropriate rate of interest is $287,000, Palma Real Estate should record a

The difference between the stated value of the note ($350,000) and the present value of the note at an appropriate rate of interest ($287,000), Palma Real Estate should record a discount on notes receivable. => discount on notes receivable.

On October 1, 2021, Jubee Corporation issued 5%, 10-year bonds with a face value of $4,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. The entry to record the issuance of the bonds would include a credit of which of the following? a) $160,000 to Premium on Bonds Payable b) $3,840,000 to Bonds Payable c) $100,000 to Interest Payable d) $160,000 to Discount on Bonds Payable

The face value of the bonds is $4,000,000, but they received $4,000,000 * 1.04 = $4,160,000 for the bonds. Therefore, they would record a premium of $160,000 ($4,160,000 - $4,000,000). => a) $160,000 to Premium on Bonds Payable

What is the proper accounting treatment for a loss that is either probable or estimable, but not both? Assume that there is at least a reasonable possibility that a liability may have been incurred.

The footnotes to the financial statements should disclose (1) the nature of the contingency, and (2) an estimate of the possible loss or range of loss or a statement that an estimate cannot be made.

When shopping for corporate bonds on the open market, you would expect the majority of the available bonds to have a face value of

The main purpose of bonds is to borrow for the long term when the amount of capital needed is too large for one lender to supply. By issuing bonds in $100, $1,000, or $10,000 denominations, a company can divide a large amount of long-term indebtedness into many small investing units, thus enabling more than one lender to participate in the loan. The most common denomination is $1,000. => 1,000

Hart Technology must accrue a loss contingency. The amount of the loss can be reasonably estimated within a range of outcomes. Of these outcomes, no single amount within the range is a better estimate than any other amount, but the attorneys have determined that the most probable amount to be paid by Hart Technology would be the minimum amount. What amount of loss accrual should Hart recognize?

The minimum of the range

On June 30, 2020, Canton Industries had an outstanding 8%, $6,000,000 face amount, 15-year bonds maturing on June 30, 2035. Interest is payable on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2020, were $210,000 and $60,000, respectively. On June 30, 2020, Canton acquired all of these bonds at 94 and retired them. The net carrying amount that should be used in computing gain or loss on this early extinguishment of debt is

The net carrying amount that can be used to compute gain or loss can be found by first adding together the bond issue costs: $210,000 + $60,000 = $270,000. Then subtract this amount from the face amount: $6,000,000 - $270,000 = $5,730,000 net carrying amount.

On January 1, 2020, Ryan Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2030 but were callable at 101 any time after December 31, 2023. Interest was payable semiannually on July 1 and January 1. On July 1, 2025, Ryan called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, which of the following is Ryan's gain or loss in 2025 on this early extinguishment of debt?

The net carrying value of the bonds is $2,080,000, but the face value is only $2,000,000 (2,000*$1,000), the total amount to be amortized as a premium is $80,000 ($2,080,000 - $2,000,000). To find the amount per period to be amortized, divide $80,000 by the number of periods (10 years * 2 periods/year = 20 periods), or $80,000/20 =$4,000. This particular bond has accrued over the period of 5.5 years, or 11 periods, so $4,000 X 11 = $44,000. Then subtract this number from the amount received at the time of issuance: $2,080,000 - $44,000 = $2,036,000. This is the carrying value at the time of recall. Next find the repurchase price: $2,000,000 X 1.01 = $2,020,000 and subtract this from the net carrying value: $2,036,000 - $2,020,000 = $16,000. Since they paid less than the carrying value, they report a gain of $16,000. => $16,000 gain

On January 1, 2016, Morley Electronics issued bonds with a par value of $1,350,000 at 95, due in 10 years. Bond issue costs were $22,000. Bond issue costs and the bond discount were amortized using straight-line methods. On January 1, 2021, Morley called the entire issue at 102. Calculate Morley's loss or gain on redemption.

The reacquisition price is $1,350,000 * 1.02 = $1,377,000. The original discount was $1,350,000 * 0.05 = $67,500; therefore, the unamortized discount is $67,500 * 5/10 = $33,750. The unamortized issue costs are $22,000 * 5/10 = $11,000. This leaves a remaining value of $1,350,000 - $33,750 - $11,000 = $1,305,250. Therefore, the loss on redemption is $1,377,000 - $1,305,250 = $71,750. => $71,750 loss

If a firm uses the fair value option to record the value of a liability, the firm will record a gain when its creditworthiness declines. The FASB says this is acceptable because

the debt holders' loss is the shareholders' gain.

Reardon Pharmaceuticals issued a $2.7 million note payable to Nagel Chemicals in exchange for chemical products. Similar notes have an interest rate of 8 percent. Nagel Chemicals plans to pay Reardon in chemicals equally over the five years, thus equaling five annual payments of $540,000. What should Nagel record as their Discount on Notes Payable when the note is issued? Assume that the PVF-OA5, 6% = 4.21236, PVF-OA5, 8% = 3.99271, PVF5, 6% = 0.74726, and PVF5, 8% = 0.68058.

The present value of five annual payments of $540,000 at 8% interest is $540,000 * 3.99271 (PVF-OA5, 8%) = $2,156,063.40. Therefore, the discount is $2,700,000 - $2,156,063.40 = $543,936.60.

On January 1, 2020, Pickens Incorporated loaned $901,560 to Hauser Enterprises in exchange for a 3 year, zero-interest-bearing note with a face amount of $1,200,000. The prevailing rate of interest for a loan of this type is 10%. The adjusting journal entry made by Hauser on December 31, 2020, to record interest incurred should be:

The present value of the note in 2017 is $901,560. At a 10% interest rate, the first year would carry an interest expense of $90,156 ($901,560 * 0.1). The entry to record the accrual of interest would be a debit to interest expense for $90,156 and a credit to discount on notes payable for $90,156. => a credit to Discount on Notes Payable for $90,156.

On January 1, 2020, Woodall Enterprises sold property to Mattson Company which originally cost Woodall $1,470,000. Mattson gave Woodall a $2,100,000 zero-interest-bearing note payable in three equal annual installments of $700,000, with the first payment due December 31, 2020. The prevailing rate of interest for a note of this type is 10%. The present value of a $2,100,000 note payable in three equal annual installments of $700,000 at a 10% rate of interest is $1,740,900. What is the amount of interest income that should be recognized by Woodall in 2020, using the effective-interest method?

