Question 1

Your company issued bonds at a premium.Which of the following statements is not true?
A)The contra account,premium on bonds payable,is amortized each year by shifting part of its balance to interest expense.
B)On the date of issuance,the stated interest rate was greater 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)The account used to record the premium has a normal debit balance.

Accepted Answer

The account used to record the premium on bonds payable has a normal credit balance, not a debit balance.

Question 2

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 carrying value of the bonds will be $100,000 at maturity.

Accepted Answer

The answer of A company receives $102,000 when it issues...

Question 3

Use the information above to answer the following question.What adjusting entry should Backyard make on June 30 before preparing its annual financial statements? 
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

The answer of Use the information above to answer the...

Question 4

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 contra-asset 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.

Accepted Answer

The company receives $490,000 in cash (98% of $500,000), records a $10,000 discount on bonds payable as a contra-liability, and credits bonds payable for the full $500,000.

Question 5

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 initially recorded with a journal entry that debits cash and credits the relevant liability account.
C)The journal entry that records 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.

Accepted Answer

This statement is not always true. Bonds payable and notes payable can be classified as either current or non-current liabilities depending on their maturity dates. If the bond or note is due within a year, it should be recorded as a current liability.

Question 6

Because interest rates have fallen,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 Bond Retirement,and a credit of $194,000 to Cash.
B)debit of $194,000 to Bonds Payable,a debit to Gain on Bond Retirement of $6,000,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.

Accepted Answer

The difference between the face value of the bonds ($200,000) and the amount paid to retire them (97% x $200,000 = $194,000) represents a gain on bond retirement. Therefore, $200,000 is debited to Bonds Payable, $6,000 is credited to Gain on Bond Retirement, and $194,000 is credited to Cash. Option B is incorrect because the debits and credits are reversed. Option C is incorrect because the credit of $6,000 should be to Gain on Bond Retirement rather than Interest Expense. Option D is incorrect because it does not account for the gain on bond retirement.

Question 7

A company has liquid assets of $600,000 and current liabilities of $500,000.What is the effect on the quick ratio if the company records an accrual adjustment for salaries of $100,000 and pays accounts payable in the amount of $50,000?
A)The quick ratio will not change as a result of either of these transactions.
B)The accrual adjustment will cause the quick ratio to decrease and the payment of accounts payable will cause an increase in the quick ratio.
C)The accrual adjustment will cause the quick ratio to increase and the payment of accounts payable will not affect the quick ratio.
D)The accrual adjustment and the payment of accounts payable will both cause the quick ratio to decrease.

Accepted Answer

The accrual adjustment increases current liabilities, decreasing the quick ratio. Paying accounts payable reduces current liabilities, increasing the quick ratio.

Question 8

If the market rate of interest is 6%,a $10,000,10-year bond with a stated annual interest rate of 8% would be issued at an amount:
A)less than face value.
B)equal to the face value.
C)greater than face value.
D)equal to the face value minus a discount.

Accepted Answer

The answer of If the market rate of interest is...

Question 9

Your company sells $50,000 of bonds for an issue price of $48,000.Which of the following statements is correct?
A)The bond sold at a price of 96,implying a discount of $4,000.
B)The bond sold at a price of 48,implying a premium of $2,000.
C)The bond sold at a price of 48,implying a premium of $4,000.
D)The bond sold at a price of 96,implying a discount of $2,000.

Accepted Answer

The issue price of $48,000 is less than the face value of $50,000, indicating a discount. To determine the percentage of the discount, we can use the formula: Discount % = (Face Value – Issue Price) / Face Value x 100%. Substituting the values, we get Discount % = (50,000 – 48,000) / 50,000 x 100% = 4%. This means that the bond sold at a discount of 4%, or at a price of 96% (100% - 4%). The discount amount is equal to the face value multiplied by the discount %, or $50,000 x 4% = $2,000. Therefore, the correct statement is that the bond sold at a price of 96, implying a discount of $2,000.

Question 10

Which of the following accounts could have a non-zero balance on a post-closing trial balance?
A)Dividends Declared
B)Premium on Bonds Payable
C)Income Tax Expense
D)Interest Expense

Accepted Answer

Premium on Bonds Payable is a contra-liability account that has a credit balance. It represents the excess amount received by the company over the face value of the bonds issued. This account is not closed at the end of the accounting period and therefore may have a non-zero balance on the post-closing trial balance. The other accounts listed, Dividends Declared, Income Tax Expense, and Interest Expense, are all temporary accounts that are closed at the end of the accounting period and would have a zero balance on the post-closing trial balance.

