Question 1

Which of the following is NOT a requirement of a capital lease?

Accepted Answer

A capital lease typically involves conditions that effectively transfer the benefits and risks of ownership from the lessor to the lessee. If ownership does not transfer at the end of the lease, this does not automatically disqualify it as a capital lease. The other options (B, C, D) are actually requirements or characteristics that can classify a lease as a capital lease.

Question 2

What is the purpose of a bond discount?

Accepted Answer

A bond discount occurs when a bond is issued at a price lower than its face value. This is often done when market interest rates are higher than the coupon rate on the bond. The purpose of a bond discount is to raise the bond interest rate to the market interest rate at the time the bond was issued. This makes the bond more attractive to investors and helps ensure that the issuer will be able to sell the bond and raise the desired amount of capital.

Question 3

Accounts Payable is generally listed first under long-term debt.

Accepted Answer

Accounts Payable is a current liability, not long-term debt. Long-term debt usually includes items such as bonds payable, bank loans, and mortgages.

Question 4

If a $15,000,8 percent,20-year bond was issued at 96 on November 1,how much will accrued interest payable be on December 31 if interest payments are made annually?

Accepted Answer

The bond pays 8% interest annually on $15,000, which is $1,200 per year. Since the bond was issued on November 1 and interest is calculated until December 31, the accrued interest for 2 months (November and December) is (2/12) * $1,200 = $200.

Question 5

On October 31,2014,Aspen Inc.recorded their semi-annual bond interest expense that contained a credit to Discount on bonds payable of $1,200.The adjusting entry on December 31,2014 will show a credit to Discount on bonds payable of:

Accepted Answer

The answer of On October 31,2014,Aspen Inc.recorded their semi-annual bond...

Question 6

With regard to long-term debt,collateral represents?

Accepted Answer

Collateral represents assets pledged to secure repayment of a loan. Therefore, option C is the correct answer. Option A refers to a specific type of long-term note payable, but does not fully encompass the definition of collateral. Option B is not related to long-term debt or collateral. Option D refers to a long-term note payable, but does not mention anything about collateral.

Question 7

Contingent liabilities pose an ethical challenge because they're based on past events,they are easier to manipulate.

Accepted Answer

Contingent liabilities are based on future events that may or may not happen, which makes their recognition and measurement uncertain, but not necessarily easier to manipulate ethically.

Question 8

$200,000 of 6%,25-year bonds were sold for $190,000 on January 1.The bonds require semiannual interest payments on June 30 and December 31.The entry to record the June 30 interest payment on the bonds would be to:

Accepted Answer

The company sold the bonds at a discount of $10,000 ($200,000 - $190,000). This discount represents the difference between the face value of the bonds ($200,000) and the amount the company received for them ($190,000).

When the bonds were issued, the company recorded a Discount on bonds payable account to reflect the discount. This account has a debit balance, which means that it reduces the carrying amount of the bonds ($200,000 - $10,000 = $190,000).

The semiannual interest payment is calculated as follows:

$200,000 x 6% x 6/12 = $6,000

Therefore, the entry to record the June 30 interest payment would be:

Debit Interest Expense $6,200
Credit Discount on bonds payable $200 
Credit Cash $6,000

The Interest Expense account is debited for the full interest payment of $6,200. The Discount on bonds payable account is credited for the portion of the discount that is amortized (i.e., the discount allocated to the current interest payment period). The Cash account is credited for the cash payment of $6,000.

Question 9

Discount on bonds payable and Premium on bonds payable are examples of:

Accepted Answer

The answer of Discount on bonds payable and Premium on...

Question 10

$400,000 of 12%,10-year bonds were sold for $380,000 on January 1.The bonds require semiannual interest payments on June 30 and December 31.The entry to record the June 30 interest payment on the bonds would be to:

Accepted Answer

The answer of $400,000 of 12%,10-year bonds were sold for...

Question 11

Leases that are treated as financed purchases are called:

Accepted Answer

Leases that are treated as financed purchases are called capital leases. This is because these leases are treated as if the lessee is purchasing the leased asset through financing, and therefore are recorded as assets on the lessee's balance sheet.

Question 12

When a company issues bonds,what are they doing?

Accepted Answer

When a company issues bonds, they are borrowing money from third parties. Bonds are a type of debt security that companies can issue to raise capital. In exchange for purchasing bonds, investors receive regular interest payments from the company and the promise that their principal investment will be repaid at a future date.

Question 13

A $250,000 issue of bonds that sold for $275,000 matures on June 25,2020.The journal entry to record the payment of the bond on the maturity date is to:

Accepted Answer

The journal entry to record the payment of the bond on the maturity date involves debiting Bonds Payable for the face value of $250,000 and crediting Cash for the same amount, as the bond is being paid off at its face value, not the amount it was sold for.

Question 14

Which of the following would be treated as a rental agreement?

Accepted Answer

Operating leases are treated as rental agreements because the lessee does not obtain ownership of the asset and typically pays for its use over a shorter period, which aligns with the concept of renting.

Question 15

Having liabilities classified incorrectly will have a big impact on the company's current ratio.

Accepted Answer

The current ratio is calculated by dividing the current assets by current liabilities. If liabilities are classified incorrectly, it can affect the calculation of the current ratio and misrepresent the company's financial health. For example, if a long-term liability is incorrectly classified as a current liability, it will increase the current liabilities and decrease the current ratio, giving a false impression of the company's short-term liquidity.

Question 16

Capital leases are most similar to:

Accepted Answer

Capital leases are similar to mortgage notes because they are long-term leases where the lessee is required to make regular payments to the lessor, similar to a mortgage where the borrower makes regular payments to the lender. Both capital leases and mortgage notes also involve an asset being used as collateral for the payments being made. Accounts payable and unearned revenue are both short-term liabilities and regular notes payable are not specifically related to leases.

Question 17

A $400,000 issue of bonds that sold for $363,000 matures on August 1,2015.The journal entry to record the payment of the bond on the maturity date is to:

Accepted Answer

The journal entry to record the payment of the bond on the maturity date involves debiting Bonds Payable for the face value of the bond ($400,000) and crediting Cash for the same amount, as the company is paying off the bond liability.

Question 18

If a $6,000,10 percent,10-year bond was issued at 104 on October 1,how much will accrued interest payable be on December 31 if interest payments are made annually?

Accepted Answer

The bond pays 10% annual interest on $6,000, which is $600 per year. Since interest payments are made annually, the accrued interest from October 1 to December 31 (3 months) is $600 * (3/12) = $150.

Question 19

On September 30,2014,Arctic Enterprises recorded their semi-annual bond interest expense that contained a credit to Discount on bonds payable of $1,600.The adjusting entry on December 31,2014 will show a credit to Discount on bonds payable of:

Accepted Answer

The answer of On September 30,2014,Arctic Enterprises recorded their semi-annual...

Question 20

Bonds payable minus the Discount on bonds payable yields the:

Accepted Answer

The carrying amount is the amount at which the bonds are reported on the balance sheet and is calculated by subtracting the discount from the bonds payable. The maturity value is the total amount due at the end of the bond term, the annual interest is the interest paid each year, and the principal amount is the amount borrowed.

Quiz 9: Current Liabilities and Long-Term Debt