Question 1

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)

B)

C)

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 2

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

Since the lease is recorded as a capital lease, it means that the lessee (Kay Animal Hospital) assumes substantially all the risks and rewards of ownership of the leased property. Therefore, it is treated as if the lessee has purchased the asset and financed it through debt. 
The recorded cost of the asset ($67,100) is treated as a liability and the annual lease payments ($10,000) are treated as a combination of principal and interest. 
Under the straight-line method, the depreciation expense is calculated as (recorded cost of asset - salvage value) / useful life. Since there is no salvage value provided, we assume it to be zero. Therefore, the annual depreciation expense is ($67,100 / 10 years) = $6,710. 
Therefore, the correct answer is A - The company will record depreciation expense of $6,710 each year.

Question 3

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 answer of A company issued $1,000,000 of 10% notes...

Question 4

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 leads to an increase in interest expense because it recognizes interest expense over the life of the bond based on the effective interest rate. As the discount on the bond is amortized, the interest expense recognized each period becomes greater, resulting in a decrease in net income and retained earnings, and a decrease in total equity. Therefore, option C is the correct answer.

Question 5

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 can be calculated by finding the difference between the face value of the bonds and the price they were sold for. Therefore, the discount would be equal to:

$200,000 - $190,200 = $9,800

To calculate the discount using the effective interest method, we need to determine the present value of the future cash flows associated with the bond. This requires us to use the market rate of interest (7.1%) rather than the stated rate of interest (6.5%).

Using the present value formula, we can determine that the present value of the bond is:

PV = FV / (1 + i)n

PV = $200,000 / (1 + 0.071)^1
PV = $186,702.34

Therefore, the discount that was recognized at the time of issuance would be:

$190,200 - $186,702.34 = $3,497.66

So, the best choice is A because it shows how the effective interest method is used to calculate the discount, which is based on the market rate of interest.

Question 6

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 lessee records periodic lease payments as rent expense on its income statement.

Question 7

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...

Question 8

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

The answer of Which of the following lease conditions would...

Question 9

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 reported as a percentage of the bond's face value, which is typically $1,000 per bond. Therefore, the bonds were sold for $498,351 / $500,000 = 0.9967, or 99.67% of face value. This means that the bond markets and financial press are likely to report the bond issue price as 99.67. Choice C is the closest answer to this percentage.

Question 10

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 ratio, also known as interest coverage ratio, is calculated by dividing the company's income before interest and taxes (EBIT) by its interest expenses. In this case, the interest expense can be calculated as $100,000 x 8.5% = $8,500. Therefore, the interest coverage (accrual basis) ratio would be $50,000 divided by $8,500, which equals 5.88. This means that the company's earnings before interest and taxes are 5.88 times greater than its interest expense.

Question 11

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 is for 7 years and the annual payments are $9,000. The company should also amortize the lease payments over the term of the lease. This method is known as capitalizing the lease, where the cost of the lease is recorded as an asset on the balance sheet and amortized over the lease term. Since the useful life of the machine is longer than the lease term, the company should test the machine for impairment at the end of each reporting period to ensure that the asset is not worth less than its carrying amount.

Question 12

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 liability is a contractual obligation to make lease payments and thus is considered a long-term liability. This liability is reported on the balance sheet as a separate line item in the long-term liability section.

Question 13

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 
Bonds Payable
Cash

Accepted Answer

The answer of The Kaplan Group sold $200,000 of 10-year...

Question 14

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 results in a constant effective interest rate for each amortization period, which is applied to the carrying value of the bond to calculate the interest expense. As the carrying value of the bond decreases with each amortization period, the amount of interest expense will also decrease. The cash interest payment may be either greater or less than the interest expense depending on the stated interest rate of the bond and the market interest rate at the time. Therefore, option B is the best choice.

Question 15

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 answer of Keystone Corporation's balance sheet showed the following...

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 answer of With the Effective Interest Method of Amortization,the...

Question 17

On January 2,2012,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 2012?
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 bond was sold at a discount, which means the carrying value will increase over time as the discount is amortized. Therefore, the carrying value will be greater than $785,000 at the end of 2012. Option A is incorrect because the carrying value will increase over time, not decrease. Option B is incorrect because some of the discount will have been amortized by the end of 2012, resulting in a higher carrying value than the initial sale price. Option D is also incorrect because the bond was sold at a discount, so there is no premium to be unamortized.

Question 18

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.

Question 19

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

The answer of A bond issuing at 101.25 means that...

Question 20

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.

Quiz 9: Long-Term Liabilities

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?

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 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%?

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

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?

Which of the following statements regarding leases is false?

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

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:

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 capital lease liability would appear on the balance sheet as:

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. )

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

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

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

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

A bond issuing at 101.25 means that the bond

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.