Deck 7: Accounting for Liabilities

Question 1

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions. The amount of total liabilities that would appear on Riley's December 31 balance sheets for Year 1 and Year 2, respectively, would be:

A) $36,000 and $0.
B) $37,890 and $0.
C) $37,890 and $38,520.
D) $1,890 and $630.

Answer 1

B
Explanation: $36,000 × 7% × 9/12 months = $1,890 interest payable on December 31, Year 1; $36,000 note payable + $1,890 interest payable = $37,890; the note is repaid before the end of Year 2, so there is no remaining liability.

Question 2

Interest charges on notes payable may be based on a(n):

A) fixed or variable interest rate.
B) fixed interest rate.
C) variable interest rate.
D) installment interest rate.

Answer 2

A
Explanation: Interest charges may be based on a fixed interest rate that remains constant during the term of the loan or may be based on a variable interest rate that fluctuates up or down during the loan period.

Question 3

Burger Barn has been named as a plaintiff in a $5 million lawsuit filed by a customer over the addictive nature of the company's french fries. Burger Barn's attorneys have advised them that the likelihood of a future obligation from the suit is remote. As a result of the lawsuit, Burger Barn should:

A) Disclose the lawsuit in the notes to the financial statements.
B) Recognize a $5 million liability on its balance sheet for the contingency.
C) Ignore the lawsuit in its financial statements.
D) Settle with the customer immediately for $5 million to avoid harmful publicity.

Answer 3

C
Explanation: Because the obligation is considered remote, it is neither recognized nor disclosed in Burger Barn's financial statements.

Question 4

Monthly remittance of sales tax:

A) Reduces liabilities.
B) Is a claims exchange transaction.
C) Reduces stockholders' equity.
D) All of these answer choices are correct.

Question 5

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. The amount of cash flow from operating activities on the Year 1 statement of cash flows would be:

A) $1,920.
B) $800.
C) $24,000.
D) zero.

Question 6

Selling $130 of merchandise to a customer for $200 cash in a state where the sales tax rate is 4%:

A) Increases cash flow from operating activities by $208.
B) Increases total assets by $78.
C) Increases equity by $70.
D) All of these answer choices are correct.

Question 7

In December Year 1, Lucas Corporation sold merchandise for $10,000 cash. Lucas estimated that $700 of warranty claims might be filed in regard to these sales. On February 12, Year 2, warranty work amounting to $550 was performed for one of the customers ($430 labor paid in cash and $120 from the materials inventory). Which of the following answers correctly shows the effect of the recognition of the warranty obligation at the end of Year 1 on the financial statements of Lucas?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 8

Issuing a note payable is a(n):

A) claims exchange transaction.
B) asset source transaction.
C) asset use transaction.
D) asset exchange transaction.

Question 9

West Company borrowed $10,000 on September 1, Year 1 from the Valley Bank. West agreed to pay interest annually at the rate of 6% per year. The note issued by West carried an 18-month term. Based on this information the amount of interest expense appearing on West's Year 1 income statement would be:

A) $-0-.
B) $150.
C) $60.
D) $200.

Question 10

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions. The amount of cash flow from operating activities that would appear on the Year 2 statement of cash flows would be:

A) $770 inflow
B) $1,400 inflow
C) $38,520 outflow
D) $1,120 outflow

Question 11

Houston Co. borrowed $20,000 from Dallas Co. on March 1, Year 1. Houston is to repay the principal and interest on March 1, Year 2. The interest rate is 8%. If the year-end adjustment is properly recorded, what will be the effects of the accrual on Houston's Year 1 financial statements?

A) Increase liabilities and increase expenses
B) Increase assets and increase revenues
C) Increase assets and increase liabilities
D) No effect

Question 12

Which of the following reflects the effect of the year-end estimation of warranty expense?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 13

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions. The amount of net income on the Year 2 income statement would be:

A) $770.
B) $630.
C) $(190).
D) $1,890.

Question 14

Which of the following represents the impact of a taxable cash sale of $400 on the accounting equation if the sales tax rate is 5%?

A) An increase to cash for $420, an increase to sales tax expense for $20, and an increase to sales revenue for $400.
B) An increase to cash for $400, an increase to sales tax payable for $20, and an increase to sales revenue for $380.
C) An increase to cash for $420, an increase to sales tax payable for $20, and an increase to sales revenue for $400.
D) None of these answer choices is correct.

