Question 1

On its most recent balance sheet date, Lancer Corp.has notes payable totalling $250,000 with the United Bank.These are 90-day notes, renewable for another 90-day period.These notes should be classified on the balance sheet of Lancer Corp.as:

Accepted Answer

The notes payable are for a term of 90 days and are renewable for another 90-day period. Therefore, they are classified as current liabilities on the balance sheet.

Question 2

When accounting for the interest on bonds payable, the cash interest paid in each period is:

Accepted Answer

The cash interest paid on bonds payable is determined by the bond's face value and the stated (coupon) interest rate, which remains constant over the life of the bond regardless of whether the bond was sold at par, a discount, or a premium.

Question 3

Kinizi Incorporated sold a $10,000, 6%, 5-year bond for $9,189 to yield 8%.Interest is paid semi-annually.The company uses the effective interest method to amortize all bond premiums and discounts.What will be the interest expense on the first payment date?

Accepted Answer

To calculate the interest expense on the first payment date, we need to determine the semi-annual interest payment and the amortization of the bond discount.
Semi-annual interest payment = $10,000 x 6% x 0.5 = $300
Discount amortization = ($10,000 - $9,189) / 10 = $81.10
Interest expense on the first payment date = $300 + $81.10 = $381.10, which is closest to option B, $368.

Question 4

If a bond sells at a discount, the amortization of the discount will:

Accepted Answer

When a bond sells at a discount, it means that the bond's price is lower than its face value, resulting in a lower interest rate than the market rate. To compensate for this lower interest rate, the discount is amortized over the bond's life, which increases the interest expense. Therefore, choice A is the correct answer.

Question 5

When will a bond sell at its face value?

Accepted Answer

A bond will sell at its face value when the coupon rate is equal to the effective rate. This means that the bond's interest payments are equal to the market's required rate of return, resulting in investors being willing to pay the face value price for the bond.

Question 6

What is a loan that provides the borrower's property as collateral called?

Accepted Answer

A mortgage loan is a loan in which the borrower's property is used as collateral. The lender can take possession of the property if the borrower fails to repay the loan. Bonds and debentures are types of investments, while a note payable is a type of loan where there is no collateral involved.

Question 7

During 2014 PAG Ltd., a clothing store, sold gift certificates totalling $42,500.By December 31, $18,250 of them had been redeemed for merchandise.What would be reported on PAG's financial statements for 2014 related to the sale and redemption of the gift certificates?

Accepted Answer

Sales of $18,250 are recognized for the redeemed certificates, and $24,250 remains as unearned revenue for the unredeemed certificates.

Question 8

If a bond sells at a premium, the amortization of the premium will:

Accepted Answer

The premium on a bond represents the amount paid above the face value of the bond. This premium is amortized (gradually reduced) over the life of the bond, which decreases the effective interest expense. Therefore, the correct answer is B: the amortization of the premium will decrease the interest expense.

Question 9

What is the term for a formal borrowing arrangement that includes collateral, in which a borrower agrees to make periodic interest payments to the lender as well as repay the principal at a specific time in the future?

Accepted Answer

The answer of What is the term for a formal...

Question 10

What is the term for a formal borrowing arrangement that includes collateral in which a borrower agrees to make blended payments of principal and interest to the lender on a periodic basis until the debt has been paid?

Accepted Answer

The term for a formal borrowing arrangement that includes collateral and requires blended payments of principal and interest on a periodic basis is a mortgage. A bond is a long-term debt instrument that is generally issued by corporations, governments, or other entities to raise capital. A debenture is a type of bond that is not secured by collateral. A note payable is a written promise to pay a specific amount of money by a certain date.

Question 11

Iqualuit Inc.issued a 20-year, $100,000 bond with a semi-annual coupon rate of 4% when market interest rates were 6%.What were the proceeds of the bond at the time of issue?

Accepted Answer

The bond was issued at a discount because the coupon rate (4%) is lower than the market interest rate (6%). The proceeds are calculated by discounting the bond's cash flows (coupon payments and principal) at the market rate, resulting in $76,885.

Question 12

Prince Rupert Corporation issued a 15-year, $200,000 bond with a semi-annual coupon rate of 6% when market rates were 4%.What were the proceeds of the bond at the time of issue?

Accepted Answer

First, calculate the semi-annual coupon payment: 
Coupon payment = Bond face value x Semi-annual coupon rate 
Coupon payment = $200,000 x 6%/2 
Coupon payment = $6,000

Next, calculate the present value of the bond: 
PV = Coupon payment x [1 - (1 + r)^-n] / r + Face value / (1 + r)^n 
Where: 
r = Market rate / 2 = 4%/2 = 2% 
n = Number of semi-annual periods = 15 years x 2 = 30

PV = $6,000 x [1 - (1 + 2%)^-30] / 2% + $200,000 / (1 + 2%)^30 
PV = $6,000 x 22.1465 + $53,151.70 
PV = $177,762.70

Therefore, the proceeds of the bond at the time of issue were $244,791.78 rounded to the nearest dollar, not one of the given answer choices.

Question 13

Ralston Company sold and issued a $100,000, 10%, bond at 99.Which of the following statements is true?

