Question 1

Megan Company borrowed $12,000 from Bank of Maryland on December 1, 2019, and signed a 3-month, 8% Notes Payable. If Megan's accounting period ends on December 31, 2019, which of the following will not be true for Megan Company?

Accepted Answer

The answer of Megan Company borrowed $12,000 from Bank of...

Question 2

On December 1, Flint Company purchased $30,000 of equipment by issuing a 4-month, 10% note payable to Bank of Maryland. Assuming the company's accounting period ends on December 31, the entry recorded by Flint Company on the note maturity date will include:

Accepted Answer

The interest for a 4-month period on a $30,000 note at 10% annual interest rate is calculated as follows: $30,000 * 10% * (4/12) = $1,000. Since the accounting period ends on December 31 and the note was issued on December 1, only one month of interest, or $250 ($30,000 * 10% * (1/12)), would be recognized in the current period. The remaining $750 of interest ($1,000 total interest - $250 recognized in the current period) would be recognized in the following period when the note matures. Therefore, an increase to Interest Expense for $750 is correct, as it reflects the additional interest expense recognized at the note's maturity.

Question 3

Keck Company signed a three-month, 8% note on November 1, 2019 for the purchase of $60,000 of inventory. Assuming the company's accounting period ends on December 31, which one of the following statements is not correct?

Accepted Answer

The interest for the three-month period is $1,200 ($60,000 x 8% x 3/12). By December 31, 2019, two months of interest ($800) should be recorded as Interest Expense and Interest Payable. On February 1, 2020, the remaining one month of interest ($400) should be recorded, not $800.

Question 4

Justin Company signed a $90,000, three-month, 9% note payable, on December 1. If the accounting period ends on December 31, the entry made at the time of the note's maturity will include:

Accepted Answer

Interest Expense = Principal x Rate x Time= $90,000 x 9% x 3/12= $2,025

Question 5

Clean-All Inc. sells washing machines with a 2 year warranty. Clean-All estimates that total warranty costs are 3% of sales. In the year 2019, Clean-All recorded total sales of washing machines of $700,000. The balance in the Estimated Liability for Warranties account was $38,200 on December 31, 2018, and $25,600 on December 31, 2019.
What must have been the actual cost of repairs (covered under warranty) for the year 2019?

Accepted Answer

The estimated warranty cost for 2019 is 3% of $700,000, which is $21,000. The beginning balance was $38,200, and the ending balance was $25,600. Therefore, the actual cost of repairs is $38,200 + $21,000 - $25,600 = $33,600.

Question 6

Ranch Company estimates warranty expense as 5% of sales. On January 1, warranties payable was $10,000, and the December 31 liability for the warranty was $11,000. During the year Ranch recorded sales of $150,000.
The amount paid by Ranch during the year to meet its warranty obligations was:

Accepted Answer

Ranch Company estimates warranty expense as 5% of sales, so the warranty expense for the year is 5% of $150,000 = $7,500. The warranty payable increased from $10,000 to $11,000, indicating that the company added $1,000 more to its liability than it paid out. Therefore, the amount paid to meet warranty obligations is the new expense ($7,500) minus the increase in liability ($1,000), which equals $6,500.

Question 7

Felicity Company sells computers with a 6-month warranty. It is estimated that 2% of all units sold will need repairs under warranty at an estimated cost of $200 per unit. During January, the company sold 100,000 computers at $1,750 each, and 1,500 computers were turned in for repairs during that same month. The total actual repairs costs amounted to $185,000 from the computer parts inventory. The balance in the Estimated Warranty Liability Account on January 1 was $15,000.
What is the balance in the Estimated Warranty Liability Account at the end of January?

Accepted Answer

The balance in the Estimated Warranty Liability Account at the end of January is $230,000. This is calculated as follows:Beginning balance: $15,000Add: Estimated warranty liability for January: $215,000Less: Actual warranty repairs: $185,000Ending balance: $230,000The estimated warranty liability for January is calculated as follows:Number of units sold: 100,000Estimated percentage of units needing repairs: 2%Number of units estimated to need repairs: 2,000Estimated cost per unit: $200Estimated warranty liability: $400,000

Question 8

Alan Company issues bonds with a par value of $800,000 on their issue date. The bonds mature in 5 years and pay 6% annual interest in semiannual payments. On the issue date, the market rate of interest (annual) is 8%.
Compute the price of the bonds on their issue date (rounded to the nearest dollar).

Accepted Answer

The answer of Alan Company issues bonds with a par...

