Question 1

International Corporation leased a building from Domestic Company. The 10-year lease is recorded as a capital lease. The annual payments are $10,000 and the recorded cost of the asset is $67,100. The straight-line method is used to calculate depreciation. Which of the following statements is true?

Accepted Answer

Because the lease is recorded as a capital lease, the lessee (International Corporation) must record the asset on its balance sheet and depreciate it over its useful life using the straight-line method. Thus, the annual depreciation expense is calculated as the recorded cost of the asset ($67,100) divided by the lease term (10 years), which equals $6,710 per year. Therefore, Choice A is the correct answer.

Question 2

Time Value of Money Tables 
Use the information provided in the time value of money tables in the text to answer the question(s) that follow.
-
Refer to the Time Value of Money Tables. Homestead Company issued $1,000,000, 7-year, 8%, bonds with interest payable semiannually. The market rate was 6%. The issuance price of the bonds is:

Accepted Answer

The answer of Time Value of Money Tables 
Use the...

Question 3

IBD Corporation has Current Assets of $200,000, Long Term Assets of $300,000, Current Liabilities of $100,000, Long Term Liabilities of $200,000, Paid in Capital of $150,000, and Retained Earnings of $50,000. Calculate IBD's debt to assets ratio?

Accepted Answer

Debt to assets ratio = Total Liabilities ÷ Total Assets
Total Liabilities = Current Liabilities + Long Term Liabilities = $100,000 + $200,000 = $300,000
Total Assets = Current Assets + Long Term Assets = $200,000 + $300,000 = $500,000
Debt to assets ratio = Total Liabilities ÷ Total Assets = $300,000 ÷ $500,000 = 0.6 or 60%.
Therefore, the correct answer is B.

Question 4

Faultless, Inc. 
Selected data from Faultless' financial statements are provided below:
$\begin{array}{lcc}
&\underline{2012}&\underline{2011}\
\text { Current Assets } & \$ 6,000 & \$ 3,000 \
\text { Long-Term Assets } & 7,000 & 4,000 \
\text { Current Liabilities } & 2,000 & 3,000 \
\text { Long-Term Liabilities } & 7,000 & 0 \
\text { Stockholders' Equity } & 4,000 & 4,000 \
\text { Net Sales } & 9,500 & 9,100 \
\text { Net Income } & 1,000 & 5000
\end{array}$
-If current assets amount to $150, total assets are $350, current liabilities are $65, and total liabilities are $100, then the current ratio is:

Accepted Answer

The answer of Faultless, Inc. 
Selected data from Faultless' financial...

Question 5

Under the effective interest method, the cash paid on each interest payment date will:

Accepted Answer

The cash paid on each interest payment date remains constant regardless of whether the bonds are issued at a premium, discount, or at par value. This is because the cash interest payment is based on the bond's stated (or nominal) interest rate and its face value, not on its carrying amount.

Question 6

Tyson Construction Inc. 
Use the information provided for Tyson Construction Inc. to answer the following question(s) using the effective interest method.
On January 2, 2012, Tyson Construction Inc. issued $1,000,000, 10-year bonds for $1,135,915. The bonds pay interest on June 30 and December 31. The stated rate is 10% and the market rate is 8%.
-
Refer to the information provided for Tyson Construction Inc. The interest expense on the bonds at June 30, 2012 is:

Accepted Answer

The interest expense is calculated using the market rate of 8% on the carrying amount of the bonds. The carrying amount is $1,135,915, so the interest expense for six months is $1,135,915 * 4% = $45,436.60.

Question 7

Britt Company 
Selected data from Britt Company's financial statements are provided below:

- Refer to the selected financial data for Britt Company. Britt's current ratio for 2012 is:

Accepted Answer

The answer of Britt Company 
Selected data from Britt Company's...

Question 8

Faultless, Inc. 
Selected data from Faultless' financial statements are provided below:
$\begin{array}{lcc}
&\underline{2012}&\underline{2011}\
\text { Current Assets } & \$ 6,000 & \$ 3,000 \
\text { Long-Term Assets } & 7,000 & 4,000 \
\text { Current Liabilities } & 2,000 & 3,000 \
\text { Long-Term Liabilities } & 7,000 & 0 \
\text { Stockholders' Equity } & 4,000 & 4,000 \
\text { Net Sales } & 9,500 & 9,100 \
\text { Net Income } & 1,000 & 5000
\end{array}$
- Refer to the financial information presented for Faultless, Inc. What is the debt to assets ratio for Faultless in the year 2011 and 2012?

Accepted Answer

The debt to assets ratio is calculated by dividing total liabilities by total assets. The correct ratios for the years 2011 and 2012 are 0.429 and 0.692, respectively.

Question 9

The bond issue price is determined by calculating the:

Accepted Answer

The bond issue price is determined by calculating the present value of the stream of interest payments and the present value of the maturity amount. This is because the present value of future cash flows is used to determine the price of the bond.

Question 10

Max's Tire Center 
Selected data from the financial statements of Max's Tire Center are provided below.
$\begin{array}{lcc}
&\underline{2012}&\underline{2011}\
\text { Total liabilities } & \$ 150,000 & \$ 138,000 \
\text { Current liabilities } & 45,000 & 42,000 \
\text { Total liabilities \& equity } & 500,000 & 490,000 \
\text { Cash flow from operations } & 160,000 & 90,000 \
\text { Net sales } & 370,000 & 360,000 \
\text { Capital expenditures } & 80,000 & 30,000
\end{array}$ 
-Refer to the selected data provided for Max's Tire Center. Which of the following would result from a horizontal analysis of Max's balance sheet?

