Deck 8: Liabilities

Question 1

The Salary Expense account is debited for:

A)gross pay plus employee payroll liabilities.
B)gross pay only.
C)gross pay minus employee payroll liabilities.
D)payroll tax liabilities only.

Answer 1

B

Question 2

The journal entry to record accrued interest on a short- term note payable must include a debit to:

A)Interest Payable and a credit to Notes Payable.
B)Interest Expense and a credit to Notes Payable.
C)Interest Payable and a credit to Interest Expense.
D)Interest Expense and a credit to Interest Payable.

Answer 2

D

Question 3

A company wishing to expand can obtain the necessary funds by borrowing on a long- term note payable or by issuing 50,000 shares of $10 par value common stock. Net income is estimated at $302,500 if the company borrows the funds, and $330,000 if the company issues stock. The company currently has 250,000 shares of common stock outstanding. If the company issues stock, earnings per share would be:

A)$1.32.
B)$1.00.
C)$1.10.
D)$6.60.

Answer 3

C

Question 4

All of the following are advantages of issuing bonds EXCEPT that:

A)it is less risky to the issuing corporation.
B)it does not dilute control of the corporation.
C)interest expense is tax deductible.
D)it generally results in a higher earnings per share.

Question 5

The interest rate that determines the amount of cash paid to the bondholder is referred to as the:

A)contract rate of interest.
B)market rate of interest.
C)effective rate of interest.
D)both B and C are correct.

Question 6

Under the effective- interest method of amortization, the amount of discount amortized each interest period is equal to the:

A)total discount, divided by the number of interest payments to be made.
B)total amount of interest expense, divided by the number of interest payments to be paid.
C)amount of interest expense plus the cash paid.
D)amount of interest expense less the cash paid.

Question 7

Any gains or loss on the early retirement of bonds sold should be recorded as an):

A)ordinary gain or loss reported on the income statement.
B)adjustment to financing activity on a statement of cash flows.
C)prior period adjustment, net of tax, shown on the statement of retained earnings.
D)other income/loss.

Question 8

What type of account is Premium on Bonds Payable and what is its normal balance?

Question 9

Davis Company's sales for March 19 were $31,900. Davis is required to collect a 7% state sales tax. The total cash received from customers was:

A)$31,223.
B)$34,133.
C)$2,233.
D)$21,289.

Question 10

Convertible bonds may be exchanged for:

A)cash.
B)an equity interest in the issuing company.
C)a related company's common stock.
D)the issuing company's goods and services.

Question 11

To determine whether a pension plan is over- funded or under- funded, a company must compare the:

A)historical cost of the pension plan assets to the accumulated benefit obligation.
B)fair market value of the pension plan assets to the historical cost of the assets.
C)fair market value of the pension plan assets to the accumulated benefit obligation.
D)accumulated benefit obligation to the plan's projected future obligation.

Question 12

A company has a probable contingent gain that can be reasonably estimated. What reporting does the FASB require regarding this contingency?

A)It should be ignored until the actual gain materializes.
B)It should be accrued and reported in the financial statements.
C)It should be reported in the notes to the financial statements.
D)It should either be recorded on the financial statements or reported in the notes to the financial statements.

Question 13

Failure to record an accrued liability causes a company to:

A)overstate assets.
B)understate owners' equity.
C)overstate expenses.
D)understate liabilities.

Question 14

On July 1 the Stanley Corporation issues $2,000,000 of 10- year, 7.5% bonds dated July 1 at 91 when the market rate of interest is 9%. Stanley Corporation uses the straight- line method of amortization. Interest is paid each June 30 and December 31. The interest expense recognized for the first semiannual interest payment on December 31 is:

A)$84,000.
B)$9,000.
C)$75,000.
D)$180,000.

Question 15

Current liabilities are obligations due within:

A)one year or within the company's normal operating cycle if it is shorter than one year.
B)one year or within the company's normal operating cycle if it is longer than one year.
C)one month or within the company's normal operating cycle if it is shorter than one month.
D)one month or within the company's normal operating cycle if it is longer than one month.

Question 16

The beginning balance in the Warranty Payable account was $50,000. Sales were $900,000 and warranty costs were estimated at 7% of sales. During the year, $55,000 was paid to settle warranty claims. As a result of these transactions, what is the amount of warranty expense for the year and what is the ending balance in Warranty Payable?

Question 17

Revision Company has just made the interest payment on its $3,000,000 of outstanding bonds. The unamortized discount is currently $127,400. Revision decided to retire the bonds by purchasing the bonds when the bonds were priced at 97. Which statement regarding the retirement is true?