The present value of the note in 2020 is $1,740,900. At a 10% interest rate, the first year would carry an interest expense of $174,090 ($1,740,900 * 0.1). => 174,090

On January 1, 2020, Reagan Enterprises sold property to Dupree Company in exchange for a $4,000,000 zero-interest-bearing note. The note is payable in 5 equal annual installments with the first payment due on December 31, 2020. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was $2,884,000 on the date of issuance. Assuming Dupree uses the effective-interest method, the balance of the Discount on Notes Payable account on December 31, 2020, after adjusting entries are made should be

The present value of the note in 2020 is $2,884,000. At a 9% interest rate, the first year would carry an interest expense of $259,560 ($2,884,000 * 0.09). The initial balance of the Discount on Notes Payable account would be $1,116,000 ($4,000,000 - $2,884,000). Therefore, the new balance after adjusting entries which would include a credit to the discount on notes payable for $259,560, would be $856,440 ($1,116,000 - $259,560). => 856,440

Gannon Auto issued a $180,000, five-year note payable to Starkey Vehicles in exchange for cash. The note was issued at 12%, but notes with similar risk have an interest rate of 9 percent. Gannon is expected to make five annual interest payments of $21,600 with one lump-sum payment for the principal at the end of Year 5. How much cash will Gannon receive on the date the note was issued? Assume that the PVF-OA5, 9% = 3.88965, PVF-OA5, 12% = 3.60478, PVF5, 9% = 0.64993, and PVF5, 12% = 0.56743.

The present value of the principle is $180,000 * 0.64993 (PVF5, 9%) = $116,987.40. The present value of the interest payments is $21,600 * 3.88965 (PVF-OA5, 9%) = $84,016.44. Therefore, Gannon should receive $116,987.40 + $84,016.44 = $201,003.84.

Ruffin Dog Supplies issued a $60,000, four-year note payable to Dozier Resources in exchange for cash. The note was issued at 8%, but notes with similar risk have an interest rate of 6 percent. Ruffin is expected to make four annual interest payments of $4,800 with one lump-sum payment for the principal at the end of Year 4. How much cash will Ruffin receive on the date the note was issued? Assume that the PVF-OA4, 6% = 3.46511, PVF-OA4, 8% = 3.31213, PVF4, 6% = 0.79209, and PVF4, 8% = 0.73503.

The present value of the principle is $60,000 * 0.79209 (PVF4, 6%) = $47,525.40. The present value of the interest payments is $4,800 * 3.46511 (PVF-OA4, 6%) = $16,632.53. Therefore, Ruffin should receive $47,525.40 + $16,632.53 = $64,157.93.

Jolly Industries issued a $1.8 million note payable to Beckman Construction in exchange for construction services. Similar notes have an interest rate of 12 percent. Beckman Construction plans to construct the building with equal costs over the life of the note, thus equaling three annual payments of $600,000. What should Beckman record as their Discount on Notes Payable when the note is issued? Assume that the PVF-OA3, 10% = 2.48685, PVF-OA3, 12% = 2.40183, PVF3, 10% = 0.75131, and PVF3, 12% = 0.71178.

The present value of three annual payments of $600,000 at 12% interest is $600,000 * 2.40183 (PVF-OA3, 12%)= $1,441,098. Therefore, the discount is $1,800,000 - $1,441,098 = $358,902.

Which of the following loss contingencies may be accrued when a loss is probable and reasonably estimable? a) Pending or threatened litigation b) Risk of loss from catastrophes assumed by insurance companies c) General or unspecified business risks d) Risk of loss or damage by fire, explosion, or other hazards

a) Pending or threatened litigation

Over the past year, the value of Peak Incorporated's bonds payable has dropped from $500,000 to $450,000. This decline in value is ________ to the firm's stockholders, because it means the firm's obligation to its debtholders has _______.

beneficial; declined.

During 2020, Dentifrice Toothpaste offers a cash rebate of $1 on each $4 tube of toothpaste sold. Dentifrice anticipates 10% of the rebates will be redeemed. During 2020, 3,000,000 tubes are sold and $160,000 rebate forms are redeemed. How should Dentifrice record the rebate expense and liability on its December 31, 2020 financial statements?

The rebate expense is the cost of the anticipated redemptions. In this case, the cost is $300,000 (3,000,000 coupons distributed *0.10 anticipated redemptions *$1 per redemption). The liability is the difference between the anticipated amount and the actual amount, which is $140,000 in this case ($300,000 - $160,000). => $300,000 expense; $140,000 liability

Earlier in the year, Oliver Industries issued $1 million of 7% bonds at face value. Oliver decided to use the fair value option for these bonds. Now, on December 31, the value of the bonds has dropped to $925,000 due to an increase in interest rates. In this situation, Oliver should record a ________ in its Bonds Payable account.

The value of the bonds has declined by $1,000,000 - $925,000 = $75,000, thus leading to a $75,000 reduction in the firm's bond liability, which would be recorded with a debit of $75,000 to Bonds Payable. => $75,000 debit

When considering current liabilities, why do accounts payable arise?

They arise because there is a lag time between receipt of services or title and the payment for them.

Current asset information for Weston Industries is shown below. If Weston's total current liabilities are $100,000, what is Weston's acid-test ratio? CURRENT ASSSETS Cash; $5,000 Short-term Investments; $68,000 Accounts Receivable; $64,000 Inventory; $110,000 Prepaid Expenses; $30,000 TOTAL CURRENT ASSETS; $277,000

To determine the acid-test ratio, the sum of cash, short-term investments, and net receivables must be divided by current liabilities, or $137,000 / $100,000 = 1.37. => 5,000 + 68,000 + 64,000 = 137,000 ==> 1.37 to 1

To determine the acid-test ratio, the sum of cash, short-term investments, and net receivables must be divided by current liabilities, or $137,000 / $100,000 = 1.37. (5,000 + 68,000 + 64,000 = 137,000) => 1.37 to 1

To determine the amount to be debited, subtract the face value from the carrying value at the redemption date: $311,235 - $300,000 = $11,235, would represent the unamortized premium at the date of extinguishment. => A debit of $11,235 to Premium on Bonds Payable

Pigeon Corporation retires its $300,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $311,235. Which of the following will be included in the entry to record the redemption? a) A credit of $3,765 to Gain on Bond Redemption b) A debit of $11,235 to Premium on Bonds Payable c) A debit of $15,000 to Premium on Bonds Payable d) A credit of $11,235 to Loss on Bond Redemption

To determine the current ratio, current assets must be divided by current liabilities, or $182,000/$170,000 = 1.07. To determine the acid-test ratio, the sum of cash, short-term investments, and net receivables ($4,000 + $61,000 + $54,000) must be divided by current liabilities, or $119,000 / $170,000 = 0.70. => The current ratio is 1.07 times and the acid-test ratio is 0.70 times.

