CH 10

CHAPTER 10
REPORTING AND ANALYZING LIABILITIES

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT
True-False Statements
1. 1 K 15. 3 K 29. 4 K 43. 5 C *57. 8 C
2. 1 K 16. 3 K 30. 4 K 44. 5 C *58. 8 C
3. 1 K 17. 3 C 31. 4 C 45. 5 C *59. 9 K
4. 1 K 18. 3 AN 32. 4 C 46. 5 C *60. 9 C
5. 2 K 19. 3 K 33. 4 C 47. 5 K *61. 9 K
6. 2 K 20. 3 K 34. 4 K 48. 5 AP *62. 9 K
7. 2 K 21. 3 C 35. 5 C 49. 6 K *63. 10 C
8. 2 K 22. 4 K 36. 5 C 50. 6 AP *64. 10 C
9. 2 K 23. 4 K 37. 5 C 51. 7 K *65. 10 C
10. 2 K 24. 4 K 38. 5 C 52. 7 K *66. 10 C
11. 2 K 25. 4 K 39. 5 K 53. 7 K
12. 2 K 26. 4 K 40. 5 C *54. 8 K
13. 3 K 27. 4 K 41. 5 C *55. 8 K
14. 3 K 28. 4 K 42. 5 K *56. 8 C
Multiple Choice Questions
67. 1 K 99. 3 K 131. 4 AP 163. 5 K 195. 6 K
68. 1 K 100. 3 C 132. 4 K 164. 5 AP 196. 6 AP
69. 1 K 101. 3 C 133. 4 K 165. 5 AP 197. 6 AP
70. 1 K 102. 3 K 134. 4 C 166. 5 AP 198. 6 AP
71. 1 C 103. 3 K 135. 4 K 167. 5 K 199. 6 C
72. 1 C 104. 3 K 136. 4 K 168. 5 K 200. 7 C
73. 1 K 105. 3 AP 137. 4 K 169. 5 C 201. 7 K
74. 1 K 106. 3 AP 138. 4 K 170. 5 C 202. 7 K
75. 1 K 107. 3 AP 139. 4 K 171. 5 C 203. 7 K
76. 2 K 108. 3 AP 140. 4 K 172. 5 C 204. 7 AP
77. 2 AP 109. 3 AN 141. 4 K 173. 5 C 205. 7 K
78. 2 AP 110. 3 AN 142. 4 K 174. 5 K 206. 7 K
79. 2 AP 111. 3 AN 143. 4 K 175. 5 K 207. 7 AP
80. 2 AP 112. 3 AN 144. 4 K 176. 5 K 208. 7 AN
81. 2 AP 113. 3 AP 145. 4 AP 177. 5 K 209. 7 AP
82. 2 AP 114. 3 AP 146. 4 AP 178. 5 AP 210. 7 AP
83. 2 C 115. 3 AP 147. 4 AP 179. 5 AP *211. 8 AP
84. 2 AP 116. 3 AP 148. 4 AP 180. 5 AP *212. 8 AP
85. 2 AP 117. 3 AP 149. 4 K 181. 5 C *213. 8 AP
86. 2 AP 118. 3 AP 150. 4 K 182. 5 AP *214. 8 AP
87. 2 AP 119. 3 AP 151. 4 K *183. 8 AP *215. 8 AP
88. 2 AP 120. 3 AP 152. 4 K *184. 8 AP *216. 8 AP
89. 2 AP 121. 3 AP 153. 5 K 185. 6 AP *217. 8 AP
90. 2 AP 122. 3 AP 154. 5 C 186. 5 AP *218. 8 AN
91. 2 C 123. 3 AP 155. 5 AP *187. 8 AP *219. 8 C
92. 3 C 124. 3 AP 156. 5 AP *188. 8 AP *220. 8 C
93. 3 K 125. 3 AP 157. 5 C 189. 6 AP *221. 8 AP
94. 3 K 126. 3 AP 158. 5 AP 190. 6 AP *222. 8 AP
95. 3 AP 127. 3 AP 159. 5 AP 191. 6 AP *223. 8 K
96. 3 AP 128. 3 AP 160. 5 K 192. 6 AP *224. 8 AP
97. 3 AN 129. 3 AP 161. 5 K 193. 6 AP *225. 8 AP
98. 3 AN 130. 4 K 162. 5 K 194. 6 AP *226. 8 AP
FOR INSTRUCTOR USE ONLY

10-2 Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition
Multiple Choice Questions (Cont.)

*227. 8 AP *232. 9 AP *237. 9 C *242. 10 AP *247. 10 AP
*228. 8 AP *233. 9 AP *238. 9 C *243. 10 AP *248. 10 AP
*229. 9 K *234. 9 AP *239. 10 K *244. 10 AP *249. 10 AP
*230. 9 AP *235. 9 AP *240. 10 AP *245. 10 AP *250. 10 AP
*231. 9 AP *236. 9 C *241. 10 AP *246. 10 AP
Brief Exercises
251. 1 AP 253. 3 AP 255. 3 AP 257. 5 AP *259. 8 AP
252. 2 AP 254. 3 AN 256. 4 AP 258. 5 AP *260. 9 AP
Exercises
261. 1,7 AP 265. 3 AP 269. 7 AP *273. 5,8 AP *277. 3,9 AP
262. 2 AP 266. 3 AP 270. 7 AN *274. 5,6,8 AP *278. 10 AP
263. 2 AP 267. 6 AP *271. 5,8 AP *275. 5,6,8 AP
264. 2 AP 268. 7 AP *272. 5,8 AP *276. 3, 9 AP
Completion Statements
279. 1 K 283. 3 K 287. 4 K 291. 5 K
280. 1 K 284. 3 K 288. 5 K 292. 7 K
281. 2 K 285. 4 K 289. 5 K 293. 7 K
282. 2 K 286. 4 K 290. 5 AP *294. 8 K
Matching
295. 4, 5
7, 8 K
Short Answer Essay
296. 3 K 299. 5 K 302. 7 K 305. 5 C
297. 4 K 300. 5 C *303. 9 C
298. 4 K 301. 6 C 304. 1 E
*This topic is dealt with in an Appendix to the chapter.
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Learning Objective 1
Item Type Item Type Item Type Item Type Item Type Item Type
1. TF 4. TF 69. MC 72. MC 75. MC 279. C
2. TF 67. MC 70. MC 73. MC 251. Be 280. C
3. TF 68. MC 71. MC 74. MC 261. Ex 304. SA
5. TF 10. TF 78. MC 83. MC 88. MC 262. Ex
6. TF 11. TF 79. MC 84. MC 89. MC 263. Ex
7. TF 12. TF 80. MC 85. MC 90. MC 264. Ex
8. TF 76. MC 81. MC 86. MC 91. MC 281. C
9. TF 77. MC 82. MC 87. MC 252. Be 282. C

