Deck 11: Long-Term Liabilities, Bonds Payable, and Classification of Liabilities on the Balance Sheet

Question 1

On July 1, 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 installments on July 1 of each year. Which of the following entries needs to be made at July 1, 2013 to reclassify the current portion of the note?

A)
B)
C)
D)

Answer 1

D

Question 2

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

Answer 2

False

Question 3

On July 1, 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 installments on July 1 of each year. Each yearly installment will include both principal repayment of $2,000 and interest payment for the preceding one-year period. What happens on December 31, 2013 before statements are prepared?

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

Answer 3

A

Question 4

On November 1, 2012, EZ Products borrowed $48,000 on a 5%, 10-year note with annual installment payments of $4,800 plus interest due on November 1 of each succeeding year. On December 31, 2013, what will the balance be in the account titled Current portion of long-term notes payable?

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

Question 5

On November 1, 2012, EZ Products borrowed $48,000 on a 5%, 10-year note with annual installment payments of $4,800 plus interest due on November 1 of each succeeding year. On November 1, the principal amount was initially recorded as Long-term notes payable, and then a second entry was made to reclassify the current portion. Which of the following is the proper reclassification entry?

A)
B)
C)
D)

Question 6

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

Question 7

On July 1, 2013, Avery Services issued a long-term note payable for $10,000. It is payable over a 5-year term in $2,000 installments on July 1 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 December 31, 2013?

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

Question 8

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

Question 9

On November 1, 2012, EZ Products borrowed $48,000 on a 5%, 10-year note with annual installment payments of $4,800 plus interest due on November 1 of each succeeding year. How much interest expense should be accrued at December 31, 2012 for the period of November 1 through year-end?

A)$1,200
B)$2,400
C)$400
D)$200

Question 10

On July 1, 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 installments on July 1 of each year. Each yearly installment will include both principal repayment of $2,000 and interest payment for the preceding one-year period. On July 1, 2014, after the first installment 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 11

On July 1, 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 installments on July 1 of each year. Which of the following entries needs to be made at year-end 2013 to accrue interest?

A)
B)
C)
D)

Question 12

Installment payments for mortgages are normally paid once per year.

Question 13

When a long-term note payable that requires annual installment 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 14

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

Question 15

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

Question 16

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

Question 17

On July 1, 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 installments on July 1 of each year. Each yearly installment will include both principal repayment of $2,000 and interest payment for the preceding one-year period. What happens on July 1, 2014?

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

Question 18

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

Question 19

On November 1, 2012, EZ Products borrowed $48,000 on a 5%, 10-year note with annual installment payments of $4,800 plus interest due on November 1 of each succeeding year. Which of the following journal entries would be needed at December 31, 2012 to accrue interest from November 1 through year-end?

A)
B)
C)
D)

Question 20

On November 1, 2012, EZ Products borrowed $48,000 on a 5%, 10-year note with annual installment payments of $4,800 plus interest due on November 1 of each succeeding year. How will the note be shown on the balance sheet dated December 31, 2012?

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

Question 21

On November 1, 2012, EZ Products borrowed $48,000 on a 5%, 10-year note with annual installment payments of $4,800 plus interest due on November 1 of each succeeding year. Which of the following describes the first installment payment made on November 1, 2013?

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

Question 22

On January 1, 2013, Thames Company purchases property and signs a 6-year mortgage note $60,000 at 4%. Please see the partial amortization schedule below. At the end of 2013, what amount would be shown on the balance sheet for current portion of mortgage payable?

A)$50,466.48
B)$9,921.93
C)$9,533.52
D)$2,226.48

Question 23

On November 1, 2013, EZ Products borrowed $48,000 on a 5%, 10-year note with annual installment payments of $4,800 plus interest due on November 1 of each succeeding year. On November 1, the principal amount was initially recorded as Long-term notes payable, and then a second entry was made to reclassify the current portion. Please provide the proper reclassification entry.

Question 24

On July 1, 2013, Avery Services issued a long-term note payable for $10,000. It is payable over a 5-year term in $2,000 installments on July 1 of each succeeding year. When the note was issued, the principal amount was initially recorded in Long-term notes payable. In addition, a second entry was made to reclassify the current portion. Please provide the journal entry needed for that reclassification.

Question 25

On July 1, 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 installments on July 1 of each year. Each yearly installment will include both principal repayment of $2,000 and interest payment for the preceding one-year period. Please provide the journal entry needed on July 1, 2014 when the first installment payment is made.

Question 26

On January 1, 2013, Thames Company purchases property and signs a 6-year mortgage note $60,000 at 4%. Please see the partial amortization schedule below. At the end of 2013, what amount would be shown on the balance sheet for mortgage payable (excluding the current portion)?

A)$40,544.55
B)$50,466.48
C)$9,533.52
D)$9,921.93

Question 27

On July 1, 2013, Avery Services issued a long-term note payable for $10,000. It is payable over a 5-year term in $2,000 installments on July 1 of each succeeding year. Please provide the initial journal entry for the issuance of the note.

Question 28

On November 1, 2014, EZ Products borrowed $48,000 on a 5%, 10-year note with annual installment payments of $4,800 plus interest due on November 1 of each succeeding year. At the end of 2014, EZ Products accrued interest expense. No further entries were made until November 1, 2015 when the first installment payment was made. That payment included both principal and interest. Please provide the journal entry for the installment payment made on November 1, 2015.