Question 11

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.
D)The account used to record the discount is a normal credit balance account.

Accepted Answer

The account used to record the discount on bonds payable is a contra liability account, which has a normal debit balance, not a credit balance.

Question 12

At the beginning of the quarter,your company borrows $20,000 by signing 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 quarters,whereas principal payments are due at the end of each year.How does this new promissory note affect the current and non-current liability amounts reported on the balance sheet at the end of the first quarter? 
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

The answer of At the beginning of the quarter,your company...

Question 13

Use the information above to answer the following question.On January 1,which of the following journal entries will be made by Backyard to record the proceeds and issue of the note? 
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

The answer of Use the information above to answer the...

Question 14

Use the information above to answer the following question.What journal entry will Backyard make when paying off the note and interest at maturity if the company's year-end is June 30? (Hint: Backyard's records were adjusted on June 30). 
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

The answer of Use the information above to answer the...

Question 15

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.

Accepted Answer

When a bond is issued at a price higher than its face value (in this case, 107% of $1,000), it is said to be sold at a premium. Therefore, the bond sold for $1,070 ($1,000 x 107%), which means that the stated interest rate was lower than the market interest rate, as investors were willing to pay more than the face value to receive a lower return.

Question 16

Accrued liabilities could include all of the following except:
A)salaries payable.
B)current portion of long-term debt.
C)income tax payable.
D)interest payable.

Accepted Answer

The current portion of long-term debt would not be included in accrued liabilities as it is a separate category of current liabilities. Accrued liabilities typically include expenses that have been incurred but not yet paid, such as salaries, income taxes, and interest.

Question 17

IBM is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15,2022.If interest rates fall in the economy so that similar financial investments pay 5%,IBM will:
A)not be able to issue the bonds 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 stated interest rate to 5%.

Accepted Answer

When interest rates in the economy fall below the stated interest rate of a bond, the bond becomes more attractive, leading to a higher issue price as buyers are willing to pay more for the higher interest rate.

Question 18

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 recorded 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.

Accepted Answer

The $12,000 of interest that accrued during the last accounting period should be recorded as a debit to Interest Expense and a credit to Interest Payable. The $6,000 of interest accumulated during this accounting period but not previously recorded should be recorded as a debit to Interest Expense and a credit to Accrued Interest. The payment of $18,000 should be recorded as a credit to Cash. Therefore, the journal entry should be a debit of $6,000 to Interest Expense, a debit of $12,000 to Interest Payable, and a credit of $18,000 to Cash. Choice C matches these debits and credits.

Question 19

IBM is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15,2022.If 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%.

Accepted Answer

If interest rates rise in the economy, investors will demand a higher rate of return on their investments. As a result, IBM will have to offer a higher yield on their bonds in order to attract buyers. This means that they will have to accept a lower issue price than originally planned to compensate for the lower stated interest rate of 7%. This will ensure that the total return (interest income plus capital gain or loss) is competitive with other financial investments offering a 9% yield.

Question 20

The three key pieces of information that are stated on a 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.

Accepted Answer

The three key pieces of information stated on a bond certificate are the stated interest rate (or coupon rate), the face value of the bond, and the maturity date. The stated interest rate determines the amount of interest that the bondholder will be paid, the face value is the amount of money that the investor will receive when the bond reaches maturity, and the maturity date indicates when the bond will be repaid by the issuer.

Quiz 10: Liabilities

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

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?

Use the information above to answer the following question.What adjusting entry should Backyard make on June 30 before preparing its annual financial statements?

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

Which of the following statements is not true?

Because interest rates have fallen,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 company has liquid assets of $600,000 and current liabilities of $500,000.What is the effect on the quick ratio if the company records an accrual adjustment for salaries of $100,000 and pays accounts payable in the amount of $50,000?

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

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

Which of the following accounts could have a non-zero balance on a post-closing trial balance?

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

Use the information above to answer the following question.On January 1,which of the following journal entries will be made by Backyard to record the proceeds and issue of the note?

Use the information above to answer the following question.What journal entry will Backyard make when paying off the note and interest at maturity if the company's year-end is June 30? (Hint: Backyard's records were adjusted on June 30) .

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

Accrued liabilities could include all of the following except:

IBM is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15,2022.If interest rates fall in the economy so that similar financial investments pay 5%,IBM will:

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 recorded on the books.The journal entry for the interest payment should:

IBM is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15,2022.If interest rates rise in the economy so that similar financial investments pay 9%,IBM will:

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