Deck 12: Non-Current Liabilities, Debentures Payable and Classification of Liabilities on the Balance Sheet

Question 1

On 1 July 2013, Avery Services issued a 4% long- term note payable for $10 000. It is payable over a 5- year term in $2 000 principal instalments on 1 July of each year. Each yearly instalment will include both principal repayment of $2 000 and interest payment for the preceding one- year period. What happens on 1 July 2014?

A)Avery pays out $400 of interest plus $2 000 of principal.
B)Avery pays out the $200 of interest that was accrued at year- end.
C)Avery pays out $400 of interest only.
D)Avery pays out $2 000 of principal only.

Answer 1

A

Question 2

The difference between a mortgage payable and a note payable is that notes payable are always long- term.

Answer 2

False

Question 3

Paris Company buys a building on a plot of land for $100 000, paying $20 000 cash and signing a 20- year mortgage payable for $80 000 at 6%. Monthly payments are $570. What portion of the first monthly payment is interest expense?

A)$550
B)$4 800
C)$400
D)$570

Answer 3

C

Question 4

Paris Company buys a building on a plot of land for $100 000, paying $20 000 cash and signing a 20- year mortgage payable for $80 000 at 6%. Monthly payments are $570. The first monthly payment was made in January 2013. After the first payment, what is the updated principal balance?

A)$79 600
B)$79 440
C)$79 830
D)$79 430

Question 5

On 1 July 2013, Avery Services issued a 4% long- term note payable for $10 000. It is payable over a 5- year term in $2 000 principal instalments on 1 July of each year. Each yearly instalment will include both principal repayment of $2 000 and interest payment for the preceding one- year period. On 1 July 2014, after the first instalment payment is made, Avery will have to reclassify an additional $2 000 from long- term notes payable to the current portion of long- term notes payable.

Question 6

Instalment payments for mortgages typically contain both an amount for principal repayment and an amount for interest.

Question 7

On 1 July 2013, Avery Services issued a long- term note payable for $10 000. It is payable over a 5- year term in $2 000 instalments on 1 July of each succeeding year. When the note was issued, the principal amount was recorded in long- term notes payable and a second entry was made to reclassify the current portion. How will this information be shown on the balance sheet dated 31 December 2013?

A)$10 000 shown as current liability only
B)$2 000 shown as current liability; $8 000 shown as non- current liability
C)$2 000 shown as current liability; $10 000 shown as non- current liability
D)The entire $10 000 shown as non- current liability

Question 8

When a long- term note payable that requires annual instalment payments is initially recorded, it is first recorded as a long- term note payable. Then, at the same date, a second entry is made to reclassify the current portion.

Question 9

The current portion of notes payable must be reported on the balance sheet combined with the long- term portion under non- current liabilities.

Question 10

On 1 November 2013, EZ Products borrowed $48 000 on a 5%, 10- year note with annual instalment payments of $4 800 plus interest due on 1 November of each succeeding year. How will the note be shown on the balance sheet dated 31 December 2013?

A)$4 800 shown as current liability, $48 000 shown as non- current liability
B)$48 000 shown as current liability only
C)Entire $48 000 shown as non- current liability
D)$4 800 shown as current liability, $43 200 shown as non- current liability

Question 11

Paris Company buys a building on a plot of land for $100 000, paying $20 000 cash and signing a 20- year mortgage payable for $80 000 at 6%. Monthly payments are $570. What portion of the first monthly payment is principal?

A)$170
B)$4 800
C)$570
D)$200

Question 12

The current portion of notes payable is the principal amount that will be paid within one year of the balance sheet date.

Question 13

When a long- term note payable is issued, the entire amount should be initially recorded as a long- term note payable.

Question 14

On 1 November 2013, EZ Products borrowed $48 000 on a 5%, 10- year note with annual instalment payments of $4 800 plus interest due on 1 November of each succeeding year. On 31 December 2014, what will the balance be in the account titled Long- term notes payable?

A)$48 000
B)$38 400
C)$43 200
D)$4 800

Question 15

On 1 November 2013, EZ Products borrowed $48 000 on a 5%, 10- year note with annual instalment payments of $4 800 plus interest due on 1 November of each succeeding year. On 31 December 2014, what will the balance be in the account titled Current portion of long- term notes payable?