Reporting and Analyzing Liabilities 10-3
13. TF 93. MC 103. MC 113. MC 123. MC 265. Ex
14. TF 94. MC 104. MC 114. MC 124. MC 266. Ex
15. TF 95. MC 105. MC 115. MC 125. MC 283. C
16. TF 96. MC 106. MC 116. MC 126. MC 284. C
17. TF 97. MC 107. MC 117. MC 127. MC 296. SA
18. TF 98. MC 108. MC 118. MC 128. MC
19. TF 99. MC 109. MC 119. MC 129. MC
20. TF 100. MC 110. MC 120. MC 253. Be
21. TF 101. MC 111. MC 121. MC 254. Be
92. MC 102. MC 112. MC 122. MC 255. Be
22. TF 29. TF 133. MC 140. MC 147. MC 285. C
23. TF 30. TF 134. MC 141. MC 148. MC 286. C
24. TF 31. TF 135. MC 142. MC 149. MC 287. C
25. TF 22. TF 136. MC 143. MC 150. MC 295. Ma
26. TF 33. TF 137. MC 144. MC 151. MC 297. SA
27. TF 34. TF 138. MC 145. MC 152. MC 298. SA
28. TF 132. MC 139. MC 146. MC 256. Be
35. TF 45. TF 159. MC 169. MC 179. MC 274. Ex
36. TF 46. TF 160. MC 170. MC 180. MC 275. Ex
37. TF 47. TF 161. MC 171. MC 181. MC 288. C
38. TF 48. TF 162. MC 172. MC 182. MC 289. C
39. TF 153. MC 163. MC 173. MC 186. MC 290. C
40. TF 154. MC 164. MC 174. MC 257. Be 291. C
41. TF 155. MC 165. MC 175. MC 258. Be 295. Ma
42. TF 156. MC 166. MC 176. MC 271. Ex 299. SA
43. TF 157. MC 167. MC 177. MC 272. Ex 300. SA
44. TF 158. MC 168. MC 178. MC 273. Ex 305. SA
49. TF 189. MC 192. MC 195. MC 198. MC 301. SA
50. TF 190. MC 193. MC 196. MC 199. MC
185. MC 191. MC 194. MC 197. MC 267. Ex
51. TF 201. MC 205. MC 209. MC 269. Ex 295. Ma
52. TF 202. MC 206. MC 210. MC 270. Ex 302. SA
53. TF 203. MC 207. MC 261. Ex 292. C
200. MC 204. MC 208. MC 268. Ex 293. C

54. TF 184. MC 214. MC 220. MC 226. MC 273. Ex
55. TF 187. MC 215. MC 221. MC 227. MC 274. Ex
56. TF 188. MC 216. MC 222. MC 228. MC 275. Ex
57. TF 211. MC 217. MC 223. MC 259. Be 295. Ma
58. TF 212. MC 218. MC 224. MC 271. Ex
183. MC 213. MC 219. MC 225. MC 272. Ex
59. TF 62. TF 231. MC 234. MC 237. MC 276. Ex
60. TF 229. MC 232. MC 235. MC 238. MC 277. Ex
61. TF 230. MC 233. MC 236. MC 260. Be 303. SA
63. TF 66. TF 241. MC 244. MC 247. MC 250. MC
64. TF 239. MC 242. MC 245. MC 248. MC 278. Ex
65. TF 240. MC 243. MC 246. MC 249. MC
Note: TF = True-False C = Completion

MC = Multiple Choice Ex = Exercise
Ma = Matching SA = Short Answer Essay
Be = Brief Exercise
CHAPTER LERANING OBJECTIVES

1. Explain a current liability and identify the major types of current liabilities. A current
liability is a debt that a company can reasonably expect to pay (a) from existing current
assets or through the creation of other current liabilities, and (b) within one year or the
operating cycle, whichever is longer. The major types of current liabilities are notes payable,
accounts payable, sales taxes payable, unearned revenues, and accrued liabilities such as
taxes, salaries and wages, and interest payable.
2. Describe the accounting for notes payable. When a promissory note is interest–bearing,
the amount of assets received upon the issuance of the note is generally equal to the face
value of the note, and interest expense is accrued over the life of the note. At maturity, the
amount paid is equal to the face value of the note plus accrued interest.
3. Explain the accounting for other current liabilities. Companies record sales taxes
payable at the time the related sales occur. The company serves as a collection agent for the
taxing authority. Sales taxes are not an expense to the company. Companies hold employee
withholding taxes, and credit them to appropriate liability accounts, until they remit these
taxes to the governmental taxing authorities. Unearned revenues are initially recorded in an
unearned revenue account. As the company recognizes revenue, a transfer from unearned
revenue to revenue occurs. Companies report the current maturities of long-term debt as a
current liability in the balance sheet.
4. Identify the types of bonds. The following different types of bonds may be issued: secured
and unsecured bonds, and convertible and callable bonds.

5. Prepare the entries for the issuance of bonds and interest expense. When companies
issue bonds, they debit Cash for the cash proceeds and credit Bonds Payable for the face
value of the bonds. In addition, they use the accounts Premium on Bonds Payable and
Discount on Bonds Payable to show the bond premium and bond discount, respectively.
Bond discount and bond premium are amortized over the life of the bond, which increases or
decreases interest expense, respectively.
6. Describe the entries when bonds are redeemed. When companies redeem bonds at
maturity, they credit Cash and debit Bonds Payable for the face value of the bonds. When
companies redeem bonds before maturity, they (a) eliminate the carrying value of the bonds
at the redemption date, (b) record the cash paid, and (c) recognize the gain or loss on
redemption.
7. Identify the requirements for the financial statement presentation and analysis of
liabilities. Current liabilities appear first on the balance sheet, followed by long-term
liabilities. Companies should report the nature and amount of each liability in the balance
sheet or in schedules in the notes accompanying the statements. They report inflows and
outflows of cash related to the principal portion of long-term debt in the financing section of
the statement of cash flows.
The liquidity of a company may be analyzed by computing the current ratio. The long-run
solvency of a company may be analyzed by computing the debt to assets ratio and the times
interest earned ratio. Other factors to consider are contingent liabilities and lease obligations.
*8. Apply the straight-line method of amortizing bond discount and bond premium. The
straight-line method of amortization results in a constant amount of amortization and interest
expense per period.
*9. Apply the effective-interest method of amortizing bond discount and bond premium.
The effective-interest method results in varying amounts of amortization and interest
expense per period but a constant percentage rate of interest. When the difference between
the straight-line and effective-interest method is material, GAAP requires use of the effective-
interest method.
*10. Describe the accounting for long-term notes payable. Each payment consists of (1)
interest on the unpaid balance of the loan, and (2) a reduction of loan principal. The interest
decreases each period, while the portion applied to the loan principal increases each period.
TRUE-FALSE STATEMENTS
1. A current liability must be paid out of current earnings.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
2. If any portion of a long-term debt is to be paid in the next year, the entire debt should be
classified as a current liability.
Reporting
3. Current liabilities are expected to be paid within one year or the operating cycle,
whichever is longer.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

4. A company whose current liabilities exceed its current assets may have a liquidity
problem.
Business Economics
5. Interest expense is reported under Other Expenses and Losses in the income statement.
Reporting
6. Notes payable usually require the borrower to pay interest.

Business Economics
7. Notes payable are often used instead of accounts payable.

Business Economics
8. A note payable must always be paid before an account payable.

Business Economics
9. A $20,000, 8%, 9-month note payable requires an interest payment of $1,200 at maturity.
Ans: T, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA
10. Most notes are not interest bearing.

Business Economics
11. With an interest-bearing note, the amount of cash received upon issuance of the note
generally exceeds the note's face value.
Business Economics
12. Interest expense on a note payable is only recorded at maturity.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
13. Current maturities of long-term debt refers to the amount of interest on a note payable that
must be paid in the current year.
Business Economics
14. Unearned revenues should be classified as Other Revenues and Gains on the income
statement.
Reporting
15. The higher the sales tax rate, the more profit a retailer can earn.
Business Economics
16. When a business sells an item and collects a state sales tax on it, a current liability arises.
Reporting

17. If a retailer sells goods for a total price of $200, which includes a 5% sales tax, the amount
of the sales tax is $9.52.
Ans: T, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
18. During the month, a company sells goods for a total of $106,000, which includes sales
taxes of $6,000; therefore, the company should recognize $100,000 in Sales Revenue
and $6,000 in Sales Tax Expense.
Ans: F, LO: 3, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
19. Payroll taxes include the employer’s share of Social Security taxes as well as state and
federal unemployment taxes.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics
20. Unearned revenues are received before goods are delivered or services are rendered.
21. Metropolitan Symphony sells 200 season tickets for $40,000 that includes a five-concert
season. The amount of Unearned Ticket Revenue after the third concert is $24,000.
Ans: F, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
22. The contractual interest rate is always equal to the market rate of interest on the date that
bonds are issued.
Business Economics
23. Each bondholder may vote for the board of directors in proportion to the number of bonds
held.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA:
Business Economics
24. Bond interest paid by a corporation is an expense, whereas dividends paid are not an
expense of the corporation.
25. Generally, convertible bonds do not pay interest.