To determine the current ratio, current assets must be divided by current liabilities, or $344,000/$300,000 = 1.15. To determine the acid-test ratio, the sum of cash, short-term investments, and net receivables ($9,000 + $89,000 + $76,000) must be divided by current liabilities, or $174,000 / $300,000 = 0.58. => The current ratio is 1.15 times and the acid-test ratio is 0.58 times.

Which of the following would likely be most successful at preventing off-balance-sheet financing? a) Reporting assets at fair value b) Reporting common stocks at market value c) Reporting current liabilities at fair value d) Reporting long-term liabilities at fair value

a) Reporting assets at fair value

To determine the current ratio, current assets must be divided by current liabilities. For 2018, $361,000 / $320,000 = 1.13. For 2019, $346,500 / $320,000 = 1.08. For 2020, $354,600 / $320,000 = 1.11. For 2021, $352,300 / $320,000 = 1.10. The higher the current ratio, the more liquid the company is. Thus, 2018's ratio represents RL's highest liquidity. => a) 2018

To determine the current ratio, current assets must be divided by current liabilities. For Q1, $278,000 / $250,000 = 1.112. For Q2, $278,500 / $250,000 = 1.114. For Q3, $276,600 / $250,000 = 1.106. For Q4, $276,900 / $250,000 = 1.108. The lower the current ratio, the less liquid the company is. Thus, Q3's ratio represents JT's lowest liquidity. => d) Q3

Why does the accounting profession no longer support the exclusion of short-term obligations expected to be refinanced from current liabilities, only if a company had the intent and ability to refinance?

To ensure comparability between companies over time.

The Lyon Corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of $750,000. To extinguish this debt, the company had to pay a call premium of $250,000. Ignoring income tax considerations, these amounts should be treated for accounting purposes by

To find the amount to be charged, add the unamortized discount and the call premium: $750,000 + $250,000 = $1,000,000. The year in which the company decides to redeem the bond the book value of the bond becomes nil in its book. Since the call premium is being paid by the corporation for early redemption of bond it will also be charged as an expense in the Income Statement in the year of redemption => charging $1,000,000 to a loss in the year of extinguishment.

The Marson Company took advantage of market conditions to refund debt. This was the fourth refunding operation carried out by Marson within the last three years. How should the excess of the carrying amount of the old debt over the amount paid to extinguish it be reported?

Whether the early redemption or other extinguishment of outstanding debt is a nonrefunding or a refunding situation, a company should recognize the difference (gain or loss) between the reacquisition price and the net carrying amount of the redeemed debt in income as part of continuing operations for the period of redemption. => As part of continuing operations

When are short-term obligation scheduled to mature?

Within one year after the date of the company's balance sheet.

On March 18, 2021, Jarius Resources issued common stock with a par value of $500,000. On March 23, 2021, they called an issue of bonds with a par value of $500,000 using the cash raised from the sale of common stock. On the balance sheet dated December 31, 2020, they would have likely reported the bonds as

a noncurrent liability.

Which of the following statements about liabilities is false? a) Stock dividends declared but not yet distributed are a reported as a liability until the stock is issued. b) Cash dividends should be recorded as a liability when they are declared by the board of directors. c) A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing. d) Unearned revenues represent advance payments for goods or services from customers.

a) Stock dividends declared but not yet distributed are a reported as a liability until the stock is issued.

Which of the following is not a characteristic of a project financing arrangement? a) The project must be one that neither entity could enter into on its own. b) Two or more entities form a new entity to construct an operating plant that will be used by both parties. c) Payment of the debt is guaranteed by the companies that formed the new entity. d) The new entity borrows money to finance the project and repays the debt from the proceeds received from the project.

a) The project must be one that neither entity could enter into on its own.

Martinez Corporation sells DVD players. The corporation also offers its customers a 4-year warranty contract. During 2020, Martinezsold 20,000 warranty contracts at $93 each. The corporation spent $185,000 servicing warranties during 2020, and it estimates that an additional $925,000 will be spent in the future to service the warranties. a) Prepare Martinez's journal entry for the sale of contracts. Assume the service costs are inventory costs. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) b) Prepare Martinez's journal entry for the cost of servicing the warranties. Assume the service costs are inventory costs. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) c) Prepare Martinez's journal entry for the recognition of warranty revenue. Assume the service costs are inventory costs. (Round intermediate calculations to 5 decimal places, e.g. 1.55467 and final answers to 0 decimal places, e.g. 5,125. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

a) (20,000 x 93) = 1,860,000 Dr. Cash 1,860,000 Cr. Unearned Warranty Revenue 1,860,000 b) Dr. Warranty Expense 185,000 Cr. Inventory 185,000 c) (20,000 x 93) / 4 = 465,000 Dr. Unearned Warranty Revenue 465,000 Cr. Warranty Revenue 465,000

Pronghorn Corporation sells computers under a 2-year warranty contract that requires the corporation to replace defective parts and to provide the necessary repair labor. During 2020, the corporation sells for cash 395 computers at a unit price of $2,390. On the basis of past experience, the 2-year warranty costs are estimated to be $158 for parts and $208 for labor per unit. (For simplicity, assume that all sales occurred on December 31, 2020.) The warranty is not sold separately from the computer. a) Record any necessary journal entries in 2020. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.) b) What liability relative to these transactions would appear on the December 31, 2020, balance sheet and how would it be classified? c) In 2021, the actual warranty costs to Pronghorn Corporation were $22,590 for parts and $40,840 for labor. Record any necessary journal entry in 2021. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

a) (395 x 2,390) = 944,050 (395 x (158 + 208)) = 144,570 Dr. Cash 944,050 Dr. Warranty Expense 144,570 Cr. Sales Revenue 944,050 Cr. Warranty Liability 144,570 b) ((395 x (158 + 208) x 1/2) = 72,285 Pronghorn Corporation Balance Sheet (Partial) December 31, 2020 Current Liabilities: Warranty Liability 72,285 Long-term Liabilities: Warranty Liability 72,285 c) (22,590 + 40,840) = 63,430 Dr. Warranty Liability 63,430 Cr. Inventory 22,590 Cr. Salaries and Wages Payable 40,840

