Deck 7: Liabilities

Question 1

A $1,500 bond quoted at

A) $1,518
B) $1,492
C) $1,478
D) $1,500

Answer 1

C

Question 2

A $10,000 bond quoted at

A) $9,897
B) $9,662
C) $10,104
D) $10,350

Answer 2

D

Question 3

The excess of a bond's issue price over its face value is known as the:

A) effective-interest
B) discount
C) premium
D) contract interest

Answer 3

C

Question 4

Under the effective-interest method of amortizing a bond premium, the interest expense recorded for each semi-annual interest payment:

A) will equal the amount of cash paid for each semi-annual interest payment
B) will decrease over the life of the bond
C) is at a different percentage of the bond's carrying value for every interest payment
D) will increase over the life of the bond

Question 5

Arrowplan Inc. prepares its financial statements in accordance with ASPE. It issued $800,000 of 7.5%, 15-year bonds dated March 1, 2020, on May 1, 2020, at 97 1/2 plus accrued interest. If Arrowplan Inc. uses the straight-line method of amortization, the entry to retire the bonds on the maturity date would include a:

A) credit to Discount on Bonds Payable for $20,000
B) credit to Cash for $800,000
C) debit to Bonds Payable for $780,000
D) debit to Premium on Bonds Payable for $20,000

Question 6

Under the effective-interest method of amortization, the cash payment on each interest payment date is calculated by multiplying the:

A) carrying value of the bonds times the effective-interest rate for the appropriate time period
B) carrying value of the bonds times the stated interest rate for the appropriate time period
C) face value of the bonds times the effective-interest rate for the appropriate time period
D) face value of the bonds times the stated interest rate for the appropriate time period

Question 7

The dollar amount of a company's net income for each common share outstanding is referred to as:

A) income as a percentage of equity
B) cumulative retained earnings ratio
C) earnings per share
D) the price-to-earnings ratio

Question 8

Current liabilities fall into two categories, which are referred to as:

A) liabilities of a known amount and liabilities whose amount must be estimated
B) liabilities of a known amount and contingent liabilities
C) contingent liabilities and non contingent liabilities
D) contra liabilities and contingent liabilities

Question 9

Which of the following best describes a term loan?

A) are not split between current and long-term portions
B) common form of long-term financing
C) allows a company to borrow a variable amount of money
D) not usually secured by certain assets

Question 10

Under the effective-interest method of amortization for bonds, the cash payment on each interest payment date:

A) decreases over the life of the bond
B) increases over the first half of the life of the bond, and then decreases thereafter
C) is constant
D) increases over the life of the bond

Question 11

Airport Software Ltd. includes an 5% sales tax in the amount credited to the sales account. If the sales account has a balance of $675,250, the amount of the sales tax payable to the government is:

A) $29,347
B) $29,450
C) $33,763
D) $32,155

Question 12

Amortizing the discount on a bond payable:

A) increases the carrying amount of the bonds
B) increases the face value of the bonds
C) decreases the carrying amount of the bonds
D) decreases the face value of the bonds

Question 13

Under the effective-interest method of amortization, interest expense each period can be

A) face value of the bonds times the stated interest rate for the appropriate time period
B) carrying value of the bonds times the effective-interest rate for the appropriate time period
C) face value of the bonds times the effective-interest rate for the appropriate time period
D) carrying value of the bonds times the stated interest rate for the appropriate time period

Question 14

When using the effective-interest method of amortizing a discount or premium, interest expense is calculated by multiplying the:

A) contract interest rate by the face value of the bonds
B) effective-interest rate by the carrying value of the bonds
C) effective-interest rate by the face value of the bonds
D) contract interest rate by the carrying value of the bonds

Question 15

Which type of lease will not increase a company's assets or liabilities?

A) an operating lease
B) a lease that splits the obligations into their current and long-term portions
C) a lease in which title is transferred to the lessee at the end of the lease term
D) a finance lease

Question 16

The carrying amount of bonds issued at a discount is calculated by:

A) subtracting Interest Expense from Bonds Payable
B) subtracting Interest Payable from Bonds Payable
C) subtracting Discount on Bonds Payable from Bonds Payable
D) subtracting the sum of Discount on Bonds Payable and Interest Payable from Bonds Payable

Question 17

Accrued interest on a short-term note payable is recorded by:

A) debiting Cash and crediting Interest Payable
B) debiting Interest Payable and crediting Cash
C) debiting Interest Payable and crediting Interest Expense
D) debiting Interest Expense and crediting Interest Payable

Question 18

The premium on bonds payable:

A) increases interest expense on the income statement
B) reduces interest expense on the income statement
C) decreases the amount of cash paid to bondholders over the stated rate of interest
D) increases the amount of cash paid to bondholders over the stated rate of interest

Question 19

Aviation Holdings Corporation's sales for the day totalled $10,552. Jensen collected an additional

A) credit to Sales Tax Expense
B) credit to Sales Tax Payable
C) debit to Sales Tax Payable
D) debit to Sales Tax Expense

Question 20

Failure to record an accrued liability causes a company to:

A) overstate assets
B) overstate liabilities
C) overstate owners' equity
D) overstate expenses

Question 21

How does a company account for the difference between interest expense and the cash payment of interest when bonds are issued at less than their face value?

