Deck 10: Liabilities

Question 1

The face value of a bond is what it is currently worth in the market.

Answer 1

False

Question 2

The principal of a loan does not include any interest charges.

Answer 2

True

Question 3

Deferred revenue is recorded as an asset until the revenue has been earned.

Answer 3

False

Question 4

Loan covenants are the collateral provided by a borrower to a lender as security on a loan.

Question 5

The market interest rate on a bond is also known as the effective interest rate or yield.

Question 6

All other things equal,the existence of a line of credit increases the debt obligation of the company.

Question 7

Publicly issued debt certificates are also known as bonds.

Question 8

A secured loan means that the borrower has a pre-approved line of credit backing the debt.

Question 9

A company is always considered a serious credit risk if its Debt-to Assets ratio is high.

Question 10

A company's current liabilities are the total amount it currently owes at a single point in time.

Question 11

The times interest earned ratio shows the amount of interest earned for each dollar of interest expense.

Question 12

Warranty payable is considered a current liability.

Question 13

A premium on a bond increases the interest expense of the loan to the issuer.

Question 14

On maturity,the carrying value of a bond will be equal to the face value.

Question 15

A discount on a bond reduces the amount that the issuer has to repay to the lenders.

Question 16

Contingent liabilities arise from past transactions or events but also depend on future events.

Question 17

Straight line method of amortization for Bonds is accepted under IFRS.

Question 18

Accrued payroll includes such liabilities as retirement and health benefits not yet paid.

Question 19

Operating cycles are generally longer than a year.

Question 20

Current liabilities are short-term obligations that will always be paid within 12 months.

Question 21

Determining bond prices is not a necessary step in accounting for a bond issue.

Question 22

In addition to wages payable,companies can also record liabilities for other aspects of payroll.

Question 23

A high times interest earned ratio indicates an extra margin of protection if the company's profitability declines in the future.

Question 24

IFRS allows the use of either the effective interest method or the straight-line method to measure a liability at amortized cost.

Question 25

Payroll deductions create current liabilities for your employer.

Question 26

The actual amount owned by investors is the carrying value of the bond.

Question 27

A bond's price does not affect the amount of each interest payment.

Question 28

The effective interest method of amortization is considered to be conceptually superior to straight-line amortization.

Question 29

When bonds payable are accounted for net of discount,the initial amount recorded in the Bonds Payable,Net account is the issue price of the bond.

Question 30

Where a bond is sold at a discount,interest expense recorded using the effective interest method is less than the interest paid on that bond.

Question 31

Discount on bonds is a contra liability account.

Question 32

A typical balance sheet provides no information regarding which of the following questions?

A)To whom does the company owe money?
B)For what does the company owe money?
C)How much does the company owe?
D)What proportion of the company's debts will be paid in the short-term?

Question 33

When bonds are issued at a discount,the bond issuer receives less cash on the maturity date than it repays on the issue date.

Question 34

When the times interest earned ratio is less than 1.0,a company is generating enough income to cover its interest expense.

Question 35

Current liabilities could include all of the following except:

A)accounts payable.
B)notes payable.
C)current operating expenses.
D)Accrued payroll.

Question 36

Payroll deductions are amounts subtracted from employees' net earnings to determine their net pay.

Question 37

Under straight-line amortization,when a bond is sold at a premium,the annual premium amortization is the total premium divided by the number of years until bond maturity.

Question 38

Bond retirement is an investing decision.

Question 39

If a company records a discount or premium with the Bonds Payable in a single account called Bonds Payable,Net,it must use the effective interest method of amortization.

Question 40

Which of the following methods of amortizing bond premium or discount is required by IFRS:

A)Straight line method of amortization only.
B)Effective interest method of amortization only.
C)Either the straight line method of amortization or effective interest method of amortization.
D)Both methods must be used.

Question 41

A company receives $95 for merchandise sold to a consumer,of which $5 is for sales tax.The $5 of sales tax:

A)increases sales revenue.
B)increases current liabilities.
C)increases selling expenses.
D)none of the answers are acceptable.

Question 42

Which of the following is a standard of recognition of contingent liabilities required by IFRS:

A)recognize the liability if the occurrence of the future event is likely meaning it is highly probable.
B)recognize the liability if the occurrence of the future event is more likely than not meaning its probable and it is also measurable.
C)does not require that it be measurable.
D)Recognize the liability if the occurrence of the future event is certain

Question 43

Accrued liabilities can include all of the following except:

A)salaries payable.
B)current portion of long-term debt.
C)income tax payable.
D)interest payable.