Wildhorse Gas Co. purchases a gas station and convenience store on January 1, 2017, at a cost of $788,000. Wildhorse expects to operate the store and gas station for 20 years. The company is legally required to remove the underground gas storage tanks from the facility at the end of its useful life. Wildhorse estimates that it will cost $108,000 to remove the tanks at the end of the facility's useful life. a) Prepare the journal entries to record the purchase of the gas station/convenience store, as well as the asset retirement obligation for the gas station/convenience store on January 1, 2017. Based on an effective-interest rate of 8%, the present value of the asset retirement obligation on January 1, 2017, is $23,171. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) b) Prepare any journal entries required for the depot and the asset retirement obligation at December 31, 2017. Wildhorse uses straight-line depreciation; the estimated salvage value for the facility is zero. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) c) On December 31, 2036 Wildhorse pays an environmental contractor to dismantle and remove the underground storage tanks at a price of $118,000.Prepare the journal entry for the settlement of the asset retirement obligation. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

a) Dr. Plant Asset 788,000 Cr. Cash 788,000 Dr. Plant Asset 23,171 Cr. Asset Retirement Obligation 23,171 b) (788,000/20 years) = 39,400 (23,171/20 years) = 1,158.55 or 1,159 (23,171 x 8%) = 1,853.68 or 1,854 Dr. Depreciation Expense 39,400 Cr. Accumulated Depreciation - Plant Asset 39,400 Dr. Depreciation Expense 1,159 Cr. Accumulated Depreciation - Plant Asset 1,159 Dr. Interest Expense 1,854 Cr. Asset Retirement Obligation 1,854 c) (118,000 - 108,000) = 10,000 Dr. Asset Retirement Obligation 108,000 Dr. Loss on ARO Settlement 10,000 Cr. Cash 118,000

Total payroll of Blossom Co. was $1,900,000, of which $280,000 represented amounts paid in excess of $128,400 to certain employees. The amount paid to employees in excess of $7,000 was $1,460,000. Income taxes withheld were $468,000. The state unemployment tax is 1.2%, the federal unemployment tax is .8%, and the F.I.C.A. tax is 7.65% on an employee's salaries and wages to $128,400 and 1.45% in excess of $128,400. a) Prepare the journal entry for the salaries and wages paid. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) b) Prepare the entry to record the employer payroll taxes. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

a) ((1,900,000 - 280,000) x 7.65%) + (280,000 x 1.45%) = 127,990 (1,900,000 - 468,000 - 127,990) = 1,304,010 Dr. Salaries and Wages Expense 1,900,000 Cr. Withholding Tax Payable 468,000 Cr. FICA Tax Payable 127,990 Cr. Cash 1,304,010 b) ((1,900,000 - 1,460,000) x 0.8%) = 3,520 (440,000 x 1.2%) = 5,280 (127,990 + 3,250 + 5,280) = 136,790 Dr. Payroll Tax Expense 136,790 Cr. FICA Tax Payable 127,990 Cr. FUTA Tax Payable 3,520 Cr. SUTA Tax Payable 5,280

The face value of the bond, the length of the term of the bond, and the par value are all needed to determine which of the following? a) Unamortized discount b) Face value c) Unamortized issue cost d) Reacquisition price

a) Unamortized discount

Which of the following most accurately describes the conditions under which a company is legally obligated for the costs associated with the retirement of a long-lived asset? a) The company is never legally obligated b) Whether the company hires another party to perform the retirement activities or performs the activities itself. c) When the company performs the activities with its own workforce and equipment. d) When the company hires another party to perform the retirement activities.

b) Whether the company hires another party to perform the retirement activities or performs the activities itself.

Monty Company began operations on January 2, 2019. It employs 11 individuals who work 8-hour days and are paid hourly. Each employee earns 9 paid vacation days and 7 paid sick days annually. Vacation days may be taken after January 15 of the year following the year in which they are earned. Sick days may be taken as soon as they are earned; unused sick days accumulate. Additional information is as follows. Actual Hourly Wage Rate 2019; 2020: $11; $12 Vacation Days Usedby Each Employee 2019; 2020: 0; 8 Sick Days Used by Each Employee 2019; 2020: 5; 6 Monty Company has chosen to accrue the cost of compensated absences at rates of pay in effect during the period when earned and to accrue sick pay when earned. a) Prepare journal entries to record transactions related to compensated absences during 2019 and 2020. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) b) Compute the amounts of any liability for compensated absences that should be reported on the balance sheet at December 31, 2019 and 2020.

a) 2019: 11 x 9 x 8 x 11 = 8,712 Dr. Salaries and Wages Expense 8,712 Cr. Salaries and Wages Payable 8,712 11 x 7 x 8 x 11 = 6,776 Dr. Salaries and Wages Expense 6,776 Cr. Salaries and Wages Payable 6,776 11 x 11 x 8 x 5 = 4,840 Dr. Salaries and Wages Payable 4,840 Cr. Cash 4,840 2020: 11 x 12 x 8 x 9 = 9,504 Dr. Salaries and Wages Expense 9,504 Cr. Salaries and Wages Payable 9,504 11 x 12 x 8 x 7 = 7,392 Dr. Salaries and Wages Expense 7,392 Cr. Salaries and Wages Payable 7,392 11 x 11 x 8 x 8 = 7,744 11 x 12 x 8 x 8 = 8,448=> 8,448 - 7,744 = 704 Dr. Salaries and Wages Expense 704 Dr. Salaries and Wages Payable 7,744 Cr. Cash 8,448 11 x 11 x 8 x 2 days = 1,936 11 x 12 x 8 x 4 = 4,224=> 1,936 + 4,224 = 6,160 11 x 12 x 8 x 6 = 6,336=> 6,336 - 6,160 = 176 Dr. Salaries and Wages Expense 176 Dr. Salaries and Wages Payable 6,160 Cr. Cash 6,336 b) 2019 Vacation Wages Payable = 8,712 2019 Sick Pay Wages Payable = (6,776 - 4,840) = 1,936 2020 Vacation Wages Payable = 8,712 + (9,504 - 7,744)=> 8,712 + 1,760 = 10,472 2020 Sick Pay Wages Payable = 1,936 + (7,392 - 6,160)=> 1,936 + 1,232 = 3,168

AROs Ex.: A firm's natural resource exploitation site will require an expenditure of $5 million to reclaim the site for environmental purposes. That expenditure is expected to be made five years from now. The present value today of that amount is $3.5 million. Because of this obligation, by what amount will (1) total depletion on the site increase and (2) how much interest (accretion) expense will be recognized, over the five years (in millions)? a) (1) $3.5; (2) $1.5 b) (1) $5.0; (2) $1.5 c) (1) $0; (2) $0 d) (1) $3.5; (2) $3.5

a) (1) $3.5; (2) $1.5 (1) The total cost of site will increase by $3.5 million. Therefore, the total depletion expense will increase by $3.5 million. (2) Moreover, the amount to be paid is $5.0 million for $3.5 million, the difference is treated as interest expense of $1.5 million.

