Question 1

Harris Company borrowed $800000 from Liber Bank on January 1 2016 in order to expand its mining capabilities. The five-year note required annual payments of $208349 and carried an annual interest rate of 8.5%. What is the amount of expense Harris must recognize on its 2017 income statement?

Accepted Answer

The expense recognized on the income statement for 2017 includes interest expense. The interest expense is calculated on the outstanding balance of the loan at the beginning of the year. After the first payment of $208,349 in 2016, part of this payment goes towards interest and the rest reduces the principal. The initial interest for the first year (2016) is 8.5% of $800,000, which is $68,000, leaving $140,349 ($208,349 - $68,000) to reduce the principal. Thus, the principal at the beginning of 2017 is $800,000 - $140,349 = $659,651. The interest expense for 2017 is 8.5% of $659,651, which equals approximately $56,070.

Question 2

The entry to record an installment payment on a long-term note payable is a. Mortgage Payable
 $\quad $ $\quad $Cash
b. Interest Expense
 $\quad $ $\quad $Cash
c. Mortgage Payable 
 $\quad $Interest Expense
 $\quad $ $\quad $Cash
d. Bonds Payable
 $\quad $ $\quad $Cash

Accepted Answer

The answer of The entry to record an installment payment...

Question 3

Rikki Company received proceeds of $188000 on 10-year 6% bonds issued on January 1 2017. The bonds had a face value of $200000 pay interest annually on December 31 and have a call price of 101. Rikki uses the straight-line method of amortization. What is the amount of interest Rikki must pay the bondholders in 2017?

Accepted Answer

The annual interest payment is calculated by multiplying the face value of the bond ($200,000) by the coupon rate (6%). Therefore, the annual interest payment is $12,000.

Since the bonds were issued at a discount (proceeds of $188,000 vs. face value of $200,000), Rikki must amortize the discount over the life of the bonds using the straight-line method. The total discount is $12,000 ($200,000 - $188,000) and since the bonds have a 10-year life, the annual amortization is $1,200 ($12,000 / 10 years).

Therefore, the total interest expense for 2017 is the sum of the annual interest payment ($12,000) and the annual amortization of the discount ($1,200), which equals $13,200. However, since the call price is 101, Rikki will likely call the bonds before they mature, so the actual interest expense for 2017 will be less than $13,200.

The closest option is B, $12,000. The annual interest on the bonds is calculated as the face value of the bonds multiplied by the stated interest rate, which is $200,000 x 6% = $12,000. 
Since the bonds were issued on January 1, 2017, Rikki must pay interest for the portion of the year that the bonds were outstanding, which is from January 1, 2017, to December 31, 2017, or 12/12 of the year. 
Using the straight-line method, the amount of bond discount that must be amortized each year is calculated by subtracting the bond's face value from the proceeds received and dividing by the term of the bonds. In this case, the bond discount is $12,000 ($200,000 face value - $188,000 proceeds received) divided by 10 years, or $1,200 per year. 
Therefore, the amount of interest expense that Rikki must recognize in 2017 is the sum of the annual interest payment of $12,000 plus the amortization of bond discount of $1,200, or $13,200. However, since the bond's call price is 101, Rikki must reduce the interest expense by the amount of the call premium that would be paid if the bonds were called. The call premium is equal to 101% of the face value, or $202,000 ($200,000 face value x 101%). Since the bonds are not yet callable, this adjustment is not necessary. 
Thus, the amount of interest Rikki must pay the bondholders in 2017 is $12,000.

Question 4

The 2017 financial statements of Barker Co. contain the following selected data (in millions). $$\begin{array} { l r } 
\text { Current Assets } & \$ 75 \
\text { Total Assets } & 140 \
\text { Current Liabilities } & 40 \
\text { Total Liabilities } & 90 \
\text { Cash } & 8
\end{array}$$ The debt to assets ratio is

Accepted Answer

The debt to assets ratio is calculated as Total Liabilities / Total Assets. Using the data provided: 90 / 140 = 0.643, or 64.3%.

Question 5

Robin Corporation retires its $800000 face value bonds at 104 on January 1 following the payment of annual interest. The carrying value of the bonds at the redemption date is $829960. The entry to record the redemption will include a

Accepted Answer

When a bond is retired before maturity, any unamortized premium or discount must be written off. In this case, since the carrying value ($829,960) is higher than the face value ($800,000), there is an unamortized premium of $29,960. To retire the bonds at 104, Robin Corporation pays $832,000 ($800,000 x 104%). To record the redemption of the bonds, the following entry is made:

Debit: Bonds Payable $800,000 
Debit: Premium on Bonds Payable $29,960 
Debit: Loss on Bond Redemption $2,040 
Credit: Cash $832,000

The loss on bond redemption is calculated as follows:

Cash paid for redemption $832,000 
Carrying amount of bonds $829,960 
Loss on redemption $2,040

Therefore, option B is the correct answer.