Accepted Answer

Horizontal analysis involves comparing financial data over a period of time. The correct choice indicates the percentage increase in total liabilities from one year to the next.

Question 11

Banister Company wishes to issue $600,000 of 10-year, 7% bonds, with interest paid annually at the end of the year. The market rate of interest is currently 5%. What information is needed in order to determine the issue price of the bond?

Accepted Answer

In order to determine the issue price of the bond, we need to know the face value of the bonds, the stated rate of interest, the market rate of interest, and the bond life. The bond rating and the purpose of the issue are not necessary to determine the issue price.

Question 12

Pointe Corporation's balance sheet showed the following amounts for its liability accounts: Notes payable, $130,000; Bonds Payable, $800,000; Accrued Expenses, $20,000; and Deferred Income Tax Liability, $120,000. Total assets was $1,470,000. The debt to assets ratio is:

Accepted Answer

The answer of Pointe Corporation's balance sheet showed the following...

Question 13

If bonds were initially issued at a discount, the interest expense on the bonds calculated using the effective interest method will:

Accepted Answer

The interest expense on bonds issued at a discount using the effective interest method will increase as the bonds approach their maturity date. This is because the effective interest rate is calculated as a percentage of the carrying value of the bonds, which will decrease over time as the discount is amortized. As the carrying value decreases, the interest expense will increase to compensate for the decreasing discount.

Question 14

Which of the following statements about bond accounting under the effective interest method is correct?

Accepted Answer

The effective interest method calculates the interest expense as a percentage of the carrying value of the bond, not the face value. Choice A is incorrect because it only calculates the cash interest paid, which is not the same as interest expense. Choice C is incorrect because the difference between cash interest paid and interest expense is used to adjust the carrying value of bonds sold at a discount, not a premium. Choice D is incorrect because the difference between interest expense and interest paid is used to adjust the carrying value of bonds sold at a premium, not a discount.

Question 15

Max's Tire Center 
Selected data from the financial statements of Max's Tire Center are provided below.
$\begin{array}{lcc}
&\underline{2012}&\underline{2011}\
\text { Total liabilities } & \$ 150,000 & \$ 138,000 \
\text { Current liabilities } & 45,000 & 42,000 \
\text { Total liabilities \& equity } & 500,000 & 490,000 \
\text { Cash flow from operations } & 160,000 & 90,000 \
\text { Net sales } & 370,000 & 360,000 \
\text { Capital expenditures } & 80,000 & 30,000
\end{array}$ 
-Refer to the selected data provided for Max's Tire Center. Which of the following would result from a vertical analysis of Max's balance sheet in 2012?

Accepted Answer

The answer of Max's Tire Center 
Selected data from the...

Question 16

Rating Corporation's balance sheet showed the following amounts for its liability accounts: Accounts Payable, $100,000; Bonds Payable, $150,000; Taxes Payable, $20,000; and Deferred Income Tax Liability, $5,000. Total assets was $500,000. The debt to assets ratio is:

Accepted Answer

The debt to assets ratio is calculated by dividing the total liabilities by the total assets. Therefore, ($100,000 + $150,000 + $20,000 + $5,000) / $500,000 = 0.55 or 55%. The best choice is D, which represents the calculated debt to assets ratio.

Question 17

Britt Company 
Selected data from Britt Company's financial statements are provided below:

-If a company's current ratio is 3.0 and the current liabilities are $100,000, then the current assets are:

Accepted Answer

The current ratio is the ratio of current assets to current liabilities. Therefore, if the current ratio is 3.0, it means that for every $1 of current liabilities, there are $3 of current assets. So, to find the current assets, we can multiply the current liabilities by the current ratio: $100,000 x 3 = $300,000. Therefore, the best choice is B, $300,000.

Question 18

Faultless, Inc. 
Selected data from Faultless' financial statements are provided below:
$\begin{array}{lcc}
&\underline{2012}&\underline{2011}\
\text { Current Assets } & \$ 6,000 & \$ 3,000 \
\text { Long-Term Assets } & 7,000 & 4,000 \
\text { Current Liabilities } & 2,000 & 3,000 \
\text { Long-Term Liabilities } & 7,000 & 0 \
\text { Stockholders' Equity } & 4,000 & 4,000 \
\text { Net Sales } & 9,500 & 9,100 \
\text { Net Income } & 1,000 & 5000
\end{array}$
-Refer to the financial information presented for Faultless, Inc. What is the company's current ratio for 2012?

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. The correct ratio is 3.0, indicating that Faultless, Inc. has three times more current assets than current liabilities.

Question 19

Bassell Enterprises has long-term assets of $800, current liabilities of $500, and long-term liabilities of $600. If the current ratio is 2.5, then current assets must be:

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. Given the current ratio of 2.5, we can set up the following equation:

2.5 = Current Assets/500

Multiplying both sides by 500, we get:

Current Assets = 2.5 * 500

Current Assets = 1250

Therefore, the current assets must be $1,250. Choice B is the correct answer.

Question 20

Tyson Construction Inc. 
Use the information provided for Tyson Construction Inc. to answer the following question(s) using the effective interest method.
On January 2, 2012, Tyson Construction Inc. issued $1,000,000, 10-year bonds for $1,135,915. The bonds pay interest on June 30 and December 31. The stated rate is 10% and the market rate is 8%.
-
Refer to the information provided for Tyson Construction Inc. Determine the cash interest to be paid on June 30, 2012.

Accepted Answer

The cash interest paid is calculated using the stated rate of 10% on the face value of the bonds: $1,000,000 * 10% / 2 = $50,000.

Quiz 9: Liabilities