Which of the following may create employer liabilities in connection with their payrolls? a) All of these answer choices are correct. b) Employee withholding taxes. c) Employee voluntary deductions. d) Employee fringe benefits.

a) All of these answer choices are correct.

An early extinguishment of bonds payable, which were originally issued at a premium, is made by the purchase of the bonds between interest dates. Which of the following is not true at the time of reacquisition? a) Any gain or loss is amortized over the remaining life of the bonds b) The premium must be amortized up to the purchase date c) Any costs of issuing the bonds must be amortized up to the purchase date d) Interest must be accrued from the last interest date to the purchase date

a) Any gain or loss is amortized over the remaining life of the bonds

Which of the following businesses would be most likely to issue only notes payable as their long-term debt instruments? a) Betty's Bakery, a small hometown bakery with a single location. b) Parham Enterprises, a corporation with multiple brand labels that sells their products internationally. c) Valdez Mexican Grille, a regional chain of restaurants found in the southwestern United States. d) Nugent Lumber, a company that cuts and ships lumber and other wood materials to home improvement stores across the country.

a) Betty's Bakery, a small hometown bakery with a single location.

Which of the following is the correct equation for bond interest expense? a) Carrying value of bonds at beginning of period X effective-interest rate b) Face amount of bonds X effective-interest rate c) Face amount of bonds X stated interest rate d) Carrying value of bonds at beginning of period X stated interest rate

a) Carrying value of bonds at beginning of period X effective-interest rate

Which of the following accounts would be correctly classified as a current liability? a) Current maturities of long-term debt b) Accounts payable—debit balances c) Dividends payable in the form of a company's stock d) Losses expected to be incurred within the next twelve months in excess of the company's insurance coverage

a) Current maturities of long-term debt

Which of the following is another name for the market rate? a) Effective yield b) Discount rate c) Premium rate d) Premium yield

a) Effective yield

Which of the following is another name for the market rate? a) Effective yield b) Premium rate c) Discount rate d) Premium yield

a) Effective yield

Under which of the following scenarios would a company likely report a noncurrent liability as a current liability on their balance sheet? a) If they plan to pay off a five-year loan with cash currently on hand in the first half of the next fiscal period b) If they plan to pay off a loan by issuing bonds in the next month c) If they plan to call bonds by using money from a bond retirement fund in the next three months d) If they plan to convert bonds to stocks within the next year

a) If they plan to pay off a five-year loan with cash currently on hand in the first half of the next fiscal period

Which of the following represents an arrangement where a company plans to pay off a long-term debt in the future by placing purchased securities in an irrevocable trust? a) In-substance defeasance b) Net redemption c) Reacquisition redemption d) Net defeasance

a) In-substance defeasance

Which of the following terms refers to a bond that does not pay interest unless the issuing company is profitable? a) Income bond b) Debenture bond c) Revenue bond d) Collateral trust bond

a) Income bond

Which of the following is included in the current ratio but not the acid-test ratio? a) Inventory b) Cash c) Net receivables d) Short-term investment

a) Inventory

Which of the following is included in the current ratio but not the acid-test ratio? a) Inventory b) Short-term investment c) Cash d) Net receivables

a) Inventory

The face value of the bond, the length of the term of the bond, and the par value are all needed to determine which of the following? a) Unamortized issue cost b) Unamortized discount c) Reacquisition price d) Face value

b) Unamortized discount

Penny is interested in investing in corporate bonds, but she is not sure what type would be the best choice for her. She tells you that she is especially interested in buying a bond that has a relatively low level of risk and offers a steady income stream. Which of the following pieces of advice would be most appropriate for you to provide? a) "Any type of debenture bond should be a solid choice. These bonds are backed by collateral, which means your risk of loss is low or even nonexistent." b) "Given your desire for a low level of risk and a steady income stream, you will want to avoid debenture bonds that are not secured by collateral and deep-discount bonds that do not provide a steady income stream, even if their price makes them seem like an appealing option." c) "I would recommend avoiding term bonds. Because these bonds all mature on a single date, you will not receive any interest payments until that maturity date is reached." d) "I think an income bond is the best choice for you, because with this type of bond, the issuing corporation must pay you a set amount of money every year until the bond reaches maturity."

b) "Given your desire for a low level of risk and a steady income stream, you will want to avoid debenture bonds that are not secured by collateral and deep-discount bonds that do not provide a steady income stream, even if their price makes them seem like an appealing option."

Which of the following may create employer liabilities in connection with their payrolls? a) Employee fringe benefits. b) All of these answer choices are correct. c) Employee withholding taxes. d) Employee voluntary deductions.

b) All of these answer choices are correct.

Which of the following loss contingencies would be incorrectly accrued? a) Obligations related to product warranties b) General or unspecified business risks c) Premiums offered to customers d) Collectibility of receivables

b) General or unspecified business risks

Which of the following are considered to be gain contingencies? I. A tax loss carryforward II. The possible receipts of donations and bonuses. III. A pending court case where the probable outcome is favorable IV. A possible payment due to the government due to a tax dispute a) I, II, III, and IV. b) I, II, and III. c) II, III, and IV. d) I, II, and IV.

b) I, II, and III.

Under which of the following circumstances should the currently maturing portion of long-term debt be classified as a current liability? a) If the debt is to be refinanced on a long-term basis. b) If the classified portion will be liquidated within one year using current assets. c) If the funds used to liquidate it are currently classified as a long-term investment on the balance sheet. d) If the debt is to be converted into capital stock.

b) If the classified portion will be liquidated within one year using current assets.