Accepted Answer

The bond sold at a discount because it was sold at 99% of its face value. The coupon rate is irrelevant in determining whether a bond sells at a premium or a discount. The effective interest rate takes into account both the coupon rate and the selling price, so it cannot be used to determine whether the bond sold at a premium or a discount. Accrued interest is added to the selling price to determine the total cash received from the sale of the bond, but it has no bearing on whether the bond sold at a premium or a discount.

Question 14

Accounting for GST includes which of the following?

Accepted Answer

Crediting GST Payable is incorrect for recording GST paid on inventory for resale or GST collected from customers. Instead, GST paid on purchases (such as inventory for resale) is recorded by debiting GST Receivable, as it represents an amount recoverable from the tax authorities. GST collected from customers is credited to GST Payable, as it represents an amount owed to the tax authorities. Therefore, the correct option is C, which accurately describes debiting GST Payable to record GST paid to suppliers, aligning with the typical accounting treatment where increases in expenses or assets (like GST paid on purchases) are debited.

Question 15

Inuvik Inc.sold a 10-year, $100,000, 6% bond for $86,410 when the market rates were 8%.Interest is paid semi-annually.If Inuvik uses the effective interest rate method, which of the following is the correct entry to record the first interest payment? $$\begin{array} { l r r } 
\text { A) Dr Interest expense } & 3,000 \
\quad \text { Cr. Interest payable } & & 3,000 \
\text { B) Dr. Interest expense } & 3,000 & \
\text { Dr. Discount on bond } & 680 & \
\text { Cr. Cash } & & 3,680 \
\text { C) Dr. Interest expense } & 3,456 & \
\quad \text { Cr. Discount on bond } & & 456 \
\text { Cr. Cash } & & { 3,000 } \
\text { D) Dr. Discount on bond } & 3,456 & \
\quad \text { Cr. Cash } &  { 3,456 }
\end{array}$$

Accepted Answer

The effective interest rate method involves calculating interest expense based on the carrying amount of the bond and the market interest rate at issuance. The bond was issued at a discount ($86,410 for a $100,000 bond), and the market rate is 8% per annum, with interest paid semi-annually. Therefore, the first interest expense is calculated as $86,410 (carrying amount) * 4% (half of the 8% annual market rate) = $3,456. This includes the $3,000 cash payment (half of the 6% coupon rate on the $100,000 face value) and an additional $456 to amortize the discount on the bond. Thus, the correct entry is to debit Interest Expense for $3,456, credit Discount on Bond for $456 to reduce the discount, and credit Cash for $3,000 for the actual cash paid out.

Question 16

Timmins Ltd.is issuing bonds today to finance the expansion of their production facilities.If Timmins thinks that interest rates are going to fall over the next few years, while the bond is outstanding, what feature might they want to add to the bond?

Accepted Answer

If Timmins Ltd. anticipates a fall in interest rates in the future, they might prefer to issue callable bonds. This feature allows the issuer to redeem the bonds before their maturity date, typically at a premium. If interest rates do indeed fall, Timmins could refinance the debt at a lower cost by calling the existing bonds and reissuing new ones at the lower rates, thus saving on interest expenses.

Question 17

What is a bond that gives the issuer the option to repurchase the bond from investors at a time other than the maturity date called?

Accepted Answer

A callable bond gives the issuer the option to repurchase the bond from investors at a time other than the maturity date.

Question 18

Kinizi Incorporated sold a $10,000, 6%, 5-year bond for $9,189 to yield 8%.Interest is paid semi-annually.The company uses the effective interest method to amortize all bond premiums and discounts.How much of the discount is amortized at the first payment date?

Accepted Answer

The answer of Kinizi Incorporated sold a $10,000, 6%, 5-year...

Question 19

Wu Company estimates its annual warranty expenses at 2 percent of annual net sales.The following details are extracted from its financial statements: $\begin{array}{l}
\text {Net sales }&\$ 4,000,000\
\text { Warranty liability account: }\
\text { January } 1,2014, \text { balance } & \$ 70,000 \text { credit } \
\text { Warranty payments during } 2014 & \$ 60,000 \text { debit }
\end{array}$ After recording the 2014 warranty expense, the warranty liability account would show a December 31, 2014, balance of:

Accepted Answer

The annual warranty expense is estimated at 2% of annual net sales, which is 2% of $4,000,000 = $80,000. The beginning balance of the warranty liability account is a $70,000 credit. During the year, $60,000 is debited for warranty payments. To find the ending balance, add the annual warranty expense to the beginning balance and then subtract the payments: $70,000 + $80,000 - $60,000 = $90,000.

Question 20

Gander Inc.had a term loan outstanding throughout the year of $500,000 with an interest rate of 8%.They make interest payments quarterly, and the last one was November 30, 2013.The next payment on the loan, $50,000, is due December 31, 2013.What amount would be reported on Gander's income statement for the year ended December 31, 2013, related to the loan?

Accepted Answer

The annual interest expense is $500,000 * 8% = $40,000. Since interest payments are made quarterly, the total interest expense for the year is $40,000.

Quiz 9: Liabilities