Question 1

Kauffman Tire Repair leased a machine that will enable it to repair tires found on monster vehicles. The annual payments are $9,000 and the life of the lease is 7 years. It is estimated that the useful life of the machine is 8 years. How would the company record the acquisition of the machine?
A)The machine would be recorded as an asset with a cost of $63,000.
B)The company would not record the machine as an asset but would record rent expense of $6,000 per year.
C)The machine would be recorded as an asset, at the present value of the annual cash payments, $9,000 for 7 years.
D)The machine would be recorded as an asset, at the present value of the annual cash payments, $6,000 for 8 years.

Accepted Answer

The company should record the acquisition of the machine as an asset, at the present value of the annual cash payments, which is $9,000 for 7 years. This is because the lease agreement is for 7 years, and the annual payments of $9,000 represent the lease payments required over that period. The useful life of the machine being 8 years is not relevant to how it should be recorded by Kauffman Tire Repair.

Question 2

The result of using the effective interest method of amortization for bond discounts is that the
A)interest expense for each amortization period is constant.
B)effective interest rate for each amortization period is constant.
C)amount of interest expense decreases each period.
D)cash interest payment is greater than the interest expense.

Accepted Answer

The effective interest method of amortization allocates interest expense over each period based on the carrying value of the bond and the effective interest rate. As the carrying value of the bond decreases, the amount of interest expense decreases each period. However, the effective interest rate remains constant throughout the life of the bond. Therefore, choice B is the correct answer.

Question 3

With the Effective Interest Method of Amortization, the amortization of a bond discount results in a(n)
A)increase in stockholders' equity.
B)decrease in liabilities.
C)increase in interest expense.
D)decrease in interest expense.

Accepted Answer

The Effective Interest Method of Amortization results in an increase in interest expense as a portion of the bond discount is recorded as interest expense each period. Therefore, option C is the correct answer.

Question 4

One way analysts measure the ability of a company to meet its obligations is to calculate the times interest earned ratio for any outstanding debt the company may have. How would a company with $100,000 of outstanding bonds paying 8.5% annually and income before interest and taxes of $50,000, calculate the interest coverage (accrual basis)ratio?
A)Income before interest and taxes divided by the interest expense.
B)Income before interest and taxes divided by carrying value of the bonds outstanding.
C)Income before interest and taxes divided by the face value on bonds.
D)Face value of the bonds divided by income before interest and taxes.

Accepted Answer

The times interest earned (interest coverage) ratio can be calculated by dividing the company's income before interest and taxes by the interest expense. In this case, the interest expense is 8.5% of $100,000 or $8,500. Therefore, the interest coverage ratio would be $50,000/$8,500, which equals approximately 5.88. This means the company's income before interest and taxes is enough to cover the interest expense 5.88 times over.

Question 5

Keystone Corporation's balance sheet showed the following liability and stockholders' equity amounts: Current Liabilities, $100,000; Bonds Payable, $150,000; Capital Lease Obligations, $20,000; Deferred Income Tax Liability, $5,000; and total stockholders' equity, $500,000. The debt-to-equity ratio is
A)0.20.
B)0.35.
C)1.22.
D)0.55.

Accepted Answer

The debt-to-equity ratio is calculated by dividing total liabilities by total stockholders' equity. Total liabilities are $100,000 (Current Liabilities) + $150,000 (Bonds Payable) + $20,000 (Capital Lease Obligations) + $5,000 (Deferred Income Tax Liability) = $275,000. The debt-to-equity ratio is $275,000 / $500,000 = 0.55.

Question 6

Karuna Consulting leased a building on January 2, 2013. The lease qualifies as an operating lease. The annual payments are $25,000 at the beginning of each year, and the life of the lease is 10 years. What entry would the company make on January 2, 2013?
A)Machine 250,000 Lease Obligation 250,000
B)Prepaid Rent 250,000 Lease Obligation 250,000
C)Prepaid Rent 25,000 Lease Obligation 25,000
D)No entry is necessary.

Accepted Answer

Since the lease payments are made at the beginning of each year, Karuna Consulting would record the prepaid rent of $25,000 on January 2, 2013, and create a corresponding liability, Lease Obligation, for the same amount. The entry would be:

Prepaid Rent 25,000
Lease Obligation 25,000

Option A is not correct because it shows the entire lease obligation being recorded upfront, which would not be the case with an operating lease. Option B is also incorrect because it shows the entire lease cost being recorded upfront as Prepaid Rent. Option D is not correct because there needs to be an entry to record the prepaid rent and the corresponding liability.

