Q&A Hero

Q: When the effective-interest method of amortization is used, what happens to interest expense as a bond moves toward maturity? A) Interest expense falls for bonds sold at either a discount or a premium. B) Interest expense rises for bonds sold at a discount and falls for bonds sold at a premium. C) Interest expense rises for bonds sold at either a discount or a premium. D) Interest expense falls for bonds sold at a discount and rises for bonds sold at a premium.

Q: On January 1, your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%. The market interest rate is 5%. The issue price of the bond was $10,866. Your company used the effective-interest method of amortization. At the end of the first year, your company should: A) debit Interest Expense for $543, debit Premium on Bonds Payable for $157, and credit Interest Payable for $700. B) debit Interest Expense for $700, credit Premium on Bonds Payable for $157, and credit Interest Payable for $543. C) debit Interest Expense for $700, debit Premium on Bonds Payable for $157, and credit Interest Payable for $543. D) debit Interest Expense for $543 and credit Interest Payable for $543.

Q: When interest expense is calculated using the effective-interest amortization method, interest expense on a bond that pays interest annually is equal to the: A) actual amount of interest paid. B) carrying value of the bonds payable multiplied by the effective interest rate. C) maturity value of the bonds payable multiplied by the effective interest rate. D) carrying value of the bonds payable multiplied by the stated interest rate.

Q: On January 1, your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%. The market interest rate is 5%. The issue price of the bond was $10,866. Using the effective-interest method of amortization and rounding to the nearest dollar, the interest expense for the first year ended December 31 would be: A) $700. B) $543. C) $667. D) $759.

Q: A company issues a 5-year bond with a $7,500 discount. Using straight-line amortization, the company should: A) debit Discount on Bonds Payable for $1,500 per year. B) credit Discount on Bonds Payable for $1,500 per year. C) debit Interest Payable for $1,500 per year. D) credit Interest Expense for $1,500 per year.

Q: A company issued 10-year, 7% bonds with a face value of $100,000. The company received $97,947 for the bonds. Using the straight-line method of amortization, the amount of interest expense for the first interest period is: A) $7,000.00 B) $7,205.30 C) $6,794.70 D) $2,053.00

Q: Using straight-line amortization, when a bond is sold at a discount: A) Bonds Payable declines by a constant amount each year. B) Interest Expense declines by a constant amount each year. C) the carrying value of the bonds declines by a constant amount each year. D) Interest Expense is a constant amount each year.

Q: Using straight-line amortization, when a bond is sold at a premium: A) the amortized premium is added to the interest payable to calculate interest expense. B) Bonds Payable rises by a constant amount each year. C) interest expense is calculated by subtracting the amortized premium from the interest payment that is to be made. D) interest expense rises each year.

Q: The issuance price of a bond does not depend on the: A) face value of the bond. B) market rate of interest. C) perceived risk associated with the bond. D) method used to amortize the discount or premium.

Q: Many lending agreements require the borrowing company to maintain certain financial standards as demonstrated by its financial statements. This feature is known as a: A) bond certificate. B) loan covenant. C) renegotiation. D) contingent liability.

Q: Which of the following statements about loan terminology is correct? A) Loan covenants are the collateral provided by a borrower to a lender as security on a loan. B) A secured loan means that the borrower has a pre-approved line of credit backing the debt. C) Lenders can revise loan terms if a borrower violates a loan covenant. D) All companies are able to establish lines of credit which will allow them to borrow money as needed, up to a prearranged limit.

Q: During the year, the company recorded services provided to customers on account. What effect will this transaction have on the debt-to-assets and times interest earned ratios? A) The debt-to-assets ratio will decrease and the times interest earned will increase. B) The debt-to-assets ratio will increase and the times interest earned will not change C) Both ratios will decrease. D) Both ratios will increase.

Q: The following data came from the financial statements of a company: Total Assets $205,000 Total Liabilities 95,000 Total Stockholders Equity 110,000 Income Tax Expense 4,000 Interest Expense 500 Net Income 65,000 What is the companys times interest earned ratio? A) 130 B) 129 C) 122 D) 139

Q: A negative times interest earned ratio suggests that the company: A) is using resources very efficiently. B) has a serious financial problem. C) has a very high interest expense. D) has a high level of sales revenue.