Question 44

Travis County Bank agrees to lend Backyard Corporation $200,000 on January 1.Backyard signs a $200,000,4%,9-month note.Interest is due at maturity on September 30. On January 1,which of the following journal entries will be made by Backyard to record the proceeds and issue of the note?

A)Debit interest expense $6,000 and cash $194,000; Credit notes payable $200,000
B)Debit cash $200,000; Credit notes payable $200,000
C)Debit interest expense $6,000 and cash $200,000; Credit notes payable $206,000
D)Debit cash $200,000 and interest expense $6,000; Credit notes payable $200,000 and interest payable $6,000

Question 45

At the beginning of the first quarter,your company borrows $20,000 for four years at 8% interest and has to repay $5,000 of principal each year.Interest is paid at the end of the second and fourth quarters,and the principal is due at the end of the year.How would this information be reported on the balance sheet at the end of the first quarter?

A)$400 as interest expense and $20,000 under long-term debt.
B)$400 as interest payable,$5,000 as current portion of long-term debt under current liabilities,and $15,000 under long-term debt.
C)$1,600 of interest under current liabilities,$5,000 as current portion of long-term debt under current liabilities and $15,000 under long-term debt.
D)$400 as interest payable under current liabilities and $20,000 under long-term debt.

Question 46

Travis County Bank agrees to lend Backyard Corporation $200,000 on January 1.Backyard signs a $200,000,4%,9-month note.Interest is due at maturity on September 30. What adjusting entry did Backyard make on June 30 before preparing its financial statements?

A)Debit interest expense $4,000; Credit interest payable $4,000
B)Debit interest expense $4,000; Credit cash $4,000
C)Debit interest payable $4,000; Credit cash $4,000
D)Debit interest payable $4,000; Credit interest expense $4,000 ½ of the annual interest must be accrued at June 30.Interest expense is increased (debited)and Interest payable is increased (credited).$2,000,000 * 4.0% * 6/12 = $4,000.

Question 47

Travis County Bank agrees to lend Backyard Corporation $200,000 on January 1.Backyard signs a $200,000,4%,9-month note.Interest is due at maturity on September 30. What journal entry will Backyard make when paying off the note and interest at maturity? (Hint: Backyard's records had been adjusted on June 30).

A)Debit notes payable $206,000; Credit cash $206,000
B)Debit notes payable $200,000 and interest expense $4,000; Credit cash $204,000
C)Debit notes payable $200,000 and interest expense $6,000; Credit cash $206,000
D)Debit notes payable $200,000,interest expense $2,000 and interest payable $4,000; Credit cash $206,000 The interest and principal of the note payable are paid on September 30 ($200,000 + [$200,000 * .04 * 9/12])= $206,000.6 months of interest accrued as of June 30 ($200,000 * .04 * 6/12)= $4,000.3 months of interest expense must be recorded for July through September 30 ($200,000 * .04 * 3/12)= $2,000.

Question 48

At the beginning of the quarter,your company borrows $20,000 using a four-year promissory note that states an annual interest rate of 8% plus principal repayments of $5,000 each year.Interest is paid at the end of the second and fourth quarter,whereas principal payments are due at the end of each year.How does this new promissory note affect the amounts of current and non-current liabilities reported on the balance sheet at the end of the first quarter?

A)Current liabilities increase $400; Non-current liabilities increase $20,000
B)Current liabilities increase $1,600; Non-current liabilities increase $20,000
C)Current liabilities increase $5,400; Non-current liabilities increase $20,000
D)Current liabilities increase $5,400; Non-current liabilities increase $15,000 At the end of the first quarter,the accrued interest payable is $400 ($20,000 * .08 * 3/12),$5,000 of the principal is a current liability since it is owed within one year,and the remaining $15,000 is a long-term liability.

Question 49

A company typically records the amount owed to suppliers for goods or services when:

A)they are ordered.
B)a verbal commitment to buy has first been made.
C)they are paid for.
D)the goods or services are received.

Question 50

On October 1,2018,you borrow $200,000 at 6% interest and record the promissory note.In April and again in October of the following year,you are required to pay half the annual interest to your creditors.On December 31,2018,your journal entry for the quarter should:

A)debit Interest Expense for $3,000 and credit Interest Payable for $3,000.
B)debit Cash for $3,000 and credit Accrued Interest for $3,000.
C)debit Interest Expense for $6,000 and credit Cash for $6,000.
D)debit Interest Expense for $6,000 and credit Notes Payable for $6,000. Three months of interest (October 1-December 31)should be accrued at December 31.A debit (increase)to Interest Expense and a credit (increase)to Interest Payable would be the accrual adjustment.
200,000 * 6 * 3/12 = 3,000.

