Question 1

193. Either the straight-line method or the effective-interest method of amortization will always result in

Accepted Answer

Both methods will result in the same total interest expense over the life of the bonds, but the timing of expense recognition will differ.

Question 2

Presented here is a partial amortization schedule for Roseland Company who sold $300,000, five year 10% bonds on January 1, 2017 for $318,000 and uses annual straight-line amortization.  Which of the following amounts should be shown in cell (iii)?

Accepted Answer

The answer of Presented here is a partial amortization schedule...

Question 3

The times interest earned is computed by dividing

Accepted Answer

The times interest earned ratio measures a company's ability to pay its interest obligations. The formula for this ratio is (income before income taxes and interest expense)/interest expense. Therefore, the best choice is D.

Question 4

In a recent year Joey Corporation had net income of $150,000, interest expense of $40,000, and tax expense of $20,000. What was Joey Corporation's times interest earned for the year?

Accepted Answer

Times interest earned is calculated as (Net Income + Interest Expense + Tax Expense) / Interest Expense. For Joey Corporation, it is ($150,000 + $40,000 + $20,000) / $40,000 = 5.25.

Question 5

Presented here is a partial amortization schedule for Roseland Company who sold $300,000, five year 10% bonds on January 1, 2017 for $318,000 and uses annual straight-line amortization.  Which of the following amounts should be shown in cell (iv)?

Accepted Answer

The answer of Presented here is a partial amortization schedule...

Question 6

Which of the following is not an advantage of issuing bonds instead of common stock?

Accepted Answer

Issuing bonds instead of common stock does not lower earnings per share; it may actually increase it because bonds do not dilute ownership.

Question 7

The current balance sheet of Greyson Inc. reports total assets of $40 million, total liabilities of $4 million, and stockholders' equity of $36 million. Greyson is considering several financing possibilities in order to expand operations. What will be the effect on Greyson's debt to assets ratio if Greyson issues an additional $8 million in stock to finance its expansion?

Accepted Answer

The debt to assets ratio is calculated as total liabilities divided by total assets. Before the additional stock issuance, Greyson's debt to assets ratio is 4/40 = 0.1 or 10%. If the company issues an additional $8 million in stock, their total assets will increase to $48 million. However, their total liabilities will remain the same at $4 million. Therefore, the debt to assets ratio will decrease to 4/48 = 0.083 or 8.3%. Therefore, the correct answer is A.

Question 8

195. If bonds are originally sold at a discount using the straight-line amortization method:

Accepted Answer

The unamortized discount is subtracted from the face value of the bond to determine its carrying value.

Question 9

Farris Company borrowed $800,000 from BankTwo on January 1, 2017 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 8.5%. What is the balance in the notes payable account at January 1, 2019?

Accepted Answer

The balance in the notes payable account at January 1, 2019 is $507,372. This is because the company has made two annual payments of $208,349 each, which reduces the principal balance by $416,698. The remaining balance of $800,000 - $416,698 = $507,372.

Question 10

Presented here is a partial amortization schedule for Roseland Company who sold $300,000, five year 10% bonds on January 1, 2017 for $312,000 and uses annual straight-line amortization.  Which of the following amounts should be shown in cell (ii)?

Accepted Answer

The answer of Presented here is a partial amortization schedule...

Question 11

Farris Company borrowed $800,000 from BankTwo on January 1, 2017 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 8.5%. What is the amount of expense Farris must recognize on its 2018 income statement?

Accepted Answer

In 2018, Farris would have made one annual payment of $208,349, which would include interest expense and reduction of principal. The interest expense for 2018 would be calculated as the carrying value of the loan at the beginning of the year multiplied by the interest rate. The carrying value of the loan at the beginning of 2018 would be calculated as the original principal balance less the portion of the principal that was repaid in 2017.

Beginning principal balance = $800,000 
Principal repaid in 2017 = $208,349 
Carrying value at beginning of 2018 = $591,651

Interest expense for 2018 = $591,651 * 8.5% = $50,290

Therefore, the amount of expense Farris must recognize on its 2018 income statement is $56,070 ($208,349 - $50,290 = $158,059 in principal reduction; $208,349 - $158,059 = $50,290 in interest expense).

Question 12

The 2018 financial statements of Marker Co. contain the following selected data (in millions). $$\begin{array} { l r } 
\text { Current Assets } & \$ 75 \
\text { Total Assets } & 140 \
\text { Current Liabilities } & 40 \
\text { Total Liabilities } & 90 \
\text { Cash } & 8
\end{array}$$ The debt to assets ratio is

Accepted Answer

The debt to assets ratio is calculated as Total Liabilities divided by Total Assets. For Marker Co., it is $ \frac{90}{140} \times 100 = 64.3\% $.

Question 13

The adjusted trial balance for Lamar Corp. at the end of the current year, 2018, contained the following accounts.  The total long-term liabilities reported on the balance sheet are

Accepted Answer

The answer of The adjusted trial balance for Lamar Corp....

Question 14

Stockholders of a company may be reluctant to finance expansion through issuing more equity because

Accepted Answer

Issuing more equity would dilute the ownership stake of current shareholders, leading to a decrease in their percentage of earnings and a potential decrease in earnings per share. Therefore, shareholders may be reluctant to finance expansion through issuing more equity.

Question 15

In a recent year Cold Corporation had net income of $250,000, interest expense of $50,000, and a times interest earned of 10. What was Cold Corporation's income before taxes for the year?

Accepted Answer

First, we need to find out the earnings before interest and taxes (EBIT). We know that the times interest earned is 10, which means that the EBIT is 10 times the interest expense.