Q: Which of the following is not used to calculate the times interest earned ratio? A) Net income. B) Income tax expense. C) Interest earned on investments. D) Interest expense

Q: A company has current assets of $5 million and net income of $10 million. Current liabilities total $2.5 million, interest expense is $2 million, and income tax expense is $3 million. What is the times interest earned ratio for this company? A) 0.5 B) 7.5 C) 0.3 D) 2.0

Q: A company had total assets of $400,000 and a debt-to-assets ratio was 0.35. Which of the following statements is not true? A) Total liabilities are $140,000. B) The debt-to-assets ratio of 0.35 indicates that the company relies less on equity financing than on debt financing. C) If other companies in the same industry are used as benchmarks and report a lower debt-to-assets ratio, this indicates that this company has a more risky financing strategy. D) If the ratio this year is lower than it was last year for this company, it indicates that the company is relying less on debt financing this year.

Q: If Company A has a debt-to-assets ratio of 0.73 while Company B has a debt-to-assets ratio of 0.45, which of the following statements is correct? A) Stockholders own a smaller proportion of Company A than Company B. B) Company A must make less profit than Company B. C) Creditors own a smaller proportion of Company A than Company B. D) Company A must have fewer assets than Company B.

Q: Pearly Gates Inc. has a debt-to-assets ratio of 0.55. This means that: A) stockholders' equity is 55% of total assets. B) stockholders' equity is 45% of total assets. C) investors provide 55% of the companys financing. D) liabilities are 55% of equity.

Q: Which of the following misstatements would cause the debt-to-assets ratio to be overstated? A) Capitalizing costs that should have been expensed as assets. B) Failing to adjust for depreciation in the current period. C) Failing to accrue income taxes of the current period. D) Failing to accrue interest earned of the current period.

Q: On December 31, 2015, a company had assets of $16 billion and stockholders' equity of $8 billion. That same company had assets of $20 billion and stockholders' equity of $9 billion as of December 31, 2016. During 2016, the company reported total sales revenue of $9 billion and total expenses of $7 billion. What is the company's debt-to-assets ratio on December 31, 2016? A) 0.55 B) 0.45 C) 0.035 D) 0.01

Q: No mention is required in the financial statements for contingent liabilities that are: A) probable. B) remote. C) possible. D) likely.

Q: When a company has a contingent liability that is remote in likelihood, the company should: A) include a description in the notes to the financial statements. B) record the amount of the liability times the probability of its occurrence. C) record the amount of the liability as a long-term liability on the balance sheet. D) exclude the information about the contingent liability from its financial statements and notes.

Q: When the amount of a contingent liability can be reasonably estimated and its likelihood is possible but not probable, the company should: A) include a description in the notes to the financial statements. B) record the amount of the liability times the probability of its occurrence. C) accrue the amount of the liability as a long-term liability. D) exclude any information about the contingent liability from its financial statements and notes.

Q: When the amount of a contingent liability cannot be reasonably estimated but its likelihood is probable, the company should: A) include a description in the notes to the financial statements. B) record the amount of the liability times the probability of its occurrence. C) record the amount of the liability as a long-term liability on the balance sheet. D) exclude the information about the contingent liability from its financial statements and footnotes.

Q: Brief Respite, Inc. sold underwear made from a fabric that gave many of its customers a serious rash. The customers are suing the company in a class action suit. Although the verdict is not yet in, Brief Respite's attorneys think it is probable that the case will cost the company $2 million. The company should: A) not include this information in its annual report. B) record a liability and a gain for $2 million. C) only explain the situation in the notes to the financial statements. D) record a liability and a loss for $2 million.

Q: Contingent liabilities must be recorded if the: A) future event is reasonably possible. B) amount owed cannot be reasonably estimated. C) future event is probable and the amount owed can be reasonably estimated. D) future event is remote.