Volpp Industries is suing Taylor Enterprises. Under which of the following circumstances would Volpp have a gain contingency related to a court case? a) If the case has not yet been brought before the court b) If the judgment was awarded to Volpp but Taylor appealed the judgment c) If no judgment was awarded and the case was ruled no fault d) If the judgment was awarded to Taylor but Volpp appealed the judgment

b) If the judgment was awarded to Volpp but Taylor appealed the judgment

RL Enterprises places a $750,000 short-term liability in the long-term liability section of its financial statements. It then includes a note giving a description of a new financing agreement for the liability and describes the terms that would be incurred by the new obligation. Which of the following can you assume based on this information? a) RL has demonstrated the ability to refinance the short-term liability on a long-term basis. b) RL intends to and has demonstrated the ability to refinance the short-term liability on a long-term basis. c) RL intends to refinance the short-term liability on a long-term basis. d) RL has proceeded with refinancing the short-term liability on a long-term basis.

b) RL intends to and has demonstrated the ability to refinance the short-term liability on a long-term basis.

Which of the following statements about short-term obligations that will be refinanced on a long-term basis is true? a) Such obligations are categorized inconsistently from company to company because no clear-cut classification exists. b) Such obligations must have contractual right to defer settlement more than one year. c) Such obligations should always be included in current liabilities rather than long-term liabilities. d) Such obligations should be excluded from the balance sheet if they are paid off before the balance sheet.

b) Such obligations must have contractual right to defer settlement more than one year.

If a bond is held to maturity, then the carrying amount and face value will have which of the following relationships? a) The carrying amount will be greater than or equal to the face value. b) The carrying amount will equal the face value. c) The carrying amount will be greater than the face value. d) The carrying amount will be less than the face value.

b) The carrying amount will equal the face value.

Which is a criterion for a company to classify short-term debt expected to be refinanced as noncurrent? a) Liability is contractually due to be settled more than one year (or operating cycle, if shorter) after the stockholder equity statement date. b) The company has a contractual right to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date. c) The CFO wants to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date. d) Liability is not under contact, however due to be settled more than one year (or operating cycle, if longer) after the balance sheet date.

b) The company has a contractual right to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date.

In order to exclude a short-term obligation from current liabilities, which of the following needs to occur? a) The company must demonstrate the ability to complete refinancing. b) The company must have a contractual right to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date. c) The company must intend to refinance the obligation on a long-term basis. d) The obligation must be due with one year (or operating cycle, if longer).

b) The company must have a contractual right to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date.

Which of the following most accurately defines the term discount as it applies to a zero-interest-bearing note? a) The discount represents the lender's costs to underwrite the note. b) The discount represents the cost of borrowing. c) The discount represents the credit quality of the borrower. d) The discount represents the allowance for uncollectible amounts.

b) The discount represents the cost of borrowing.

Which of the following provisions would you most expect to see in the indenture for a convertible bond? a) "All interest payments for this bond will be provided at the time of the bond's maturity." b) "At any time in the next 10 years, the corporation may compel the holder of this bond to redeem it for cash." c) "At any time in the next five years, this bond may be redeemed for 30 shares of common stock." d) "Upon maturity, this bond may be redeemed for either cash or five barrels of crude oil."

c) "At any time in the next five years, this bond may be redeemed for 30 shares of common stock."

Which of the following is an example of a disclosure of accrual for loss contingency? a) "The company is named in numerous lawsuits alleging that the plaintiff incurred injury as a result of using our product. These suits are similar in nature to those filed against other companies in the industry." b) "We are self-insured for certain insurable risks consisting primarily of employee health insurance programs. We fully insured future risks for long-term disability, but maintained a self-insured position for claims incurred prior to inception of that coverage." c) "During December, a run of gadgets shipped to customers was found to be faulty. The gadgets have been recalled and customer reimbursement in the amount of $1,500,000 has been charged to current operations." d) "During Q1, a U.S. District court awarded an $800,000 judgment against Company X for failure to uphold our agreement. No income related to this judgment has been recorded because Company X has filed an appeal."

c) "During December, a run of gadgets shipped to customers was found to be faulty. The gadgets have been recalled and customer reimbursement in the amount of $1,500,000 has been charged to current operations."

Discount on bonds payable should be shown on the balance sheet as which of the following? a) An asset b) A reduction of stockholders' equity c) A deduction from bonds payable. d) Both an asset and a liability

c) A deduction from bonds payable.

Which of the following statements about after costs associated with warranties and guarantees is true? a) After cost liability should not be recognized even if it is reasonably estimable. b) After costs associated with warranties and guarantees are usually insignificant. c) After costs include all costs incurred after sale that are incident to the correction of defects. d) After costs amounts, dates, and customers are indefinite, making liability improbable.

c) After costs include all costs incurred after sale that are incident to the correction of defects.

Which of the following would be inaccurately classified as a current liability? a) Customer advances and deposits. b) Unearned revenues. c) Bonds payable d) Income taxes payable.

c) Bonds payable

Which of the following is the rate of interest actually earned by bondholders? a) Nominal rate b) Stated rate c) Effective rate d) Coupon rate

c) Effective rate

Which of the following statements about current liabilities is incorrect? a) Under the cash basis method, warranty costs are charged to expense as they are paid. b) A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing. c) FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority. d) Cash dividends should be recorded as a liability when they are declared by the board of directors.

c) FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority.

Under which of the following circumstances would a long-term note payable be classified as a current liability? a) If the balance is due within one year or the current operating cycle, whichever is shorter b) If the note payable has an effective interest rate of zero c) If the balance is due within one year or the current operating cycle, whichever is longer d) If the note payable was issued at a discount or premium

c) If the balance is due within one year or the current operating cycle, whichever is longer

Under which of the following circumstances would a long-term note payable be classified as a current liability? a) If the note payable was issued at a discount or premium b) If the balance is due within one year or the current operating cycle, whichever is shorter c) If the balance is due within one year or the current operating cycle, whichever is longer d) If the note payable has an effective interest rate of zero

c) If the balance is due within one year or the current operating cycle, whichever is longer

If bonds are initially sold at a discount and the straight-line method of amortization is used, then which of the following will prove to be true about interest expense in the earlier years? a) It will be less than the stated (nominal) rate of interest. b) It will be less than what it would have been had the effective-interest method of amortization been used. c) It will exceed what it would have been had the effective-interest method of amortization been used. d) It will be the same as what it would have been had the effective-interest method of amortization been used.

c) It will exceed what it would have been had the effective-interest method of amortization been used.