26. An unsecured bond is one that is issued against the general credit of the borrower.
27. Bonds are a form of interest-bearing notes payable.

Reporting
28. Neither corporate bond interest nor dividends are deductible for tax purposes.
Reporting

29. The face value is the amount of principal and interest due at the maturity date.
Reporting
30. Convertible bonds are often called callable bonds.

Business Economics
31. A $150,000 bond with a quoted priced of 102 ¼ is sold for $153,375.
32. If a bond has a stated value of $1,000 and a contractual interest rate of 6 percent, then
the interest paid annually will be $60.
33. The current market value of a bond is equal to the present value of all future cash
payments promised by the bond.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
34. The board of directors may authorize more bonds than are issued.
35. The carrying value of bonds is calculated by adding the balance of the Discount on Bonds
Payable account to the balance in the Bonds Payable account.
Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
36. The carrying value of a bond is equal to the market price on the date of sale.
Reporting
37. Total interest cost for a bond issued at a premium equals the total of the periodic interest
payments added to the premium.
Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
38. Total interest cost for a bond issued at a premium equals the total of the periodic interest
payments minus the premium.
Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
39. The calculation of interest to be paid each interest period in connection with a bond
payable is not influenced by any premium or discount upon issuance.
IMA: FSA
40. If $150,000 face value bonds are issued at 102, the proceeds received will be $102,000.
IMA: FSA
41. If bonds sell at a premium, the interest expense recognized each year will be greater than
the bond interest paid.
Reporting

42. If the market rate of interest at the date of issuance of a bond is greater than the stated
interest rate, the bond will be issued at a premium.
IMA: FSA
43. If a corporation issued bonds at an amount less than face value, it indicates that the
corporation has a weak credit rating.
Business Economics
44. A corporation that issues bonds at a discount will recognize interest expense at a rate
which is greater than the market rate of interest.
Reporting
45. If bonds are issued at a discount, the issuing corporation will pay a principal amount less
than the face amount of the bonds on the maturity date.
Business Economics
46. If bonds are issued at a premium, the carrying value of the bonds will be greater than the
face value of the bonds for all periods prior to the bond maturity date.
Reporting
47. If the market rate of interest is greater than the contractual rate of interest, bonds will sell
at a discount.
Reporting
48. If $180,000, 6%, bonds are issued on January 1, and pay interest annually, the amount of
interest paid will be $10,800.
Ans: T, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
49. Material gains or losses on bond redemption are reported as an extraordinary item on the
income statement.
Reporting
50. If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss
on redemption will be recorded.
Ans: T, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
51. The classification of a liability as current or noncurrent is important because it may affect
the evaluation of a company’s liquidity.
Reporting
52. The debt to assets ratio measures the percentage of the total assets provided by
creditors.
Business Economics
53. The times interest earned is computed by dividing net income by interest expense.
Business Economics
*54. Premium on bonds payable may be amortized by the straight-line method if the results
obtained by its use do not materially differ from the results obtained by use of the
effective-interest method.
Business Economics
*55. Discount on bonds payable may be amortized by the straight-line method if the results
obtained by its use do not materially differ from the results obtained by use of the
effective-interest method.
Business Economics
*56. If the straight-line method of amortization is used, the amount of unamortized premium on
bonds payable will increase as the bonds approach maturity.
Reporting
*57. If the straight-line method of amortization is used, the amount of unamortized premium on
bonds payable will decrease as the bonds approach maturity.
Reporting
*58. If the straight-line method of amortization is used, the amount of yearly interest expense
will increase as the bonds approach maturity.
Reporting
*59. When the effective-interest method of amortization is used, the amount of interest
expense for a given period is calculated by multiplying the face rate of interest by the
bond’s carrying value at the beginning of the given period.
IMA: FSA
*60. Regardless of whether the straight-line method or the effective-interest method is used,
the carrying value of a bond issued at a discount will decrease continually over the bond’s
life.
Reporting
*61. The effective-interest method produces a constant dollar amount of interest expense to be
reported each interest period.
Reporting
*62. When there are material differences between the results of using the straight-line method
and using the effective-interest method of amortization, the effective-interest method
should be used.
Reporting
*63. In a monthly mortgage payment, the same amount is recorded as interest expense as in
the previous month’s payment.
IMA: FSA

*64. When a monthly mortgage payment is made and recorded, the debit to Mortgage Payable
represents the reduction in the principal balance.
IMA: FSA
*65. An installment note calling for equal total payments each period will result in an interest
portion that decreases in each successive period.
IMA: FSA
*66. An installment note calling for equal total payments each period will result in a principal
portion that decreases in each successive period.
IMA: FSA
Answers to True-False Statements

1. F 12. F 23. F 34. T 45. F *56. F
2. F 13. F 24. T 35. F 46. T *57. T
3. T 14. F 25. F 36. T 47. T *58. F
4. T 15. F 26. T 37. F 48. T *59. F
5. T 16. T 27. T 38. T 49. F *60. F
6. T 17. T 28. F 39. T 50. T *61. F
7. T 18. F 29. F 40. F 51. T *62. T
8. F 19. T 30. F 41. F 52. T *63. F
9. T 20. T 31. T 42. F 53. F *64. T
10. F 21. F 32. T 43. F *54. T *65. T
11. F 22. F 33. T 44. F *55. T *66. F
MULTIPLE CHOICE QUESTIONS
67. Liabilities are classified on the balance sheet as current or

a. deferred.
b. unearned.
c. long-term.
d. accrued.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
68. Most companies pay current liabilities

a. out of current assets.
b. by issuing interest-bearing notes payable.
c. by issuing stock.
d. by creating long-term liabilities.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
69. A current liability is a debt that can reasonably be expected to be paid

a. within one year, or the operating cycle, whichever is longer.
b. between 6 months and 18 months.
c. out of currently recognized revenues.
d. out of cash currently on hand.
Reporting

70. Which of the following most likely would be classified as a current liability?
a. Dividends payable
b. Bonds payable in 5 years
c. Three-year notes payable
d. Mortgage payable as a single payment in 10 years
Reporting
71. Failure to record a liability will probably

a. result in an overstated net income.
b. result in overstated total liabilities and owner’s equity.
c. have no effect on net income.
d. result in understated total assets.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
72. Very often, failure to record a liability means failure to record a(n)
a. revenue.
b. asset conversion.
c. footnote.
d. expense.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
73. Current liabilities are due

a. but not receivable for more than one year.
b. but not payable for more than one year.
c. and receivable within one year.
d. and payable within one year.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
74. Liabilities are classified as current or long-term based on their

a. description.
b. payment terms.
c. due date.
d. amount.
Reporting
75. Which of the following is not a current liability on December 31, 2014?
a. A Note Payable due December 31, 2015
b. An Accounts Payable due January 31, 2015
c. A lawsuit judgment to be decided on January 10, 2015
d. Accrued salaries payable from 2014
Reporting
76. With an interest-bearing note, the amount of assets received upon issuance of the note is
generally
a. equal to the note's face value.
b. greater than the note's face value.
c. less than the note's face value.
d. equal to the note's maturity value.