Q: Which of the following are generally recorded as liabilities on the balance sheet if the loss can be reasonably estimated? A) Remote likelihood liabilities B) Possible contingent liabilities C) Probable contingent liabilities D) Immaterial contingent liabilities

Q: When the amount of a contingent liability can be reasonably estimated and its likelihood is probable, the company should: A) include a description in the notes to the financial statements. B) record the estimated amount of the liability times the probability of its occurrence. C) record the estimated amount of the liability on the balance sheet. D) exclude the information about the contingent liability from its financial statements and notes.

Q: Which of the following would not be considered a contingent liability? A) Products sold with a warranty B) Pending lawsuits C) Frequent flyer miles earned by passengers D) Cash received from advance ticket sales

Q: Which of the following statements best describes a contingent liability? A) The amount of a contingent liability is known and will definitely have to be paid in the future. B) A contingent liability is a potential liability that has arisen because of a past transaction or event, but its ultimate outcome will not be known until a future event occurs or fails to occur. C) A contingent liability will only be incurred if a particular future event takes place. D) A contingent liability is a potential liability that will be incurred if a natural disaster happens.

Q: A contingent liability is: A) always a specific amount. B) an obligation arising from the purchase of goods or services on credit. C) an obligation not requiring a future payment. D) a potential obligation that depends on a future event.

Q: Which one of the following accounts would not necessarily be classified as a current liability? A) Accounts payable B) Accrued liabilities C) Contingent liabilities D) Current portion of long-term debt

Q: When a company issues bonds that do not pay periodic interest, the bonds are called: A) convertible bonds. B) debenture bonds. C) serial bonds. D) zero-coupon bonds.

Q: Bonds that are backed with a pledge of the companys assets are called: A) debenture bonds. B) convertible bonds. C) secured bonds. D) registered bonds.

Q: Debentures are: A) unsecured bonds. B) secured bonds. C) serial bonds. D) callable bonds.

Q: Some bonds mature in installments. If a bond issue contains this feature, the bonds are known as: A) secured bonds. B) convertible bonds. C) callable bonds. D) serial bonds.

Q: Some bonds allow the borrower to repay the bond by issuing stock. These bonds are known as: A) convertible bonds. B) debenture bonds. C) callable bonds. D) coupon bonds.

Q: Some bonds allow the issuing company to retire the bond with cash at any time. These bonds are known as: A) convertible bonds. B) debenture bonds C) callable bonds. D) coupon bonds.

Q: A company has bonds outstanding with a face value of $100,000. The unamortized premium on these bonds is $2,700. If the company retired these bonds at a call price of 99, the journal entry to record this retirement includes a debit to: A) Bonds Payable for $100,000, a debit to Premium on Bonds Payable for $2,700, a credit to Cash for $99,000, and a credit to Gain on Bond Retirement for $3,700. B) Bonds Payable for $100,000, a debit to Loss on Bond Retirement for $1,700, a credit to Cash for $99,000, and a credit to Premium on Bonds Payable for $2,700. C) Bonds Payable for $100,000, credit to Cash for $99,000, and a credit to Gain on Bond Retirement for $1,000. D) Bonds Payable for $100,000, a debit to Loss on Bond Retirement for $1,673, and a credit to Cash for $101,673.

Q: A company retires its bonds with a face value of $100,000 at 105. The carrying value of the bonds at the retirement date is $103,745. The journal entry to record this retirement will include a: A) debit to Premium on Bonds Payable. B) credit to Gain on Bond Retirement. C) credit to Bonds Payable. D) debit to Discount on Bonds Payable.

Q: The entry to record a bond retirement at maturity usually involves: A) no gain or loss. B) a credit to Gain on Bond Retirement. C) a debit to Loss on Bond Retirement. D) a credit to Bonds Payable.

Q: Because interest rates have fallen, a company retires bonds which had been issued at their face value of $200,000. The company bought the bonds back at 97. The journal entry to record this retirement includes a debit of: A) $200,000 to Bonds Payable, a credit of $6,000 to Gain on Bond Retirement, and a credit of $194,000 to Cash. B) $194,000 to Bonds Payable, a debit to Gain on Bond Retirement of $6,000, and a credit of $200,000 to Cash. C) $200,000 to Bonds Payable, a credit of $6,000 to Interest Expense, and a credit of $194,000 to Cash. D) $194,000 to Bonds Payable and a credit of $194,000 to Cash.