RL Enterprises financial statements include a $100,000, 8%, nine-month note in its long-term liabilities section. RL plans to retire the liability at maturity using proceeds from the liquidation of an investment property. Which of the following can you assume based on this information? a) RL is using an asset classified as short-term to pay off a current liability. b) RL is using an asset classified as long-term to pay off a long-term liability. c) RL is using an asset classified as long-term to pay off a current liability.

c) RL is using an asset classified as long-term to pay off a current liability.

Which of the following is not something that needs to be determined to find the loss on redemption? a) Unamortized issue cost b) Reacquisition price c) Stated interest rate d) Unamortized discount

c) Stated interest rate

JT Enterprises has $800,000 in short-term debt that it both intends to and has the ability to refinance. As a result, JT excludes this debt from the current liabilities section of its financial statements. In doing so, JT should not include which of the following in the note to the financial statements? a) A general description of the financing agreement. b) The terms of the any new obligation incurred or to be incurred. c) The amount of interest to be paid over the life of the long-term obligation. d) The terms of any equity security issued or to be issued.

c) The amount of interest to be paid over the life of the long-term obligation.

Amador Incorporated signed a long-term mortgage note to provide funds to build a new building. The note was secured by the title to the building. If Amador is expected to pay the bank $90,000 per year for 10 years to repay the loan, which of the following relationships can you expect to apply to the situation? a) The amount of interest expense will remain constant over the 10-year period. b) The balance of Mortgage Payable at a given balance sheet date will be reported as a long-term liability. c) The balance of Mortgage Payable will decrease over the 10-year period. d) The balance of Mortgage Payable will remain a constant amount over the 10-year period.

c) The balance of Mortgage Payable will decrease over the 10-year period.

A corporation's board of directors has just approved a new bond issue. Before the bond issue can take place, which of the following must occur? a) The firm must seek approval from all parties who hold any of its long-term debt. b) The firm must seek approval from all parties who hold any of its short-term debt. c) The firm's stockholders must approve the new bond issue. d) The firm's existing bondholders must approve the new bond issue.

c) The firm's stockholders must approve the new bond issue.

Which of the following scenarios would be most beneficial for a firm's shareholders, assuming overall interest rates remain constant and the firm uses the fair value option to value its bonds? a) The value of the firm's bonds payable increases while the value of its assets remains constant. b) The value of the firm's bonds payable increases while the value of its assets decreases. c) The value of the firm's bonds payable decreases while the value of its assets remains constant. d) The value of the firm's bonds payable decreases while the value of its assets decreases.

c) The value of the firm's bonds payable decreases while the value of its assets remains constant.

Under which of the following circumstances should a company account for warranty costs and the related liability? a) When the warranty costs are associated with a service contract sold separately from the product. b) When the duration of the warranty is two years or more and relates to a sales-type warranty. c) When the warranty is an integral and inseparable part of the sale d) When the warranty period relates to an extended warranty.

c) When the warranty is an integral and inseparable part of the sale

A company that enters into off-balance-sheet financing

can enhance the quality of its reported financial position and perhaps permit credit to be obtained more readily and at less cost.

The ___________________ amount will be equal to the maturity value if a bond is held to maturity.

carrying

Because they usually involve short periods and the difference in their present and maturity value is so small that it is immaterial, ________ are usually recorded and reported at full maturity value on financial statements.

current liabilities

If the balance of a long-term note payable is due within one year or the current operating cycle, whichever is longer, it should be classified as a

current liability.

Penny is interested in investing in corporate bonds, but she is not sure what type would be the best choice for her. She tells you that she is especially interested in buying a bond that has a relatively low level of risk and offers a steady income stream. Which of the following pieces of advice would be most appropriate for you to provide? a) "Any type of debenture bond should be a solid choice. These bonds are backed by collateral, which means your risk of loss is low or even nonexistent." b) "I think an income bond is the best choice for you, because with this type of bond, the issuing corporation must pay you a set amount of money every year until the bond reaches maturity." c) "I would recommend avoiding term bonds. Because these bonds all mature on a single date, you will not receive any interest payments until that maturity date is reached." d) "Given your desire for a low level of risk and a steady income stream, you will want to avoid debenture bonds that are not secured by collateral and deep-discount bonds that do not provide a steady income stream, even if their price makes them seem like an appealing option."

d) "Given your desire for a low level of risk and a steady income stream, you will want to avoid debenture bonds that are not secured by collateral and deep-discount bonds that do not provide a steady income stream, even if their price makes them seem like an appealing option."

Which of the following statements about contingent liability is true? a) A contingent liability is not disclosed in the financial statements. b) A contingent liability is accrued even though it cannot be reasonably estimated. c) A contingent liability definitely exists as a liability but its amount and due date are indeterminable. d) A contingent liability is the result of a loss contingency.

d) A contingent liability is the result of a loss contingency.

Which of the following long-term debts should be classified as a current liability? a) A liability that will be converted into capital stock b) A debt that will be retired from the proceeds of a new debt issue c) A debt that will be retired by non current assets accumulated for that purpose d) A note that is due on demand as a result of a violated debt agreement

d) A note that is due on demand as a result of a violated debt agreement

A recently graduated staff auditor is reviewing evidence of the ability and intent to complete a refinancing of a short-term obligation. Which of the following should the auditor reject as being inadequate evidence for reclassification? a) Entering into an agreement that gives the company the right to defer settlement for at least one year b) Actual refinancing after the balance sheet date by issuance of a long-term obligation. c) Actual refinancing after the balance sheet date by issuance of equity securities. d) A statement by the board of directors that refinancing is inevitable.

d) A statement by the board of directors that refinancing is inevitable.

Which of the following statements about accounts payable is true? a) When accounts payable are recorded at the net amount, a Purchase Discounts account will be used. b) When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account will be used. c) Accounts payable are recorded at present value d) Accounts payable are also called trade accounts payable.

d) Accounts payable are also called trade accounts payable.

Professor Lawson is preparing a lecture on contingencies for his Intermediate Accounting class. He would be incorrect to include which example as a gain contingency? a) Charlie Enterprises expects to be given a used milling machine by its parent company to replace its existing machine. b) Alpha Industries was charged too much income tax by the federal government and anticipates a full refund of the overage. c) Delta Converting plans to carry this year's net operating losses to next year's profits in a tax loss carryforward. d) Bravo Engineering is a defendant in a lawsuit and payment by Bravo is contingent on the outcome of the proceedings.

d) Bravo Engineering is a defendant in a lawsuit and payment by Bravo is contingent on the outcome of the proceedings.

Which of the following is the correct equation for bond interest expense? a) Face amount of bonds X effective-interest rate b) Face amount of bonds X stated interest rate c) Carrying value of bonds at beginning of period X stated interest rate d) Carrying value of bonds at beginning of period X effective-interest rate

d) Carrying value of bonds at beginning of period X effective-interest rate

Which of the following formulas is used to compute the debt to assets ratio? a) Divide long-term liabilities by total assets. b) Divide current liabilities by total assets. c) Divide total assets by total liabilities. d) Divide total liabilities by total assets.

d) Divide total liabilities by total assets.

Which of the following statements most accurately defines liabilities? a) Liabilities are deferred credits that are recognized and measured in conformity with generally accepted accounting principles. b) Liabilities are accounts having credit balances after closing entries are made. c) Liabilities are obligations to transfer ownership shares to other entities in the future. d) Liabilities are obligations arising from past transactions and payable in assets or services in the future.

d) Liabilities are obligations arising from past transactions and payable in assets or services in the future.

Which of the following is a distinct characteristic of a current liability and not a long-term liability? a) Unavoidable obligation. b) Present obligation that entails settlement by probable future transfer or use of cash, goods, or services. c) Transaction or other event creating the liability has already occurred. d) Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

d) Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

Which of the following most accurately describes the relationship between a company's current liabilities and its operating cycle? a) Current liabilities are the result of operating transactions that have occurred within the current operating cycle. b) There is no relationship between a company's current liabilities and operating cycle. c) Current liabilities cannot exceed the amount of expenses incurred in one operating cycle. d) Liquidation of current liabilities is reasonably expected within the company's operating cycle.

d) Liquidation of current liabilities is reasonably expected within the company's operating cycle.

Rose Corp. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. Which of the following is a step in calculating the issue price of the bonds? a) Multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity table b) Multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table c) Multiply $10,000 by the table value for 10 periods and 10% from the present value of an annuity table d) Multiply $5,000 by the table value for 20 periods and 4% from the present value of an annuity table

d) Multiply $5,000 by the table value for 20 periods and 4% from the present value of an annuity table

RL Enterprises places a $750,000 short-term liability in the long-term liability section of its financial statements. It then includes a note giving a description of a new financing agreement for the liability and describes the terms that would be incurred by the new obligation. Which of the following can you assume based on this information? a) RL has proceeded with refinancing the short-term liability on a long-term basis. b) RL intends to refinance the short-term liability on a long-term basis. c) RL has demonstrated the ability to refinance the short-term liability on a long-term basis. d) RL intends to and has demonstrated the ability to refinance the short-term liability on a long-term basis.

d) RL intends to and has demonstrated the ability to refinance the short-term liability on a long-term basis.

If a company exchanges a debt instrument with no ready market for property with an indeterminable fair value,

the present value of the debt instrument must be approximated using an imputed interest rate.

In which of the following scenarios may a company exclude a short-term obligation from current liabilities? a) A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis. b) A company may exclude a short-term obligation from current liabilities if it is paid off after the balance sheet date and subsequently replaced by long-term debt before the balance sheet is issued. c) A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing. d) The company must have a contractual right to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date.

d) The company must have a contractual right to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date.

If an enterprise intends to refinance a short-term obligation on a long-term basis, which of the following conditions must it meet in order to exclude that obligation from current liabilities? a) The interest rate on the long-term obligation is not above the prime rate. b) The enterprise must demonstrate that a negative effect on working capital will result if it is not reclassified. c) The enterprise must be able to demonstrate the ability and intent to complete the refinancing. d) The enterprise has a contractual right to defer settlement of the liability for at least one year.

d) The enterprise has a contractual right to defer settlement of the liability for at least one year.

A ten-year bond was issued in 2020 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2022, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2022 should have equaled which of the following? a) The face amount plus unamortized discount b) The call price c) The call price less unamortized discount d) The face amount less unamortized discount

d) The face amount less unamortized discount

The Lyle Company issued bonds with a maturity amount of $200,000 and a maturity date ten years from the date of issue. Which of the following is indicated if the bonds were issued at a premium? a) The market and nominal rates coincided b) No necessary relationship exists between the two rates c) The effective yield or market rate of interest exceeded the stated (nominal) rate d) The nominal rate of interest exceeded the market rate

d) The nominal rate of interest exceeded the market rate

Which of the following is true of the printing costs and legal fees associated with the issuance of bonds? a) They should be expensed when incurred. b) They should not be reported as an expense until the period the bonds mature or are retired. c) They should be accumulated in a deferred charge account and amortized over the life of the bonds. d) They should be reported as a deduction from the face amount of bonds payable and amortized over the life of the bonds.

d) They should be reported as a deduction from the face amount of bonds payable and amortized over the life of the bonds.

Hinds Enterprises issued bonds at a premium. They traditionally use the effective interest method of amortization. Therefore, you would expect the earlier years of the bonds to have an interest expense that is

greater than if the straight-line method were used.

Catalano Produce has several types of debt, including six different short- and long-term loans from the bank and three different issues of bonds. Catalano will likely

have an extensive note in the financial statements disclosing the major characteristics of their debt, including maturity dates and interest rates.

Off-balance-sheet financing is often an attractive option for companies with ________ debt that are trying to obtain additional financing.

high

Brownlee Enterprises calculates the value of their bond investments based on the fair value option. If the market interest rate declines, the value of Brownlee's bonds is likely to

increase

A company must recognize an asset retirement obligation when

it has an existing legal obligation and can reasonably estimate the amount of the liability.

A company's current ratio provides information about that company's ________________.

liquidity

JT Engineering plans to retire a short-term bond payable using a bond sinking fund. This fund is classified as a long-term asset. Based on this information, JT should report the bond payable in the _________________ liabilities section of its financial statements.

long-term

When investors purchase callable bonds, they do so with the knowledge that they

may be compelled to redeem the bond earlier than they would like.

Rowell Industries issued a 10%, five-year, $150,000 note payable to Hogue Financing at a price of $153,400. This note was issued at a(n)

premium

The value of a note payable is calculated as follows:

present value of its future interest and principal cash flows.

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