Question 1

If $4,000,000 of 12% bonds are issued at 103 1/4, the amount of cash received from the sale is:

Accepted Answer

To find the amount of cash received from the sale, we need to calculate the total amount of money raised by the bond issue.

The face value of the bonds is $4,000,000, and they are issued at a premium of 3 1/4%, which means they are sold for 103.25% of their face value.

To calculate the total amount of money raised, we can use the following formula:

Total amount raised = Face value of bonds x Issue price

Total amount raised = $4,000,000 x 1.0325

Total amount raised = $4,130,000

Therefore, the amount of cash received from the sale is $4,130,000. The correct answer is C.

Question 2

A company issues 5,000 shares of $15 par common stock.As a result, the earnings per share of the company _____.

Accepted Answer

Issuing more shares increases the total number of shares outstanding, which typically decreases earnings per share unless the additional capital raised significantly increases net income.

Question 3

On July 1, Mark Co.issued $3,000,000 of 10-year, 8% bonds at par.Interest on the bonds is payable semiannually on December 31 and June 30.On payment of interest, net assets of the company:

Accepted Answer

The 8% bonds were issued at par for $3,000,000. This means that the company received the full amount of $3,000,000 from bondholders. The bonds have a stated interest rate of 8%, which means that the company must pay $240,000 ($3,000,000 x 8%) in interest each year. The interest is paid semiannually, which means that the company will pay $120,000 ($240,000/2) in interest on December 31 and $120,000 ($240,000/2) in interest on June 30. When the company pays the interest, its net assets will decrease by $120,000 ($240,000/2). Therefore, the correct answer is C.

Question 4

The cost of a product warranty should be included as an expense in the:

Accepted Answer

The cost of a product warranty should be included as an expense in the period of the sale of the product. This is because the cost of the warranty is incurred at the time of sale, and is considered a selling expense. Including the cost of the warranty in the period of sale ensures that the associated expenses are properly matched with the revenue generated from the sale.

Question 5

The charter of a corporation provides for the issuance of 100,000 shares of common stock.Assume that 60,000 shares were originally issued and 5,000 were subsequently reacquired.What is the number of shares outstanding?

Accepted Answer

Outstanding shares are the number of shares that have been issued and are currently held by shareholders. To find the number of outstanding shares, we need to subtract the number of reacquired shares from the original shares issued:

60,000 original shares issued - 5,000 reacquired shares = 55,000 outstanding shares. Thus, the correct answer is D) 55,000.

Question 6

When the contract rate of interest on bonds is higher than the market rate of interest, the bonds sell at:

Accepted Answer

When the contract rate of interest on bonds is higher than the market rate, investors are willing to pay more for the bonds because they offer a higher return than what is currently available in the market, hence they sell at a premium.

Question 7

When the contract rate of interest on bonds is less than the market rate of interest, the bonds sell at:

Accepted Answer

When the contract rate of interest on bonds is less than the market rate of interest, the bonds sell at a discount. This is because investors can earn a higher rate of return on alternative investments with higher market rates of interest, making the lower-rate bond less appealing and causing its price to decrease below its face value.

Question 8

Contingent liabilities that are probable but cannot be reasonably estimated are disclosed in the:

Accepted Answer

Probable contingent liabilities that cannot be reasonably estimated are disclosed in the notes to the financial statements as they are not yet certain or measurable enough to be recorded as a liability on the balance sheet. The current liabilities section is reserved for liabilities that are due within one year, and the long-term liabilities section is for liabilities due after one year. The retained earnings section of the statement of stockholders' equity is used to show changes in the company's ownership interests over time.

Question 9

If $1,000,000 of 10% bonds are issued at 98, the amount of cash received from the sale is:

Accepted Answer

When bonds are issued at 98, it means they are issued at 98% of their face value. Therefore, $1,000,000 * 98% = $980,000.