Q: When bonds are retired at their maturity date, the balance in the Bonds Payable account is equal to the bonds: A) face value minus any premium amortized. B) face value plus interest to be paid. C) face value plus any discount amortized. D) face value.

Q: Which of the following statements about a 10-year bond issued at a discount is not correct? A) At the end of ten years, the balance in the Discount on Bonds Payable account will equal zero. B) At the end of ten years, the carrying value will equal the face value. C) At the end of ten years, the total interest expense will reflect the market rate of interest. D) At the end of ten years, the total interest expense will equal the total interest paid.

Q: Which of the following statements about the issuance of bonds at a discount is not correct? A) The contra liability account, Discount on Bonds Payable, is amortized each year by shifting part of its balance to interest expense. B) As the current date approaches the maturity date, the carrying value of the bond approaches the face value of the bond. C) At the date of issuance, the market interest rate was higher than the stated interest rate. D) The account used to record the discount is a normal credit balance account.

Q: Which of the following statements about the issuance of bonds at a premium is not correct? A) The Premium on Bonds Payable account is amortized each year and reduces the companys annual Interest Expense. B) On the date of issuance, the stated interest rate was greater than the market interest rate. C) As the current date approaches the maturity date, the carrying value of the bond approaches the face value of the bond. D) The account used to record the premium has a normal debit balance.

Q: The account entitled Premium on Bonds Payable: A) increases when amortization entries are made. B) appears on the balance sheet of the issuer as a deduction from bonds payable. C) decreases when amortization entries are made and its balance is equal to zero at the maturity date of the bond. D) is a contra account with a normal debit balance.

Q: Which of the following statements about bond premiums or discounts is correct? A) A discount on a bond reduces the amount that the issuer has to repay to the lenders. B) A premium on a bond increases the interest expense of the loan to the issuer. C) A premium on a bond increases the amount that the issuer has to repay to the lenders. D) A discount on a bond increases the interest expense of the loan to the issuer.

Q: Use the information above to answer the following question. What is the total amount of interest expense that will be recorded over the life of these bonds? A) $300,000 B) $285,000 C) $315,000 D) $330,000

Q: Use the information above to answer the following question. What is the issue price of these bonds? A) $300,000 B) $285,000 C) $315,000 D) $330,000

Q: A company issued 10-year, 8% bonds with a face value of $200,000. Interest is paid annually. The market rate on the issue date was 7.5% and the company received $206,948 in cash proceeds. Which of the following statements is correct? A) The company must pay $184,000 at maturity plus $16,000 in interest each year for 10 years. B) The company must pay $206,948 at maturity plus $15,000 in interest each year for 10 years. C) The company must pay $200,000 at maturity plus $16,000 in interest each year for 10 years. D) The company must pay $200,000 at maturity plus $15,000 in interest each year for 10 years.

Q: The annual interest payment on bonds: A) increases over the life of the bonds when bonds are issued at a discount. B) decreases over the life of the bonds when bonds are issued at a discount. C) stays constant over the life of the bonds, regardless of whether bonds are issued at par, a discount, or a premium. D) increases over the life of the bonds under the effective-interest method, but stays constant under the straight-line method of amortization.

Q: The Discount on Bonds Payable account is reported in the financial statements as: A) a reduction from the Bond Payable account on the balance sheet. B) an expense on the income statement. C) an asset on the balance sheet. D) revenue on the income statement.

Q: Which of the following accounts could have a non-zero balance on a post-closing trial balance? A) Salaries and Wages Expense B) Premium on Bonds Payable C) Income Tax Expense D) Interest Expense

Q: A company receives $102,000 when it issues a bond with a face value of $100,000 and a stated interest rate of 7%. Which of the following statements is correct? A) The entry to record the issuance will include a credit to Bonds Payable for $102,000. B) The market interest rate is 7%. C) The annual interest expense is $7,000. D) The carrying value of the bonds will be $100,000 at maturity.

