Question 1

In Year 1,Karaoke Tunes issued $200,000 of bonds for $190,200.The stated rate of interest was 6.5%.The market rate of interest was 7.1%.How will the company calculate the discount at the time the bonds were issued using the effective interest method? Refer to the PV table on pages 717 to 720 of the text..

Accepted Answer

To calculate the discount using the effective interest method, we need to calculate the present value of the bond at the market rate of interest of 7.1%. The calculation would be:
Present value = $200,000 x FVIF(7.1%, 1 year)
= $200,000 x 0.9359
= $187,180
Since the company issued the bond at $190,200, it received a discount of $3,020. Therefore, the correct choice is B: $190,200 x FVIF(7.1%, 1 year).

Question 2

On January 1,Year 1,Kale Farms purchased a tractor for $20,000.The company signed a 6% installment note to pay off the debt,with 48 monthly payments over four years.Each payment is $469.70.How much interest must be paid over the life of the loan?

Accepted Answer

$469.70 F1F1F1S1*F1F1F10 48 = $22,545.60 - $20,000 = $2,545.60

Question 3

Which of the following lease conditions would result in a finance lease to the lessee?

Accepted Answer

A finance lease must meet at least one of four criteria according to ASC 842-10-25-2: 
1) The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. 
2) The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. 
3) The lease term is for the major part of the remaining economic life of the underlying asset (which is significantly extending the remaining life of the asset if it were not leased). 
4) The present value of the sum of the lease payments and any residual value guaranteed by the lessee is equal to or greater than substantially all of the fair value of the underlying asset. Option B meets the second criteria as it grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.

Question 4

Which of the following accounts does NOT appear on the balance sheet of a lessee company recording a finance lease?

Accepted Answer

Rent expense on the income statement would not appear on the balance sheet of a lessee company recording a finance lease. The other options all relate to the finance lease liability and the leased asset, which would appear on the balance sheet.

Question 5

What is the result of using the effective interest method of amortization for bond discounts?

Accepted Answer

The effective interest method of amortization for bond discounts results in a constant effective interest rate for each amortization period, which is used to calculate the interest expense. This method results in a decreasing amount of discount being amortized each period, which in turn results in an increasing amount of interest expense each period. Therefore, option B is the correct answer.

Question 6

With the effective interest method of amortization,what does the amortization of a bond premium result in?

Accepted Answer

The amortization of a bond premium decreases interest expense over the life of the bond, as it effectively spreads the premium paid over the bonds' term to maturity, reducing the amount of interest recognized in each period.

Question 7

On January 2,Year 1,Kampai Sushi Bar sold $800,000 of bonds for $785,000.The bonds will mature in 10 years and pay interest annually on December 31.The company properly recorded the payment of interest and the amortization of the discount using the effective interest method.What will the carrying value of the bonds and/or the unamortized discount at the end of Year 1 be? Refer to the PV table on pages 717 to 720 of the text..

Accepted Answer

The carrying value of the bonds will be greater than $785,000 at the end of Year 1 because the discount on the bonds (the difference between the face value and the issued price) is amortized over the life of the bonds, increasing the carrying value each year until it reaches the face value at maturity.

Question 8

The Kaplan Group sold $200,000 of 10-year bonds for $190,000.The face rate on the bonds was 8% and interest is paid annually on December 31.What entry will be made on December 31 when the interest is paid? (Numbers are omitted.)

Accepted Answer

The bonds were sold at a discount, so the interest expense will include both the cash interest payment and the amortization of the discount. The entry will debit interest expense, credit cash for the interest payment, and credit discount on bonds payable for the amortization of the discount.

Question 9

Kaleidoscope Paint
On January 1, Year 1, this company issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of amortizing bond discounts and premiums. Refer to the PV table on pages 717 to 720 of the text.
-Refer to the figure Kaleidoscope Paint.What is the carrying value of the bonds on the maturity date?

Accepted Answer

Using the effective interest method, the bond discount of $19,255 is amortized over the life of the bond. The carrying value of the bond on the maturity date will be equal to the face value of the bond, which is $500,000. Therefore, the correct answer is D.

Question 10

A bond is issued at 101.25.What does this signify?

Accepted Answer

When a bond is issued at 101.25, it means it sold for 101.25% of its face value. Since bond prices are typically quoted as a percentage of their face value, and the standard face value is $1,000, a price of 101.25 means it sold for $1,012.50.

