Question 1

A $500,000 bond is retired at 97 when the carrying amount of the bond is $480,000. The entry to record the retirement would include a:

Accepted Answer

The carrying amount of the bond is $480,000, which is less than the face value of $500,000. This means that if the bond is retired, the company will have to pay more than the carrying amount. Therefore, there will be a loss on retirement. The loss is calculated as follows:
Face value - Carrying amount = Loss
$500,000 - $480,000 = $20,000 loss.
Therefore, the entry to record the retirement would include a $20,000 loss. Option D is the correct choice.

Question 2

When a bond is issued at a discount, the amount of interest expense for an interest period is calculated by multiplying the amount times the interest rate during the period.

Accepted Answer

When a bond is issued at a discount, the interest expense is calculated using the carrying amount of the bond and the market interest rate.

Question 3

On December 31, 20A, Dive Company sold $100,000, ten-year, 8% bonds at 104.5. The bonds were dated January 1, 20A, and interest is payable each June 30 and December 31. The company uses the straight-line amortization method. The company should report the long-term liability (carrying value) for the bonds on the December 31, 20A, statement of financial position as which of the following?

Accepted Answer

The bonds were sold at a premium, so the carrying value will be greater than the face value. The premium is amortized over the life of the bonds using the straight-line method. The carrying value on December 31, 20A, will be the face value plus the unamortized premium. The unamortized premium is calculated as follows:Unamortized premium = Premium / Number of interest periodsUnamortized premium = $4,500 / 20Unamortized premium = $225Carrying value = Face value + Unamortized premiumCarrying value = $100,000 + $225Carrying value = $100,225

Question 4

On July 1, 20B, WildWorld Inc. sold (issued) 300, $1,000, ten-year, 7% bonds at 101. The bonds were dated July 1, 20B, and semi-annual interest will be paid each December 31 and June 30. WildWorld uses straight-line amortization. What is the bond liability that would be reported on the statement of financial position at December 31, 20B?

Accepted Answer

The answer of On July 1, 20B, WildWorld Inc. sold...

Question 5

Bonds payable usually are classified on the statement of financial position as which of the following?

Accepted Answer

Bonds payable are typically long-term liabilities as they have a maturity date beyond one year from the date of the statement of financial position.

Question 6

Accurate Numbers, Inc., issued $100,000 of 10 year, 12% bonds dated April 1, 20A, for $102,360 on April 1, 20A. The bonds pay interest on April 1 and October 1. Straight-line amortization is used by the company. What entry is needed at October 1 for the first interest payment?

Accepted Answer

The answer of Accurate Numbers, Inc., issued $100,000 of 10...

Question 7

Which item listed below does not influence the issue price (present value) of a bond?

Accepted Answer

The reason the bond was issued does not affect the present value of the bond. The present value is determined by the dollar amounts to be received, the market rate of interest, and the length of time until the amounts are received.

Question 8

On December 31, 20A, Bennett recorded an adjusting entry to account for interest that had accrued on the note. What is the approximate amount of interest expense that would have accrued at December 31, 20A?

Accepted Answer

The interest rate on the note is 10%, and the note has been outstanding for 8 months (May 1st to December 31st). Therefore, the interest expense would be calculated as follows:
$500,000 x 10% x (8/12) = $25,402. Therefore, the answer is choice C.

Question 9

The amortization of bond premium by the issuer will do which of the following?

Accepted Answer

Amortizing a bond premium decreases the interest expense because the premium reduces the effective interest cost over the life of the bond.

Question 10

If the market rate of interest is 10%, a rational person would just as soon receive $1,100 three years from now as what amount today (round to the nearest dollar)?

Accepted Answer

To find the present value of $1,100 received three years from now at a 10% interest rate, use the formula: PV = FV / (1 + r)^n. Here, FV = $1,100, r = 0.10, and n = 3. PV = $1,100 / (1.10)^3 = $826 (rounded to the nearest dollar).

Question 11

You have been asked to compute the amount of a fund that will be available at the end of three years as a result of a single sum of $1,000 that is deposited. What is the interest concept that best describes this application?