Question 29

Paris Company buys a building on a plot of land for $100,000, paying $20,000 cash and signing a 20-year mortgage note for $80,000 at 6%. Monthly payments are $570. The first monthly payment was made in January, 2013. Please provide the journal entry for the first monthly payment.

Question 30

On November 1, 2014, EZ Products borrowed $48,000 on a 5%, 10-year note with annual installment payments of $4,800 plus interest due on November 1 of each succeeding year. Please provide the journal entry to accrue interest expense for the period of November 1 through the end of the year.

Question 31

Paris Company buys a building on a plot of land for $100,000, paying $20,000 cash and signing a 20-year mortgage note for $80,000 at 6%. An appraisal shows the value of the building to be $70,000 and the value of the land to be $30,000. Please provide the journal entry for the purchase.

Question 32

On January 1, 2013, Thames Company purchases property and signs a 6-year mortgage note for $60,000 at 4%. Please see the partial amortization schedule below. At January 1, 2013, what portion of the balance of the mortgage payable should be shown as a current liability?

A)$11,760.00
B)$9,533.52
C)$2,226.48
D)$50,466.48

Question 33

On January 1, 2013, Thames Company purchases property and signs a 6-year mortgage note for $60,000 at 4%. Please see the partial amortization schedule below. For the year 2013, what will be the total interest expense recorded by Thames Company for this mortgage?

A)$200.00
B)$9,533.52
C)$11,760.00
D)$2,226.48

Question 34

On November 1, 2012, EZ Products borrowed $48,000 on a 5%, 10-year note with annual installment payments of $4,800 plus interest due on November 1 of each succeeding year. On December 31, 2013, what will the balance be in the account titled Long-term notes payable?

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

Question 35

On January 1, 2013, Thames Company purchases property and signs a 6-year mortgage note for $60,000 at 4%. Please see the partial amortization schedule below.
On January 1, 2013, Thames recorded the entire principal amount of $60,000 as mortgage payable. They would then record a second entry to reclassify the current portion. Please provide that entry.

Question 36

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

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

Question 37

On November 1, 2013, EZ Products borrowed $48,000 on a 5%, 10-year note with annual installment payments of $4,800 plus interest due on November 1 of each succeeding year. Please provide the first journal entry for the initial issuance of the note.

Question 38

Paris Company buys a building on a plot of land for $100,000, paying $20,000 cash and signing a 20-year mortgage note 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)$79,430
B)$79,600
C)$79,830
D)$79,440

Question 39

On July 1, 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 installments on July 1 of each year. Each yearly installment will include both principal repayment of $2,000 and interest payment for the preceding one-year period. Please provide the journal entry needed at year-end 2013 to accrue the interest expense from July 1 through the end of the year.

Question 40

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

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

Question 41

The reason people buy bonds is to:

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

Question 42

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

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

Question 43

Bonds are long-term liabilities issued to multiple lenders, usually in increments of $1,000.

Question 44

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

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

Question 45

Which of the following is TRUE of a premium on bonds payable?

A)A premium on bonds payable is added to the bonds payable balance and shown with long-term liabilities on the balance sheet.
B)A premium on bonds payable is added to the bonds payable balance and shown with owner's equity on the balance sheet.
C)A premium on bonds payable is subtracted from the bonds payable balance and shown with long-term liabilities on the balance sheet.
D)A premium on bonds payable is subtracted from the bonds payable balance and shown with the current liabilities on the balance sheet.

Question 46

Which of the following is TRUE of a discount on bonds payable?

A)A discount on bonds payable is added to the bonds payable balance and shown with long-term liabilities on the balance sheet.
B)A discount on bonds payable is subtracted from the bonds payable balance and shown with the current liabilities on the balance sheet.
C)A discount on bonds payable is added to the bonds payable balance and shown with owner's equity on the balance sheet.
D)A discount on bonds payable is subtracted from the bonds payable balance and shown with long-term liabilities on the balance sheet.

Question 47

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

Question 48

Which of the following describes a serial bond?

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

Question 49

A bond payable is similar to which of the following?

A)Accounts receivable
B)Property, plant & equipment
C)Note payable
D)Note receivable

Question 50

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

Question 51

On January 1, 2013, Thames Company purchases property and signs a 6-year mortgage note for $60,000 at 4%. Please see the partial amortization schedule below.
At December 31, 2013, after the December payment has been made, a new reclassification entry must be made to update the balance in the current portion of mortgage payable. Please provide that journal entry.

Question 52

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

Question 53

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

Question 54

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

Question 55

Which of the following describes the term maturity date?

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

Question 56

Which of the following describes a term bond?

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

Question 57

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

Question 58

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

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

Question 59

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

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

Question 60

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

Question 61

The balance in the Bonds payable account is a credit of $50,000. The balance in the Discount on bonds payable account is a debit of $1,500. The bond carrying amount is $51,500.

Question 62

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

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

Question 63

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

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

Question 64

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

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

Question 65

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

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

Question 66

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

Question 67

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

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

Question 68

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

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

Question 69

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

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

Question 70

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

Question 71

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

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

Question 72

Which of the following describes a secured bond?

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

Question 73

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

Question 74

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

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

Question 75

Which of the following describes a debenture?

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

Question 76

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

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

Question 77

The balance in the Bonds payable account is a credit of $50,000. The balance in the Discount on bonds payable is a debit of $1,500. The balance sheet will report the bond balance as $48,500.

Question 78

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

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

Question 79

The balance in the Bonds payable account is a credit of $50,000. The balance in the Premium on bonds payable account is a credit of $900. The bond carrying amount is $50,900.

Question 80

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

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