Question 1

Dart Company issued $600,000 of 8%, 5-year bonds at 105, with interest paid annually.Assuming straight-line amortization, what is the carrying value of the bonds after one year?

Accepted Answer

The premium paid for the bonds is $600,000 x 105% = $630,000. Straight-line amortization per year is ($630,000 - $600,000)/5 years = $6,000. Thus, after one year, the carrying value of the bond is $630,000 - $6,000 = $624,000. Therefore, the correct answer is C.

Question 2

On January 1, Dade Corporation issued $3,000,000, 7%, 5-year bonds with interest payable on December 31.The bonds sold for $3,216,288.The market rate of interest for these bonds was 6%.On the first interest date, using the effective-interest method, the debit entry to Interest Expense is for

Accepted Answer

Using the effective-interest method, the interest expense is calculated by multiplying the carrying value of the bonds (which will change each period due to amortization of the premium) by the market rate of interest.

Carrying value of bonds at the beginning = $3,216,288 (issue price) 
Interest payment due = $3,000,000 x 7% = $210,000 
Amortization of premium = $216,288/5 years = $43,258.40

Therefore, the carrying value of bonds at the first interest payment date = $3,216,288 - $43,258.40 = $3,173,029.60

Interest expense = $3,173,029.60 x 6% = $190,381.78 
Therefore, the debit entry to Interest Expense is $192,977 ($190,381.78 rounded to the nearest dollar). The correct answer is C.

Question 3

Under IFRS, liabilities

Accepted Answer

Under IFRS, liabilities may be legally enforceable by a contract or law but need not be. This means that a company may have a liability even if there is no formal contract or legal obligation, as long as there is a probable outflow of resources and a reliable estimate of the amount can be made. This differs from GAAP, which generally requires a legal obligation or constructive obligation before a liability can be recognized.

Question 4

During the month, a company sells goods for a total of $108,000, which includes sales taxes of $8,000; therefore, the company should recognize $100,000 in Sales Revenues and $8,000 in Sales Tax Expense.

Accepted Answer

The company should recognize the full amount of $108,000 as Sales Revenues and also record the $8,000 in Sales Tax Expense separately.

Question 5

If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss on redemption will be recorded.

Accepted Answer

The carrying value of the bonds is $476,000, but they are being redeemed for 97% of their $500,000 par value, which is $485,000. This means there is a loss of $9,000 ($485,000 - $476,000) on the redemption.

Question 6

The straight-line method of amortization allocates an increasing amount to interest expense each interest period.

Accepted Answer

The straight-line method of amortization allocates an equal amount to interest expense each interest period.

Question 7

From a liquidity standpoint, it is more desirable for a company to have current

Accepted Answer

Having current assets exceed current liabilities means that the company has enough liquid resources to cover its short-term obligations. This is considered desirable from a liquidity standpoint, as it means the company is less likely to face cash flow difficulties in the near future. Option A is also correct as it implies that the company has just enough current assets to pay off its current liabilities, but option C is a stronger indicator of liquidity. Options B and D are not desirable from a liquidity standpoint.

Question 8

The entry to record the payment of an interest-bearing note at maturity after all interest expense has been recognized is

Accepted Answer

When an interest-bearing note is paid at maturity after all interest expense has been recognized, the principal amount is paid along with the last interest payment. As all interest expense has already been recognized, no additional journal entry is needed for interest. The entry to record the payment of the note at maturity is simply a debit to Notes Payable and a credit to Cash. Therefore, the best choice is option A, which is a simple entry to record the payment of the note.

Question 9

A retail store credited the Sales Revenue account for the sales price and the amount of sales tax on sales.If the sales tax rate is 5% and the balance in the Sales Revenue account amounted to $630,000, what is the amount of the sales taxes owed to the taxing agency?

Accepted Answer

The sales revenue includes both the sales price and the sales tax. If $630,000 is the total, then $630,000 = Sales + 0.05(Sales). Solving for Sales gives $600,000, and the sales tax is 5% of $600,000, which is $30,000.

Question 10

Oakley Company does not ring up sales taxes separately on the cash register.Total receipts for February amounted to $42,800.If the sales tax rate is 7%, what amount must be remitted to the state for February's sales taxes?