A)Revision paid $2,910,000 to purchase the bond and recognized a $164,800 loss.
B)Revision paid $2,910,000 to purchase the bond and recognized a $37,400 loss.
C)Revision paid $2,872,600 to purchase the bond and recognized a $127,400 loss.
D)Revision paid $3,000,000 to purchase the bond and recognized a $164,800 loss.

Question 18

Warranty expense should be recorded in the period:

A)immediately following the period in which the product is sold.
B)the product is sold.
C)the product is paid for by the customer.
D)the product sold is repaired or replaced.

Question 19

Jaye's Company paid $750 cash to replace a part on equipment sold under warranty. To recognize the payment, which of the following are correct?

A)Debit Parts Expense and credit Cash
B)Debit Equipment Expense and credit Cash
C)Debit Warranty Payable and credit Cash
D)Debit Warranty Expense and credit Cash

Question 20

Great Peaks, Inc., has $3,600,000 of bonds outstanding with an unamortized discount of $160,000 immediately following the last interest payment. At that time, the bonds were converted into $350,000 shares of $10 par common stock. As a result of this conversion:

A)liabilities decreased by $3,440,000 and stockholders' equity increased by $3,440,000.
B)liabilities decreased by $3,440,000 and stockholders' equity increased by $3,400,000.
C)liabilities decreased by $3,600,000 and stockholders' equity increased by $3,600,000.
D)liabilities decreased by $3,600,000 and stockholders' equity increased by $3,400,000.

Question 21

On a bond's maturity date, its face value will equal the:

A)maturity value.
B)maturity value less all interest payments.
C)maturity value plus all interest payments.
D)present value of the bonds on its issuance date.

Question 22

On December 12, the G. Baker Corporation purchases $13,000 of equipment by issuing a 30- day, 9% note payable. The total cash paid on the maturity date of the note is:

A)$13,000.
B)$13,065.
C)$13,750.
D)$13,097.50.

Question 23

The carrying amount of bonds issued at a discount is calculated by:

A)subtracting Interest Payable from Bonds Payable.
B)subtracting Interest Expense from Bonds Payable.
C)subtracting Discount on Bonds Payable from Bonds Payable.
D)subtracting the sum of Discount on Bonds Payable and Interest Payable from Bonds Payable.

Question 24

Which of the following are overstated as a result of the failure to record an accrued liability?

A)Net income, current ratio, and rate of return on debt
B)Current ratio, acid- test ratio, and rate of return on debt
C)Net income, current ratio, and acid test ratio
D)Net income, acid- test ratio, and rate of return on debt

Question 25

Under the effective- interest method of amortizing bond premium, the interest expense recorded for each semiannual interest payment:

A)is at the same percentage of the bond's carrying value for every interest payment.
B)will equal the amount of cash paid for each semiannual interest payment.
C)is equal to the carrying value of the bond times the contract rate of interest for each semiannual interest period.
D)will increase over the life of the bond.

Question 26

Under the effective- interest method of amortizing bond discount, the interest expense recorded for each semiannual interest payment:

A)increases over the life of the bond.
B)decreases over the life of the bond.
C)exceeds the interest expense recognized by the straight- line method.
D)remains constant over the life of the bond.

Question 27

Bonds with a 6% interest rate were issued when the market rate of interest was 7%. This bond was issued at:

A)a discount.
B)par value.
C)a premium.
D)face value.

Question 28

Current liabilities fall into two categories which are referred to as:

A)contingent liabilities and noncontingent liabilities.
B)contingent liabilities and contra- liabilities.
C)unearned liabilities and accrued liabilities.
D)liabilities of a known amount and estimated liabilities.

Question 29

A company has a contingent loss that can be estimated and has a reasonably possible chance of occurrence. What reporting does the FASB require regarding this contingency?

A)It should be accrued and reported on the financial statements.
B)It should be put into a memo until the actual loss materializes
C)It should be accrued and reported on the financial statements and reported in the notes to the financial statements.
D)It should be reported in the notes to the financial statements.

Question 30

Bonds which are backed only by the good faith of the borrower are referred to as:

A)junk bonds.
B)insecure bonds.
C)unregistered bonds.
D)debenture bonds.

Question 31

Monthly sales were $150,000. Warranty costs are estimated at 5% of monthly sales. In the month of sale, the company should record a debit to:

A)Sales for $7,500.
B)Warranty Expense for $7,500.
C)Warranty Payable for $7,500.
D)none of the accounts. No entry is required since the actual liability amount is not known.

