Question 1

On January 1, 2021, Donahue Company, a calendar-year company, issued $600,000 of notes payable, of which $150,000 is due on January 1 for each of the next four years.The proper balance sheet presentation on December 31, 2021, is

Accepted Answer

The amount due within one year (January 1, 2022) is classified as current liabilities, which is $150,000. The remaining $450,000 is long-term debt, as it is due after one year. Therefore, the proper balance sheet presentation on December 31, 2021, is Current liabilities, $150,000; Long-term debt, $450,000.

Question 2

Pickett Company typically sells subscriptions on an annual basis and publishes six times a year.The magazine sells 90,000 subscriptions in January at $15 each.What entry is made in January to record the sale of the subscriptions?

Accepted Answer

The entry to record the sale of subscriptions will be:

January 1
Cash                        $1,350,000
  Unearned Subscription Revenue        $1,350,000

This is because the company has received the cash for the subscriptions but has not yet earned it since the magazine will be published six times throughout the year. The $1,350,000 is calculated as follows:

90,000 subscriptions sold x $15 per subscription = $1,350,000.

Option A is incorrect because it only records the cash received but doesn't properly reflect the liability for unearned revenue.

Option C is incorrect because it only records the revenue but doesn't reflect the fact that it is unearned at this time.

Option D is incorrect because it doesn't properly record the revenue as unearned and also includes an unnecessary expense account.

Question 3

Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called

Accepted Answer

Callable bonds are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer. Early retirement bonds and debentures are not specific types of bonds, and options refer to a different financial instrument altogether.

Question 4

The selling price of a $10,000, 5-year bond, will be less than $10,000 if the

Accepted Answer

When the market interest rate (the rate required by investors) is greater than the contractual interest rate (the rate promised by the bond issuer), the bond is less attractive to investors and its price will fall below its face value of $10,000.

Question 5

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

Accepted Answer

The carrying value of the bonds at the redemption date is $829,960, which is higher than the face value of $800,000. This suggests that the bonds were sold at a premium, and the premium was amortized over the life of the bonds. When the bonds are retired, the premium needs to be written off. The premium on bonds payable is a contra account to the bonds payable and has a credit balance. To write off the premium, we need to debit the premium account. However, since the carrying value exceeds the face value, we also need to recognize a loss on bond redemption. The loss is the difference between the carrying value and face value, which is $29,960. Therefore, the entry to record the redemption will include a debit of $2,040 to Loss on Bond Redemption (which is the $29,960 loss divided by the 5-year life of the bonds times 1 year) and a debit of $32,000 to Premium on Bonds Payable.

Question 6

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

Accepted Answer

The answer of The entry to record an installment payment...

Question 7

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 at the end of the third interest period is $965,000. This is calculated by taking the initial carrying value of the bonds ($1,000,000) and subtracting the amortization for the first three interest periods. The amortization for each interest period is $5,000 ($1,000,000 x 12% x 1/2).

Question 8

Over the term of the bonds, the balance in the Discount on Bonds Payable account will

Accepted Answer

The balance in the Discount on Bonds Payable account represents the amount by which the face value of the bond is less than the amount received from selling the bond. This discount is amortized over the term of the bond, which means it is gradually reduced until it is completely eliminated by the time the bond matures. Therefore, the balance in the Discount on Bonds Payable account will decrease as the discount is amortized. It is not affected by market volatility or fluctuations.

Question 9

Which of the following statements regarding the effective-interest method of accounting for bonds characteristics is false?

Accepted Answer

The amount of periodic interest expense actually increases over the life of a discounted bond issue when using the effective-interest method, because the carrying value of the bond increases over time, leading to higher interest expense calculations as the bond approaches maturity.

Question 10

The effective-interest method for amortization of bond discounts is required under

Accepted Answer

The effective-interest method for amortization of bond discounts is required under both GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards), ensuring consistency in financial reporting across different jurisdictions.

Quiz 10: Liabilities