Accepted Answer

The answer of Oakley Company does not ring up sales...

Question 11

Bonds issued against the general credit of the borrower are called

Accepted Answer

Debenture bonds are unsecured bonds, which means they are not backed by collateral. Instead, they are issued based on the creditworthiness of the borrower.

Question 12

The total cost of borrowing is increased only if the

Accepted Answer

If bonds are issued at a discount, then the total cost of borrowing will be increased as the company will have to pay back more than the amount borrowed due to the discounted sale of bonds. In contrast, if bonds are issued at a premium, then the total cost of borrowing will be reduced as the company receives more money upfront than the face value of the bonds, which offsets the higher interest payments. Selling bonds at face value does not impact the total cost of borrowing, and if the market interest rate is less than the contractual interest rate, the cost of borrowing may be lower, not higher.

Question 13

Bargain Company has $1,500,000 of bonds outstanding.The unamortized premium is $19,600.If the company redeemed the bonds at 101, what would be the gain or loss on the redemption?

Accepted Answer

The redemption price is 101% of $1,500,000, which is $1,515,000. The carrying amount of the bonds is $1,500,000 + $19,600 = $1,519,600. The gain on redemption is $1,519,600 - $1,515,000 = $4,600.

Question 14

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 15

Which of the following is not an advantage of issuing bonds instead of common stock?

Accepted Answer

Issuing bonds instead of common stock does not dilute ownership or control, which is an advantage. However, it can lead to higher interest expenses, potentially reducing earnings per share on common stock, which is not considered an advantage.

Question 16

On January 1, 2022, $3,000,000, 10-year, 10% bonds, were issued for $2,916,000.Interest is paid annually on January 1.If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount is

Accepted Answer

The discount on bonds payable is $84,000 ($3,000,000 - $2,916,000). 
The annual amortization amount using straight-line method is $8,400 ($84,000 ÷ 10 years). 
Monthly amortization amount is $700 ($8,400 ÷ 12 months).

Question 17

On January 1, Jorge Inc.issued $3,000,000, 8% bonds for $2,817,000.The market rate of interest for these bonds is 9%.Interest is payable annually on December 31.Jorge uses the effective-interest method of amortizing bond discount.At the end of the first year, Jorge should report unamortized bond discount of:

Accepted Answer

The amount of bond discount to be amortized each year using the effective-interest method is calculated as:
Carrying value of the bond at the beginning of the year x Market rate of interest
= $2,817,000 x 9%
= $253,530

The interest expense for the year would be:
Carrying value of the bond at the beginning of the year x Stated interest rate
= $2,817,000 x 8%
= $225,360

Therefore, the amount of bond discount to be amortized for the year would be:
Amortization amount = Interest expense - Bond discount
= $225,360 - $253,530
= ($28,170)

The carrying value of the bond at the end of the year would be:
Carrying value of the bond at the beginning of the year - Amortization amount
= $2,817,000 - ($28,170)
= $2,788,830

The unamortized bond discount at the end of the first year would be the difference between the bond's face value and its carrying value:
Unamortized bond discount = Face value of the bond - Carrying value of the bond
= $3,000,000 - $2,788,830
= $211,170

Therefore, the correct answer is (B) $169,470, which is the amount of bond discount that has not yet been amortized at the end of the first year.

Question 18

When current liabilities are presented under IFRS, they are generally shown

Accepted Answer

Under IFRS, current liabilities are generally presented in order of liquidity, meaning the liabilities that are going to be paid off first are listed first. This is important information for investors and analysts who are interested in a company's short-term financial obligations.

Question 19

A current liability must be paid out of current earnings.

Accepted Answer

A current liability must be paid within one year or an operating cycle, whichever is longer, but not necessarily out of current earnings; it can be paid from existing current assets or through the creation of other current liabilities.

Question 20

Current maturities of long-term debt refers to the amount of interest on a note payable that must be paid in the current year.

Accepted Answer

Current maturities of long-term debt refer to the principal amount of a long-term debt that is due within the current year, not the interest.

Quiz 10: Liabilities