Question 11

Kay Animal Hospital has leased a building.The 10-year lease is recorded as a finance lease.The annual payments are $10,000.The recorded cost of the asset is $67,100.The straight-line method is used to calculate depreciation.What is the effect on the company's records?

Accepted Answer

Since the lease is recorded as a finance lease and the cost of the asset is recorded, the company will need to depreciate the asset over its useful life. The straight-line method is being used, so the annual depreciation expense will be the recorded cost of $67,100 divided by the useful life of 10 years, which equals $6,710 per year. Therefore, choice A is correct. No information is provided about any interest expense, so choices C and D can be eliminated. Choice B is incorrect because the annual payments are $10,000, but this is not the same as the annual depreciation expense.

Question 12

Kaleidoscope Paint
On January 1, Year 1, this company issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of amortizing bond discounts and premiums. Refer to the PV table on pages 717 to 720 of the text.
-Refer to the figure Kaleidoscope Paint.What is the carrying value of the bonds after the first interest payment is made on June 30,Year 1? Refer to the PV table on pages 717 to 720 of the text..

Accepted Answer

$480,745 + ($24,037 - $22,500)= $482,282

Question 13

Kaleidoscope Paint
On January 1, Year 1, this company issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of amortizing bond discounts and premiums. Refer to the PV table on pages 717 to 720 of the text.
-Refer to the figure Kaleidoscope Paint.What will be the cash payment on June 30,Year 1?

Accepted Answer

$500,000 F1F1F1S1*F1F1F10 .09 x 6/12 = $22,500

Question 14

Kid Karate issued $100,000 of 6%,10-year bonds when the market rate of interest was 5%.The proceeds from this bond issue were $107,000.Using the effective interest method of amortization,what is the result on interest payments or amortization? Assume interest is paid annually.Refer to the PV table on pages 717 to 720 of the text..

Accepted Answer

$107,000 F1F1F1S1*F1F1F10 5% = $5,350 F1F1F1S1-F1F1F10 $6,000 = $-650

Question 15

Kauffman Tire Repair has leased a machine.The annual payments are $9,000.The life of the lease is seven years.It is estimated that the useful life of the machine is eight years.How will the company record this acquisition?

Accepted Answer

The company should record the machine as an asset at the present value of the annual cash payments, which is $9,000 for seven years, as that is the life of the lease. This is because, under a lease agreement, the lessee has the right to use the equipment for the duration of the lease, but does not own the equipment. Therefore, the cost of the equipment should not be recorded as an asset, but rather the present value of the lease payments.

Question 16

A company issued $1,000,000 of 10% notes that resulted in interest expense of $100,000 per year.What is the company's net cash outflow if the effective tax rate is 40%?

Accepted Answer

Interest expense $100,000 F1F1F1S1*F1F1F10 (1 F1F1F1S1-F1F1F10 .40)= $60,000

Question 17

Which of the following statements characteristic of leases?

Accepted Answer

Accounting standards recognize two primary types of leases: operating leases and finance leases (also known as capital leases in some frameworks), which are distinguished based on the extent to which the risks and rewards of ownership of the leased asset are transferred.

Question 18

With the effective interest method of amortization,what does the amortization of a bond discount result in?

Accepted Answer

Amortizing a bond discount using the effective interest method results in an increase in interest expense. This is because the effective interest method allocates the bond discount or premium over the life of the bond as an adjustment to interest expense. The interest expense recognized would be greater than the coupon rate of the bond because the discount reduces the effective interest rate of the bond.

Question 19

A company issued $500,000 of bonds for $498,351.Interest is paid semiannually.What are the bond markets and the financial press likely to report as the bond issue price?

Accepted Answer

$498,351 / $500,000 F1F1F1S1*F1F1F10 100 = 99.67

Question 20

Karuna Consulting leased a building on January 2,Year 1.The lease qualifies as an operating lease.The annual payments are $25,000 at the beginning of each year,and the life of the lease is 10 years.What entry would the company make on January 2,Year 1?

Accepted Answer

For an operating lease, the initial entry typically involves recognizing the lease payment as an expense or a prepaid asset when the payment is made at the beginning of the period. Since the payment is at the beginning of the year, it is recorded as Prepaid rent. The amount is $25,000, matching the annual payment, not the total for the 10 years.

Quiz 9: Long-Term Liabilities