Question 15

Under what condition is a pending lawsuit recognized as a liability on a company's balance sheet?

A) The amount can be reasonably estimated.
B) The outcome is probable.
C) The outcome is reasonably possible.
D) The outcome is probable and can be reasonably estimated.

Question 16

In December Year 1, Lucas Corporation sold merchandise for $10,000 cash. Lucas estimated that $700 of warranty claims might be filed in regard to these sales. On February 12, Year 2, warranty work amounting to $550 was performed for one of the customers ($430 labor paid in cash and $120 from the materials inventory). Which of the following answers indicates the effect of the February 12, Year 2 transaction on the financial statements of Lucas Corporation?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 17

The party who borrows money in a note payable is known as the:

A) Maker.
B) Payee.
C) Issuer.
D) Both Maker and Issuer.

Question 18

Franklin Company issued a $40,000 note to the Mercantile Bank on August 1, Year 1. The note carried a one-year term and a 12% rate of interest. The accrual of interest on December 31, Year 1 will:

A) Decrease assets and decrease retained earnings by $2,000.
B) Increase liabilities and decrease equity by $2,000.
C) Increase liabilities and decrease equity by $1,600.
D) Decrease equity and increase liabilities by $4,800.

Question 19

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. Based on this information alone, the amount of total liabilities appearing on Madison's Year 1 balance sheet would be:

A) $24,720
B) $24,800
C) $25,920
D) $24,000

Question 20

Which of the following is a claims exchange transaction?

A) Accrued interest on a note payable.
B) Issued a note to purchase equipment.
C) Repaid principal on a note payable.
D) Paid interest on a note payable.

Question 21

Currie Company borrowed $20,000 from the Sierra Bank by issuing a 10% three-year note. Currie agreed to repay the principal and interest by making annual payments in the amount of $8,042. Based on this information, the amount of the interest expense associated with the second payment would be: (Round your answer to the nearest dollar.)

A) $730.
B) $1,396.
C) $2,000.
D) $8,042.

Question 22

When do the effects of product warranties appear on the statement of cash flows?

A) When the sale of merchandise is made.
B) When the warranty obligation is recognized.
C) When there is a settlement of a warranty claim made by a customer.
D) None of these answer choices are correct.

Question 23

On January 1, Year 1, the Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a five-year 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan based on the present value of annuity factor would be $81,150. The amount of principal repayment included in the December 31, Year 1 payment is:

A) $25,920.
B) $81,150.
C) $74,658.
D) $55,230.

Question 24

How does the amortization of the principal balance on an installment note payable affect the amount of interest expense recorded each succeeding year?

A) Reduces the amount of interest expense each year
B) Increase the amount of interest expense each year
C) Has no effect on interest expense each year
D) Cannot be determined from the information provided

Question 25

The Platte Corporation issues a 5-year note payable on January 1, Year 1 for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal. Which of the following answers correctly shows the effect of the issuance of the note on Platte's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 26

Which of the following items would be least likely to appear in the current liabilities section of a classified balance sheet?

A) Interest Payable.
B) Wages Payable.
C) Accounts Payable.
D) Bonds Payable.

Question 27

Regardless of the specific type of long-term debt, which of the following is normally required with debt transactions?

A) to repay the debt
B) to pay dividends
C) to pay interest
D) to repay the interest and repay the debt

Question 28

The Platte Corporation issues a 5-year note payable on January 1, Year 1 for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal. Which of the following correctly shows the effects of the December 31, Year 2 payment (rounded to the nearest whole dollar)?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 29

Bonds payable are usually classified on the balance sheet as:

A) current liabilities.
B) long-term liabilities.
C) investments and funds.
D) other assets.

Question 30

On a classified balance sheet, the financial statement user will be able to distinguish between:

A) cash flow from operations and cash flow from investing activities.
B) current and noncurrent assets.
C) product and period costs.
D) none of these answer choices are correct.

Question 31

Franklin Company obtained a $160,000 line of credit from the State Bank on January 1, Year 1. The company agreed to accept a variable interest rate that was set at 2% above the bank's prime lending rate. The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of Year 1 are shown in the following table. Assume that Franklin borrows or repays on the first day of each month. Borrowing is shown as a positive amount and repayments are shown as negative amounts indicated by parentheses. Based on this information alone, the amount of interest expense recognized in March would be closest to:

A) $232.
B) $262.
C) $292.
D) $408.