Question 32

A company failed to recognize an accrued liability. As a result,:

A)the current ratio is overstated because the denominator is overstated.
B)the current ratio is understated because the denominator is overstated.
C)the current ratio is understated because the denominator is understated.
D)the current ratio is overstated because the denominator is understated.

Question 33

A company wishing to expand can obtain the necessary funds by borrowing on a long- term note payable or by issuing 50,000 shares of $10 par value common stock. Net income is estimated at $302,500 if the company borrows the funds, and $330,000 if the company issues stock. The company currently has 250,000 shares of common stock outstanding. If the company issues stock instead of borrowing funds, earnings per share would

A)increase by $0.11.
B)decrease by $0.11.
C)decrease by $0.21.
D)increase by $0.21.

Question 34

Under the effective- interest method of amortization, the cash payment on each interest payment is calculated by multiplying the:

A)face value of the bonds times the stated interest rate for the appropriate time period.
B)carrying value of the bonds times the stated interest rate for the appropriate time period.
C)carrying value of the bonds times the effective- interest rate for the appropriate time period.
D)face value of the bonds times the effective- interest rate for the appropriate time period.

Question 35

Which entry could be used to record sales tax?

A)Debit Cash, credit Sales Tax Payable
B)Debit Sates Tax Expense, credit Sales
C)Debit Sales Tax Payable, credit Sales Tax Expense
D)Debit Sales Tax Expense, credit Sales Tax Payable

Question 36

Which type of lease will NOT increase a company's assets or liabilities?

A)A funded lease
B)A capital lease
C)The present value of lease payments is 90% or more of the market value of the leased asset
D)A lease in which title is transferred to the lessee at the end of the lease term

Question 37

Which of the following accounts represents a deferred revenue? i. Interest Revenue
Ii. Income Tax Payable
Iii. Unearned Subscription Revenue

A)i only
B)iii only
C)ii only
D)both ii and iii

Question 38

The stated interest rate is also referred to as the:

A)coupon rate.
B)market interest rate.
C)present value interest rate.
D)effective interest rate.

Question 39

Speedo sales credits all amounts received from customers to its Sales account. The monthly receipts were $773,000. This amount included a 7% state sales tax. The amount of the sales tax payable to this state is:

A)$54,110.
B)$63,250.
C)$71,242.
D)$50,570.

Question 40

On August 1, 2008, Tyler Corporation issues $3,000,000 of 10- year bonds dated August 1, 2008, at 101 when the market rate of interest is 8%. Tyler Corporation uses the effective- interest method of amortization and interest is paid each January 31, and July 31. No accrual has been made. The entry to record the first semiannual interest payment on January 31, 2009, will include a:

A)debit to Interest Expense for $121,200.
B)credit to Interest Payable for $120,000.
C)debit to Premium on Bonds Payable for $300,000.
D)credit to Premium on Bonds Payable for $240,000.

Question 41

The fair market value of long- term debt:

A)is reported in the financing activities section of the statement of cash flows.
B)is shown on the financial statements if it results in the company has an operating loss.
C)is required to be reported on the financial statements.
D)is never shown on the financial statements.

Question 42

Kosovo Company has $45 million in long- term debt, payable in annual installments of $15 million. How much of the debt should be reported as current and as long- term liabilities? Current Liabilities Long- Term Liabilities

A)$45 million $0
B)$7.5 million $40 million
C)$15 million $30 million
D)$0 $45 million

Question 43

Immediately after the last interest payment, Hoffman & Stuart Company converted $2,500,000 of its bonds into 250,000 shares of $10 par value common stock. The unamortized premium on the bonds at the date of conversion was $86,625. The entry to record the conversion would include:

A)liabilities decreased by $3,600,000 and stockholders' equity increased by $3,440,000.
B)liabilities decreased by $3,440,000 and stockholders' equity increased by $3,600,000.
C)liabilities decreased by $3,600,000 and stockholders' equity increased by $3,400,000.
D)liabilities decreased by $3,440,000 and stockholders' equity increased by $3,440,000.

Question 44

The carrying amount of bonds is equal to:

A)the face value of the bonds plus the premium on bonds payable.
B)the face value of the bonds less the discount on bonds payable.
C)the face value of the bonds less the premium on bonds payable.
D)Both the face values of the bonds plus the premium and less the discount on bonds payable are correct.

Question 45

Computing Magazine receives $100 in advance from a customer for a 2 year subscription. Computing Magazine's entry to record this transaction would include a:

A)credit to Unearned Subscription Revenue for $100.
B)debit to Unearned Subscription Revenue for $100.
C)debit to Subscription Revenue for $100.
D)credit to Subscription Revenue for $100.