Question 51

The three key pieces of information that are stated on the bond certificate are:

A)the interest payment,the face value of the bond,and the credit rating of the company.
B)the market interest rate,the price of the bond,and the maturity date.
C)the stated interest rate,the face value of the bond,and the maturity date.
D)the interest payment,the issue price of the bond,and the credit rating of the company.

Question 52

A company pays $9,000 in interest on notes consisting of $6,000 of interest that was accrued during the last accounting period and $3,000 of interest that accumulated during this accounting period that has not yet been accrued on the books.The journal entry for the interest payment should:

A)debit Interest Expense $9,000 and credit Cash $9,000.
B)debit Cash $9,000 and credit Interest Payable $9,000.
C)debit Interest Expense $3,000,debit Interest Payable $6,000,and credit Cash $9,000.
D)debit Interest Payable $6,000,debit Accrued Interest $3,000,and credit Cash $9,000.

Question 53

In October,you borrow $50,000,repayable in five years,at 8% annual interest,in order to buy new equipment.In March and again in September of the following year you pay half the annual interest to your creditors.Assuming no other long-term debt,what is the initial balance in the long-term debt account?

A)$54,000
B)$50,000
C)$46,000
D)$52,000

Question 54

During one pay period,your company distributes $130,500 to employees as net pay.The income tax withholdings were $19,000 and the Canada Pension Plan withholdings were $5,000.The total wages/salary expense to the company,which includes CPP matching,during this period was:

A)$149,500.
B)$130,500.
C)$154,500.
D)$159,500. $130,500 + $19,000 + $5,000 (Employee's CPP contribution)+ $5,000 (Employer's CPP match)= $159,500.

Question 55

IBM is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15,2019.Interest rates rise in the economy so that similar financial investments pay 9%.IBM will:

A)not be able to issue the bonds because no one will buy them.
B)receive a higher issue price to compensate buyers for the lower stated interest rate.
C)have to accept a lower issue price to attract buyers.
D)have to reprint the bond certificates to change the stated interest rate to 9%.

Question 56

On October 1,you borrow $200,000 for 10 years at 7% interest in order to build a new facility.In April and again in October of the following year,you pay half the annual interest to your creditors.The journal entry to record the issuance of the promissory note should:

A)debit Notes Payable for $200,000,debit Interest Expense for $14,000,credit Cash for $200,000,and credit Interest Payable for $14,000.
B)debit Accrued Interest for $14,000 and credit Cash for $14,000.
C)debit Cash for $200,000 and credit Notes Payable for $200,000.
D)debit Cash for $200,000,debit Interest Expense for $14,000,credit Notes Payable for $200,000,and credit Interest Payable $14,000.

Question 57

If a company's gross salaries are $12,000,and it withholds $1,800 for income taxes and $800 for Employment Insurance and other deductions,the journal entry to record the employees' pay should include a:

A)debit to Salaries Expense for $9,400.
B)debit to Salaries Payable for $9,400.
C)credit to Salaries Payable for $12,000.
D)credit to Cash for $9,400.

Question 58

Which of the following statements is not true?

A)Bonds and promissory notes are two ways a company can borrow the funds necessary to finance its activities.
B)Both bonds payable and notes payable are typically initially recorded with a journal entry that debits cash and credits the relevant liability account.
C)The journal entry recording interest owed on bonds and notes includes a debit to interest expense and a credit to interest payable.
D)Bonds payable and notes payable are always non-current liability accounts.

Question 59

Current liabilities are due:

A)but not receivable for more than the current operating cycle or more than one year,whichever is longer.
B)but not payable for more than the current operating cycle or one year,whichever is longer.
C)and receivable within the current operating cycle or one year,whichever is longer.
D)and payable within the current operating cycle or one year,whichever is longer.

Question 60

Travis County Bank agrees to lend Backyard Corporation $200,000 on January 1.Backyard signs a $200,000,4%,9-month note.Interest is due at maturity on September 30. A company pays $18,000 in interest on notes,consisting of $12,000 interest that accrued during the last accounting period and $6,000 of interest accumulated during this accounting period but not previously accrued on the books.The journal entry for the interest payment should:

A)debit Interest Expense for $18,000 and credit Cash for $18,000.
B)debit Cash for $18,000 and credit Interest Payable for $18,000.
C)debit Interest Expense for $6,000,debit Interest Payable $12,000 and credit Cash for $18,000.
D)debit Interest Payable for $12,000,debit Accrued Interest $6,000 and credit Cash for $18,000.