Question 32

Which of the following items is not classified as a current asset?

A) Office equipment.
B) Merchandise inventory.
C) Office supplies.
D) Prepaid rent.

Question 33

On January 1, Year 1, the Niagara Corporation arranges a $6,000 line of credit with the Centennial Bank. It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and repayments are to take place on January 1 of each year. Niagara records the first year's interest payment on December 31, Year 1. Centennial's prime rate is 4% for Year 1. Which of the following answers shows the effect of this event on the financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 34

Which of the following correctly describes an installment note?

A) An installment note requires equal interest payments with the entire principal balance paid at maturity.
B) An installment note requires equal payments of interest and principal in which the amount of interest decreases over the life of the note.
C) An installment note requires equal payments of interest and principal in which the amount of interest increases over the life of the note.
D) The installment note requires decreasing payments of interest and principal in which the amount of interest remains constant over the life of the note.

Question 35

On January 1, Year 1, the Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a five-year 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan based on the present value of annuity factor would be $81,150. Which choice reflects the financial statement effects of the cash payment on December 31, Year 1?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 36

The Platte Corporation issues a 5-year note payable on January 1, Year 1 for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal. Which of the following shows the effect of the December 31, Year 1 payment?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 37

Benitez Co. had sales of $800,000 in Year 1. The company expects to incur warranty expenses amounting to 3% of sales. There were $13,000 of warranty obligations paid in cash during Year 1. Based on this information:

A) Warranty expenses would decrease net earnings by $24,000 in Year 1.
B) Cash would decrease by $13,000 as a result of the accounting events associated with warranties in Year 1.
C) The warranties payable account would increase by $11,000 in Year 1.
D) All of these answer choices are correct.

Question 38

On January 1, Year 1, the Niagara Corporation arranges a $6,000 line of credit with the Centennial Bank. It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and repayments are to take place on January 1 of each year. Niagara begins its loan transactions with Centennial Bank by borrowing $2,000 on January 1, Year 1. Which of the following answers shows the effect of this event on the financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 39

North Woods Company has a line of credit with the Olympia State Bank. North Woods agreed to pay interest at an annual rate equal to 2% above the bank's prime rate. Funds are borrowed or repaid on the first day of each month and interest is paid in cash on the last day of each month. Borrowing is shown as a positive amount, and repayments are shown as negative amounts indicated by parentheses. Activity to date is given as follows: The amount of interest paid at the end of March would be:

A) $150.
B) $300.
C) $267.
D) $250.

Question 40

On January 1, Year 1, Burton Corporation recorded an event that increased its cash account by $196,000, increased its discount on bonds payable account by $4,000, and increased its bonds payable account by $200,000. Which of the following correctly describes that event?

A) Burton issued bonds at 102.
B) Burton issued bonds at 98.
C) Burton issued bonds at a $4,000 premium.
D) Burton signed a note payable for $196,000.

Question 41

Jones Company issued bonds with a $200,000 face value on January 1, Year 1. The five-year term bonds were issued at 97 and had a 7½% stated rate of interest that is payable in cash on December 31^st of each year. Jones amortizes the bond discount using the straight-line method. Based on this information: The amount of interest expense shown on Jones's December 31, Year 1 income statement would be:

A) $16,200.
B) $21,000.
C) $15,000.
D) $13,800.

Question 42

The Gordon Corporation issued $70,000 of 6%, 5-year bonds on January 1, Year 1 at 98. The interest payments are due on December 31 each year. Gordon uses the straight-line method of amortization. On December 31, Year 5, Gordon Corporation records interest and amortization. Immediately after that, Gordon pays off the bonds as scheduled. Which of the following answers shows the effect of the bond payoff on the financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 43

Issuing bonds payable when the market rate of interest is less than the stated interest rate:

A) results in bonds being issued at a premium.
B) results in bonds being issued at less than their face value.
C) raises the effective interest rate above the stated rate of interest.
D) results in bonds being issued at a premium and the effective interest rate is higher than the stated rate.

Question 44

Pace Company issued at 97 bonds with a face value of $200,000. As a result of the issue:

A) Assets and liabilities would both increase by $200,000.
B) Assets and liabilities would both increase by $194,000.
C) Assets would increase by $194,000 and liabilities would increase by $200,000.
D) Assets would increase by $200,000, and liabilities would increase by $194,000.

