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Exam 7: Accounting for Liabilities

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Question 61

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If bonds are issued at a premium, the bond issuer will pay the bondholders an amount lower than the issue price at maturity.

A) True
B) False

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Question 62

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Indicate whether each of the following statements regarding effective interest amortization is true or false. _____ a) The effective interest method of bond premium amortization matches interest expense with the declining carrying value of the bond. _____ b) Interest expense on a bond issued at a discount will be lower in the bond's first year than if the company had used straight-line amortization. _____ c) The carrying value of a bond issued at a premium will decrease by smaller and smaller amounts each year. _____ d) Interest expense is calculated by multiplying the beginning carrying value of the bond by the stated rate of interest. _____ e) Effective interest amortization can only be used on bonds that pay interest annually.

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a) This is true. The difference between ...

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Question 63

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Victor Company issued bonds with a $250,000 face value and a 6% stated rate of interest on January 1, Year 1. The bonds carried a 5-year term and sold for 95. Victor uses the straight-line method of amortization. Interest is payable on December 31 of each year. The carrying value of the bond liability on the December 31, Year 3 balance sheet was:

In September of Year 1, Hansen Company issued a note payable to borrow money from its bank. Principal and interest on the note would come due in June Year 2. Interest expense on this note must be accrued at the end of Year 1 for the period from issuance of the note to the last day of the accounting period.

On January 1, Year 1, The Hanover Corporation issued $70,500 of 8%, 5-year bonds at 97. Hanover uses the straight-line method of bond discount amortization. The interest payments are due on December 31 each year. How much interest expense will Hanover report on its income statement on December 31, Year 1?

Jones Company issued bonds with a $200,000 face value on January 1, Year 1. The five-year term bonds were issued at 97 and had a 7½% stated rate of interest that is payable in cash on December 31^st of each year. Jones amortizes the bond discount using the straight-line method. Based on this information: The total amount of liabilities shown on Jones's December 31, Year 2 balance sheet would be:

All lawsuits in which a company has been named a defendant should be either disclosed in the company's notes to the financial statements, or recognized as a liability on its balance sheet.

On January 1, Year 1, the Niagara Corporation arranges a $6,000 line of credit with the Centennial Bank. It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and repayments are to take place on January 1 of each year. Niagara begins its loan transactions with Centennial Bank by borrowing $2,000 on January 1, Year 1. Which of the following answers shows the effect of this event on the financial statements?

Eureka Company issued $100,000 in bonds payable on January 1, Year 1. The bonds were issued at face value and carried 5-year term to maturity. They had a 7% stated rate of interest that was payable in cash on January 1st of each year beginning January 1, Year 2. Based on this information, the amount of total liabilities appearing on the December 31, Year 1 balance sheet would be:

Weller Company issued bonds with a face value of $400,000, a 10% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Weller uses the effective interest method of amortization. The market rate of interest on the date of issue was 8%. Interest is paid annually on December 31. Assuming Weller issued the bond for $431,940, the amount of interest expense appearing on the Year 3 income statement would be:

Davis Corporation borrowed $50,000 on January 1, Year 1. The loan is for a ten-year period and has an annual interest rate of 9%. At the end of each year, Davis will make a payment of $7,791, which includes both principal and interest. The amount of the payment for Year 1 that is interest expense is $4,500.

On January 1, Year 1, Carlyle Corporation issued a five-year term note. The note requires an annual cash payment on December 31 of each year. The payment includes a principal reduction and interest. Indicate whether each of the following statements is true or false. _____ a) The issuance of the note will increase assets and liabilities. _____ b) The first payment on the note will reduce liabilities and assets, but will not affect equity. _____ c) The second payment on the note will include higher interest expense than did the first payment. _____ d) Each payment on the note includes a cash flow from operating activities and a cash flow from financing activities. _____ e) The amount of reduction in liabilities will increase with each succeeding payment.

Which of the following represents the impact of a taxable cash sale of $400 on the accounting equation if the sales tax rate is 5%?

Monthly remittance of sales tax due has no impact on the income statement, but reduces cash flow from operating activities.

When calculating interest expense on a 6-month note, multiply the principal by the interest rate, and then multiply by 6/12.

Burger Barn has been named as a plaintiff in a $5 million lawsuit filed by a customer over the addictive nature of the company's french fries. Burger Barn's attorneys have advised them that the likelihood of a future obligation from the suit is remote. As a result of the lawsuit, Burger Barn should:

Issuing a note payable is a(n) :

Indicate whether each of the following statements about bonds payable is true or false. _____ a) Premium on Bonds Payable is recorded when bonds are issued at less than their face value. _____ b) Premium on Bonds Payable is a liability account. _____ c) The balance in the Discount on Bonds Payable account increases liabilities. _____ d) Discount on Bonds Payable is an expense account. _____ e) A discount on bonds payable occurs when the stated interest rate on the bonds is less than the market or effective interest.

On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method of amortization. Which of the following answers shows the effect of the bond issuance on January 1, Year 1?

Fisher Company has been named as the defendant in a class action lawsuit. Indicate whether each of the following statements regarding the lawsuit is true or false. _____ a) If the outcome is likely, a liability should be recognized on the balance sheet for the full amount of the suit, even if the company's attorneys estimate the outcome to be much lower. _____ b) If the outcome is likely, but cannot be reasonably estimated, the contingency should be disclosed in the notes to the financial statements. _____ c) If the outcome is reasonably possible, the contingency should be disclosed in the notes to the financial statements. _____ d) Every lawsuit, regardless how frivolous, should be disclosed in the notes to the financial statements. _____ e) If an active hurricane season has been predicted for the Florida gulf coast, businesses in that region should not disclose contingencies for catastrophic loss in the notes to their financial statements.