Question 1

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 2

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 3

On March 31, 2015, $6,000,000 of 6%, 10-year bonds payable, dated December 31, 2014, are issued. Interest on the bonds is payable semiannually each June 30 and December 31. The total amount received (including accrued interest) by the issuing corporation is $6,072,000. Which of the following is correct?
A)The bonds were issued at a premium.
B)The amount of cash paid to bondholders on the next interest date, June 30, 2015, is $360,000.
C)The amount of cash paid to bondholders on the next interest date, June 30, 2015, is $60,000.
D)The bonds were issued at a discount.

Accepted Answer

The answer of On March 31, 2015, $6,000,000 of 6%,...

Question 4

Farris Company borrowed $800,000 from BankTwo on January 1, 2014 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, 2016?
A)$800,000
B)$507,372
C)$659,651
D)$664,000

Accepted Answer

The balance in the notes payable account at January 1, 2016 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 5

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?
A)5.25
B)4.75
C)3.75
D)4.25

Accepted Answer

The answer of In a recent year Joey Corporation had...

Question 6

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 these bonds, it will have to pay 104% of the face value, which is $20 million x 1.04 = $20.8 million. However, the current market value of the bonds is only $20 million x 0.94 = $18.8 million. Therefore, Townson Co. will have to pay more than the market value of the bonds, resulting in a loss of $20.8 million - $18.8 million = $2 million.

Question 7

On December 1, 2014, 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, 2014. The portion of the second monthly payment made on January 31, 2015, which represents repayment of principal is:
A)$1,200.
B)$1,212.
C)$7,200.
D)$5,988.

Accepted Answer

The amount of interest accrued on the first payment, made on December 31, 2014, can be calculated as:

Interest = P × r × t
Where:
P = Principal = $600,000
r = Monthly interest rate = Annual interest rate ÷ 12 = 12% ÷ 12 = 1%
t = Time = 1 month

Interest = $600,000 × 1% × 1 = $6,000

Therefore, the amount of the first payment that goes towards principal repayment is:

Principal = Payment - Interest = $7,200 - $6,000 = $1,200

Now, we need to calculate the remaining mortgage balance after the first payment. We can do this using the formula for the present value of an annuity:

PV = P × [((1 + r)^n - 1) ÷ (r × (1 + r)^n)]
Where:
PV = Present value of the mortgage
P = Payment amount = $7,200
r = Monthly interest rate = 1%
n = Total number of payments = 15 years × 12 months/year = 180

PV = $600,000 × [((1 + 1%)^180 - 1) ÷ (1% × (1 + 1%)^180)] = $498,703.46 (rounded)

Therefore, the amount of principal repayment included in the second payment, made on January 31, 2015, is:

Principal = Payment - Interest = $7,200 - ($498,703.46 × 1% ÷ 12) = $1,211.94 (rounded)

The correct answer is therefore B) $1,212.

Question 8

The adjusted trial balance for Lamar Corp. at the end of the current year, 2015, contained the following accounts.  The total long-term liabilities reported on the balance sheet are
A)$1,945,000.
B)$1,935,000.
C)$2,095,000.
D)$2,085,000.

Accepted Answer

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

Question 9

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?
A)$550,000
B)$500,000
C)$450,000
D)None of the answers are correct.

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 10

202. $4 million, 8%, 10-year bonds are issued at face value. Interest will be paid semi-annually. When calculating the market price of the bond, the present value of A)$320,000 received for 10 periods must be calculated. B)$4 million received in 10 periods must be calculated. C)$4 million received in 20 periods must be calculated. D)$160,000 received for 10 periods must be calculated.

Accepted Answer

The market price of the bond is calculated by finding the present value of the principal amount ($4 million) received at the end of the bond term, which is 20 periods (10 years with semi-annual payments).

Question 11

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 12

The times interest earned is computed by dividing
A)net income by interest expense.
B)income before income taxes by interest expense.
C)income before interest expense by interest expense.
D)income before income taxes and interest expense by interest expense.

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 13

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 14

Each of the following may be shown on a supporting schedule instead of on the balance sheet except the
A)current maturities of long-term debt.
B)conversion privileges.
C)interest rates.
D)maturity dates.

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.

Question 15

201. The present value of a bond is also known as its A)face value. B)market price. C)future value. D)deferred value.

Accepted Answer

The present value of a bond is the current market price that an investor is willing to pay for that bond. The face value of a bond is the amount that will be paid back to the investor at maturity. The future value refers to the value of the bond at the end of its term, and the deferred value is not a commonly used financial term.

Question 16

The 2015 financial statements of Marker Co. contain the following selected data (in millions). The debt to assets ratio is
A)64.3%.
B)53.3%.
C)28.6%.
D)147.4%.

Accepted Answer

The debt to assets ratio is calculated as Total Liabilities divided by Total Assets. The correct ratio is 64.3%, which means that 64.3% of the company's assets are financed by debt.

Question 17

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 18

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 19

Farris Company borrowed $800,000 from BankTwo on January 1, 2014 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 2015 income statement?
A)$68,000.
B)$56,070.
C)$43,127.
D)$50,290.

Accepted Answer

The interest expense for 2015 can be calculated using the following formula: 
Interest Expense = Beginning Balance x Interest Rate 
Since this is the second year of the loan, the beginning balance would be the original loan amount minus the first annual payment: 
Beginning Balance = $800,000 - $208,349 = $591,651 
Thus, the interest expense for 2015 would be: 
Interest Expense = $591,651 x 8.5% = $50,290 
Therefore, the answer is B.

Question 20

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. Each question based on this data is independent of any others. 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?
A)The debt to assets ratio will decrease from .1(4/40) to .083 (4/48) after the additional stock sale.
B)The debt to assets ratio will decrease from 4/36 before to 4/44 after the additional stock sale.
C)The debt to assets ratio will increase from 40 before to 48 after the additional investment.
D)The additional stock issuance will have no effect on the debt to assets ratio.

Accepted Answer

Debt to assets ratio = Total liabilities/Total assets
Before the additional stock sale: Debt to assets ratio = 4/40 = 0.1
After the additional stock sale: Total assets will increase to $48 million ($40 million + $8 million), while total liabilities will remain at $4 million. 
Debt to assets ratio after the sale = 4/48 = 0.083. Therefore, the debt to assets ratio will decrease from 0.1 to 0.083 after the additional stock sale.

Quiz 10: Liabilities

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

In the balance sheet, mortgage notes payable are reported as

Farris Company borrowed $800,000 from BankTwo on January 1, 2014 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, 2016?

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?

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:

The adjusted trial balance for Lamar Corp. at the end of the current year, 2015, contained the following accounts. The total long-term liabilities reported on the balance sheet are

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?

202. $4 million, 8%, 10-year bonds are issued at face value. Interest will be paid semi-annually. When calculating the market price of the bond, the present value of

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

The times interest earned is computed by dividing

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

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

201. The present value of a bond is also known as its

The 2015 financial statements of Marker Co. contain the following selected data (in millions) . The debt to assets ratio is

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 $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

Farris Company borrowed $800,000 from BankTwo on January 1, 2014 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 2015 income statement?