Q: Your company is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15, 2022. If interest rates rise in the economy so that similar financial investments pay 9%, your company will: A) not be able to issue the bonds because no one will buy them. B) receive a higher issue price to compensate buyers for the lower stated interest rate. C) have to accept a lower issue price to attract buyers. D) have to reprint the bond certificates to change the stated interest rate to 9%.

Q: Your company issues $500,000 in bonds at a price of 98. The journal entry used to record the issuance will include a debit to: A) Cash for $490,000, a debit to Discount on Bonds Payable for $10,000, and a credit to Bonds Payable for $500,000. B) Cash for $490,000, a debit to Discount on Bonds Payable for $10,000, and a credit to Bonds Payable for $500,000. C) Bonds Payable for $500,000, a credit to Discount on Bonds Payable for $10,000, and a credit to Cash for $490,000. D) Bonds Payable for $490,000, a debit to Discount on Bonds Payable for $10,000, and a credit to Cash for $500,000.

Q: Your company sells $40,000 of one-year, 10% bonds for an issue price of $39,000. The journal entry to record this transaction will include a credit to Bonds Payable in the amount of: A) $39,000. B) $40,000. C) $43,000. D) $44,000.

Q: Your company is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15, 2022. If interest rates fall in the economy so that similar financial investments pay 5%, your company will: A) not be able to issue the bonds because no one will buy them. B) receive a higher issue price as buyers compete for the bonds. C) have to accept a lower issue price to attract buyers. D) have to reprint the bond certificates to change stated interest rate to 5%.

Q: A corporate bond with a face value of $1,000 is issued at 107. This means that the bond actually sold for: A) $107 and the stated interest rate was higher than the market interest rate. B) $1,070 and the stated interest rate was higher than the market interest rate. C) $107 and the stated interest rate was lower than the market interest rate. D) $1,070 and the stated interest rate was lower than the market interest rate.

Q: Your company sells $50,000 of one-year, 10% bonds for an issue price of $52,000. The journal entry to record this transaction will include a credit to Bonds Payable in the amount of: A) $50,000. B) $52,000. C) $55,000. D) $57,000.

Q: Your company sells $50,000 of bonds for an issue price of $48,000. Which of the following statements is correct? A) The bond sold at a price of 96, implying a discount of $4,000. B) The bond sold at a price of 48, implying a premium of $2,000. C) The bond sold at a price of 48, implying a premium of $4,000. D) The bond sold at a price of 96, implying a discount of $2,000.

Q: Your company sells $50,000 of bonds for an issue price of $52,000. Which of the following statements is correct? A) The bond sold at a price of 52, implying a premium of $2,000. B) The bond sold at a price of 104, implying a discount of $2,000. C) The bond sold at a price of 52, implying a discount of $2,000. D) The bond sold at a price of 104, implying a premium of $2,000.

Q: Your company issues $50,000 of one-year, 10% bonds at face value. The journal entry to record this transaction will include a debit to: A) Cash and a credit to Bonds Payable for $50,000. B) Cash and a credit to Bonds Payable for $55,000. C) Cash for $55,000, a credit to Bonds Payable for $50,000, and a credit to Interest Payable for $5,000. D) Cash for $50,000, a debit to Interest Expense for $5,000, and a credit to Bonds Payable for $55,000.

Q: Your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%. The market interest rate is 5%. The issue price of the bond is calculated as the: A) present value of $10,000 to be received in 5 years plus the present value of $700 per year for 5 years. B) face value of the bonds, $10,000. C) amount investors would have to pay to earn 7% interest. D) amount investors would have to pay to earn an average of the stated interest rate and the market interest rate.

Q: The three key pieces of information that are stated on a bond certificate are the: A) interest payment, the face value of the bond, and the credit rating of the company. B) market interest rate, the price of the bond, and the maturity date. C) stated interest rate, the face value of the bond, and the maturity date. D) interest payment, the issue price of the bond, and the credit rating of the company.