A) The difference is accounted for using Amortization of Bond Premium.
B) The difference is accounted for using Amortization of Bond Discount.
C) In this situation the cash payment of interest will exceed interest expense.
D) The difference is accounted for using Bonds Payable.

Question 22

The interest rate that investors demand for loaning their money is referred to as the:

A) effective interest rate
B) coupon interest rate
C) contract interest rate
D) stated interest rate

Question 23

Market conditions may force a company to issue its bonds at less than the face value of the bonds. The Discount on Bonds Payable account is used in this situation. This account:

A) is a contra liability account
B) is a liability account
C) is an expense account
D) is a contra asset account

Question 24

On a bond's maturity date, its carrying value will equal the:

A) present value of the bond on its issuance date
B) maturity value less all interest payments
C) maturity value plus all interest payments
D) maturity value

Question 25

Under the effective-interest method of amortization, the cash payment on each interest payment date will:

A) remain the same for each interest period
B) increase if bonds are issued at par
C) decrease if bonds are issued at a premium
D) increase if bonds are issued at a discount

Question 26

All of the following are advantages of issuing stock except:

A) generally results in a higher earnings per share
B) creates no interest expense which must be paid
C) creates no liabilities for the corporation
D) less risky to the issuing corporation

Question 27

The carrying amount of bonds issued at a premium is calculated by:

A) subtracting Interest Payable from Bonds Payable
B) adding Premium on Bonds Payable to Bonds Payable
C) adding Interest Payable to Bonds Payable
D) subtracting Premium on Bonds Payable from Bonds Payable

Question 28

Revaluation Magazine receives $90 in advance from a customer for a 3-year subscription. Revaluation Magazine's entry to record this transaction would include:

A) debit to Unearned Subscription Revenue for $90
B) credit to Subscription Revenue for $90
C) debit to Subscription Revenue for $90
D) credit to Unearned Subscription Revenue for $90

Question 29

Earnings per share (EPS) is calculated by:

A) dividing the average number of common shares outstanding throughout the year by net income
B) dividing net income by the average number of common shares outstanding throughout the year
C) dividing the number of common shares outstanding at the end of the year by net income
D) dividing net income by the number of common shares outstanding at the end of the year

Question 30

The accounts payable turnover ratio is equal to divided by average _.

A) debt; total assets
B) long-term debt; common shareholders' equity
C) cost of goods sold; accounts payable
D) debt; common shareholders' equity

Question 31

Potential liabilities that depend on future events arising out of past events are called:

A) long-term liabilities
B) contingent liabilities
C) actual liabilities
D) estimated liabilities

Question 32

All of the following are advantages of issuing bonds except:

A) less risky to the issuing corporation
B) does not dilute control of the corporation
C) interest expense reduces income tax
D) generally results in higher earnings per share

Question 33

On July 1, 2020, Cargo Corporation issues $4,000,000 of 10-year bonds dated July 1, 2020, at 100 1/2 when the market rate of interest was 8%. Cargo Corporation uses the effective-interest method of amortization. Interest is paid each June 30 and December 31. The entry to record the first
Semi-annual interest payment on December 31, 2020, will include a:

A) credit to Interest Payable for $160,000
B) debit to Interest Expense for $160,800
C) credit to Premium on Bonds Payable for $320,000
D) debit to Premium on Bonds Payable for $321,600

Question 34

Under the effective-interest method of amortization, the amount of discount amortized each interest period is equal to the:

A) total discount divided by the number of interest payments to be made
B) amount of interest expense plus the cash paid
C) amount of interest expense less the cash paid
D) total amount of interest expense divided by the number of interest payments to be made

Question 35

On December 16, 2020, the ACE Corporation purchases $15,000 of equipment by issuing a 30-day, 12% note payable. The total amount of interest due on the note is:

A) $73.97
B) $800.00
C) $147.95
D) $1,800.00

Question 36

Warranty expense should be recorded in the period:

A) that the product sold is repaired or replaced
B) immediately following the period in which the product is sold
C) that the product is paid for by the customer
D) the product is sold

Question 37

Bonds with a face value of $100,000 were sold at an effective rate of 10% to yield cash proceeds in excess of $100,000. It is apparent the bonds had a:

A) stated rate less than 10%
B) market rate less than 10%
C) stated rate greater than 10%
D) market rate greater than 10%

Question 38

The cash proceeds received from issuing a bond are less than the face value of the bond. It is apparent that the bond was issued at:

A) face value
B) a premium
C) par value
D) a discount

Question 39

The journal entry to record accrued interest on a short-term note payable must include a:

A) debit to Note Payable
B) debit to Interest Expense
C) credit to Interest Expense
D) debit to Interest Payable

