Question 1

When a company issues a bond at a premium:

Accepted Answer

When a bond is issued at a premium, it means the coupon rate is higher than the market rate, leading to interest expense being less than the interest paid.

Question 2

The liability for product warranty claims is an example of a liability that:

Accepted Answer

The liability for product warranty claims involves estimates (A), is recorded to match revenue and expense (B), and results in a reduction of net income (C). Therefore, all options are correct.

Question 3

The amortization of bond discount:

Accepted Answer

Amortizing a bond discount increases the bond interest expense over the interest paid, as the discount is spread over the life of the bond, increasing the effective interest rate.

Question 4

Which of the following is a true statement pertaining to bonds?

Accepted Answer

Bonds can be sold at a discount, par, or premium.

Question 5

On June 1, 2019, an advance rent payment of $8,400, representing a four-month prepayment for the months of June, July, August, and September, was received in cash from the company's tenant. The adjusting entry that will be made at the end of each month to show the amount of rent "earned" during the month is:

Accepted Answer

The advance rent payment covers four months, so each month $2,100 ($8,400/4) is earned. The adjusting entry transfers this amount from Unearned Rent Revenue to Rent Revenue.

Question 6

Which of the following is true regarding bond discounts and/or premiums?

Accepted Answer

Both bond discounts and premiums are amortized over the life of the bond to adjust the interest expense recognized in each period.

Question 7

When bonds are issued at a premium:

Accepted Answer

When bonds are issued at a premium, the interest expense is less than the interest paid because the premium reduces the effective interest cost over the life of the bond.

Question 8

When a company issues a bond at a discount:

Accepted Answer

When a bond is issued at a discount, the company receives less than the face value initially but must pay the full face value at maturity. The difference between the issue price and the face value is amortized as additional interest expense over the life of the bond, making the interest expense greater than the actual interest paid.

Question 9

Which of the following is not sometimes associated with bonds?

Accepted Answer

Cumulative is typically associated with preferred stock, not bonds.

Question 10

On June 1, 2019, an advance rent payment of $8,400, representing a four-month prepayment for the months of June, July, August, and September, was received in cash from the company's tenant. The journal entry to record the effects of the four months of rent collected in advance on June 1, 2019 is:

Accepted Answer

The advance rent payment is initially recorded as a liability (Unearned Rent Revenue) because it represents a future obligation to provide rental services.

Question 11

Southern Company's accountant failed to accrue as of 12/31/19 some employee fringe benefit program expenses that were incurred in 2019 and that will be paid in 2020.The result of this omission is to:

Accepted Answer

The omission of accruing expenses results in understated liabilities, overstating the current ratio. It also overstates net income, leading to overstated ROI and ROE.

Question 12

Southern Company's accountant failed to accrue as of 12/31/19 some employee fringe benefit program expenses that were incurred in 2019 and that will be paid in 2020.The result of this omission is to:

Accepted Answer

The omission of accruing expenses results in understating 2019 expenses, which increases net income, and understating current liabilities, as the liability for the expenses is not recorded.

Question 13

If the market price of a bond exceeds its face amount:

Accepted Answer

When the market price of a bond exceeds its face amount, it indicates that the bond is trading at a premium. This typically occurs when the bond's coupon rate is higher than the current market interest rate, making it more attractive to investors.

Question 14

The balance of the Estimated Warranty Liability account was $28,000 on January 1, 2019, and $36,300 on December 31, 2019.Based on an analysis of warranty claims during the past several years, this year's warranty provision was established at 2% of sales, and sales during the year were $4,200,000. What amount of warranty expense will appear on the income statement for the year ended December 31, 2019?

Accepted Answer

The warranty expense is calculated as 2% of sales, which is $4,200,000 * 2% = $84,000.

Question 15

Financial leverage refers to which of the following?

Accepted Answer

Financial leverage refers to the difference between the rate of return earned on assets (ROI) and the rate of return earned on stockholders' equity (ROE).

Question 16

The largest item of the Deferred Tax Liability for most companies is caused by:

Accepted Answer

Differences in depreciation methods (accelerated vs. straight-line) for tax versus financial accounting purposes often create the largest deferred tax liabilities, as accelerated depreciation for tax purposes results in lower taxable income in the early years compared to straight-line depreciation used for financial reporting.

Question 17

The noncurrent Deferred Tax Liability account arises because:

Accepted Answer

Deferred tax liabilities arise when expenses are recognized in the financial statements before they are deductible for tax purposes, leading to taxable temporary differences.

Question 18

The market value of a bond is the sum of the present value of future interest payments and the present value of the amount to be repaid at maturity, discounted at:

Accepted Answer

The market value of a bond is calculated by discounting the future cash flows (interest payments and principal repayment) at the market rate, which reflects the current interest rate environment and the bond's risk.

Question 19

Many airlines have frequent flyer programs that permit travelers to accumulate credits that can be applied to the cost of tickets for future flights.Most airlines recognize the cost of their frequent flyer programs when the credits are used to purchase tickets.This practice, which seems to ignore the matching concept, results in:

Accepted Answer

This practice results in understating liabilities and expenses because the cost is recognized only when credits are used, not when they are earned, delaying expense recognition.

Question 20

For the payroll period ended on May 7, 2019, gross pay was $102,000, net pay was $78,000, and various withholdings totaled $24,000.The journal entry to show the effects of the payroll accrual on May 7, 2019 is:

Accepted Answer

The correct journal entry records the total wages expense as a debit and credits the liabilities for withholdings and wages payable.

Quiz 7: Accounting for and Presentation of Liabilities

When a company issues a bond at a premium:

The liability for product warranty claims is an example of a liability that:

The amortization of bond discount:

Which of the following is a true statement pertaining to bonds?

Which of the following is true regarding bond discounts and/or premiums?

When bonds are issued at a premium:

When a company issues a bond at a discount:

Which of the following is not sometimes associated with bonds?

On June 1, 2019, an advance rent payment of $8,400, representing a four-month prepayment for the months of June, July, August, and September, was received in cash from the company's tenant. The journal entry to record the effects of the four months of rent collected in advance on June 1, 2019 is:

Southern Company's accountant failed to accrue as of 12/31/19 some employee fringe benefit program expenses that were incurred in 2019 and that will be paid in 2020.The result of this omission is to:

Southern Company's accountant failed to accrue as of 12/31/19 some employee fringe benefit program expenses that were incurred in 2019 and that will be paid in 2020.The result of this omission is to:

If the market price of a bond exceeds its face amount:

Financial leverage refers to which of the following?

The largest item of the Deferred Tax Liability for most companies is caused by:

The noncurrent Deferred Tax Liability account arises because:

The market value of a bond is the sum of the present value of future interest payments and the present value of the amount to be repaid at maturity, discounted at:

For the payroll period ended on May 7, 2019, gross pay was $102,000, net pay was $78,000, and various withholdings totaled $24,000.The journal entry to show the effects of the payroll accrual on May 7, 2019 is: