Question 1

If a $6,000, 10 percent, 10-year bond was issued at 106 on October 1, how much will accrued interest payable be on December 31 if interest payments are made annually? (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.)

Accepted Answer

The annual interest on a $6,000 bond at 10 percent is $600. Since interest is paid annually and we're looking at the interest accrued from October 1 to December 31, this represents 3 months or a quarter of a year. Therefore, the accrued interest is 1/4 of the annual interest: $600 * 1/4 = $150. The issue price of the bond (106% of face value) does not affect the calculation of accrued interest.

Question 2

In a(n)_____ lease the lessee will record the lease by debiting an asset account and crediting Lease Payable.

Accepted Answer

Capital leases are recorded on the balance sheet as an asset (leased asset) and a liability (lease payable), whereas operating leases are recorded only as rent expense on the income statement. Short-term leases are leases with terms of 12 months or less, and long-term leases are leases with terms greater than 12 months. However, the lease accounting treatment depends on whether it is an operating lease or capital lease, not on the length of the lease term. Therefore, the best choice for this question is B, capital lease.

Question 3

On October 31, 2016, Renoir, Inc. recorded their semi-annual bond interest expense that contained a credit to Discount on bonds payable of $2,600. The adjusting entry on December 31, 2016 will show a credit to Discount on bonds payable of: (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar.)

Accepted Answer

The answer of On October 31, 2016, Renoir, Inc. recorded...

Question 4

$400,000 of 11%, 10-year bonds were sold for $370,000 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 11%, 10-year bonds were sold...

Question 5

A $430,000 issue of bonds that sold for $403,000 matures on August 1, 2020. The journal entry to record the payment of the bond on the maturity date is to:

Accepted Answer

When a bond matures, the company needs to pay back the face value of the bond to the bondholders, regardless of the price at which the bond was issued. In this case, the face value of the bond is $430,000. Therefore, the correct journal entry is to debit (decrease) Bonds Payable for $430,000 and credit (decrease) Cash for $430,000, reflecting the payment of the bond at its face value.

Question 6

Bonds payable minus the Discount on bonds payable yields the:

Accepted Answer

The carrying amount is the amount at which the bonds are recorded on the balance sheet and is calculated by subtracting the discount from the bonds payable. It represents the net liability of the company with respect to the bonds outstanding. The maturity value refers to the face value of the bonds, while the principle amount is the amount borrowed by the company when issuing the bonds. The annual interest is the amount of interest paid on the bonds each year.

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

If a $15,000, 8 percent, 20-year bond was issued at 95 on November 1, how much will accrued interest payable be on December 31 if interest payments are made annually? (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.)

Accepted Answer

Accrued interest = (Face value x Coupon rate x Days accrued) / 365= (15,000 x 0.08 x 61) / 365= $200

Question 9

A $260,000 issue of bonds that sold for $255,000 matures on June 25, 2020. The journal entry to record the payment of the bond on the maturity date is to:

Accepted Answer

When bonds mature, the company needs to pay back the face value of the bonds to the bondholders, regardless of the price at which the bonds were issued. In this case, the face value of the bonds is $260,000, so the company needs to debit Bonds Payable for $260,000 to remove the liability from its books and credit Cash for $260,000 to reflect the outflow of cash.

Question 10

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

Accepted Answer

Liabilities are a key component of the current ratio, which is a measure of a company's ability to pay off its short-term debts. If liabilities are classified incorrectly (e.g. long-term debt is classified as current debt), it can impact the current ratio and potentially give an inaccurate representation of the company's financial health.

Question 11

Leases that are treated as financed purchases are called:

Accepted Answer

Leases that are treated as financed purchases, where the lessee essentially owns the asset and is responsible for maintenance and other aspects of ownership, are classified as capital leases. Operating leases, on the other hand, are more like renting and do not involve transferring ownership of the asset. Expense leases and revenue leases are not commonly used accounting terms.

Question 12

On September 30, 2016, Illusions, Inc. recorded their semi-annual bond interest expense that contained a credit to Discount on bonds payable of $1,800. The adjusting entry on December 31, 2016 will show a credit to Discount on bonds payable of: (Round your final answer to the nearest dollar.)

Accepted Answer

The semi-annual bond interest expense was already recorded and included a credit to Discount on bonds payable. Therefore, the remaining balance of the discount account should be spread out evenly over the remaining life of the bonds until maturity. Since there are two semi-annual periods between September 30 and December 31, the amount of discount to be amortized for one period is $1,800/2 = $900. Therefore, the adjusting entry on December 31, 2016 will show a credit to Discount on bonds payable of $900.

Question 13

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 14

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 15

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

Accepted Answer

Accounts Payable is a current liability, not a long-term debt, and therefore it would not be listed under long-term debt.

Question 16

When a company issues bonds, what are they doing?

Accepted Answer

When a company issues bonds, it means that they are borrowing money from third parties. The bonds act as evidence of debt and the bondholders are essentially lending money to the company in exchange for interest payments and the eventual return of their principal investment.

Question 17

With regard to long-term debt, collateral represents?

Accepted Answer

Collateral refers to assets that are pledged to secure the repayment of a loan. These assets can include real estate, vehicles, equipment, or other valuable items that are owned by the borrower and can be used by the lender to recoup their losses if the borrower defaults on the loan. Options A, D, and B do not accurately represent collateral for long-term debt.

Question 18

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 19

What is the purpose of a bond discount?

Accepted Answer

A bond discount raises the effective interest rate of the bond to match the market interest rate at the time of issuance. This occurs because the bond is sold for less than its face value, and the difference between the purchase price and the face value at maturity effectively increases the yield to the investor, aligning it with current market rates.

Question 20

Capital leases are most similar to:

Accepted Answer

Capital leases are similar to mortgage notes as they involve the use of an asset (usually property) and require the lessee to make fixed payments over a period of time. The lessee also has the option to purchase the asset at the end of the lease term. Accounts payable and unearned revenue are both liabilities, but they do not involve the use of an asset in the same way that capital leases do. Regular notes payable may involve the borrowing of funds, but they do not necessarily involve the use of an asset as collateral, as is the case with a capital lease.

Quiz 9: Current Liabilities and Long-Term Debt