Accepted Answer

The question asks for the amount that will be available at the end of three years from a single sum of $1,000 that is deposited, which describes the future value of a single amount.

Question 12

If bonds have been issued at a premium, then over the life of the bonds the

Accepted Answer

When bonds are issued at a premium, the carrying amount decreases over time as the premium is amortized.

Question 13

Calculation of the amount of the equal periodic payments that would be required at the end of each year to accumulate a $20,000 fund at the end of the tenth year is most readily determined by reference to a table that shows which of the following?

Accepted Answer

The problem asks for the calculation of equal periodic payments in order to accumulate a fund at the end of a certain period of time. This is a classic example of an annuity problem. Therefore, the most suitable table to use is the one that shows the future value of an annuity of $1, which will help determine the amount of each payment needed to accumulate the desired fund. The future value of $1 table (A) and present value tables (C and D) are not as relevant to this problem.

Question 14

In 2014, The W D Co. had total liabilities of $22,704 million and total assets of $43,679 million. In 2013, they had total liabilities of $21,990 million and total assets of $41,378 million. Calculate their debt to equity ratio for 2014 and 2013, respectively.

Accepted Answer

The debt to equity ratio is calculated as total liabilities divided by total equity. Total equity is total assets minus total liabilities. For 2014, equity is $43,679M - $22,704M = $20,975M, so the ratio is $22,704M / $20,975M = 1.08. For 2013, equity is $41,378M - $21,990M = $19,388M, so the ratio is $21,990M / $19,388M = 1.13.

Question 15

If a bond payable is sold (issued) at a premium, the amount of the carrying value (the long-term liability) reported on the subsequent statements of financial position does which of the following?

Accepted Answer

When a bond is issued at a premium, the carrying value decreases each year as the premium is amortized over the life of the bond.

Question 16

The amortization of a bond discount results in periodic interest expense

Accepted Answer

The answer of The amortization of a bond discount results...

Question 17

A corporation issues $100,000, 10%, 5-year bonds on January 1, 2014 for $108,111, at a price to yield 8%. Interest is paid semi-annually on January 1 and July 1. The amount of premium amortized on July 1, 2014 is

Accepted Answer

The premium amortization is calculated using the effective interest method. The interest expense for the period is $108,111 * 4% = $4,324.44. The actual interest payment is $5,000. The premium amortized is $5,000 - $4,324.44 = $675.56, rounded to $676.

Question 18

In 2014, C Co. reported a times interest earned ratio of 12.33 times while P Co. reported a ratio of 11.07 times. Which of the following statements is false?

Accepted Answer

The times interest earned ratio measures a company's ability to cover its interest charges with its earnings. A higher ratio indicates that the company is more capable of meeting its interest expense obligations. Thus, Statement A is false as C Co. having a higher ratio than P Co. indicates that it is more capable of meeting its interest expenses and is, therefore, more likely to be able to pay off its debt. Statements B, C, and D are true based on the ratios reported by the two companies.

Question 19

How much would Kristen have to deposit in the bank today if she will be earning a 6% annual rate of return and wants to have $5,000 in the bank at the end of five years? (Round to the nearest dollar).

Accepted Answer

To find the present value of $5,000 to be received in 5 years at a 6% annual interest rate, use the formula: PV = FV / (1 + r)^n. Here, FV = $5,000, r = 0.06, and n = 5. PV = 5000 / (1.06)^5 = $3,736 (rounded to the nearest dollar).

Question 20

On January 1, 20A, Ross Company acquired a truck that had a purchase price of $20,000. The seller agreed to allow Ross to pay for the truck over a two-year period at 10% interest with equal payments due at the end of 20A and 20B. What is the amount of each annual payment the company must make (round to the nearest dollar)?

Accepted Answer

The truck is financed with equal payments over two years at 10% interest. Using the formula for an annuity payment, the annual payment is calculated as $11,524.

Quiz 11: Reporting and Interpreting Stockholders Equity