Reporting
77. Moss County Bank agrees to lend the Sadowski Brick Company $300,000 on January 1.
Sadowski Brick Company signs a $300,000, 6%, 9-month note. The entry made by
Sadowski Brick Company on January 1 to record the proceeds and issuance of the note is
a. Interest Expense.............................................................13,500
Cash. ..........................................................................286,500
Notes Payable................................................................ 300,000
b. Cash ..........................................................................300,000
Notes Payable................................................................ 300,000
c. Cash ..........................................................................300,000
Interest Expense ............................................................13,500
Notes Payable ............................................................... 313,500
d. Cash ..........................................................................300,000
Interest Expense.............................................................13,500
Notes Payable................................................................ 300,000
Interest Payable............................................................. 13,500
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Solution: $300,000 face value
Sadowski Brick Company signs a $300,000, 6%, 9-month note. What is the adjusting
entry required if Sadowski Brick Company prepares financial statements on June 30?
a. Interest Expense...............................................................9,000
b. Interest Expense...............................................................9,000
Cash.............................................................................. 9,000
c. Interest Payable................................................................9,000
Cash.............................................................................. 9,000
d. Interest Payable................................................................9,000
Interest Expense............................................................ 9,000
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Solution: $300,000  .06  6/12  $9,000
Sadowski Brick Company signs a $300,000, 6%, 9-month note. What entry will Sadowski
Brick Company make to pay off the note and interest at maturity assuming that interest
has been accrued to September 30?
a. Notes Payable..............................................................313,500
Cash.............................................................................. 313,500
b. Notes Payable..............................................................300,000
Interest Payable..............................................................13,500
Cash.............................................................................. 313,500
c. Interest Expense.............................................................13,500
Notes Payable..............................................................300,000
Cash.............................................................................. 313,500
Notes Payable..............................................................300,000
Interest Expense...............................................................4,500
Cash.............................................................................. 313,500
Solution: $300,000  .06  9/12  $13,500

80. West County Bank agrees to lend Drake Builders Company $200,000 on January 1.
Drake Builders Company signs a $200,000, 6%, 6-month note. The entry made by Drake
Builders Company on January 1 to record the proceeds and issuance of the note is
Cash. ..........................................................................194,000
Notes Payable................................................................ 200,000
b. Cash ..........................................................................200,000
Notes Payable................................................................ 200,000
c. Cash ..........................................................................200,000
Notes Payable................................................................ 206,000
d. Cash ..........................................................................200,000
Notes Payable................................................................ 200,000
Solution: $200,000 face value
Drake Builders Company signs a $200,000, 6%, 6-month note. What is the adjusting entry
required if Drake Builders Company prepares financial statements on March 30?
Cash.............................................................................. 6,000
c. Interest Expense...............................................................3,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Solution: $200,000  .06  3/12  $3,000
Drake Builders Company signs a $200,000, 6%, 6-month note. What entry will Drake
Builders Company make to pay off the note and interest at maturity assuming that interest
has been accrued to June 30?
a. Notes Payable..............................................................206,000
Cash.............................................................................. 206,000
b. Notes Payable..............................................................200,000
Interest Payable................................................................6,000
Cash.............................................................................. 206,000
Notes Payable..............................................................200,000
Cash.............................................................................. 206,000
Notes Payable..............................................................200,000
Cash.............................................................................. 206,000
Solution: $200,000  .06  6/12  $6,000

83. As interest is recorded on an interest-bearing note, the Interest Expense account is

a. increased; the Notes Payable account is increased.
b. increased; the Notes Payable account is decreased.
c. increased; the Interest Payable account is increased.
d. decreased; the Interest Payable account is increased.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
84. On October 1, Sam's Painting Service borrows $100,000 from National Bank on a 3-
month, $100,000, 4% note. What entry must Sam's Painting Service make on December
31 before financial statements are prepared?
a. Interest Payable................................................................1,000
d. Interest Expense...............................................................1,000
Notes Payable................................................................ 1,000
Solution: $100,000  .04  3/12  $1,000
85. On October 1, Sam's Painting Service borrows $100,000 from National Bank on a 3-
month, $100,000, 4% note. The entry by Sam's Painting Service to record payment of the
note and accrued interest on January 1 is
a. Notes Payable..............................................................101,000
Cash.............................................................................. 101,000
b. Notes Payable..............................................................100,000
Cash.............................................................................. 101,000
c. Notes Payable..............................................................100,000
Cash.............................................................................. 104,000
d. Notes Payable..............................................................100,000
Cash.............................................................................. 101,000
Solution: $100,000  .04  3/12  $1,000
86. The interest charged on a $250,000 note payable, at the rate of 6%, on a 90-day note
would be
a. $15,000.
b. $7,500.
c. $3,750.
d. $1,250.
Solution: $250,000  .06  90/360  $3,750

would be
a. $15,000.
b. $7,500.
c. $3,750.
d. $2,500.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Solution: $250,000  .06  60/360  $2,500
88. The interest charged on a $250,000 note payable, at the rate of 6%, for a year would be
a. $15,000.
b. $7,500.
c. $3,750.
d. $1,250.
Solution: $250,000  .06  $15,000
would be
a. $4,200.
b. $2,100.
c. $1,050.
d. $700.
Solution: $70,000  .06  90/360  $1,050
would be
a. $4,200.
b. $2,100.
c. $1,050.
d. $700.
Solution: $70,000  .06  60/360  $700
91. Interest expense on an interest-bearing note is

a. always equal to zero.
b. accrued over the life of the note.
c. only recorded at the time the note is issued.
d. only recorded at maturity when the note is paid.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
92. Sales taxes collected by a retailer are recorded by

a. crediting Sales Tax Revenue.
b. debiting Sales Tax Expense.
c. crediting Sales Taxes Payable.
d. debiting Sales Taxes Payable.
IMA: FSA

93. Unearned Rent Revenue is

a. a contra account to Rent Revenue.
b. a revenue account.
c. reported as a current liability.
d. debited when rent is received in advance.
Reporting
94. The amount of sales tax collected by a retail store when making sales is
a. a miscellaneous revenue for the store.
b. a current liability.
c. not recorded because it is a tax paid by the customer.
d. recorded as an operating expense.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
95. A company receives $176, of which $16 is for sales tax. The journal entry to record the
sale would include a
a. debit to Sales Taxes Expense for $16.
b. credit to Sales Taxes Payable for $16.
c. debit to Sales Revenue for $176.
d. debit to Cash for $160.
96. A company receives $261, of which $21 is for sales tax. The journal entry to record the
sale would include a
a debit to Sales Taxes Expense for $21.
b. debit to Sales Taxes Payable for $21.
c. debit to Sales Revenue for $261.
d. debit to Cash for $261.
97. A retail store credited the Sales Revenue account for the sales price and the amount of
sales tax on sales. If the sales tax rate is 5% and the balance in the Sales Revenue
account amounted to $252,000, what is the amount of the sales taxes owed to the taxing
agency?
a. $240,000
b. $252,000
c. $12,600
d. $12,000
Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: ($252,000  1.05)  .05  $12,000

98. A retail store credited the Sales Revenue account for the sales price and the amount of
sales tax on sales. If the sales tax rate is 5% and the balance in the Sales Revenue
account amounted to $420,000, what is the amount of the sales taxes owed to the taxing
agency?
a. $400,000
b. $420,000
c. $21,000
d. $20,000
Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: ($420,000  1.05)  .05  $20,000
99. The current portion of long-term debt should

a. be paid immediately.
b. be reclassified as a current liability.
c. be classified as a long-term liability.
d. not be separated from the long-term portion of debt.
Reporting
100. On January 1, 2014, Ermler Company, a calendar-year company, issued $1,000,000 of

notes payable, of which $250,000 is due on January 1 for each of the next four years. The
proper balance sheet presentation on December 31, 2014, is
a. Current liabilities, $1,000,000.
b. Long-term debt , $1,000,000.
c. Current liabilities, $500,000; Long-term Debt, $500,000.
d. Current liabilities, $250,000; Long-term Debt, $750,000.
Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: $1,000,000  $250,000  $750,000
101. On January 1, 2014, Keisler Company, a calendar-year company, issued $700,000 of

notes payable, of which $175,000 is due on January 1 for each of the next four years. The
proper balance sheet presentation on December 31, 2014, is
a. Current liabilities, $700,000.
b. Long-term debt, $700,000.
c. Current liabilities, $175,000; Long-term Debt, $525,000.
d. Current liabilities, $525,000; Long-term Debt, $175,000.
Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
102. Sales taxes collected by a retailer from a customer are expenses

a. of the retailer.
b. of the customers.
c. of the government.
d. that are not recognized by the retailer until they are submitted to the government.
Reporting

