Question 1

If there is a loss on bonds redeemed early, it is
A) debited directly to Retained Earnings.
B) reported as an "Other Expense" on the income statement.
C) reported as an "Extraordinary Item" on the income statement.
D) debited to Interest Expense, as a cost of financing.

Accepted Answer

A loss on bonds redeemed early is reported as an "Other Expense" on the income statement because it is not considered an extraordinary item or a regular financing cost.

Question 2

Premium on Bonds Payable
A) has a debit balance.
B) is a contra account.
C) is considered to be a reduction in the cost of borrowing.
D) is deducted from bonds payable on the balance sheet.

Accepted Answer

Premium on Bonds Payable is the amount paid by investors above the face value of the bond. It is considered to be a reduction in the cost of borrowing because the company receives a lower effective interest rate as a result of the premium. It is not a contra account, has a credit balance and is not deducted from bonds payable on the balance sheet.

Question 3

On December 1, 2017, Crawley Corporation incurs a 15-year $600,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $7,200, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, 2017. The portion of the second monthly payment made on January 31, 2018, which represents repayment of principal is:
A) $1,200.
B) $1,212.
C) $7,200.
D) $5,988.

Accepted Answer

The first payment of $7,200 made on December 31, 2017, consists of both principal and interest. The interest component of the payment can be calculated as follows:

Interest = Mortgage balance at the beginning of the month x Monthly interest rate
Monthly interest rate = Annual interest rate / 12 months = 12% / 12 = 1%

For the first payment, the mortgage balance is $600,000, so the interest component is:

Interest = $600,000 x 1% = $6,000

The remaining $1,200 of the payment represents repayment of principal.

On January 31, 2018, the mortgage balance will have been reduced by $1,200, so it will be $598,800. The interest component of the second payment can be calculated as:

Interest = $598,800 x 1% = $5,988

Therefore, the amount of the second payment that represents repayment of principal is:

$7,200 - $5,988 = $1,212.

Hence, the correct answer is B.

Question 4

Horton Company purchased a building on January 2 by signing a long-term $480,000 mortgage with monthly payments of $4,500. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be
A) $480,000.
B) $479,500.
C) $476,000.
D) $475,500.

Accepted Answer

The answer of Horton Company purchased a building on January...

Question 5

When bonds are converted into common stock,
A) the market price of the stock on the date of conversion is credited to the Common Stock account.
B) the market price of the bonds on the date of conversion is credited to the Common Stock account.
C) the market price of the stock and the bonds is ignored when recording the conversion.
D) gains or losses on the conversion are recognized.

Accepted Answer

When bonds are converted into common stock, the market price of the stock and the bonds is ignored. The book value of the bonds is transferred to the common stock and additional paid-in capital accounts, without recognizing any gain or loss.

Question 6

In the balance sheet, mortgage notes payable are reported as
A) a current liability only.
B) a long-term liability only.
C) both a current and a long-term liability.
D) a current liability except for the reduction in principal amount.

Accepted Answer

Mortgage notes payable are reported as both a current and a long-term liability on the balance sheet. The portion due within the next year is classified as a current liability, while the remaining balance is classified as a long-term liability.

Question 7

Townson Co. has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94. If Townson Co. calls $20 million of these bonds it will report:
A) A $1,400,000 gain.
B) A $800,000 loss.
C) An unrealized gain.
D) Neither gains nor losses are recognized on early retirements of debt.

Accepted Answer

If Townson Co. calls $20 million of the bonds, they will have to pay $20.8 million (20 million x 104% call price). However, they will only receive $18.8 million (20 million x 94% market price), resulting in a loss of $800,000.

Question 8

Winter Company purchased a building on January 2 by signing a long-term $630,000 mortgage with monthly payments of $5,400. The mortgage carries an interest rate of 10 percent. The entry to record the first monthly payment will include a
A) debit to the Cash account for $5,400.
B) credit to the Cash account for $5,250.
C) debit to the Interest Expense account for $5,250.
D) credit to the Mortgage Payable account for $5,400.

Accepted Answer

The answer of Winter Company purchased a building on January...

Question 9

A corporation recognizes a gain or loss
A) only when bonds are converted into common stock.
B) only when bonds are redeemed before maturity.
C) when bonds are redeemed at or before maturity.
D) when bonds are converted into common stock and when they are redeemed before maturity.

Accepted Answer

The answer of A corporation recognizes a gain or loss
A)...

Question 10

The current carrying value of Kane's $800,000 face value bonds is $797,000. If the bonds are retired at 103, what would be the amount Kane would pay its bondholders?
A) $797,000
B) $800,000
C) $820,910
D) $824,000

Accepted Answer

The bonds are retired at 103% of the face value. Therefore, Kane would pay 103% of $800,000, which is $824,000.

Question 11

If bonds with a face value of $140,000 are converted into common stock when the carrying value of the bonds is $135,000, the entry to record the conversion will include a debit to
A) Bonds Payable for $140,000.
B) Bonds Payable for $135,000.
C) Discount on Bonds Payable for $5,000.
D) Bonds Payable equal to the market price of the bonds on the date of conversion.

Accepted Answer

When bonds are converted into common stock, the entry to record the conversion includes debiting Bonds Payable for the face value of the bonds, which is $140,000 in this case, regardless of their carrying value or market price at the time of conversion.

Question 12

If sixty $1,000 convertible bonds with a carrying value of $70,000 are converted into 9,000 shares of $5 par value common stock, the journal entry to record the conversion is

Accepted Answer

The answer of If sixty $1,000 convertible bonds with a...