Question 6

If sixty $1000 convertible bonds with a carrying value of $70000 are converted into 9000 shares of $5 par value common stock the journal entry to record the conversion is a.
$\begin{array}{llr}
  \text { Bonds Payable } &70,000\
 \text { Common Stock } &&70,000\
\end{array}$

b.
$\begin{array}{llr}
  \text { Bonds Payable } &60,000\
 \text { Premium on Bonds Payable } &10,000\
 \text {Common Stock  } &&70,000
\end{array}$

c.
$\begin{array}{llr}
  \text {  Bonds Payable} &60,000\
 \text { Premium on Bonds Payable } &10,000\
 \text { Common Stock } &&45,000\
 \text { Paid-in Capital in Excess of Par } &&25,000
\end{array}$

d.
$\begin{array}{llr}
  \text { Bonds Payable } &70,000\
 \text { Discount on Bonds Payable} &&10,000\
 \text { Common Stock } &&45,000\
 \text {  Paid-in Capital in Excess of Par} &&15,000
\end{array}$

Accepted Answer

The answer of If sixty $1000 convertible bonds with a...

Question 7

Which one of the following amounts increases each period when accounting for long-term notes payable?

Accepted Answer

The answer of Which one of the following amounts increases...

Question 8

In a recent year Luke Corporation had net income of $250000 interest expense of $50000 and a times interest earned of 10. What was Luke Corporation's income before taxes for the year?

Accepted Answer

The times interest earned ratio is calculated as income before interest and taxes divided by interest expense. Given a times interest earned of 10 and interest expense of $50,000, the income before interest and taxes is 10 * $50,000 = $500,000. To find income before taxes, add net income ($250,000) to interest expense ($50,000), which equals $300,000. However, this calculation is incorrect based on the given formula and information. The correct calculation should be directly from the times interest earned formula: since the income before interest and taxes (EBIT) is 10 times the interest expense, and the interest expense is $50,000, the correct EBIT is indeed $500,000, which means the income before taxes is also $500,000, making the initial explanation incorrect in its calculation method. The correct income before taxes is directly given by the times interest earned calculation, which is $500,000.

Question 9

The current carrying value of Lane's $800000 face value bonds is $797000. If the bonds are retired at 103 what would be the amount Lane would pay its bondholders?

Accepted Answer

The bonds are retired at 103, meaning Lane would pay 103% of the face value. 103% of $800,000 is $824,000.

Question 10

Bond interest paid is

Accepted Answer

Bond interest paid is determined by the coupon rate and remains the same regardless of whether the bonds sell at a discount or a premium.

Question 11

Lowe Company has $1500000 of bonds outstanding. The unamortized premium is $19600. If the company redeemed the bonds at 101 what would be the gain or loss on the redemption?

Accepted Answer

The gain on redemption is calculated by comparing the redemption price with the carrying amount of the bonds. The carrying amount is the face value plus unamortized premium, which is $1,500,000 + $19,600 = $1,519,600. The redemption price is 101% of the face value, which is $1,500,000 * 1.01 = $1,515,000. Therefore, the gain is the carrying amount minus the redemption price, which is $1,519,600 - $1,515,000 = $4,600.

Question 12

In the balance sheet mortgage notes payable are reported as

Accepted Answer

Mortgage notes payable are reported as both a current and a long-term liability on the balance sheet. The portion due within the next year is classified as a current liability, while the remaining balance is classified as a long-term liability.

Question 13

Bond Corporation issues 5000 10-year 8% $1000 bonds dated January 1 2017 at 103. The journal entry to record the issuance will show a

Accepted Answer

The bonds are issued at 103, meaning they are issued at 103% of the face value. The premium is calculated as 3% of the total face value of the bonds ($5,000,000), which equals $150,000. Therefore, the journal entry will include a credit to Premium on Bonds Payable for $150,000.

Question 14

Norton Company purchased a building on January 2 by signing a long-term $480000 mortgage with monthly payments of $4500. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be

Accepted Answer

The answer of Norton Company purchased a building on January...