Question 9

Jordan Corporation issued $300,000 of 15-year bonds on January 1. The bonds pay interest on January 1 and July 1 with a stated annual rate of 8 percent.
If the market rate of annual interest at the time the bonds are sold is 6 percent, what will be the issue price of the bonds?

Accepted Answer

The issue price of the bonds will be higher than their face value because the stated interest rate (8%) is higher than the market interest rate (6%) at the time of issuance. This means the bonds will be issued at a premium. To calculate the issue price, we need to discount the future cash flows (interest payments and the principal repayment) back to their present value using the market interest rate of 6%. The correct calculation involves using the present value formula for an annuity (to calculate the present value of the interest payments) and the present value formula for a single sum (to calculate the present value of the principal repayment). The sum of these two present values gives the total issue price of the bonds, which is $358,802 in this case.

Question 10

When the market rate of interest was 10%, Wallace Corporation issued $1,000,000, 12%, 8-year bonds that pay interest semiannually. The selling price of this bond issue was:

Accepted Answer

The bonds were issued at a premium because the coupon rate (12%) is higher than the market rate of interest (10%). This means the bonds offer more interest than the current market rate, making them more valuable. The exact selling price can be calculated using the present value of an annuity formula for the semiannual interest payments and the present value formula for the lump sum principal payment at maturity. The correct calculation results in option C, $1,108,376, as the selling price.

Question 11

On January 1, Andrew Company issues $320,000, 15 year, 8% bonds (paying semiannual interest) for $360,800, when the annual market rate of interest is 6%.
If the company uses the effective interest method of amortization, the journal entry to record the semi-annual interest on June 30 will include a:

Accepted Answer

The premium on bonds payable is amortized over the life of the bond. Using the effective interest method, the interest expense is calculated based on the carrying amount of the bond and the market rate. The difference between the interest expense and the cash interest payment is the amortization of the premium. Here, the premium amortization is $1,976.

Question 12

Jared Company issued 6%, 5-year bonds, with par value of $800,000, paying semiannual interest, for $745,464. The annual market rate of interest on the date of issue was 8%.
Assuming effective interest method of amortization, calculate the bond interest expense on the first interest payment date.

Accepted Answer

The correct answer is A.The bond interest expense on the first interest payment date is $29,819. This is calculated as follows:Bond interest expense = (Carrying value of bonds x Annual market rate of interest) / 2Carrying value of bonds = $745,464Annual market rate of interest = 8%Bond interest expense = ($745,464 x 8%) / 2= $29,819

Question 13

On January 1, Alicia Company borrowed $25,000 cash by signing an 8 year, 7% mortgage note that requires equal total payments of $4,187 on December 31 of each year.
The balance in the Note Payable account after the first payment is made is:

Accepted Answer

The first payment of $4,187 includes both interest and principal repayment. The interest for the first year is $1,750 (7% of $25,000). Therefore, the principal repayment is $4,187 - $1,750 = $2,437. The new balance is $25,000 - $2,437 = $22,563.

Question 14

C-Mart Industries issued bonds with a face value of $6,000,000 and a coupon rate of 5% paid semiannually for 4 years. The market rate of interest is 6%.
How much is the market value of the bond using a present value table?

Accepted Answer

The market value of the bond is calculated by discounting the future cash flows (interest payments and the principal repayment) back to their present value using the market rate of interest. The bond pays semiannual interest, so the coupon payment is 5% of $6,000,000 divided by 2, which is $150,000 every six months. Over 4 years, there are 8 payments. The present value of these payments plus the present value of the principal amount (discounted back at the market rate of 6% per annum, or 3% per semiannual period) gives the market value of the bond. The correct calculation aligns with option B, $5,789,414, when using the present value tables for both the annuity (interest payments) and the lump sum (principal repayment) at the market rate.

Question 15

Core Earth Company gave a creditor a 90-day, 6% note payable for $14,000 on December 1, 2019. 
Required:
a. What amount of interest will be accrued as of December 31, 2019?
b. Where will this amount be reported in the company's financial statements?

Accepted Answer

The answer of Core Earth Company gave a creditor a...

Question 16

Indicate the proper financial classification (balance sheet or income statement) for each of the following accounts:
a. Accrued interest payable
b. Bonds payable
c. Mortgage interest expense
d. Bonds due to be paid within 12 months

Accepted Answer

The answer of Indicate the proper financial classification (balance sheet...

Question 17

Calculate the interest accrued for each of the following notes payable owed by Circle Rope Company as of December 31, 2019:

Accepted Answer

The answer of Calculate the interest accrued for each of...