A)$4 800
B)$48 000
C)$400
D)$43 200

Question 16

Instalment payments for mortgages are normally paid once per year.

Question 17

On 1 July 2013, Avery Services issued a 4% long- term note payable for $10 000. It is payable over a 5- year term in $2 000 principal instalments on 1 July of each year. Each yearly instalment will include both principal repayment of $2 000 and interest payment for the preceding one- year period. What happens on 31 December 2013 before statements are prepared?

A)Avery must pay out $200 of interest expense to the note holder.
B)Avery does not need to take any actions.
C)Avery must accrue $200 of interest expense.
D)Avery must accrue for the coming $2 000 principal payment.

Question 18

When a company accrues interest payable on a long- term note at year- end, the interest payable must be shown as a non- current liability on the balance sheet, along with the long- term note payable balance.

Question 19

On 1 November 2013, EZ Products borrowed $48 000 on a 5%, 10- year note with annual instalment payments of $4 800 plus interest due on 1 November of each succeeding year. Which of the following describes the first instalment payment made on 1 November 2014?

A)$2 400 principal plus $2 400 interest
B)$4 800 principal plus $2 400 interest
C)$2 000 interest only
D)$4 800 principal plus $400 interest

Question 20

A mortgage payable is a debt that is backed with a security interest in property.

Question 21

The interest rate on which cash payments to debenture holders are based is the:

A)amortisation rate.
B)discount rate.
C)stated rate.
D)market rate.

Question 22

Which of the following describes the term maturity date?

A)The date on which the debenture is issued
B)The date on which the debenture is cancelled
C)The date on which each interest payment is made
D)The date on which the principal amount is repaid to the debenture holder

Question 23

Which of the following statements is TRUE about a debenture that is issued at a premium?

A)It will be sold above par.
B)Its interest rate is lower than the prevailing market rate.
C)It will be sold at par.
D)It will repay principal at more than the face value.

Question 24

Which of the following is the amount the borrower must pay back to the debenture holders?

A)Market value
B)Present value
C)Principal amount
D)Stated interest value

Question 25

If a debenture is issued at a discount, it will sell for more than face value.

Question 26

Which of the following statements is TRUE about a debenture that is issued at a discount?

A)It will be sold for less than the face value.
B)It will be sold at par.
C)It will repay principal at less than the face value.
D)Its interest rate is higher than the prevailing market rate.

Question 27

Which of the following describes a secured debenture?

A)A debenture that is not backed by assets
B)A debenture that gives the debenture holder a claim over the issuer's assets if the issuer fails to pay
C)A debenture that matures at one specified time
D)A debenture that repays principal in instalments

Question 28

Which of the following describes a serial debenture?

A)A debenture that gives the debenture holder a claim for specific assets if the issuer fails to pay
B)A debenture that is not backed by specific assets
C)A debenture that repays principal in instalments
D)A debenture that matures at one specified time

Question 29

If debentures with a face value of $100 000 are sold at 88, the amount of cash proceeds is:

A)$88 000.
B)$100 000.
C)$108 800.
D)$99 912.

Question 30

Which of the following occurs when a debenture's stated interest rate is higher than the market interest rate?

A)The debenture will be issued at par.
B)The debenture will be issued at a premium.
C)The debenture will be issued at maturity value.
D)The debenture will be issued at a discount.

Question 31

The reason people buy debentures is to:

A)reduce their income taxes.
B)save money.
C)receive dividend payments.
D)earn interest.

Question 32

The market rate is the rate used to calculate the actual cash payments made to debenture holders.

Question 33

If a debenture is issued at a premium, it will sell for more than face value.

Question 34

Which of the following describes a term debenture?

A)A debenture that gives the debenture holder a claim for specific assets if the issuer fails to pay
B)A debenture that repays principal in instalments
C)A debenture that matures at one specified time
D)A debenture that is not backed by specific assets

Question 35

The issue price of a debenture-whether it is sold at par, premium, or discount-has no effect on the required principal repayment at maturity.

Question 36

Which of the following occurs when a debenture's stated interest rate is less than the market interest rate?

A)The debenture will be issued at a premium.
B)The debenture will be issued at par.
C)The debenture will be issued at maturity value.
D)The debenture will be issued at a discount.

Question 37

Once a debenture has been sold to a debenture holder, it may not be re- sold to other investors, but must be held by the first buyer until maturity.