103. A retailer that collects sales taxes is acting as an agent for the
a. wholesaler.
b. customer.
c. taxing authority.
d. chamber of commerce.
Business Economics
104. Sales taxes collected by a retailer are reported as

a. contingent liabilities.
b. revenues.
c. expenses.
d. current liabilities.
Reporting
105. A cash register tape shows cash sales of $6,000 and sales taxes of $300. The journal
entry to record this information is
a. Cash ..............................................................................6,000
Sales Revenue............................................................... 6,000
b. Cash ..............................................................................6,300
Sales Tax Revenue........................................................ 300
Sales Revenue............................................................... 6,000
c. Cash ..............................................................................6,000
Sales Tax Expense..............................................................300
Sales Revenue............................................................... 6,300
d. Cash ..............................................................................6,300
Sales Revenue............................................................... 6,000
Sales Taxes Payable..................................................... 300
106. Don's Pharmacy has collected $600 in sales taxes during March. If sales taxes must be
remitted to the state government monthly, what entry will Don's Pharmacy make to show
the March remittance?
a. Sales Tax Expense..............................................................600
Cash.............................................................................. 600
b. Sales Taxes Payable...........................................................600
Cash.............................................................................. 600
c. Sales Tax Expense..............................................................600
d. No entry required.

107. A cash register tape shows cash sales of $2,500 and sales taxes of $200. The journal
entry to record this information is
a. Cash ..............................................................................2,700
Sales Revenue............................................................... 2,700
b. Cash ..............................................................................2,700
Sales Tax Payable......................................................... 200
Sales Revenue............................................................... 2,500
c. Cash ..............................................................................2,500
Sales Tax Expense..............................................................200
Sales Revenue............................................................... 2,700
d. Cash ..............................................................................2,700
Sales Revenue............................................................... 2,500
Sales Tax Revenue........................................................ 200
108. Al’s Bookstore has collected $750 in sales taxes during April. If sales taxes must be
remitted to the state government monthly, what entry will Al's Bookstore make to show the
April remittance?
a. Sales Tax Expense..............................................................750
Cash.............................................................................. 750
b. Sales Taxes Payable...........................................................750
Cash.............................................................................. 750
c. Sales Tax Expense..............................................................750
d. No entry required.
109. Morgan Company does not ring up sales taxes separately on the cash register. Total
receipts for February amounted to $25,440. If the sales tax rate is 6%, what amount must
be remitted to the state for February's sales taxes?
a. $1,527
b. $1,440
c. $1,435
d. It cannot be determined.
Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Solution: ($25,440  1.06)  .06  $1,440
110. Norlan Company does not ring up sales taxes separately on the cash register. Total
receipts for October amounted to $29,400. If the sales tax rate is 5%, what amount must
be remitted to the state for October's sales taxes?
a. $1,400
b. $1,470
c. $70
Ans: A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Solution: ($29,400  1.05)  .05  $1,400

111. Tina's Boutique has total receipts for the month of $24,255 including sales taxes. If the
sales tax rate is 5%, what are Tina's sales for the month?
a. $23,043
b. $23,100
c. $24,255
Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Solution: $24,255  1.05  $23,100
112. Dominic's Salon has total receipts for the month of $30,210 including sales taxes. If the
sales tax rate is 6%, what are Dominic's sales for the month?
a. $28,398.30
b. $32,023.20
c. $28,500.00
Ans: C, LO: 3, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: $30,210  1.06  $28,500
113. The following totals for the month of April were taken from the payroll records of Noll
Company.
Salaries $60,000
FICA taxes withheld 4,590
Income taxes withheld 12,500
Medical insurance deductions 2,250
Federal unemployment taxes 160
State unemployment taxes 1,080
The journal entry to record the monthly payroll on April 30 would include a
a. debit to Salaries and Wages Expense for $60,000.
b. credit to Salaries and Wages Payable for $60,000.
c. debit to Salaries and Wages Payable for $60,000.
d. debit to Salaries and Wages Expense for $40,660.
Company.
Salaries $60,000
The entry to record the payment of net payroll would include a
a. debit to Salaries and Wages Payable for $39,580.
b. debit to Salaries and Wages Payable for $40,660.
d. credit to Cash for $45,250.
Solution: $60,000  $4,590  $12,500  $2,250  $40,660

Company.
Salaries $60,000
The entry to record accrual of employer’s payroll taxes would include a
a. debit to Payroll Tax Expense for $1,240.
b. debit to Payroll Tax Expense for $5,830.
c. credit to FICA Taxes Payable for $9,180.
d. credit to Payroll Tax Expense for $1,240.
Solution: $4,590 + $160 + $1,080  $5,830
Company.
Salaries $60,000
The entry to record the accrual of federal unemployment tax would include a
a. credit to Federal Unemployment Taxes Payable for $160.
b. debit to Federal Unemployment Taxes Expense for $160.
c. credit to Payroll Tax Expense for $160.
d. debit to Federal Unemployment Taxes Payable for $160.
117. Keller Company issued a five-year interest-bearing note payable for $200,000 on January
1, 2013. Each January the company is required to pay $40,000 on the note. How will this
note be reported on the December 31, 2014, balance sheet?
a. Long-term debt, $200,000
b. Long-term debt, $160,000
c. Long-term debt, $120,000; Long-term Debt due within one year, $40,000
d. Long-term debt of $160,000; Long-term Debt due within one year, $40,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: $200,000  $40,000  $40,000  $120,000

118. The following totals for the month of April were taken from the payroll records of Metz
Company.
Salaries $30,000
The journal entry to record the monthly payroll on April 30 would include a
Company.
Salaries $30,000
Solution: $30,000  $2,295  $6,600  $1,200  $19,905
Company.
Salaries $30,000
a. debit to Payroll Tax Expense for $4,035.
b. credit to Payroll Tax Expense for $4,035.
Solution: $2,295 + $240 + $1,500  $4,035

Company.
Salaries $30,000
b. credit to Federal Unemployment Taxes Expense for $240.
122. The following totals for the month of March were taken from the payroll records of Kern
Company.
Salaries $54,000
Medical insurance deductions 783
The journal entry to record the monthly payroll on March 30 would include a
c. debit to Salaries and Wages Expense for $54,000.
Company.
Salaries $54,000
Solution: $54,000  $4,131  $11,880  $783  $37,206

Company.
Salaries $54,000
a. debit to Payroll Tax Expense for $7,263
b. debit to Payroll Tax Expense for $19,143
Solution: $4,131 + $432 + $2,700  $19,143
Company.
Salaries $54,000
b. debit to Federal Unemployment Taxes Expense for $432.
126. Two sisters operate a bed and breakfast on the coast of Maine. As customers make
reservations they are required to pay cash in advance equal to one-half of the rate for
their stay. How should the sisters account for the cash received as reservations are
made?
a. Cash
Unearned Service Revenue
b. Cash
Service Revenue
c. Unearned Service Revenue
Service Revenue
d. Cash
Sales Revenue