Question 45

Eureka Company issued $100,000 in bonds payable on January 1, Year 1. The bonds were issued at face value and carried 5-year term to maturity. They had a 7% stated rate of interest that was payable in cash on January 1st of each year beginning January 1, Year 2. Based on this information, the amount of total liabilities appearing on the December 31, Year 1 balance sheet would be:

A) $100,000.
B) $7,000.
C) $99,300.
D) $107,000.

Question 46

The Gordon Corporation issued $70,000 of 6%, 5-year bonds on January 1, Year 1 at 98. The interest payments are due on December 31 each year. Gordon uses the straight-line method of amortization. Which of the following answers shows the effect of the first interest payment and amortization of premium or discount?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 47

Jones Company issued bonds with a $200,000 face value on January 1, Year 1. The five-year term bonds were issued at 97 and had a 7½% stated rate of interest that is payable in cash on December 31^st of each year. Jones amortizes the bond discount using the straight-line method. Based on this information: The amount of cash outflow from operating activities shown on Jones's December 31, Year 2 statement of cash flows would be:

A) $15,000.
B) $16,200.
C) $13,800.
D) $17,400.

Question 48

Johansen Company issued a bond at a discount. Which of the following choices accurately reflects how the issue would affect Johansen's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 49

Denver Co. issued bonds with a face value of $100,000 and a stated interest rate of 8%. The bonds have a life of five years and were sold at 102 ½. If Denver amortizes discounts and premiums using the straight-line method, the amount of interest expense each full year would be:

A) $7,500.
B) $8,500.
C) $8,000.
D) $8,200.

Question 50

Jones Company issued bonds with a $200,000 face value on January 1, Year 1. The five-year term bonds were issued at 97 and had a 7½% stated rate of interest that is payable in cash on December 31^st of each year. Jones amortizes the bond discount using the straight-line method. Based on this information: The total amount of liabilities shown on Jones's December 31, Year 2 balance sheet would be:

A) $191,600.
B) $194,000.
C) $196,400.
D) $195,200.

Question 51

On January 1, Year 1, The Hanover Corporation issued $70,500 of 8%, 5-year bonds at 97. Hanover uses the straight-line method of bond discount amortization. The interest payments are due on December 31 each year. How much interest expense will Hanover report on its income statement on December 31, Year 1?

A) $423
B) $2,115
C) $5,640
D) $6,063

Question 52

Bluestone Company issued bonds with a face value of $500,000 on January 1, Year 1 at 90. How would this event affect the company's financial statements?

A) Increase assets (cash) by $450,000, decrease liabilities (discounts on bonds payable) by $50,000, and increase liabilities by $500,000.
B) Increase assets (cash) by $500,000, decrease liabilities (discounts on bonds payable) by $50,000, and increase liabilities by $550,000.
C) Increase assets (cash) by $450,000, decrease liabilities (premium on bonds payable) by $50,000, and increase liabilities by $500,000.
D) Increase assets (cash) by $500,000 and increase liabilities by $500,000.

Question 53

On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method of amortization. Which of the following shows the effect of the interest payment and amortization on December 31, Year 1?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 54

If a bond is sold at 101, its stated rate of interest would be:

A) equal to the market rate.
B) unrelated to the market rate.
C) higher than the market rate.
D) lower than the market rate.

Question 55

On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method of amortization. Which of the following answers shows the effect of the bond issuance on January 1, Year 1?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 56

The reason bonds are sometimes issued at a discount is:

A) the stated rate of interest is higher than the rate being paid on investments in the securities market with comparable risk.
B) the stated rate of interest is the same as the rate being paid on investments in the securities market with comparable risk.
C) the stated rate of interest is lower than the rate being paid on investments in the securities market with comparable risk.
D) the bonds are being issued between interest payment dates.

Question 57

The Gordon Corporation issued $70,000 of 6%, 5-year bonds on January 1, Year 1 at 98. The interest payments are due on December 31 each year. Gordon uses the straight-line method of amortization. Which of the following answers shows the effect of the bond issuance on the financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 58

Marvin Company issues $125,000 of bonds at face value on January 1. The bonds carry a 6% annual stated rate of interest. Interest is payable in cash on December 31 of each year. Which of the following reflects the financial statement effects of the first interest payment?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 59

A five-year, $500,000 bond was issued on January 1, Year 1. The stated rate of interest was 8%, and the effective rate of interest was 10%. The interest is paid semiannually. Which of the following statements is correct?