Question 38

Debentures are non- current liabilities issued to multiple lenders, usually in increments of $1 000.

Question 39

When a debenture is sold, the selling price is generally equivalent to the present value of the debenture payments.

Question 40

The company will repay the principal amount of the debenture on the maturity date.

Question 41

If debentures with a face value of $100 000 are sold at par, the amount of cash proceeds is:

A)$88 000.
B)$99 912.
C)$100 000.
D)$108 800.

Question 42

Premium on debentures payable is spread over the term of the debentures and reduces total interest expense.

Question 43

The time value of money is based on which of the following concepts?

A)The concept that money loses its purchasing power over time
B)The concept that money can be converted into other currencies over time
C)The concept that money earns income over time
D)The concept that money becomes obsolete over time

Question 44

A debenture is sold for an amount equal to its face value. Which of the following statements would explain why?

A)The debenture is not secured by specific assets of the issuer.
B)The debenture's stated rate is higher than the prevailing market rate at time of sale.
C)The debenture's stated rate is the same as the prevailing market rate at time of sale.
D)The debenture's stated rate is lower than the prevailing market rate at time of sale.

Question 45

A debenture is sold for an amount higher than face value. Which of the following statements would explain why?

A)The debenture's stated rate is lower than the prevailing market rate at time of sale.
B)The debenture is not secured by specific assets of the issuer.
C)The debenture's stated rate is the same as the prevailing market rate at time of sale.
D)The debenture's stated rate is higher than the prevailing market rate at time of sale.

Question 46

The balance in the Debentures payable is a credit of $50 00. The balance in the Premium on debentures payable is a credit of $900. The balance sheet will report the debenture balance as $49 100.

Question 47

If a debenture's stated interest rate is lower than the market rate, which of the following is TRUE?

A)The debenture will be issued at a discount.
B)The debenture will be issued at a premium.
C)The debenture will be issued at par.
D)The debenture will be issued for an amount higher than the maturity value.

Question 48

The balance in the Debentures payable account is a credit of $50 000. The balance in the Premium on debentures payable account is a credit of $900. The debenture carrying amount is $50 900.

Question 49

If a company issues a debenture in- between interest payments, the company can pay a prorated portion of the interest payment on the regular payment date.

Question 50

The debenture carrying amount is the balance in the debenture payable account subtracted from or added to the balance in either the discount or premium account.

Question 51

If a debenture's stated interest rate is the same as the market rate, which of the following is TRUE?

A)The debenture will be issued for an amount lower than the maturity value.
B)The debenture will be issued at par.
C)The debenture will be issued at a premium.
D)The debenture will be issued at a discount.

Question 52

The balance in the Debentures payable account is a credit of $50 000. The balance in the Discount on debentures payable account is a debit of $1 500. The debenture carrying amount is $51 500.

Question 53

Premium on debentures payable is considered to be additional interest expense of the company that issues the debenture.

Question 54

A debenture is sold for an amount less than its face value. Which of the following statements would explain why?

A)The debenture's stated rate is higher than the prevailing market rate at time of sale.
B)The debenture is not secured by specific assets of the issuer.
C)The debenture's stated rate is lower than the prevailing market rate at time of sale.
D)The debenture's stated rate is the same as the prevailing market rate at time of sale.

Question 55

Discount on debentures payable is considered to be additional interest expense of the company that issues the debenture.

Question 56

If debentures with a face value of $100 000 are sold at 102, the amount of cash proceeds is:

A)$108 800.
B)$99 898.
C)$102 000.
D)$100 000.

Question 57

The balance in the Debentures payable account is a credit of $50 000. The balance in the Discount on debentures payable is a debit of $1 500. The balance sheet will report the debenture balance as
$48 500.

Question 58

If a debenture's stated interest rate is higher than the market rate, which of the following is TRUE?

A)The debenture will be issued at par.
B)The debenture will be issued for an amount lower than the maturity value.
C)The debenture will be issued at a discount.
D)The debenture will be issued at a premium.

Question 59

On 1 January 2014, Davie Services issued $20 000 of 8% debentures that mature in five years. They were sold at discount, for a total of $19 000. On 1 January 2019, when the debentures mature, Davie Services will make the final principal payment. That entry will be which of the following?