Q: Which of the following statements about bond terminology is correct? A) The face value of a bond is what it is currently worth in the market. B) The stated interest rate is expressed as an annual interest rate even if the bonds pay semiannual interest payments. C) The stated rate of interest always presents the amount that investors are willing to pay for the bond on the issue date. D) The carrying value of the bond is always equal to the face value of the bond.

Q: Which of the following statements about bonds and notes is not correct? A) A company can borrow the funds necessary to finance its activities using bonds or promissory notes. B) Borrowings using bonds or notes are initially recorded with a journal entry that debits Cash and credits the relevant liability account. C) The journal entry that records interest owed on bonds and notes includes a debit to Interest Expense and a credit to Interest Payable. D) Bonds Payable and Notes Payable are always classified as noncurrent liability accounts.

Q: Accrued liabilities could include all of the following except: A) Wages and Salaries Payable. B) Current Portion of Long-Term Debt. C) Income Tax Payable. D) Interest Payable.

Q: Which of the following statements is not correct? A) An A rating is the best credit rating a company can earn. B) Credit ratings below BB are called junk. C) A credit rating agency indicates a companys ability to pay its debts on a timely basis. D) Standard and Poors, Fitch, and Moodys are the names of credit rating agencies.

Q: At the beginning of the year, your company borrows $20,000 by signing a four-year promissory note that states an annual interest rate of 8% plus principal repayments of $5,000 each year. Interest is paid at the end of the second and fourth quarters, whereas principal payments are due at the end of each year. How does this new promissory note affect the current and non-current liability amounts reported on the classified balance sheet prepared at the end of the first quarter? A) Increase current liabilities by $400; increase non-current liabilities by $20,000 B) Increase current liabilities by $1,600; increase non-current liabilities by $20,000 C) Increase current liabilities by $5,400; increase non-current liabilities by $20,000 D) Increase current liabilities by $5,400; increase non-current liabilities by $15,000

Q: Unearned revenues are liabilities because: A) no cash has changed hands. B) goods or services have been paid for, but not yet provided to the customer. C) the company is transferring them to another period for tax reasons. D) the customer may someday return items purchased for a refund.

Q: Engstrom Company makes a sale and collects a total of $378, which includes an 8% sales tax. What is the amount that will be credited to the Sales Revenue account? A) $378 B) $350 C) $406 D) $348

Q: Zorn Inc. makes a sale for $300. The company is required to collect sales taxes amounting to 9%. What is the amount that will be credited to the Sales Tax Payable account? A) $27 B) $273 C) $300 D) $327

Q: A company receives $95 for merchandise sold to a consumer of which $5 is for sales tax. The $5 of sales tax: A) increases sales revenue. B) increases current liabilities. C) increases selling expenses. D) is not recorded until it is forwarded to the state government.

Q: Sales tax collected by a company is normally reported as: A) a current liability. B) income tax expense. C) an asset. D) an operating expense.

Q: Use the information above to answer the following question. What is the entry to record the payment of interest at the maturity date of the note? A) Debit Notes Payable for $50,000, debit Interest Expense for $4,500, and credit Cash for $54,500 B) Debit Interest Payable for $1,500, debit Interest Expense for $750, and credit Cash for $2,250 C) Debit Interest Expense for $2,250, and credit Cash for $2,250 A) Debit Interest Expense for $2,000 debit Interest Payable for $2,500, and credit Cash for $4,500

Q: Use the information above to answer the following question. What is the adjusting journal entry at December 31 to record the accrued interest on the note payable? A) Debit Interest Expense and credit Interest Payable for $1,500 B) Debit Interest Expense and credit Interest Payable for $2,000 C) Debit Interest Expense and credit Interest Payable for $4,500 D) Debit Interest Payable and credit Cash for $2,000

Q: Use the information above to answer the following question. What journal entry will Brickyard make when paying the note at maturity? A) Debit Cash and credit Notes Payable for $200,000 B) Debit Cash and credit Notes Payable for $206,000 C) Debit Notes Payable and credit Cash for $206,000 D) Debit Notes Payable and credit Cash for $200,000