Question 40

On July 1, 2020, the Jazz Corporation issues $4,000,000 of 10-year bonds dated July 1, 2020, at 89 when the market rate of interest was 8%. Jazz Corporation uses the effective-interest method of amortization. Interest is paid each June 30 and December 31. The entry to record the first semi-annual interest payment on December 31, 2020, will include a:

A) credit to Discount on Bonds Payable for $284,800
B) debit to Premium on Bonds Payable for $160,000
C) credit to Interest Payable for $320,000
D) debit to Interest Expense for $142,400

Question 41

Bonds in a particular issue which mature in installments over a period of time are called:

A) serial bonds
B) callable bonds
C) convertible bonds
D) term bonds

Question 42

The carrying amount of bonds issued at a discount is calculated by subtracting Discount on Bonds
Payable from Bonds Payable.

Question 43

A bond issued at a price above its maturity or par value is sold at a premium.

Question 44

A bond issued at a discount typically has a market price that decreases towards maturity value.

Question 45

Bonds which mature at the same time are called:

A) term bonds
B) convertible bonds
C) callable bonds
D) serial bonds

Question 46

Failure to accrue interest expense results in an overstatement of net income and an understatement of liabilities.

Question 47

An accrued expense is an expense incurred by the company but not yet paid in cash.

Question 48

Bonds which are backed only by the good faith of the borrower are referred to as:

A) mortgage bonds
B) registered bonds
C) secured bonds
D) debenture bonds

Question 49

Trading on equity occurs when an organization earns more income on borrowed money than the related interest expenses.

Question 50

One advantage of borrowing from bondholders is that they have no vote in the management of the company.

Question 51

When the discount on bonds payable is amortized, the carrying value of the bonds:

A) will decrease
B) will always remain unchanged
C) will increase
D) may increase or decrease depending on the face value of the bonds

Question 52

The account Sales Tax Payable represents a company's liability to the government for sales taxes collected.

Question 53

A repair to an appliance under warranty occurs within the warranty period. What adjustment is made?

A) Warranty Expense is debited.
B) Estimated Warranty Payable is credited.
C) Repair Expense is debited.
D) Estimated Warranty Payable is debited.

Question 54

Dreams Take Flight Ltd. includes the sales tax in the amount recorded in the Sales account. The adjusting entry at the end of the period includes a:

A) debit to Sales
B) debit to Sales Tax Expense
C) debit to Sales Tax Payable
D) credit to Sales

Question 55

The phrase term bonds applies when all the bonds in a particular issue mature in installments over a period of time.

Question 56

Another name for the effective interest rate is the market interest rate.

Question 57

The interest rate that determines the amount of cash paid to the bondholder is referred to as the:

A) effective interest rate
B) contract interest rate
C) market interest rate
D) market price rate

Question 58

Details about a company's liabilities should be included in the notes to the financial statements.

Question 59

Current liabilities are obligations due within one year or within the company's normal operating cycle if it is longer than one year.

Question 60

Under the effective-interest method of amortizing bond premiums, the interest expense recorded for each semi-annual interest payment:

A) will equal the amount of cash paid for each semi-annual interest payment
B) is at the same percentage of the bond's carrying value for every interest payment
C) will increase over the life of the bond
D) is equal to the carrying value of the bond times the contract rate of interest for each semi-annual interest period

Question 61

An example of a post retirement benefit provided by a company is medical insurance for retired workers.

Question 62

The carrying amount of bonds issued at a premium is calculated by subtracting Premium on
Bonds Payable from Bonds Payable.

Question 63

Interest expense will decrease each period if a company uses the effective-interest method of amortization and the bonds are issued at a discount.

Question 64

Using the effective-interest method of amortization, interest expense is based on the carrying amount of the bonds times the effective-interest rate for the interest period.

Question 65

An unearned revenue arises when a company receives cash from its customers in advance of earning the revenue.

Question 66

A good credit rating makes it easier to issue shares.

Question 67

The effective-interest method of amortization keeps interest expense at the same dollar amount of the bond's carrying value for every interest payment over the bond's life.

Question 68

The times interest earned ratio is calculated by taking interest expense divided by operating income.

Question 69

A dollar received today is worth more than a dollar to be received 5 years from now.

Question 70

The market or effective rate of interest is used to calculate the actual amount of interest bondholders will receive from a company issuing bonds.

Question 71

The adjusting entry to accrue interest on a note payable requires a credit to Interest Payable.

Question 72

Earnings per share is the amount of a company's net income earned by each of its common shares outstanding.

Question 73

A company's payroll deductions of income tax, Canada Pension Plan, Employment Insurance, and benefits are all classified as current liabilities.

Question 74

The carrying value of bonds will decrease each interest period if the bonds were issued at a premium.

Question 75

Debentures carry a lower interest rate than secured bonds because of the risk associated with them.

Question 76

A contingent liability that has a remote chance of occurrence should be disclosed in the financial statement notes.

Question 77

A bond issued at a premium typically has a market price that decreases towards maturity value.