A)Debit Debenture discount for $1 000 and credit Cash for $1 000.
B)Debit Debentures payable for $19 000, debit Debenture discount for $1 000 and credit Cash for $19 000.
C)Debit Debentures payable for $19 000 and credit Cash for $1 000.
D)Debit Debentures payable for $20 000 and credit Cash for $20 000.

Question 60

The Cases Company issues $800 000 of 7%, 10- year debentures on 31 March 2013. The debenture pays interest on 31 March and 30 September. Which of the following statements is TRUE?

A)If the market rate of interest is 8%, the debentures will issue at par.
B)If the market rate of interest is 8%, the debentures will issue at a discount.
C)If the market rate of interest is 8%, the debentures will issue above par.
D)If the market rate of interest is 8%, the debentures will issue at a premium.

Question 61

The balance in the Debentures payable account is a credit of $50 000. The balance in the Discount on debentures payable account is a debit of $1 500. How much is the debenture carrying amount?

A)$50 000
B)$48 500
C)$51 500
D)$1 500

Question 62

On 2 January 2014, Mahoney Sales issued $10 000 in debentures for $10 900. They were 5- year debentures with a stated rate of 4%, and pay half- yearly interest payments. Mahoney Sales uses the straight- line method to amortise the debenture premium. After the first interest payment on 30 June 2014, what was the debenture carrying amount?

A)$10 810
B)$9 190
C)$9 810
D)$9 100

Question 63

McDonald Sales prepared a debenture issue of $20 000 dated 1 January 2013. The debentures have a stated rate of 3% and a term of 6 years. The debenture issue was delayed, and the debentures were finally sold on 1 March 2013 at par. How much cash will McDonald receive for the debentures?

A)$20 300
B)$19 900
C)$20 000
D)$20 100

Question 64

On 1 November 2015, Archangel Services issued $200 000 of 10- year debentures with a stated rate of 3%. The debentures were sold at par, and make half- yearly payments on 30 April and 31 October. At 31 December 2015, Archangel made an adjusting entry to accrue interest at year- end. How much interest expense will be recorded at 31 December 2015?

A)$500
B)$1 000
C)$1 500
D)$6 000

Question 65

On 1 November 2015, Archangel Services issued $200 000 of 10- year debentures with a stated rate of 3%. The debentures were sold at par, and make half- yearly payments on 30 April and 31 October. At 31 December 2015, Archangel made an adjusting entry to accrue interest at year- end. No further entries were made until 30 April 2016, when the first payment was sent out. At that time, how much interest expense was recorded for the period of January to April 2016?

A)$2 000
B)$6 000
C)$3 000
D)$1 000

Question 66

McDonald Sales prepared a debenture issue of $20 000 dated 1 January 2013. The debentures have a stated rate of 3% and a term of 6 years. The debenture issue was delayed, and the debentures were finally sold on 1 March 2013 at par. On 30 June 2013, the first half- yearly interest payment is made. How much is the total amount of interest expense McDonalds will record for the first half of 2013?

A)$350
B)$600
C)$200
D)$300

Question 67

On 31 December 2013, Peterson Sales has a debentures payable balance of $40 000 and a premium on debentures payable of $900. On the balance sheet, how will this information be shown?

A)$40 000 less one- tenth of $900 for a net balance of $39 910
B)$40 000 only
C)$40 000 plus a premium of $900 for a net balance of $40 900
D)$40 000 less premium of $900 for a net balance of $39 100

Question 68

McDonald Sales prepared a debenture issue of $20 000 dated 1 January 2013. The debentures have a stated rate of 3% and a term of 6 years. The debenture issue was delayed, and the debentures were finally sold on 1 March 2013 at par. On 30 June 2013, the first half- yearly interest payment is made. How much will be paid out to debenture holders on 30 June 2013?

A)$300
B)$600
C)$100
D)$200

Question 69

On 2 January 2014, Mahoney Sales issued $10 000 in debentures for $9 400. They were 5- year debentures with a stated rate of 4%, and pay half- yearly interest payments. Mahoney Sales uses the straight- line method to amortise the debenture discount. On 30 June 2014, when Mahoney makes the first payment to debenture holders, how much will they report as interest expense?

A)$260
B)$200
C)$400
D)$60

Question 70

The balance in the Debentures payable account is a credit of $50 000. The balance in the Premium on debentures payable account is a credit of $900. How much is the debenture carrying amount?