Question 7

Which of the following statements regarding leases is false?
A)Lease agreements are a popular form of financing the purchase of assets because leases do not require a large initial outlay of cash.
B)Accounting recognizes two types of leases--operating and capital leases.
C)If a lessor classifies a lease as a capital lease, then the lessor records a lease liability on its balance sheet.
D)If a lease is classified as an operating lease, the lessee records an asset on its balance sheet.

Accepted Answer

If a lease is classified as an operating lease, the lessee does not record an asset on its balance sheet. Instead, the lease payments are recorded as expenses on the income statement over the lease term.

Question 8

A bond issuing at 101.25 means that the bond
A)sold for $101.25.
B)sold at a discount.
C)sold for $1,012.50.
D)stated rate is lower than the market rate of interest.

Accepted Answer

A bond issuing at 101.25 means it is sold at 101.25% of its face value. If the face value is $1,000, it sold for $1,012.50.

Question 9

A company issued $1,000,000 of 10% notes that resulted in interest expense of $100,000 per year. What is the company's net cash outflow if the effective tax rate is 40%?
A)$100,000
B)$ 60,000
C)$ 40,000
D)$160,000

Accepted Answer

The interest expense is $100,000, and with a 40% tax rate, the tax savings is $40,000 ($100,000 * 40%). Therefore, the net cash outflow is $60,000 ($100,000 - $40,000).

Question 10

The Kaplan Group sold $200,000 of 10-year bonds for $190,000. The face rate on the bonds was 8% and interest is paid annually on December 31. What entry would be made on December 31 when the interest is paid? (Numbers are omitted.)
A)Interest Expense Cash
B)Interest Expense Discount on Bonds Payable
Cash.
C)Interest Expense Discount on Bonds Payable
Cash
D)Interest Expense Bonds Payable
Cash.

Accepted Answer

The entry should account for the interest expense, the cash paid, and the amortization of the discount on bonds payable.

Question 11

Kid Karate issued $100,000 of 6%, 10 year bonds when the market rate of interest was 5%. The proceeds from this bond issue were $107,000. Using the effective interest method of amortization, which of the following statements is true? Assume interest is paid annually.
A)Interest payments to bondholders each period will be $5,000.
B)Interest payments to bondholders each period will be $5,350.
C)Amortization of the premium for the first interest period will be $5,000.
D)Amortization of the premium for the first interest period will be $650.

Accepted Answer

The effective interest method of amortization requires that the premium be amortized over the life of the bonds.

First, we need to calculate the annual interest payment on the bonds. This is calculated as:

$100,000 * 6% = $6,000

Next, we need to calculate the amount of premium that needs to be amortized each year. This is calculated as:

($107,000 - $100,000) / 10 = $700

Since interest is paid annually, the premium amortization for the first year will be $700 - $50 (the difference between the annual interest payment and the amount of premium amortization). This gives us:

$650

Therefore, the correct answer is D: Amortization of the premium for the first interest period will be $650.

Question 12

Which of the following accounts would not appear on the balance sheet of a lessee company recording a capital lease?
A)accumulated depreciation on the leased asset
B)capital lease liability in the current liability section
C)capital leases liability in the long-term liability section
D)rent expense on the income statement

Accepted Answer

Rent expense appears on the income statement, not the balance sheet. A capital lease involves recording the leased asset and corresponding liability on the balance sheet, along with accumulated depreciation.

Question 13

In 2013, Karaoke Tunes issued $200,000 of bonds for $190,200. If the stated rate of interest was 6.5% and the market rate of interest was 7.1%, how would the company calculate the discount at the time the bonds were issued using the effective interest method?
A)$190,200 * 7.1%
B)$190,200 * 6.5%
C)$200,000 * 7.1%
D)$200,000 * 6.5%

Accepted Answer

The discount is calculated using the market rate of interest on the carrying amount of the bonds, which is $190,200 * 7.1%.

Question 14

A company issued $500,000 of bonds for $498,351. Interest is paid semiannually. The bond markets and the financial press are likely to report the bond issue price as
A)498.35.
B)100.00.
C)99.67.
D)49.84.

Accepted Answer

The bond issue price is always reported as a percentage of the face value. In this case, the face value of the bonds is $500,000, and the issue price is $498,351. Therefore, the issue price as a percentage of face value is (498,351 / 500,000) x 100% = 99.67%. Hence, the likely report by bond markets and the financial press would be 99.67%.

Question 15

Kay Animal Hospital leased a building to expand its services downtown. The 10-year lease is recorded as a capital lease. The annual payments are $10,000 and the recorded cost of the asset is $67,100. The straight-line method is used to calculate depreciation. Which of the following statements is true?
A)The company will record depreciation expense of $6,710 each year.
B)The company will record depreciation expense of $10,000 each year.
C)No depreciation expense will be recorded.
D)No interest expense will be recorded.