Question 13

If bonds can be converted into common stock,
A) they will sell at a lower price than comparable bonds without a conversion feature.
B) they will carry a higher interest rate than comparable bonds without the conversion feature.
C) they will be converted only if the issuer calls them in for conversion.
D) the bondholder may benefit if the market price of the common stock increases substantially.

Accepted Answer

If bonds can be converted into common stock, the bondholders may benefit if the market price of the common stock increases substantially. Therefore, the value of the bond may increase, resulting in a higher return for the bondholder. However, the conversion feature may lower the interest rate of the bond to compensate for the potential increase in value. The conversion is typically at the option of the bondholder, not the issuer, and may only be exercised during a specified period. Thus, D is the correct answer.

Question 14

Thirty $1,000 bonds with a carrying value of $39,600 are converted into 4,000 shares of $5 par value common stock. The common stock had a market value of $9 per share on the date of conversion. The entry to record the conversion is  d

Accepted Answer

The answer of Thirty $1,000 bonds with a carrying value...

Question 15

Lark Corporation retires its $800,000 face value bonds at 104 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $829,960. The entry to record the redemption will include a
A) credit of $2,040 to Loss on Bond Redemption.
B) debit of $2,040 to Loss on Bond Redemption.
C) credit of $32,040 to Premium on Bonds Payable.
D) debit of $32,000 to Premium on Bonds Payable.

Accepted Answer

The difference between the carrying value ($829,960) and the redemption amount ($800,000 x 104% = $832,000) is a loss on redemption of $2,040. This loss needs to be recorded with a debit to Loss on Bond Redemption. The premium on bonds payable would have been recorded as a credit balance on the balance sheet, but it is not affected by the redemption and therefore does not require an entry.

Question 16

A mortgage note payable with a fixed interest rate requires the borrower to make installment payments over the term of the loan. Each installment payment includes interest on the unpaid balance of the loan and a payment on the principal. With each installment payment, indicate the effect on the portion allocated to interest expense and the portion allocated to principal.

Accepted Answer

The answer of A mortgage note payable with a fixed...

Question 17

The entry to record an installment payment on a long-term note payable is
A) Mortgage Payable Cash
B) Interest Expense Cash
C) Mortgage Payable Interest Expense
Cash
D) Bonds Payable Cash

Accepted Answer

When recording an installment payment on a long-term note payable, we need to account for both the principal amount and the interest expense. The principal amount is recorded as a reduction in the Mortgage Payable account, while the interest expense is recognized separately.

Option A is incorrect because it only accounts for the principal amount, ignoring the interest expense.

Option B is incorrect because it only accounts for the interest expense, ignoring the principal amount.

Option D is incorrect because it refers to "Bonds Payable" instead of "Mortgage Payable," which is the correct account for a long-term note payable.

Therefore, the best choice is C, which accounts for both the principal amount and the interest expense by reducing the Mortgage Payable account and recognizing the interest expense separately.

Question 18

Which one of the following amounts increases each period when accounting for long-term notes payable?
A) Cash payment
B) Interest expense
C) Principal balance
D) Reduction of principal

Accepted Answer

The answer of Which one of the following amounts increases...

Question 19

A $600,000 bond was retired at 98 when the carrying value of the bond was $590,000. The entry to record the retirement would include a
A) gain on bond redemption of $10,000.
B) loss on bond redemption of $10,000.
C) loss on bond redemption of $2,000.
D) gain on bond redemption of $2,000.

Accepted Answer

The bond was retired for $588,000 ($600,000 x 98%), which is $2,000 less than its carrying value of $590,000, resulting in a gain on bond redemption of $2,000.

Question 20

A $600,000 bond was retired at 102 when the carrying value of the bond was $622,000. The entry to record the retirement would include a
A) gain on bond redemption of $12,000.
B) loss on bond redemption of $10,000.
C) loss on bond redemption of $12,000.
D) gain on bond redemption of $10,000.

Accepted Answer

The answer of A $600,000 bond was retired at 102...

Quiz 10: Liabilities

If there is a loss on bonds redeemed early, it is

Premium on Bonds Payable

Horton Company purchased a building on January 2 by signing a long-term $480,000 mortgage with monthly payments of $4,500. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be

When bonds are converted into common stock,

In the balance sheet, mortgage notes payable are reported as

Townson Co. has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94. If Townson Co. calls $20 million of these bonds it will report:

Winter Company purchased a building on January 2 by signing a long-term $630,000 mortgage with monthly payments of $5,400. The mortgage carries an interest rate of 10 percent. The entry to record the first monthly payment will include a

A corporation recognizes a gain or loss

The current carrying value of Kane's $800,000 face value bonds is $797,000. If the bonds are retired at 103, what would be the amount Kane would pay its bondholders?

If bonds with a face value of $140,000 are converted into common stock when the carrying value of the bonds is $135,000, the entry to record the conversion will include a debit to

If sixty $1,000 convertible bonds with a carrying value of $70,000 are converted into 9,000 shares of $5 par value common stock, the journal entry to record the conversion is

If bonds can be converted into common stock,

Thirty $1,000 bonds with a carrying value of $39,600 are converted into 4,000 shares of $5 par value common stock. The common stock had a market value of $9 per share on the date of conversion. The entry to record the conversion is d

Lark Corporation retires its $800,000 face value bonds at 104 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $829,960. The entry to record the redemption will include a

The entry to record an installment payment on a long-term note payable is

Which one of the following amounts increases each period when accounting for long-term notes payable?

A $600,000 bond was retired at 98 when the carrying value of the bond was $590,000. The entry to record the retirement would include a

A $600,000 bond was retired at 102 when the carrying value of the bond was $622,000. The entry to record the retirement would include a