Question 15

The adjusted trial balance for Otam Corp. at the end of the current year 2017 contained the following accounts. $\begin{array}{lr}
5 \text {-year Bonds Payable } 8 \% & \$ 1,500,000 \
\text { Interest Payable } & 50,000 \
\text { Premium on Bonds Payable } & 150,000 \
\text { Notes Payable (3 mo.) } & 40,000 \
\text { Notes Payable }(5 \mathrm{yr}) & 145,000 \
\text { Mortgage Payable }(\$ 10,000 \text { due currently) } & 300,000 \
\text { Salaries and Wages Payable } & 18,000 \
\text { Taxes Pavable (due } 3 / 15 \text { of } 2018) & 25,000
\end{array}$ The total long-term liabilities reported on the balance sheet are

Accepted Answer

The answer of The adjusted trial balance for Otam Corp....

Question 16

Harris Company borrowed $800000 from Liber Bank on January 1 2016 in order to expand its mining capabilities. The five-year note required annual payments of $208349 and carried an annual interest rate of 8.5%. What is the balance in the notes payable account at December 31 2017?

Accepted Answer

The correct answer is B. The balance in the notes payable account at December 31, 2017, is $507,372. This is because the company has made two annual payments of $208,349 each, which reduces the principal balance by $416,698. The remaining principal balance of $383,302 is then multiplied by the annual interest rate of 8.5% to arrive at the interest expense for the year of $32,580. This interest expense is then added to the principal balance to arrive at the total balance in the notes payable account of $507,372.

Question 17

Brooks Company received proceeds of $188500 on 10-year 8% bonds issued on January 1 2015. The bonds had a face value of $200000 pay interest annually on January 1 and have a call price of 101. Brooks uses the straight-line method of amortization. Brooks Company decided to redeem the bonds on January 1 2017. What amount of gain or loss would Brooks report on its 2017 income statement?

Accepted Answer

To calculate the gain or loss on redemption, we need to compare the carrying value (the remaining balance on the bond liability account after amortization) with the redemption price.

Step 1: Calculate the carrying value of the bonds on January 1, 2017:

The bonds were issued on January 1, 2015, with a face value of $200,000 and an 8% coupon rate. This means that the annual cash interest payment is $16,000 ($200,000 x 8%).

The bonds pay interest annually on January 1, so they would have paid interest twice by January 1, 2017:

- On January 1, 2015, the company would have received $16,000 x 1 = $16,000 in interest.
- On January 1, 2016, the company would have received another $16,000 x 1 = $16,000 in interest.

The total cash received from interest payments is $32,000 ($16,000 + $16,000). Therefore, the remaining balance on the bond liability account after amortization is:

Carrying value = Face value - Amortization of bond discount + Accrued interest
Carrying value = $200,000 - ($188,500 - $200,000)/10 x 2 + $32,000
Carrying value = $190,200

Step 2: Calculate the redemption price:

The bonds have a call price of 101, which means they can be redeemed at 101% of face value. The face value is $200,000, so the redemption price is:

Redemption price = Face value x Call price
Redemption price = $200,000 x 1.01
Redemption price = $202,000

Step 3: Calculate the gain or loss on redemption:

To calculate the gain or loss on redemption, we need to compare the carrying value with the redemption price:

Gain or Loss = Redemption price - Carrying value
Gain or Loss = $202,000 - $190,200
Gain or Loss = $11,800

Since the company has a loss on redemption, the answer is C) $11,200 loss.

Question 18

A mortgage note payable with a fixed interest rate requires the borrower to make installment payments over the term of the loan. Each installment payment includes interest on the unpaid balance of the loan and a payment on the principal. With each installment payment indicate the effect on the portion allocated to interest expense and the portion allocated to principal. $\begin{array}{cc}
  \text { Portion Allocated } &  \text { Portion Allocated  } \
 \underline{  \text { to Interest Expense } }&   \underline{\text { to Payment of Principal }} \
\end{array}$
A)$\begin{array}{cc}
  &&\text {  Increases} &&&&&  \text { Increases } \\end{array}$
B) $\begin{array}{cc} &&\text { Increases } &&&&  \text { Decreases } \\end{array}$
C) $\begin{array}{cc} &&\text {Decreases  } &&&&  \text { Decreases } \\end{array}$
D)$\begin{array}{cc} && \text { Decreases } &&&&  \text { Increases } \
\end{array}$

Accepted Answer

The answer of A mortgage note payable with a fixed...

Question 19

A $600000 bond was retired at 102 when the carrying value of the bond was $622000. The entry to record the retirement would include a

Accepted Answer

The answer of A $600000 bond was retired at 102...

Question 20

Autumn Company purchased a building on January 2 by signing a long-term $630000 mortgage with monthly payments of $5400. The mortgage carries an interest rate of 10 percent. The entry to record the first monthly payment will include a

Accepted Answer

The first monthly interest expense is calculated as 10% annual interest on the $630,000 mortgage, divided by 12 months, which equals $5,250. Thus, the entry will include a debit to the Interest Expense account for $5,250.