A) This bond was issued at a premium, and each semiannual cash payment is $25,000.
B) This bond was issued at a discount, and each semiannual cash payment is $20,000.
C) This bond was issued at a discount, and the annual interest expense is $40,000.
D) This bond was issued at a premium, and the annual interest expense is $40,000.

Question 60

Kier Company issued $200,000 in bonds on January 1, Year 1. The bonds were issued at face value and carried a 4-year term to maturity. They had a 6½% stated rate of interest that was payable in cash on December 31st. Based on this information alone, the amount of interest expense shown on the December 31, Year 1 income statement and the cash flow from operating activities shown on the December 31, Year 1 statement of cash flows would be:

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 61

Jacobs Company issued bonds with $300,000 face value on January 1, Year 1. The bonds were issued at 102 and carried a 5-year term to maturity. They had a 9% stated rate of interest that was payable in cash on December 31st of each year. Jacobs uses the straight-line method of amortization. Based on this information alone, the recognition of interest expense on December 31, Year 1 would act to:

A) Decrease equity by $25,800, decrease liabilities by $1,200, and decrease assets by $27,000.
B) Decrease both assets and equity by $2,700.
C) Decrease both assets and equity by $25,800.
D) Increase liabilities by $1,200, decrease assets by $25,800, and decrease equity by $27,000.

Question 62

The Clarion Company provides a one-year warranty on all merchandise it sells. In Year 1, the company recorded sales of $500,000. It estimated that the warranty costs on these sales would amount to $2,000. In July, Year 2, Clarion paid $250 to satisfy a warranty claim. Indicate whether each of the following statements is true or false.
_____ a) Clarion's recognition of the warranty obligation at the end of Year 1 reduced total assets and total equity.
_____ b) Clarion's recognition of the warranty obligation at the end of Year 1 increased Clarion's total liabilities.
_____ c) The July, Year 2 transaction reduced total assets and net income for Year 2.
_____ d) The July, Year 2 transaction reduced Clarion's total liabilities.
_____ e) The recognition of the warranty obligation at the end of Year 1 did not affect Clarion's revenue for the year.

Question 63

If a company uses the effective interest method of amortizing a bond premium, the carrying value of the bond will:

A) decrease by equal amounts each year.
B) decrease by smaller amounts each year.
C) decrease by larger amounts each year.
D) be lower than the face value of the bond until maturity.

Question 64

Indicate whether each of the following is true or false. Perez Company borrowed money from its bank in July Year 1. The accrual of interest on the loan at the end of Year 1:
_____ a) reduces cash flows.
_____ b) involves recognition of interest expense.
_____ c) does not affect income for Year 1.
_____ d) involves recognition of a liability.
_____ e) records a cash payment for interest.

Question 65

Straight-line interest amortization of a premium or discount on bonds payable:

A) assigns variable amounts of interest over the term of the liability.
B) uses compound interest principles.
C) assigns the same amount of interest to each interest period over the term of the liability.
D) is required for U.S. income tax reporting.

Question 66

Weller Company issued bonds with a face value of $400,000, a 10% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Weller uses the effective interest method of amortization. The market rate of interest on the date of issue was 8%. Interest is paid annually on December 31. Assuming Weller issued the bonds for $431,940, the carrying value of the bonds on the December 31, Year 3 balance sheet would be closest to:

A) $420,615.
B) $426,495.
C) $414,264.
D) $404,800.

Question 67

Victor Company issued bonds with a $250,000 face value and a 6% stated rate of interest on January 1, Year 1. The bonds carried a 5-year term and sold for 95. Victor uses the straight-line method of amortization. Interest is payable on December 31 of each year. The amount of interest expense appearing on the December 31, Year 3 income statement would be:

A) $17,500.
B) $12,500.
C) $14,250.
D) $15,000.

Question 68

If a company uses the effective interest method of amortizing a bond discount, the interest expense that is recognized each year will:

A) be greater than the interest payment.
B) increase from year to year.
C) remain the same from year to year.
D) be greater than the interest payment and also will increase from year to year.

Question 69

Bruce Company experienced an accounting event that that increased interest expense, decreased the discount on bonds payable, and decreased cash. Which of the following choices accurately reflects how this event would affect Bruce's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 70

Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Wayne uses the straight-line method of amortization. Interest is paid annually on December 31. Assuming Wayne issued the bond for 102½, the amount of interest expense appearing on the Year 1 income statement would be:

A) $34,500.
B) $36,000.
C) $37,500.
D) $15,000.