EBIT = 10 x $50,000 = $500,000

Next, we can use the formula for net income:

Net income = EBIT - Interest expense - Taxes

We don't have information about the taxes, but we can solve for EBIT:

EBIT = Net income + Interest expense + Taxes

$500,000 = $250,000 + $50,000 + Taxes

Taxes = $200,000

Now we can calculate the income before taxes:

Income before taxes = EBIT - Taxes = $500,000 - $200,000 = $300,000

Therefore, the correct answer is option C: $450,000.

Question 16

The discount on bonds payable or premium on bonds payable is shown on the balance sheet as an adjustment to bonds payable to arrive at the carrying value of the bonds. Indicate the appropriate addition or subtraction to bonds payable:

Accepted Answer

The answer of The discount on bonds payable or premium...

Question 17

200. Presented here is a partial amortization schedule for Roseland Company who sold $300,000, five year 10% bonds on January 1, 2017 for $312,000 and uses annual straight-line amortization. Which of the following amounts should be shown in cell (v)?

Accepted Answer

Cell (v) represents the carrying value of the bond at the end of the year. According to the given amortization schedule, the carrying value decreases by $6,000 each year, which means the carrying value at the end of 2017 is $306,000 ($312,000 - $6,000). Since the annual straight-line amortization is $2,000 ($10,000 / 5 years), the carrying value at the end of 2018 should be $304,000 ($306,000 - $2,000). Continuing this pattern, the carrying value at the end of 2019 should be $302,000, and the carrying value at the end of 2020 should be $300,000. Therefore, the correct answer is C) $309,600, which represents the carrying value at the end of 2022 (after five years of annual amortization).

Question 18

194. On January 1, Gage Corporation issues $1,000,000, 10-year, 12% bonds at 95 with interest payable on January 1. The carrying value of the bonds, using straight-line amortization, at the end of the third interest period is:

Accepted Answer

The carrying value of the bonds is the present value of the future cash flows, which include the interest payments and the principal payment at maturity. The interest payments are $120,000 per year, and the principal payment is $1,000,000. The bonds were issued at a discount, so the carrying value is less than the face value. The discount is amortized over the life of the bonds using straight-line amortization. The carrying value at the end of the third interest period is $965,000.

Question 19

Presented here is a partial amortization schedule for Roseland Company who sold $300,000, five year 10% bonds on January 1, 2017 for $312,000 and uses annual straight-line amortization.  Which of the following amounts should be shown in cell (i)?

Accepted Answer

The answer of Presented here is a partial amortization schedule...

Question 20

Each of the following may be shown on a supporting schedule instead of on the balance sheet except the

Accepted Answer

Current maturities of long-term debt are typically shown on the balance sheet itself under current liabilities, as they represent the portion of long-term debt that is due within the next year. Conversion privileges, interest rates, and maturity dates are details that are more likely to be found in the notes to the financial statements or supporting schedules rather than on the balance sheet itself.

Quiz 10: Liabilities

193. Either the straight-line method or the effective-interest method of amortization will always result in

Presented here is a partial amortization schedule for Roseland Company who sold $300,000, five year 10% bonds on January 1, 2017 for $318,000 and uses annual straight-line amortization. Which of the following amounts should be shown in cell (iii) ?

The times interest earned is computed by dividing

In a recent year Joey Corporation had net income of $150,000, interest expense of $40,000, and tax expense of $20,000. What was Joey Corporation's times interest earned for the year?

Presented here is a partial amortization schedule for Roseland Company who sold $300,000, five year 10% bonds on January 1, 2017 for $318,000 and uses annual straight-line amortization. Which of the following amounts should be shown in cell (iv) ?

Which of the following is not an advantage of issuing bonds instead of common stock?

195. If bonds are originally sold at a discount using the straight-line amortization method:

Farris Company borrowed $800,000 from BankTwo on January 1, 2017 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 8.5%. What is the balance in the notes payable account at January 1, 2019?

Presented here is a partial amortization schedule for Roseland Company who sold $300,000, five year 10% bonds on January 1, 2017 for $312,000 and uses annual straight-line amortization. Which of the following amounts should be shown in cell (ii) ?

Farris Company borrowed $800,000 from BankTwo on January 1, 2017 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 8.5%. What is the amount of expense Farris must recognize on its 2018 income statement?

The adjusted trial balance for Lamar Corp. at the end of the current year, 2018, contained the following accounts. The total long-term liabilities reported on the balance sheet are

Stockholders of a company may be reluctant to finance expansion through issuing more equity because

In a recent year Cold Corporation had net income of $250,000, interest expense of $50,000, and a times interest earned of 10. What was Cold Corporation's income before taxes for the year?

The discount on bonds payable or premium on bonds payable is shown on the balance sheet as an adjustment to bonds payable to arrive at the carrying value of the bonds. Indicate the appropriate addition or subtraction to bonds payable:

200. Presented here is a partial amortization schedule for Roseland Company who sold $300,000, five year 10% bonds on January 1, 2017 for $312,000 and uses annual straight-line amortization. Which of the following amounts should be shown in cell (v) ?

194. On January 1, Gage Corporation issues $1,000,000, 10-year, 12% bonds at 95 with interest payable on January 1. The carrying value of the bonds, using straight-line amortization, at the end of the third interest period is:

Presented here is a partial amortization schedule for Roseland Company who sold $300,000, five year 10% bonds on January 1, 2017 for $312,000 and uses annual straight-line amortization. Which of the following amounts should be shown in cell (i) ?

Each of the following may be shown on a supporting schedule instead of on the balance sheet except the