Exam 10: Reporting and Analyzing Liabilities

Warner Company issued $4,000,000 of 6%, 10-year bonds on one of its interest dates for $3,454,800 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. What amount of discount (to the nearest dollar) should be amortized for the first interest period?

Unearned revenues are received before goods are delivered or services are rendered.

Over the term of the bonds, the balance in the Discount on Bonds Payable account will

Downs Company issued $400,000 of 8%, 5-year bonds at 106, which pays interest annually. Assuming straight-line amortization, what is the total interest cost of the bonds?

Herman Company received proceeds of ₤471,250 on 10-year, 8% bonds issued on January 1, 2012. The bonds had a face value of ₤500,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Herman uses the straight-line method of amortization. Herman Company decided to redeem the bonds on January 1, 2014. What amount of gain or loss would Herman report on its 2014 income statement?

The contractual interest rate on a bond is often referred to as the

Moss County Bank agrees to lend the Sadowski Brick Company $300,000 on January 1. Sadowski Brick Company signs a $300,000, 6%, 9-month note. What entry will Sadowski Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30?

Generally, convertible bonds do not pay interest.

If a bond has a stated value of $1,000 and a contractual interest rate of 6 percent, then the interest paid annually will be $60.

Four thousand bonds with a face value of $1,000 each, are sold at 97. The entry to record the issuance is

Scribner Company issued $400,000 of 8%, 5-year bonds at 106. Assuming straight-line amortization and annual interest payments, how much bond interest expense is recorded on the next interest date?

Al's Bookstore has collected $750 in sales taxes during April. If sales taxes must be remitted to the state government monthly, what entry will Al's Bookstore make to show the April remittance?

Wishbone Company maintains two separate accounts payable computer systems. One is known to all the users, and is used to process payments to vendors. Employees enter the vendor code, or the name and address of new vendors, the amount, the account, and so on. The other system is a secret one. It is used to cross-check the vendors against an approved vendor list. If a vendor is not listed as approved, the payment process is halted. Internal audit employees seek to verify the existence of a bona fide claim by the vendor. All inquiries are made at the top management level, and very discreetly. No one but top management, the internal audit staff, and the Board of Directors of the company is even aware of the second system. Required: Is it ethical for a company to have a secret system like the one described? Explain.

The contractual interest rate is always equal to the market rate of interest on the date that bonds are issued.

If bonds sell at a premium, the interest expense recognized each year will be greater than the bond interest paid.

When there are material differences between the results of using the straight-line method and using the effective-interest method of amortization, the effective-interest method should be used.

The present value of a bond is also known as its

Stockholders of a company may be reluctant to finance expansion through issuing more equity because

Material gains or losses on bond redemption are reported as an extraordinary item on the income statement.