Question 71

Weller Company issued bonds with a face value of $400,000, a 10% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Weller uses the effective interest method of amortization. The market rate of interest on the date of issue was 8%. Interest is paid annually on December 31. Assuming Weller issued the bond for $431,940, the amount of interest expense appearing on the Year 3 income statement would be:

A) $33,649.
B) $20,000.
C) $34,120.
D) $46,350.

Question 72

On January 1, Year 1, Sheffield Co. issued bonds with a face value of $200,000, a term of ten years, and a stated interest rate of 6%. The bonds were issued at 105, and interest is payable each December 31. Sheffield uses the straight-line method to amortize the bond discount. The carrying value of the bonds that would be reported on the December 31, Year 4 balance sheet is:

A) $204,000.
B) $200,000.
C) $205,000.
D) $206,000.

Question 73

Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Wayne uses the straight-line method of amortization. Interest is paid annually on December 31. If Wayne issued the bonds for 96, the:

A) market rate of interest was equal to the stated rate of interest.
B) market rate of interest was lower than the stated rate of interest.
C) market rate of interest was higher than the stated interest rate.
D) bonds carried a variable or floating rate that changed in response to market conditions.

Question 74

King Company experienced an accounting event that affected its financial statements as indicated below: Which of the following accounting events could have caused these effects on King's statements?

A) Repaid a bond issued at a discount.
B) Borrowed funds through a line-of-credit.
C) Made a payment on an installment loan.
D) Issued a bond at a discount.

Question 75

Fisher Company has been named as the defendant in a class action lawsuit. Indicate whether each of the following statements regarding the lawsuit is true or false.
_____ a) If the outcome is likely, a liability should be recognized on the balance sheet for the full amount of the suit, even if the company's attorneys estimate the outcome to be much lower.
_____ b) If the outcome is likely, but cannot be reasonably estimated, the contingency should be disclosed in the notes to the financial statements.
_____ c) If the outcome is reasonably possible, the contingency should be disclosed in the notes to the financial statements.
_____ d) Every lawsuit, regardless how frivolous, should be disclosed in the notes to the financial statements.
_____ e) If an active hurricane season has been predicted for the Florida gulf coast, businesses in that region should not disclose contingencies for catastrophic loss in the notes to their financial statements.

Question 76

Victor Company issued bonds with a $250,000 face value and a 6% stated rate of interest on January 1, Year 1. The bonds carried a 5-year term and sold for 95. Victor uses the straight-line method of amortization. Interest is payable on December 31 of each year. The amount of cash flow from operating activities on the December 31, Year 3 statement of cash flows would be:

A) $17,500.
B) $15,000.
C) $14,250.
D) $12,500.

Question 77

Victor Company issued bonds with a $250,000 face value and a 6% stated rate of interest on January 1, Year 1. The bonds carried a 5-year term and sold for 95. Victor uses the straight-line method of amortization. Interest is payable on December 31 of each year. The carrying value of the bond liability on the December 31, Year 3 balance sheet was:

A) $241,000.
B) $242,500.
C) $237,500.
D) $245,000.

Question 78

Indicate whether each of the following statements is true or false.
_____ a) An eight-month, 6% note for $10,000 will require the issuer to pay $600 in interest.
_____ b) Interest expense is considered an operating expense on the income statement.
_____ c) Payment of interest is considered an operating activity on the statement of cash flows.
_____ d) Payment of interest on a one-year note due on March 1 will include a reduction in liabilities.
_____ e) The accrual of interest expense is an asset use transaction.

Question 79

Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Wayne uses the straight-line method of amortization. Interest is paid annually on December 31. Assuming Wayne issued the bonds for 102½, the carrying value of the bonds on the December 31, Year 1 balance sheet would be:

A) $601,500.
B) $613,500.
C) $615,000.
D) $616,500.

Question 80

The carrying value of a bond issued at a premium:

A) decreases by equal amounts each year if straight-line amortization is used.
B) decreases by equal amounts each year if effective interest amortization is used.
C) decreases by larger and larger amounts each year if effective interest amortization is used.
D) decreases by equal amounts each year if straight-line amortization is used and decreases by increasing amounts each year if effective interest amortization is used.