A)$51 900
B)$50 900
C)$49 100
D)$900

Question 71

On 1 November 2015, Archangel Services issued $200 000 of 10- year debentures with a stated rate of 3%. The debentures were sold at discount for $191 000, and make half- yearly payments on 30 April and 31 October. At 31 December 2015, Archangel made an adjusting entry to accrue interest at year- end. How much interest expense is recorded at 31 December 2015?

A)$2 150
B)$2 000
C)$1 150
D)$1 075

Question 72

McDonald Sales prepared a debenture issue of $20 000 dated 1 January 2013. The debentures have a stated rate of 3% and a term of 6 years. The debenture issue was delayed, and the debentures were finally sold on 1 March 2013 at par. The journal entry to record the issue of the debentures on 1 March 2013 will include which of the following?

A)Credit to Interest payable of $100
B)Debit to Cash for $20 300
C)Credit to Debentures payable for $20 100
D)Credit to Cash for $20 110

Question 73

On 1 January 2014, Davie Services issued $20 000 of 8% debentures that mature in five years. They were sold at a premium, for a total of $20 750. The debentures pay half- yearly interest payments on 30 June and 31 December of each year. On 30 June 2014, how much is the total amount paid to debenture holders?

A)$800.00
B)$830.00
C)$1 660.00
D)$276.67

Question 74

On 1 January 2014, Davie Services issued $20 000 of 8% debentures that mature in five years. They were sold at a premium, for a total of $20 750. On 1 January 2019, when the debentures mature, Davie Services will make the final principal payment. That entry will include which of the following?

A)Debit Debentures payable for $20 000 and credit Cash for $20 000.
B)Debit Debenture premium for $250 and credit Cash for $250.
C)Debit Debentures payable for $20 000, credit Debenture premium for $750 and Credit Cash for $19 250.
D)Debit Debentures payable for $20 750 and credit Cash for $20 750.

Question 75

On 2 January 2014, Mahoney Sales issued $10 000 in debentures for $9 400. They were 5- year debentures with a stated rate of 4%, and pay half- yearly interest payments. Mahoney Sales uses the straight- line method to amortise the debenture discount. After the second interest payment on 31 December 2014, what was the debenture carrying amount?

A)$9 460
B)$9 520
C)$9 880
D)$9 400

Question 76

On 1 January 2014, Davie Services issued $20 000 of 8% debentures that mature in five years. They were sold at discount, for a total of $19 000. The debentures pay half- yearly interest payments on 30 June and 31 December of each year. On 30 June 2014, how much is the total amount paid to debenture holders?

A)$253.33
B)$760.00
C)$1 520.00
D)$800.00

Question 77

On 31 December 2013, Peterson Sales has a Debentures payable balance of $40 000 and a Discount on debentures payable of $2 100. On the balance sheet, how will this information be shown?

A)$40 000 only
B)$40 000 less one- tenth of $2 100 for a net balance of $39 790
C)$40 000 plus discount for a total balance of $42 100
D)$40 000 less discount of $2 100 for a net balance of $37 900

Question 78

On 1 November 2015, Archangel Services issued $200 000 of 10- year debentures with a stated rate of 3%. The debentures were sold at discount for $191 000, and make half- yearly payments on 30 April and 31 October. At 31 December 2015, Archangel made an adjusting entry to accrue interest at year- end. No further entries were made until 30 April 2016 when the first interest payment was made. How much interest expense will be recorded for the period of January to April 2016?

A)$2 000
B)$2 700
C)$2 300
D)$3 000

Question 79

On 1 January 2014, Davie Services issued $20 000 of 8% debentures that mature in five years. They were sold at par. The debentures pay half- yearly interest payments on 30 June and 31 December of each year. On 30 June 2014, how much are the total interest payments made to debenture holders?

A)$800.00
B)$133.33
C)$1 600.00
D)$160.00

Question 80

On 2 January 2014, Mahoney Sales issued $10 000 in debentures for $9 400. They were 5- year debentures with a stated rate of 4%, and pay half- yearly interest payments. Mahoney Sales uses the straight- line method to amortise the debenture discount. After the first interest payment on 30 June 2014, what was the debenture carrying amount?

A)$9 880
B)$9 400
C)$9 460
D)$10 000