Question 61

Which one of the following can have a non-zero balance on a post-closing trial balance?

A)Dividends declared
B)Premium on bonds payable
C)Income tax expense
D)None of the answers are acceptable.

Question 62

Your company sells $50,000 of bonds for an issue price of $48,000.Which of the following statements is correct?

A)The bonds sold at a price of 96,implying a discount of $4,000.
B)The bonds sold at a price of 48,implying a premium of $2,000.
C)The bonds sold at a price of 48,implying a premium of $4,000.
D)The bonds sold at a price of 96,implying a discount of $2,000. The issue price is $48,000/$50,000 = 96% of face value.The discount is $50,000 - $48,000 = $2,000.

Question 63

Your company issues $500,000 in bonds at an issue price of 98.The company will record:

A)a debit of $490,000 to cash,a debit of $10,000 to a contra liability account to reflect the discount,and a credit of $500,000 to bonds payable.
B)a debit of $490,000 to cash,a debit of $10,000 to a Loss account to reflect the discount,and a credit of $500,000 to bonds payable.
C)a debit of $500,000 to bonds payable,a credit of $10,000 to a contra liability account to reflect the discount,and a credit to cash of $490,000.
D)a debit of $490,000 to bonds payable,a debit of $10,000 to a contra asset account to reflect the discount,and a credit to cash of $500,000. Bonds that are issued for less than face value have an issue price of less than 100; this means the bonds sold at a discount.The discount is recorded in a contra-liability account.

Question 64

A company sells $200,000 in long-term bonds and pays off $200,000 in accounts payable.Which of the following statements is true?

A)Both the debt-to-assets ratio and times interest earned ratio will rise.
B)The debt-to-assets ratio will fall but the times interest earned ratio will rise.
C)The debt-to-assets ratio will have no change but the times interest earned ratio will fall.
D)Both the debt-to-assets ratio and times interest earned ratio will fall.

Question 65

A company has current assets of $5 million and long term assets of $10 million.Current liabilities total $2.5 million,and long term liabilities total $5.5 million.What is the Debt-to Assets ratio for the company?

A)2
B).625
C)0.5
D).53 $8,000,000/$15,000,000 = .5333.

Question 66

You are considering buying a bond from a company that has a Debt-to-Assets ratio of 0.65.This means that:

A)the company has 65% of its total assets in the current category.
B)the company has 35 cents of total assets financed by debt..
C)65% of the company's total assets were financed by debt.
D)shareholders currently own 65% of the company's assets.

Question 67

A company sells $200,000 in long-term bonds and buys $200,000 in inventory for cash.Which of the following statements is true?

A)The debt-to-assets ratio will stay the same and the times interest earned ratio will rise.
B)The quick ratio will rise and the times interest earned ratio will rise.
C)The debt-to-assets ratio will rise but the times interest earned ratio will fall.
D)The quick ratio will rise and the times interest earned ratio will stay the same.

Question 68

Your company issued bonds at a premium.Which of the following statements is true?

A)The contra account,premium on bonds payable,is amortized each year by adding part of its balance to interest expense.
B)On the date of issuance,the stated interest rate of the bond was less than the market interest rate.
C)As the current date approaches the maturity date,the carrying value of the bond approaches the face value of the bond.
D)All of the answers are acceptable.

Question 69

A company's balance sheet at the end of year is as follows: $$\begin{array} { | l | r | } \hline \text { Assets } & \\\hline \text { Cash } & \$ 104,600 \\\hline \text { Accounts receivable (less allowance for doubtful accourts) } & 209,300 \\\hline \text { Inventories } & 118,500 \\\hline \text { Short-tem investments } & \underline { 11,500 } \\\hline \text { Tatal current assets } & 443,900 \\\hline \text { Property, plant, and equipment } & \mathbf { 2 9 2 , 6 0 0 } \\\hline \text { Long-temn irvestrnent } & \underline { 23,500 } \\\hline \text { TOTAL ASSETs } & \underline { 760,000 } \\\hline \text { Liabilities } & \\\hline \text { Accounts payable } & \mathbf { \$ 3 7 0 , 9 0 0 } \\\hline \text { Current portion of long-tem debt } & \mathbf { 3 5 , 8 5 0 } \\\hline \text { Long-tem debt } & \underline { \mathbf { 2 5 0 } 000 } \\\hline \text { TOTAL LIABILITIES } & \mathbf { \$ 6 5 6 , 7 5 0 } \\\hline\end{array}$$ The debt-to-assets ratio for this company is:

A)approximately 1.15.
B)approximately 0.91.
C)approximately 1.86.
D)approximately 0.86.

