Question 1

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

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

Question 2

When bonds are converted into common stock,

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 3

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

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Question 4

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?

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The answer of Farris Company borrowed $800,000 from BankTwo on...

Question 5

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:

Accepted Answer

If Townson Co. calls $20 million of the bonds, they would have to pay $20.8 million (104% of $20 million) to retire the bonds. However, the market value of the bonds is only $18.8 million (94% of $20 million). Therefore, Townson Co. would incur a loss of $2 million ($20.8 million - $18.8 million).

Question 6

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

Accepted Answer

An installment payment on a long-term note payable involves both the reduction of the principal amount of the note payable (which is recorded as a debit to the Mortgage Payable account) and the payment of interest on the outstanding balance (which is recorded as a credit to the Interest Expense account). The cash payment is recorded as a credit to the Cash account. Therefore, the entry to record an installment payment on a long-term note payable is Mortgage Payable + Interest Expense Cash. Choice C best represents this entry.

Question 7

Premium on Bonds Payable

Accepted Answer

Premium on Bonds Payable is the excess amount paid by investors over the face value of the bond. It is considered to be a reduction in the cost of borrowing since the company receiving the premium will use the additional funds to offset the interest expenses of the bond. It does not have a debit balance and is not a contra account. It is presented separately from the bonds payable on the balance sheet.

Question 8

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

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

Question 9

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

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Question 10

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

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Question 11

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:

Accepted Answer

The total annual interest on the mortgage is 12% of $600,000, which is $72,000. The monthly interest is therefore $6,000 ($72,000 divided by 12). The remaining $1,200 of the monthly payment ($7,200 - $6,000) is applied to repayment of principal.

For the first monthly payment made on December 31, 2017, none of the $7,200 payment goes towards principal. Therefore, the outstanding principal at the end of December is still $600,000.

For the second monthly payment made on January 31, 2018, $1,200 of the $7,200 payment goes towards repayment of principal. Therefore, the outstanding principal at the end of January is $598,800 ($600,000 - $1,200).

Therefore, the portion of the second monthly payment made on January 31, 2018, which represents repayment of principal is $1,200.

Question 12

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

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 13

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

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 14

If bonds can be converted into common stock,

Accepted Answer

If bonds can be converted into common stock, the bondholder may benefit if the market price of the common stock increases substantially. This is because the conversion option allows the bondholder to convert the bond into shares of the issuing company's common stock at a predetermined price. If the market price of the common stock increases above this predetermined price, then the bondholder can convert the bond and sell the shares for a higher price, resulting in a profit. Therefore, bonds with a conversion feature may sell at a higher price than comparable bonds without such a feature.

Question 15

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

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

Question 16

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

To calculate the amount of expense Farris must recognize on its 2018 income statement, we need to use the effective interest method. Under this method, the interest expense for the year is calculated by multiplying the carrying value of the loan at the beginning of the period by the effective interest rate.

Carrying value of the loan at the beginning of 2018 = $800,000 - $208,349 = $591,651
Effective interest rate = 8.5%
Interest expense for 2018 = $591,651 * 8.5% = $50,290

Therefore, the answer is choice B.

Question 17

In the balance sheet, mortgage notes payable are reported as

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 18

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

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Question 19

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.

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

Question 20

A corporation recognizes a gain or loss

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

Quiz 10: Liabilities