Question 46

Edna Corporation signed a lease for $600,000 for an automobile. The automobile has an estimated useful life of 5 years. This lease would be considered to be a capital lease if:

A)the lease agreement allows Edna to purchase the automobile for $250 at the end of the lease.
B)the present value of the lease payments equals $25,000.
C)the auto is leased for two years.
D)title to the automobile transfers to Edna at the end of the lease term.

Question 47

Hornbeck Company issued $100,000 bonds payable with a 7% interest rate at a price of 97. The journal entry to record the issue of the bond includes:

A)a debit to Discount on Bonds Payable, $3,000.
B)a debit to Bonds Payable $100,000
C)a credit to Cash, $97,000.
D)all of these answers.

Question 48

Bonds with a face value of $100,000 were sold at an effective interest rate of 9% to yield cash proceeds in excess of $100,000. It is apparent that the bonds had a:

A)market rate greater than 9%.
B)stated rate less than 9%.
C)stated rate greater than 9%.
D)market rate less than 9%.

Question 49

On April 1, the ZachMore Corporation issues $500,000 of 10 year, 7% bonds dated April 1 when the market rate of interest is 8% at $466,024.21. ZachMore Corporation uses the effective- interest method of amortization. Interest is paid each March 31, and September 30. The interest expense at the December 31 year end is:

A)$35,000.
B)$40,000.
C)$46,644.63.
D)$27,984.27.

Question 50

Under the effective- interest method of amortization, interest expense each period can be calculated by multiplying the:

A)carrying value of the bonds times the effective- interest rate for the appropriate time period.
B)face value of the bonds times the stated interest rate for the appropriate time period.
C)carrying value of the bonds times the stated interest rate for the appropriate time period.
D)face value of the bonds times the effective- interest rate for the appropriate time period.

Question 51

The retirement of callable bonds at an amount above face value would appear on a statement of cash flows as an:

A)outflow in the financing activities section.
B)inflow in the financing activities section.
C)inflow in the operating activities section.
D)outflow in the operating activities section.

Question 52

Potential liabilities that depend on future events arising out of past events are called:

A)long- term liabilities.
B)estimated liabilities.
C)actual liabilities.
D)contingent liabilities.

Question 53

A company has a contingent loss that can be estimated and has a probable chance of occurrence. What reporting does the FASB require regarding this contingency?

A)It should be accrued and reported on the financial statements and reported in the notes to the financial statements.
B)It should be accrued and reported on the financial statements.
C)It should be reported in the notes to the financial statements.
D)It should be ignored until the actual loss materializes.

Question 54

Bonds with a face value of $150,000 are issued at 98. The statement of cash flows would report a:

A)cash inflow of $147,000 in the investing activities section.
B)cash inflow of $147,000 in the financing activities section.
C)cash inflow of $3,000 in the investing activities section.
D)cash inflow of $3,000 in the financing activities section.

Question 55

The premium on bonds payable:

A)increases the amount of cash paid to bondholders over the stated rate of interest.
B)decreases the amount of cash paid to bondholders over the stated rate of interest.
C)increases interest expense on the income statement.
D)reduces interest expense on the income statement.

Question 56

Bonds with an 8% interest rate were issued when the market rate of interest was 9%. The quoted bond price will be:

A)greater than 100.
B)100.
C)less than 100.
D)the price cannot be determined.

Question 57

On December 12, the G. Baker Corporation purchases $13,000 of equipment by issuing a 30- day, 9% note payable. The amount of accrued interest on December 31 is:

A)$70.
B)$63.
C)$65.
D)$75.

Question 58

A $5,000, 7.5% bond is quoted at 101. How much cash will be received when the bond is issued?

A)$4,950
B)$5,375
C)$5,050
D)$5,000

Question 59

Bonds in a particular issue which mature in installments over a period of time are called:

A)convertible bonds.
B)serial bonds.
C)term bonds.
D)callable bonds.

Question 60

Secured bonds are also called:

A)callable bonds.
B)mortgage bonds.
C)convertible bonds.
D)debenture bonds.

Question 61

Assume the following: Sales revenue was $3,000,000. Interest expense was $15,000. Operating income was $300,000. The times interest earned is:

A)30 times.
B)40 times.
C)20 times.
D)187 times.