Question 18

Determine how each of the following transactions affect liabilities.
a. Payment to employees for wages previously accrued
b. Accrue interest of $100 on a note payable
c. Payment of $90 to bank for interest accrued on a note payable

Accepted Answer

The answer of Determine how each of the following transactions...

Question 19

Gander Mountain took out a one-year, 6%, $50,000 to be repaid on April 1, 2020. Interest is due when the loan is repaid. How much interest should be accrued at December 31, 2019, and how should it be recorded in the financial statements?

Accepted Answer

The answer of Gander Mountain took out a one-year, 6%,...

Question 20

The following items represent various types of liabilities.
1. A manufacturing company is sued for alleged product liability. The company's attorney does not feel that the suit will result in liability to the company, but a loss is possible. If adversely adjudicated, the liability would be material. 
2. Omega has sold products to Bright Eye Jewelers, a retailer that sold the products to customers. The manufacturer's warranty offers replacement of the product if it is found to be defective within 90 days of the sale to the consumer. Historically, 0.06% of the products are returned for replacement.
3. A customer has filed a lawsuit for a minor amount against Bright Eye Jewelers. Bright Eye's attorneys have reviewed the case and have found that many similar cases have never been awarded to the plaintiff. 
Identify if the above independent situations should be (a) recorded in the financial statements, (b) disclosed in a footnote in the financial statements, or (c) neither.

Accepted Answer

The answer of The following items represent various types of...

Quiz 9: Liabilities

Megan Company borrowed $12,000 from Bank of Maryland on December 1, 2019, and signed a 3-month, 8% Notes Payable. If Megan's accounting period ends on December 31, 2019, which of the following will not be true for Megan Company?

On December 1, Flint Company purchased $30,000 of equipment by issuing a 4-month, 10% note payable to Bank of Maryland. Assuming the company's accounting period ends on December 31, the entry recorded by Flint Company on the note maturity date will include:

Keck Company signed a three-month, 8% note on November 1, 2019 for the purchase of $60,000 of inventory. Assuming the company's accounting period ends on December 31, which one of the following statements is not correct?

Justin Company signed a $90,000, three-month, 9% note payable, on December 1. If the accounting period ends on December 31, the entry made at the time of the note's maturity will include:

Ranch Company estimates warranty expense as 5% of sales. On January 1, warranties payable was $10,000, and the December 31 liability for the warranty was $11,000. During the year Ranch recorded sales of $150,000. The amount paid by Ranch during the year to meet its warranty obligations was:

Jordan Corporation issued $300,000 of 15-year bonds on January 1. The bonds pay interest on January 1 and July 1 with a stated annual rate of 8 percent. If the market rate of annual interest at the time the bonds are sold is 6 percent, what will be the issue price of the bonds?

When the market rate of interest was 10%, Wallace Corporation issued $1,000,000, 12%, 8-year bonds that pay interest semiannually. The selling price of this bond issue was:

Jared Company issued 6%, 5-year bonds, with par value of $800,000, paying semiannual interest, for $745,464. The annual market rate of interest on the date of issue was 8%. Assuming effective interest method of amortization, calculate the bond interest expense on the first interest payment date.

On January 1, Alicia Company borrowed $25,000 cash by signing an 8 year, 7% mortgage note that requires equal total payments of $4,187 on December 31 of each year. The balance in the Note Payable account after the first payment is made is:

C-Mart Industries issued bonds with a face value of $6,000,000 and a coupon rate of 5% paid semiannually for 4 years. The market rate of interest is 6%. How much is the market value of the bond using a present value table?

Core Earth Company gave a creditor a 90-day, 6% note payable for $14,000 on December 1, 2019. Required: a. What amount of interest will be accrued as of December 31, 2019? b. Where will this amount be reported in the company's financial statements?

Indicate the proper financial classification (balance sheet or income statement) for each of the following accounts: a. Accrued interest payable b. Bonds payable c. Mortgage interest expense d. Bonds due to be paid within 12 months

Calculate the interest accrued for each of the following notes payable owed by Circle Rope Company as of December 31, 2019:

Determine how each of the following transactions affect liabilities. a. Payment to employees for wages previously accrued b. Accrue interest of $100 on a note payable c. Payment of $90 to bank for interest accrued on a note payable

Gander Mountain took out a one-year, 6%, $50,000 to be repaid on April 1, 2020. Interest is due when the loan is repaid. How much interest should be accrued at December 31, 2019, and how should it be recorded in the financial statements?