127. Julie Lambert has a large consulting practice. New clients are required to pay one-half of
the consulting fees up front. The balance is paid at the conclusion of the consultation.
How does Lambert account for the cash received at the end of the engagement?
a. Cash
b. Cash
Service Revenue
c. Prepaid Service Revenue
Service Revenue
d. No entry is required when the engagement is concluded.
128. Madson Company typically sells subscriptions on an annual basis, and publishes six times
a year. The magazine sells 75,000 subscriptions in January at $10 each. What entry is
made in January to record the sale of the subscriptions?
a. Subscriptions Receivable..............................................750,000
Subscription Revenue.................................................... 750,000
b. Cash ..........................................................................750,000
Unearned Subscription Revenue................................... 750,000
c. Subscriptions Receivable..............................................125,000
d. Prepaid Subscriptions...................................................750,000
Cash.............................................................................. 750,000
Solution: $75,000  $10  $750,000
129. Mohling Company typically sells subscriptions on an annual basis, and publishes eight
times a year. The magazine sells 45,000 subscriptions in January at $10 each. What entry
is made in January to record the sale of the subscriptions?
a. Subscriptions Receivable..............................................450,000
Subscription Revenue.................................................... 450,000
b. Cash ..........................................................................450,000
c. Subscriptions Receivable............................................... 56,250
d. Prepaid Subscriptions...................................................450,000
Cash.............................................................................. 450,000
Solution: $45,000  $10  $450,000
130. From the standpoint of the issuing company, a disadvantage of using bonds as a means
of long-term financing is that
a. bond interest is deductible for tax purposes.
b. interest must be paid on a periodic basis regardless of earnings.
c. income to stockholders may increase as a result of trading on the equity.
d. the bondholders do not have voting rights.
Business Economics

131. If a corporation issued $8,000,000 in bonds which pay 5% annual interest, what is the
annual net cash cost of this borrowing if the income tax rate is 30%?
a. $4,000,000
b. $120,000
c. $400,000
d. $280,000
Problem Solving, IMA: Business Economics
Solution: ($8,000,000  .05)  (1  .30) $280,000
132. Secured bonds are bonds that

a. are in the possession of a bank.
b. can be converted into common stock.
c. have specific assets of the issuer pledged as collateral.
d. mature in installments.
Business Economics
133. A legal document that indicates the name of the issuer, the face value of the bond and
such other data is called
a. a bond certificate.
b. a bond debenture.
c. trading on the equity.
d. a convertible bond.
Business Economics
134. Stockholders of a company may be reluctant to finance expansion through issuing more
equity because
a. leveraging with debt is always a better idea.
b. their earnings per share may decrease.
c. the price of the stock will automatically decrease.
d. dividends must be paid on a periodic basis.
Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
135. Which of the following is not an advantage of issuing bonds instead of common stock?
a. Stockholder control is not affected
b. Earnings per share on common stock may be lower
c. Tax savings result
d. Each of these answer choices is an advantage.
Business Economics
136. Bonds that are secured by real estate are termed

a. mortgage bonds.
b. serial bonds.
c. debentures.
d. convertible bonds.
Business Economics

137. Bonds that may be exchanged for common stock at the option of the bondholders are
called
a. options.
b. stock bonds.
c. convertible bonds.
d. callable bonds.
Business Economics
138. Bonds that are subject to retirement at a stated dollar amount prior to maturity at the
option of the issuer are called
a. callable bonds.
b. early retirement bonds.
c. options.
d. debentures.
Business Economics
139. Bonds that are issued against the general credit of the borrower are called
a. callable bonds.
b. debenture bonds.
c. secured bonds.
d. term bonds.
Business Economics
140. Corporations are granted the power to issue bonds through

a. tax laws.
b. state laws.
c. federal security laws.
d. bond debentures.
Business Economics
141. Bonds are not always categorized as

a. callable or convertible.
b. term or serial.
c. secured or unsecured.
d. secured or debenture.
Business Economics
142. Which of the following statements concerning bonds is not a true statement?
a. Bonds are generally sold through an investment company.
b. The bond indenture is prepared after the bonds are printed.
c. The bond indenture and bond certificate are separate documents.
d. The trustee keeps records of each bondholder.
Business Economics
143. The contractual rate of interest is usually stated as a(n)

a. monthly rate.
b. daily rate.
c. semiannual rate.
d. annual rate.
Business Economics
144. When authorizing bonds to be issued, the board of directors does not specify the
a. total number of bonds authorized to be sold.
b. contractual interest rate.
c. selling price.
d. total face value of the bonds.
Business Economics
145. Bonds with a face value of $300,000 and a quoted price of 102¼ have a selling price of
a. $360,675.
b. $306,075.
c. $300,675.
d. $306,750.
Solution: $300,000  $1.0225  $306,750
a. $291,750.
b. $291,075.
c. $291,006.
d. $292,500.
Solution: $300,000  .9725  $291,750
a. $417,000.
b. $416,100.
c. $401,700.
d. $416,000.
Solution: $400,000  $1.0425  $417,000
148. Bonds with a face value of $400,000 and a quoted price of 98½ have a selling price of
a. $393,000.
b. $392,200.
c. $392,020.
d. $394,000.
Solution: $400,000  .985  $394,000
149. The present value of a bond is also known as its

a. face value.
b. market price.
c. future value.
d. deferred value.
Business Economics

150. All of the following statements regarding convertible bonds are true except
a. if the market price of common stock increases substantially, bondholders with
convertible bonds benefit.
b. convertible bonds can be converted into common stock at the option of the issuing
company.
c. bondholders with convertible bonds receive interest on the bonds until conversion.
d. convertible bonds sell at a higher price and pay a low rate of interest than those
without the conversion option.
Business Economics
151. The contractual interest rate on a bond is often referred to as the

a. callable rate.
b. the maturity rate.
c. market rate.
d. stated rate.
Business Economics
152. If the market interest rate for a bond is higher than the stated interest rate, the bond will
sell at
a. a premium.
b. a discount.
c. par.
d. either a discount or premium.
Business Economics
153. If the market rate of interest is greater than the contractual rate of interest, bonds will sell
a. at a premium.
b. at face value.
c. at a discount.
d. only after the stated rate of interest is increased.
Business Economics
154. The interest expense recorded on an interest payment date is increased

a. by the amortization of premium on bonds payable.
b. by the amortization of discount on bonds payable.
c. only if the bonds were sold at face value.
d. only if the market rate of interest is less than the stated rate of interest on that date.
IMA: FSA
155. On January 1, 2014, $2,000,000, 10-year, 10% bonds, were issued for $1,940,000.
Interest is paid annually on January 1. If the issuing corporation uses the straight-line
method to amortize discount on bonds payable, the monthly amortization amount is
a. $19,400.
b. $6,000.
c. $1,616.
d. $500.
Solution: [($2,000,000  $1,940,000)  10]  12  $500

156. A corporation issues $200,000, 10%, 5-year bonds on January 1, 2014, for $191,600.
Interest is paid annually on January 1. If the corporation uses the straight-line method of
amortization of bond discount, the amount of bond interest expense to be recognized in
December 31, 2014’s adjusting entry is
a. $21,680.
b. $20,000.
c. $18,320.
d. $1,680.
Solution: [($200,000  $191,600)  5] + ($200,000  .10)  $21,680
157. If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest
annually would sell at an amount
a. less than face value.
b. equal to face value.
c. greater than face value.
d. that cannot be determined.
Ans: C, LO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
158. On January 1, 2014, $2,000,000, 5-year, 10% bonds, were issued for $2,120,000. Interest
is paid annually on January 1. If the issuing corporation uses the straight-line method to
amortize premium on bonds payable, the monthly amortization amount is
a. $17,666.
b. $24,000.
c. $2,400.
d. $2,000.
Solution: [($2,120,000  $2,000,000)  5]  12  $2,000
159. A corporation issues $200,000, 8%, 5-year bonds on January 1, 2014, for $208,400.
Interest is paid annually on January 1. If the corporation uses the straight-line method of
amortization of bond premium, the amount of bond interest expense to be recognized in
December 31, 2014’s adjusting entry is
a. $14,320.
b. $16,000.
c. $17,680.
d. $1,680.
Solution: ($200,000  .08)  [($208,400  $200,000)  5]  $14,320
160. If the market rate of interest is lower than the contractual interest rate, the bonds will sell
at
a. face value.
b. a premium.
c. a discount.
d. an unknown amount.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,