Question 70

If the market rate of interest is 6%,a $10,000,10-year bond with a stated annual interest rate of 8% would issue at an amount:

A)less than face value (discount).
B)equal to the face value (par).
C)greater than face value (premium).
D)that cannot be determined.

Question 71

Your company issued bonds at a discount.Which of the following statements is not true?

A)The contra liability account,discount on bonds payable,is amortized each year by shifting part of its balance to interest expense.
B)As the current date approaches the maturity date,the carrying value of the bond approaches the face value of the bond.
C)At the date of issuance,the market interest rate was higher than the stated interest rate on the bond.
D)At the date of issuance,the market interest rate was lower than the stated interest rate on the bond.

Question 72

A company has current assets of $5 million and net income of $10 million.Current liabilities total $2.5 million,interest expense is $2 million,and income tax expense is $3 million.The times interest earned ratio for this company is approximately:

A)0.5.
B)7.5.
C)0.3.
D)2.0. ($10,000,000 + $2,000,000 + $3,000,000)/$2,000,000 = 7.5.

Question 73

A company receives $102,000 when it issues a bond with a face value of $100,000 and a stated interest rate of 7%.Which of the following statements is true?

A)The annual interest expense is $7,000.
B)The market interest rate is 7%.
C)A contra account to bonds payable is not needed.
D)The face value of the bond on maturity will be $100,000.

Question 74

Encana Corp.is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15,2019.Interest rates fall in the economy so that similar financial investments pay 5%.Encana will:

A)not be able to issue the bonds from the market because no one will buy them.
B)receive a higher issue price as buyers compete for the bonds.
C)have to accept a lower issue price to attract buyers.
D)have to reprint the bond certificates to change the stated interest rate to 5%.

Question 75

Which of the following is not used to calculate the times interest earned ratio?

A)Net income.
B)Income tax expense.
C)Interest earned on investments.
D)Interest expense.

Question 76

Areeana Company has a debt-to-assets ratio of 0.60.Which of the following,if it occurred on the last day of the accounting period,would increase Areeana's debt-to-assets ratio?

A)Borrowing with a short-term promissory note.
B)Paying off some accounts payable.
C)Lending money to employees on a promissory note.
D)None of the answers are acceptable.

Question 77

A corporate bond with a face value of $1,000 is issued at 107.This means that the bond actually sold for:

A)$107 and the stated interest rate was higher than the market interest rate.
B)$1,070 and the stated interest rate was higher than the market interest rate.
C)$107 and the stated interest rate was lower than the market interest rate.
D)$1,070 and the stated interest rate was lower than the market interest rate.

Question 78

Which of the following would help a company improve its debt-to-assets ratio?

A)Borrowing money just before the end of the accounting period.
B)Shifting resources from long-term assets to short-term assets.
C)Paying off obligations.
D)All of the answers are acceptable.

Question 79

As a result of a drop in interest rates,a company retires bonds which had been issued at their face value of $200,000.The company bought the bonds back at 97.This retirement would be recorded with a:

A)debit of $200,000 to Bonds Payable,a credit of $6,000 to Gain on Bonds Retired,and a credit of $194,000 to Cash.
B)debit of $200,000 to Bonds Payable and a credit of $200,000 to Cash.
C)debit of $200,000 to Bonds Payable,a credit of $6,000 to Interest Expense,and a credit of $194,000 to Cash.
D)debit of $194,000 to Bonds Payable and a credit of $194,000 to Cash. Since the bonds were issued at face value,there is no discount or premium and the carrying value of the bonds is the face value,$200,000.

Question 80

Your company sells $50,000 of bonds for an issue price of $52,000.Which of the following statements is correct?

A)The bond sold at a price of 52,implying a premium of $2,000.
B)The bond sold at a price of 104,implying a discount of $2,000.
C)The bond sold at a price of 52,implying a discount of $2,000.
D)The bond sold at a price of 104,implying a premium of $2,000. The issue price is $52,000/$50,000 = 104% of face value.The premium is $52,000 - $50,000 = $2,000.