Quiz 15: Long-Term Liabilities

Harris Company borrowed $800000 from Liber Bank on January 1 2016 in order to expand its mining capabilities. The five-year note required annual payments of $208349 and carried an annual interest rate of 8.5%. What is the amount of expense Harris must recognize on its 2017 income statement?

The entry to record an installment payment on a long-term note payable is a. Mortgage Payable $\quad$ $\quad$ Cash b. Interest Expense $\quad$ $\quad$ Cash c. Mortgage Payable $\quad$ Interest Expense $\quad$ $\quad$ Cash d. Bonds Payable $\quad$ $\quad$ Cash

Robin Corporation retires its $800000 face value bonds at 104 on January 1 following the payment of annual interest. The carrying value of the bonds at the redemption date is $829960. The entry to record the redemption will include a

Which one of the following amounts increases each period when accounting for long-term notes payable?

In a recent year Luke Corporation had net income of $250000 interest expense of $50000 and a times interest earned of 10. What was Luke Corporation's income before taxes for the year?

The current carrying value of Lane's $800000 face value bonds is $797000. If the bonds are retired at 103 what would be the amount Lane would pay its bondholders?

Bond interest paid is

Lowe Company has $1500000 of bonds outstanding. The unamortized premium is $19600. If the company redeemed the bonds at 101 what would be the gain or loss on the redemption?

In the balance sheet mortgage notes payable are reported as

Bond Corporation issues 5000 10-year 8% $1000 bonds dated January 1 2017 at 103. The journal entry to record the issuance will show a

Norton Company purchased a building on January 2 by signing a long-term $480000 mortgage with monthly payments of $4500. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be

Harris Company borrowed $800000 from Liber Bank on January 1 2016 in order to expand its mining capabilities. The five-year note required annual payments of $208349 and carried an annual interest rate of 8.5%. What is the balance in the notes payable account at December 31 2017?

A $600000 bond was retired at 102 when the carrying value of the bond was $622000. The entry to record the retirement would include a

Autumn Company purchased a building on January 2 by signing a long-term $630000 mortgage with monthly payments of $5400. The mortgage carries an interest rate of 10 percent. The entry to record the first monthly payment will include a

Quiz 15: Long-Term Liabilities

Harris Company borrowed $800000 from Liber Bank on January 1 2016 in order to expand its mining capabilities. The five-year note required annual payments of $208349 and carried an annual interest rate of 8.5%. What is the amount of expense Harris must recognize on its 2017 income statement?

The entry to record an installment payment on a long-term note payable is a. Mortgage Payable \quad \quad Cash b. Interest Expense \quad \quad Cash c. Mortgage Payable \quad Interest Expense \quad \quad Cash d. Bonds Payable \quad \quad Cash

Robin Corporation retires its $800000 face value bonds at 104 on January 1 following the payment of annual interest. The carrying value of the bonds at the redemption date is $829960. The entry to record the redemption will include a

Which one of the following amounts increases each period when accounting for long-term notes payable?

In a recent year Luke Corporation had net income of $250000 interest expense of $50000 and a times interest earned of 10. What was Luke Corporation's income before taxes for the year?

The current carrying value of Lane's $800000 face value bonds is $797000. If the bonds are retired at 103 what would be the amount Lane would pay its bondholders?

Bond interest paid is

Lowe Company has $1500000 of bonds outstanding. The unamortized premium is $19600. If the company redeemed the bonds at 101 what would be the gain or loss on the redemption?

In the balance sheet mortgage notes payable are reported as

Bond Corporation issues 5000 10-year 8% $1000 bonds dated January 1 2017 at 103. The journal entry to record the issuance will show a

Norton Company purchased a building on January 2 by signing a long-term $480000 mortgage with monthly payments of $4500. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be

Harris Company borrowed $800000 from Liber Bank on January 1 2016 in order to expand its mining capabilities. The five-year note required annual payments of $208349 and carried an annual interest rate of 8.5%. What is the balance in the notes payable account at December 31 2017?

A $600000 bond was retired at 102 when the carrying value of the bond was $622000. The entry to record the retirement would include a

Autumn Company purchased a building on January 2 by signing a long-term $630000 mortgage with monthly payments of $5400. The mortgage carries an interest rate of 10 percent. The entry to record the first monthly payment will include a

The entry to record an installment payment on a long-term note payable is a. Mortgage Payable $\quad$ $\quad$ Cash b. Interest Expense $\quad$ $\quad$ Cash c. Mortgage Payable $\quad$ Interest Expense $\quad$ $\quad$ Cash d. Bonds Payable $\quad$ $\quad$ Cash