161. If bonds are issued at a premium, the stated interest rate is

a. higher than the market rate of interest.
b. lower than the market rate of interest.
c. too low to attract investors.
d. adjusted to a higher rate of interest.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
162. The present value of a $10,000, 5-year bond, will be less than $10,000 if the
a. contractual rate of interest is less than the market rate of interest.
b. contractual rate of interest is greater than the market rate of interest.
c. bond is convertible.
d. contractual rate of interest is equal to the market rate of interest.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
163. The market value (present value) of a bond is a function of all of the following except the
a. dollar amounts to be received.
b. maturity date.
c. market interest rate.
d. type of bonds.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
164. Gomez Corporation issues 600, 10-year, 8%, $1,000 bonds dated January 1, 2014, at 96.
The journal entry to record the issuance will show a
a. debit to Cash of $600,000.
b. credit to Discount on Bonds Payable for $24,000.
c. credit to Bonds Payable for $576,000.
d. debit to Cash for $576,000.
Solution: (600  $1,000)  .96  $576,000
165. Yanik Corporation issues 4,000, 10-year, 8%, $1,000 bonds dated January 1, 2014, at 97.
The journal entry to record the issuance will show a
a. debit to Cash of $4,000,000.
b. debit to Discount on Bonds Payable for $120,000.
c. credit to Bonds Payable for $3,880,000.
d. credit to Cash for $3,880,000.
Solution: (4,000  $1,000)  (1  .97)  $120,000
166. Molina Corporation issues 4,000, 10-year, 8%, $1,000 bonds dated January 1, 2014, at
103. The journal entry to record the issuance will show a
a. debit to Cash of $4,000,000.
b. debit to Premium on Bonds Payable for $120,000.
c. credit to Bonds Payable for $4,000,000.
d. credit to Cash for $4,120,000.
Solution: 4,000  $1,000  $4,000,000

167. The market rate of interest is often called the

a. stated rate.
b. effective rate.
c. coupon rate.
d. contractual rate.
Business Economics
168. If bonds are issued at a discount, it means that the

a. financial strength of the issuer is suspect.
b. market interest rate is higher than the contractual interest rate.
c. market interest rate is lower than the contractual interest rate.
d. bondholder will receive effectively less interest than the contractual rate of interest.
Business Economics
169. Selling the bonds at a premium has the effect of

a. causing the total cost of borrowing to be higher than the bond interest paid.
b. causing the total cost of borrowing to be lower than the bond interest paid.
c. raising the effective interest rate above the state interest rate.
d. increasing the amount of cash paid for interest each 6 months.
170. When bonds are issued at a premium, the total interest cost of the bonds over the life of
the bonds is equal to the amount of
a. interest paid over the life of the bond.
b. interest paid over the life of the bond plus the amount of premium at sale point.
c. interest paid over the life of the bond minus the amount of premium at sale point.
d. premium at sale point.
171. The statement "Bond prices vary inversely with changes in the market rate of interest"
means that if the
a. market rate of interest increases, the contractual interest rate will decrease.
b. contractual interest rate increases, then bond prices will go down.
c. market rate of interest decreases, then bond prices will go up.
d. contractual interest rate increases, the market rate of interest will decrease.
172. The carrying value of bonds will equal the market price
a. at the close of every trading day.
b. at the end of the fiscal period.
c. on the date of issuance.
d. every six months on the date interest is paid.
Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
173. Over the term of the bonds, the balance in the Discount on Bonds Payable account will
a. fluctuate up and down if the market is volatile.
b. decrease.
c. increase.
d. be unaffected until the bonds mature.
Reporting
174. The sale of bonds above face value

a. is a rare occurrence.
b. will cause the total cost of borrowing to be less than the bond interest paid.
c. will cause the total cost of borrowing to be more than the bond interest paid.
d. will have no net effect on interest expense by the time the bonds mature.
Business Economics
175. In the balance sheet, the account Premium on Bonds Payable is

a. added to bonds payable.
b. deducted from bonds payable.
c. classified as a stockholders' equity account.
d. classified as a revenue account.
Reporting
176. In the balance sheet, the account Discount on Bonds Payable is

a. added to bonds payable.
b. deducted from bonds payable.
c. classified as a stockholders' equity account.
d. classified as a revenue account.
Reporting
177. Bond discount should be amortized to comply with

a. the historical cost principle.
b. the expense recognition principle.
c. the revenue recognition principle.
d. conservatism.
Reporting
178. Four thousand bonds with a face value of $1,000 each, are sold at 102. The entry to
record the issuance is
a. Cash .......................................................................4,080,000
Bonds Payable............................................................... 4,080,000
b. Cash .......................................................................4,000,000
Premium on Bonds Payable...........................................80,000
Bonds Payable............................................................... 4,080,000
c. Cash .......................................................................4,080,000
Premium on Bonds Payable........................................... 80,000
Bonds Payable............................................................... 4,000,000
d. Cash .......................................................................4,080,000
Discount on Bonds Payable........................................... 80,000
Bonds Payable............................................................... 4,000,000
Solution: (4,000  $1,000)  1.02  $4,080,000

179. Four thousand bonds with a face value of $1,000 each, are sold at 97. The entry to record
the issuance is
a. Cash .......................................................................3,880,000
Bonds Payable............................................................... 3,880,000
b. Cash .......................................................................3,880,000
Discount on Bonds Payable..........................................120,000
Bonds Payable............................................................... 4,000,000
c. Cash .......................................................................3,880,000
Premium on Bonds Payable........................................... 120,000
Bonds Payable............................................................... 4,000,000
d. Cash .......................................................................4,000,000
Discount on Bonds Payable........................................... 120,000
Bonds Payable............................................................... 3,880,000
180. The journal entry to record the issuance of bonds at a discount will include a
a. debit to Cash for the face amount of the bonds.
b. debit to Cash for the face amount of the bonds plus the amount of the discount.
c. debit to Cash for the face amount of the bonds minus the amount of the discount.
d. credit to Cash for the face amount of the bonds.
Ans: C, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
Solution: (4,000  $1,000)  .97  $3,880,000
181. If bonds have been issued at a discount, then over the life of the bonds the
a. carrying value of the bonds will decrease.
b. carrying value of the bonds will increase.
c. interest expense will increase, if the discount is being amortized on a straight-line
basis.
d. unamortized discount will increase.
Reporting
182. Winrow Company received proceeds of $565,500 on 10-year, 8% bonds issued on

January 1, 2013. The bonds had a face value of $600,000, pay interest annually on
December 31st, and have a call price of 101. Winrow uses the straight-line method of
amortization. What is the amount of interest Winrow must pay the bondholders in 2013?
a. $45,240
b. $48,000
c. $51,450
d. $44,550
Solution: $600,000  .08  $48,000

*183. Winrow Company received proceeds of $565,500 on 10-year, 8% bonds issued on

amortization. What is the amount of interest expense Winrow will show with relation to
these bonds for the year ended December 31, 2014?
a. $48,000
b. $45,240
c. $51,450
d. $44,550
Solution: ($600,000  $565,500)  10  $3,450; ($600,000  .08) + $3,450  $51,450
*184. Winrow Company received proceeds of $565,500 on 10-year, 8% bonds issued on

amortization. What is the carrying value of the bonds on January 1, 2015?
a. $600,000
b. $572,400
c. $593,100
d. $568,950
Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: [($600,000  $565,500)  10]  2  $6,900; $565,500 + $6,900  $572,400
185. Winrow Company received proceeds of $565,500 on 10-year, 8% bonds issued on

amortization. Winrow Company decided to redeem the bonds on January 1, 2015. What
amount of gain or loss would Winrow report on its 2015 income statement?
a. $27,600 gain
b. $33,600 gain
c. $33,600 loss
d. $27,600 loss
Solution: ($600,000  $565,500)  10  $3,450; ($600,000  1.01)  [$565,500 + ($3,450  2)]  $33,600
186. Sparks Company received proceeds of $423,000 on 10-year, 8% bonds issued on