Accepted Answer

Under a capital lease, the lessee records the leased asset as a fixed asset and records depreciation on a straight-line basis. The annual depreciation would be calculated as the cost of the asset ($67,100) divided by the lease term (10 years), which would result in depreciation expense of $6,710 per year.

Question 16

With the Effective Interest Method of Amortization, the amortization of a bond premium results in a(n)
A)increase in liabilities.
B)decrease of stockholders' equity.
C)increase in interest expense.
D)decrease in interest expense.

Accepted Answer

The Effective Interest Method results in a decrease in interest expense over time as the bond premium is amortized, reducing the carrying amount of the bond.

Question 17

A capital lease liability would appear on the balance sheet as
A)stockholder's equity.
B)long-term liability.
C)current asset.
D)long-term asset.

Accepted Answer

A capital lease creates a long-term liability for the lessee, as they are obligated to make payments over an extended period of time. Therefore, option B is the correct answer. Options A, C, and D do not accurately describe the nature of a capital lease liability.

Question 18

On January 2, 2013, Kampai Sushi Bar sold $800,000 of bonds for $785,000. The bonds will mature in 10 years and pay interest annually on December 31. The company properly recorded the payment of interest and amortization of the discount using the effective interest method. Which of the following statements is true about the carrying value of the bonds and/or the unamortized discount at the end of 2013?
A)The carrying value will be less than $785,000.
B)The carrying value will be $785,000.
C)The carrying value will be greater than $785,000.
D)The unamortized premium will be more than $15,000.

Accepted Answer

The carrying value of the bonds will be greater than $785,000 because the discount is being amortized over time, increasing the carrying value each year.

Question 19

Which of the following lease conditions would result in a capital lease to the lessee?
A)The lessee will return the property to the lessor at the end of the lease term.
B)The lessee can purchase the property for $1 at the end of the lease term.
C)The fair market value of the property at the inception of the lease is $20,000; the present value of the lease payments is $17,600.
D)The lease term is 70% of the property's economic life.

Accepted Answer

A lease is classified as a capital lease if it meets any of the following criteria: transfer of ownership, bargain purchase option, lease term is 75% or more of the economic life, or present value of lease payments is 90% or more of the fair value. Option B indicates a bargain purchase option, which qualifies it as a capital lease.

Question 20

A company's balance sheet showed the following amounts for liabilities and stockholders' equity accounts: Current Liabilities, $50,000; Bonds Payable, $600,000; Capital Lease Obligations, $120,000; and Deferred Income Tax Liability, $20,000. Total stockholders' equity was $520,000. What is the debt-to-equity ratio?
A)0.66
B)0.70
C)1.42
D)1.52

Accepted Answer

The answer of A company's balance sheet showed the following...

Quiz 9: Long-Term Liabilities

Kauffman Tire Repair leased a machine that will enable it to repair tires found on monster vehicles. The annual payments are $9,000 and the life of the lease is 7 years. It is estimated that the useful life of the machine is 8 years. How would the company record the acquisition of the machine?

The result of using the effective interest method of amortization for bond discounts is that the

With the Effective Interest Method of Amortization, the amortization of a bond discount results in a(n)

Karuna Consulting leased a building on January 2, 2013. The lease qualifies as an operating lease. The annual payments are $25,000 at the beginning of each year, and the life of the lease is 10 years. What entry would the company make on January 2, 2013?

Which of the following statements regarding leases is false?

A bond issuing at 101.25 means that the bond

A company issued $1,000,000 of 10% notes that resulted in interest expense of $100,000 per year. What is the company's net cash outflow if the effective tax rate is 40%?

The Kaplan Group sold $200,000 of 10-year bonds for $190,000. The face rate on the bonds was 8% and interest is paid annually on December 31. What entry would be made on December 31 when the interest is paid? (Numbers are omitted.)

Kid Karate issued $100,000 of 6%, 10 year bonds when the market rate of interest was 5%. The proceeds from this bond issue were $107,000. Using the effective interest method of amortization, which of the following statements is true? Assume interest is paid annually.

Which of the following accounts would not appear on the balance sheet of a lessee company recording a capital lease?

In 2013, Karaoke Tunes issued $200,000 of bonds for $190,200. If the stated rate of interest was 6.5% and the market rate of interest was 7.1%, how would the company calculate the discount at the time the bonds were issued using the effective interest method?

A company issued $500,000 of bonds for $498,351. Interest is paid semiannually. The bond markets and the financial press are likely to report the bond issue price as

With the Effective Interest Method of Amortization, the amortization of a bond premium results in a(n)

A capital lease liability would appear on the balance sheet as

Which of the following lease conditions would result in a capital lease to the lessee?