Question 62

A bond with a stated interest rate of 8% and a market rate of 7% was issued at a price reflecting the market interest rate. As the bond matures:

A)the Discount on Bonds Payable decreases.
B)the Premium on Bonds Payable decreases.
C)the Premium on Bonds Payable increases.
D)the Discount on Bonds Payable increases.

Question 63

Which of the following statements about capital leases is incorrect?

A)Under a capital lease, the lessee's books do not report the leased asset.
B)A capital lease is non- cancellable.
C)A capital lease is a long- term financial obligation.
D)Under a capital lease, the lessee records a lease liability at the beginning of the lease term.

Question 64

The purchase of merchandise inventory frequently results in a liability.

Question 65

A $3,000, 7.5% bond is quoted at 97.5. When the bond is issued, the Bonds Payable account will be increased by:

A)$2,925
B)$3,225
C)$2,775
D)$3,000

Question 66

A company wishing to maximize earnings per share would:

A)issue stock or bonds, depending upon the tax rate.
B)issue bonds.
C)issue stock or bonds, depending upon the interest rate.
D)issue stock.

Question 67

On December 12, the G. Baker Corporation purchases $13,000 of equipment by issuing a 30- day, 9% note payable. The total cash paid for interest at maturity of the note is:

A)$97.50.
B)$1,300.
C)$70.
D)$13,000.

Question 68

Pharma Inc., issued $800,000 of 7.5%, 15- year bonds dated April 1, 2008 on April 1, 2008, at 97 ½. If Pharma Inc., uses the straight- line method of amortization, the entry to retire the bonds on the maturity date would include a:

A)credit to Cash for $800,000.
B)debit to Premium on Bonds Payable for $20,000.
C)debit to Bonds Payable for $780,000.
D)credit to Discount on Bonds Payable for $20,000.

Question 69

A bond with a stated interest rate of 6% and a market rate of 8% was issued at a price reflecting the market interest rate. As the bond matures:

A)the Discount on Bonds Payable decreases.
B)the Premium on Bonds Payable increases.
C)the Discount on Bonds Payable increases.
D)the Premium on Bonds Payable decreases.

Question 70

Amortizing the discount on bonds payable:

A)decreases the carrying value of the bonds.
B)increases the carrying amount of the bonds.
C)decreases the face value of the bonds.
D)increases the face value of the bonds.

Question 71

A $50,000, 7% bond is issued at a $1,500 premium. On the issue date, the carrying value of the bond is:

A)$51,500
B)$50,000
C)$48,500
D)$50,150

Question 72

All of the following are advantages of issuing stock EXCEPT that it:

A)creates no liabilities for the corporation.
B)is less risky to the issuing corporation.
C)creates no interest expense which must be paid.
D)generally results in a higher earnings per share.

Question 73

A $3,000, 7.5% bond is quoted at 97.5. How much cash will be received when the bond is issued?

A)$2,775
B)$3,000
C)$3,225
D)$2,925

Question 74

Under the effective- interest method of amortization, the cash payment on each interest payment date will:

A)increase if bonds are issued at a discount.
B)increase if bonds are issued at par.
C)remain the same for each interest period.
D)decrease if bonds are issued at a premium.

Question 75

Short- term notes payable are:

A)generally due within three months, with a maximum time period of six months.
B)shown on the balance sheet after bonds payable.
C)shown as a reduction to notes receivable on the balance sheet, with an appropriate footnote disclosure.
D)shown on the balance sheet with current liabilities.

Question 76

The carrying value of a bond immediately after the bond was issued was $121,250. The bond price was 97. The face value of the bond was:

A)$125,000.
B)$123,750.
C)$121,250.
D)$121,250.

Question 77

Which is the preferred method to use when amortizing a bond discount or premium?

A)Straight- line method of amortization
B)Market- interest rate method of amortization
C)Effective interest method of amortization
D)Both straight- line and market- interest rate methods of amortization are equally preferable

Question 78

The interest rate that investors demand for loaning their money is referred to as the:

A)effective rate of interest.
B)contract rate of interest.
C)stated rate of interest.
D)both B and C are correct.

Question 79

All of the following criteria would qualify a lease as a capital lease EXCEPT:

A)the present value of the lease payments equals 70% of the market value of the leased asset.
B)the lease term is 80% of the asset's estimated useful life.
C)title to the leased asset transfers to the lessee at the end of the lease term.
D)the lease agreement contains a bargain purchase option.

Question 80

The discount on bonds payable:

A)reduces interest expense on the income statement.
B)increases the amount of cash paid to bondholders over the stated rate of interest.
C)decreases the amount of cash paid to bondholders over the stated rate of interest.
D)increases interest expense on the income statement.