Question 10

If bonds are issued at a premium, the stated interest rate is:

Accepted Answer

When bonds are issued at a premium, it means that the selling price of the bonds is higher than their face value (par value). As a result, the effective interest rate (yield to maturity) of the bonds is lower than their stated interest rate. Therefore, in order to attract investors, the stated interest rate has to be higher than the market rate of interest. This compensates investors for the premium paid for the bonds and provides them with a higher yield than they could obtain from similar securities with a lower stated interest rate.

Question 11

On July 1, George Co.issued $3,000,000 of 10-year, 8% bonds at par.Interest on the bonds is payable semiannually on December 31 and June 30.As a result of this transaction, net assets of the company:

Accepted Answer

The answer of On July 1, George Co.issued $3,000,000 of...

Question 12

Which of the following factors affects the accounting for contingent liabilities?

Accepted Answer

The accounting for contingent liabilities is affected by the likelihood of occurring and measurement. The likelihood of occurring indicates the probability of the contingency happening, and the measurement influences the amount to be recorded in the financial statements. Factors such as financial and economic conditions, the coupon rate and market rate of interest, and investor's expectations may impact the likelihood and measurement of a contingent liability, but they do not directly affect the accounting treatment of it.

Question 13

If $500,000 of 8% bonds are issued at 102, the amount of cash received from the sale is:

Accepted Answer

When bonds are issued at 102, it means they are issued at 102% of their face value. Therefore, the cash received is 102% of $500,000, which is $500,000 * 1.02 = $510,000.

Question 14

The periodic interest to be paid on bonds is identified in the bond indenture and is expressed as a percentage of the face amount of the bond.This percentage or rate of interest is called the:

Accepted Answer

The rate of interest identified in the bond indenture is known as the contract rate. The other options are incorrect: accrued rate refers to the interest that has accumulated but not yet been paid, internal rate is a financial concept used in calculating the present value of future cash flows, and effective rate is the actual rate of return on an investment after taking into account all associated expenses and fees.

Question 15

Most employers are levied a tax on payrolls for:

Accepted Answer

Employers are levied a tax on their payrolls for federal unemployment compensation tax which is a program that provides temporary financial assistance to workers who lost their jobs through no fault of their own.

Question 16

If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount:

Accepted Answer

Since the bond's coupon rate (12%) is higher than the market interest rate (10%), it will sell at a premium, meaning for an amount greater than its face value. Investors are willing to pay more for a bond that offers a higher return than the current market rate.

Question 17

The _____ is determined by transactions between buyers and sellers of similar bonds.

Accepted Answer

The effective interest rate is determined by transactions between buyers and sellers of similar bonds. The stated interest rate is the rate specified in the bond agreement, the internal interest rate is the rate used by a company to evaluate the potential profitability of an investment, and the straight-line rate is a method of calculating the amortization of a bond premium or discount.

Question 18

The par value per share of common stock represents:

Accepted Answer

The par value per share of common stock represents the monetary amount assigned to each share of stock in the articles of incorporation. It does not represent the minimum selling price, minimum amount received during liquidation, or the amount of dividends per share to be received each year.

Question 19

When the market rate of interest on bonds is equal to the contract rate, the bonds will sell at:

Accepted Answer

When the market rate of interest on bonds is equal to the contract rate, the bonds will sell at their face value. This is because the bond's contract rate is equal to the market rate of interest and therefore there is no incentive for investors to pay more (premium) or less (discount) than the face value of the bond.

Question 20

_____ liabilities may arise from past transactions if certain events occur in the future.

Accepted Answer

Contingent liabilities are potential liabilities that may arise from past transactions or events, but their occurrence depends on the outcome of uncertain future events. They are not recognized as actual liabilities on the balance sheet but are disclosed in the footnotes as they could have an impact on the financial position of the company. Current, noncurrent, and long-term liabilities are all recognized as actual liabilities on the balance sheet.

Quiz 8: Liabilities and Stockholders Equity