Question 1

The contractual interest rate is always stated as a(n)

Accepted Answer

The contractual interest rate is typically stated as an annual rate. This allows for easier comparison between different types of loans or investments, as well as consistency in calculating interest over time. While interest may be compounded daily or monthly, the annual rate is the standard reference point.

Question 2

In the balance sheet, the account Premium on Bonds Payable is

Accepted Answer

The account Premium on Bonds Payable is added to Bonds Payable on the balance sheet because it represents the amount by which the bond was sold over its face value, effectively increasing the total amount of the bond liability recorded.

Question 3

A $600,000 bond was retired at 98 when the carrying value of the bond was $590,000.The entry to record the retirement would include a

Accepted Answer

The bond was retired at 98% of its face value, which is $588,000 (98% of $600,000). The carrying value was $590,000. The difference of $2,000 ($590,000 - $588,000) is a gain on bond redemption.

Question 4

In a recent year, Joey Corporation had net income of $150,000, interest expense of $40,000, and tax expense of $20,000.What was Joey Corporation's times interest earned
For the year?

Accepted Answer

The times interest earned ratio is calculated as (Net Income + Interest Expense + Tax Expense) / Interest Expense. For Joey Corporation, this would be ($150,000 + $40,000 + $20,000) / $40,000 = $210,000 / $40,000 = 5.25.

Question 5

On January 1, 2021, $2,000,000 of 10-year, 10% bonds, were issued for $1,946,000.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 answer of On January 1, 2021, $2,000,000 of 10-year,...

Question 6

When the effective-interest method of bond premium amortization is used, the

Accepted Answer

When using the effective-interest method, the amount of premium amortized will get larger with successive amortization as the carrying value of the bonds decreases. This is because the effective interest rate is calculated based on the current carrying value of the bonds, which means that the interest expense is higher in the earlier periods and decreases over time. The carrying value of the bonds will also decrease with successive amortization, not increase. The interest paid to bondholders will remain the same, as it is based on the contractual rate.

Question 7

When a company retires bonds before maturity, the gain or loss on redemption is the difference between the cash paid and the

Accepted Answer

The carrying value of the bonds represents their book value on the company's balance sheet, which includes any unamortized premium or discount on the bonds as well as any related issuance costs. Therefore, the gain or loss on redemption is calculated as the difference between the cash paid to retire the bonds and their carrying value.

Question 8

On January 1, 2021, Bose Company issued bonds with a face value of $600,000.The bonds carry a stated interest of 7% payable each January 1.
Instructions
a.Prepare the journal entry for the issuance assuming the bonds are issued at 95.
b.Prepare the journal entry for the issuance assuming the bonds are issued at 105.

Accepted Answer

The answer of On January 1, 2021, Bose Company issued...

Question 9

Interest expense on a note payable is only recorded at maturity.

Accepted Answer

Interest expense on a note payable is typically accrued and recorded over the life of the note, not just at maturity.

Question 10

If the market interest rate is greater than the contractual interest rate, bonds will sell at a discount.

Accepted Answer

When the market interest rate is greater than the contractual interest rate, the bond's return is not sufficient to justify its price. As a result, investors will only purchase bonds at a discount.

Question 11

A 10% stock dividend is the equivalent of a $1,000 par value bond paying annual interest of 10%.

Accepted Answer

A stock dividend and a bond are two different types of securities and cannot be directly compared. A stock dividend involves the distribution of additional shares of stock to existing shareholders, while a bond pays interest to bondholders. The value of a stock dividend depends on the current market price of the stock, while the value of a bond is fixed at its par value. Therefore, a 10% stock dividend cannot be equated to a $1,000 par value bond paying annual interest of 10%.

Question 12

All of the following are generally reported as current liabilities except

Accepted Answer

Current liabilities are those obligations that are due within one year or the normal operating cycle of the business, whichever is longer. Accounts payable, notes payable, and unearned revenues are examples of current liabilities as they are typically due within one year. Bonds payable, on the other hand, may have a longer term and are classified as either current or long-term liabilities based on their due date. Therefore, bonds payable are not generally reported as current liabilities.

Question 13

As interest is recorded on an interest-bearing note, the Interest Expense account is

Accepted Answer

The Interest Expense account is increased to record the interest incurred on the note, and the Interest Payable account is increased to record the amount of interest that has not yet been paid. The Notes Payable account is not affected by the recording of interest expense.

Question 14

On October 1, 2020, Pennington Company issued a $90,000, 10%, 9-month interest-bearing note.Assuming interest was accrued on June 30, 2021, the entry to record the payment of the note on July 1, 2021, will include a:

Accepted Answer

The interest for 9 months is $6,750 ($90,000 * 10% * 9/12). On June 30, 2021, interest payable of $6,750 would have been recorded, and on July 1, 2021, this amount is debited to clear the liability.

Question 15

Sales taxes collected by a retailer are expenses

Accepted Answer

Sales taxes collected by a retailer are considered liabilities to the government but are expenses of the customers, as they are the ones who ultimately bear the cost. The retailer acts merely as a collector and remitter of these taxes to the government.

Question 16

Which one of the following payroll taxes does not result in a payroll tax expense for the employer?

Accepted Answer

Federal income tax withheld from employees' wages does not result in a payroll tax expense for the employer because it is merely collected by the employer and remitted to the government; the employer does not bear the cost.

Question 17

When authorizing bonds to be issued, the board of directors does not specify the

Accepted Answer

The board of directors typically specifies the total number of bonds authorized to be sold, the contractual interest rate, and the total face value of the bonds, but not the selling price, as the selling price can fluctuate based on market conditions.

Question 18

Four thousand bonds with a face value of $1,000 each, are sold at 105.The entry to record the issuance is

Accepted Answer

The answer of Four thousand bonds with a face value...

Question 19

The loss on bond redemption is equal to

Accepted Answer

The loss on bond redemption is equal to the excess of the redemption price over the carrying value of the bonds. This is because the carrying value represents the book value of the bonds, and any redemption or retirement of the bonds will result in a loss or gain depending on the difference between the redemption price and the carrying value. The balance in discount or premium on the bonds payable may be part of the calculation of the carrying value, but it does not directly determine the loss on redemption.

Question 20

In a recent year, Cold Corporation had net income of $250,000, interest expense of $50,000, and a times interest earned of 10.What was Cold Corporation's income before taxes for the year?

Accepted Answer

The formula for times interest earned is net income before taxes divided by interest expense. Rearranging this formula, we can find that net income before taxes is equal to times interest earned multiplied by interest expense. Plugging in the given values, we have:
Net income before taxes = 10 x $50,000 = $500,000 
However, we are looking for income before taxes, not net income before taxes. We know that net income equals income before taxes minus taxes. We are not given information about the amount of taxes paid, but we do know that net income was $250,000. Therefore, we can set up the equation:
$250,000 = income before taxes - taxes 
We do not know the amount of taxes paid, but we do know that income before taxes was $500,000. Solving for taxes, we get:
$250,000 = $500,000 - taxes
$250,000 = taxes
Therefore, the income before taxes was $500,000 - $250,000 = $250,000.

Quiz 10: Liabilities