December 31st, and have a call price of 102. Sparks uses the straight-line method of
amortization. What is the amount of interest Sparks must pay the bondholders in 2013?
a. $33,840
b. $32,000
c. $32,640
d. $3,384
Solution: $400,000  .08  $32,000

*187. Sparks Company received proceeds of $423,000 on 10-year, 8% bonds issued on

amortization. What is the amount of interest expense Sparks will show with relation to
these bonds for the year ended December 31, 2014?
a. $32,000
b. $33,840
c. $29,700
d. $25,100
Solution: ($423,000  $400,000)  10  $2,300; ($400,000  .08)  $2,300  $29,700
*188. Sparks Company received proceeds of $423,000 on 10-year, 8% bonds issued on

amortization. What is the carrying value of the bonds on January 1, 2015?
a. $400,000
b. $418,400
c. $381,600
d. $420,700
Solution: ($423,000  $400,000)  10  $2,300;
189. Sparks Company received proceeds of $423,000 on 10-year, 8% bonds issued on

amortization. Sparks Company decided to redeem the bonds on January 1, 2015. What
amount of gain or loss would Sparks report on their 2015 income statement?
a. $18,400 gain
b. $10,400 gain
c. $10,400 loss
d. $18,400 loss
Solution: ($423,000  $400,000)  10  $2,300; ($400,000  1.02)  [$423,000  ($2,300  2)]  $10,400
190. Hogan Company has $1,000,000 of bonds outstanding. The unamortized premium is
$14,400. If the company redeemed the bonds at 101, what would be the gain or loss on
the redemption?
a. $4,400 gain
b. $4,400 loss
c. $10,000 gain
d. $10,000 loss
Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: ($1,000,000 + $14,400)  ($1,000,000  1.01)  $4,400

191. The current carrying value of Kennett’s $600,000 face value bonds is $597,750. If the
bonds are retired at 102, what would be the amount Kennett would pay its bondholders?
a. $597,750
b. $600,000
c. $603,000
d. $612,000
Solution: $600,000  1.02  $612,000
192. Ervay Company has $875,000 of bonds outstanding. The unamortized premium is
$12,600. If the company redeemed the bonds at 101, what would be the gain or loss on
the redemption?
a. $3,850 gain
b. $3,850 loss
c. $8,750 gain
d. $8,750 loss
Solution: ($875,000  1.01)  ($875,000 + 12,600)  $3,850
193. The current carrying value of Pierce’s $900,000 face value bonds is $896,600. If the
bonds are retired at 102, what would be the amount Pierce would pay its bondholders?
a. $896,600
b. $900,000
c. $902,000
d. $918,000
Solution: $900,000  1.02  $718,000
194. Hulse Corporation retires its $600,000 face value bonds at 105 on January 1, following the
payment of annual interest. The carrying value of the bonds at the redemption date is
$622,470. The entry to record the redemption will include a
a. credit of $22,470 to Loss on Bond Redemption.
b. debit of $22,470 to Premium on Bonds Payable.
c. credit of $7,530 to Gain on Bond Redemption.
d. debit of $30,000 to Premium on Bonds Payable.
Solution: $622,470  $600,000  $22,470
195. When bonds are retired before maturity,

a. only a loss on redemption can be recorded.
b. only a gain on redemption can be recorded.
c. either a gain or a loss on redemption can be recorded.
d. neither a gain nor a loss on redemption can be recorded.
Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

196. A $900,000 bond was retired at 98 when the carrying value of the bond was $888,000.
The entry to record the retirement would include a
a. gain on bond redemption of $12,000.
b. loss on bond redemption of $6,000.
c. loss on bond redemption of $12,000.
d. gain on bond redemption of $6,000.
Solution: $888,000  ($900,000  .98)  $6,000
Solution: $777,500  ($750,000  1.03)  $5,000
Solution: $618,000  ($600,000  .98)  $30,000
199. Restoration Company issued bonds that had the following data associated with them:
Interest to be paid is $40,000.
Interest expense to be recorded is $45,000.
Which of the following characteristics is true?
a. The bonds are sold at a premium.
b. After recording the interest expense, the amortization will decrease the bond carrying
value.
c. The difference between the interest expense and the interest to be paid is the bond's
par value.
d. After recording the interest expense, the amortization will increase the bond carrying
value.
Reporting
200. All of the following are true regarding financial statement analysis ratios associated with
liabilities except
a. a high times interest earned ratio indicates that a company is more likely to meet
interest payments as scheduled.
b. high liquidity ratios mean that lines of credit should be high to compensate.
c. if a company's current ratio is lower than the industry average, then it may lack
liquidity.
d. unrecorded obligations causing sizeable differences between liquidity and solvency
ratios can be ignored.
Business Economics

201. From an accounting standpoint, all of the following are contingencies that must be
evaluated for off-balance sheet purposes except
a. product warranties.
b. general business risks.
c. money-back guarantees for products.
d. environmental cleanup obligations.
Reporting
202. A measure of a company’s solvency is the

a. acid-test ratio.
b. current ratio.
c. times interest earned.
d. asset turnover ratio.
Business Economics
203. The times interest earned is computed by dividing

a. net income by interest expense.
b. income before income taxes by interest expense.
c. income before interest expense by interest expense.
d. income before interest expense and income taxes by interest expense.
Business Economics
204. In a recent year Garvey Corporation had net income of $100,000, interest expense of
$20,000, and tax expense of $30,000. What was Garvey Corporation’s times interest
earned for the year?
a. 5.00
b. 6.00
c. 6.50
d. 7.50
Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: ($100,000 + $20,000 + $30,000)  $20,000  7.50
205. Liquidity ratios measure a company's

a. operating cycle.
b. revenue-producing ability.
c. short-term debt paying ability.
d. long-range solvency.
Business Economics
206. The relationship between current assets and current liabilities is

a. useful in determining income.
b. useful in evaluating a company's liquidity.
c. called the matching principle.
d. useful in determining the amount of a company's long-term debt.
Business Economics

207. In a recent year Hart Corporation had net income of $125,000, interest expense of
$30,000, and tax expense of $40,000. What was Hart Corporation’s times interest earned
for the year?
a. 6.50
b. 4.17
c. 5.17
d. 5.50
Solution: ($125,000 + $30,000 + $40,000)  $30,000  6.50
208. In a recent year Ley Corporation had net income of $150,000, interest expense of
$30,000, and a times interest earned ratio of 8. What was Ley Corporation’s income
before taxes for the year?
a. $270,000
b. $240,000
c. $210,000
d. None of these answer choices are correct.
Ans: C, LO: 7, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: (x + $30,000)  $30,000  8; x + $30,000  $240,000; x  $210,000
209. The adjusted trial balance for Hamilton Corp. at the end of the current year, 2014,
contained the following accounts.
5-year Bonds Payable 8% $1,200,000
Bond Interest Payable 50,000
Premium on Bonds Payable 100,000
Notes Payable (3 mo.) 40,000
Notes Payable (5 yr.) 165,000
Mortgage Payable ($15,000 due currently) 200,000
Salaries and Wages Payable 18,000
Taxes Payable (due 3/15 of next yr) 25,000
The total long-term liabilities reported on the balance sheet are
a. $1,565,000
b. $1,550,000
c. $1,665,000
d. $1,650,000
Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: $120,000 + $100,000 + $165,000 + ($200,000  $15,000)  $1,650,000

210. The 2014 financial statements of Harper Co. contain the following selected data (in
millions).
Current assets $ 90
Total assets 160
Current liabilities 40
Total liabilities 75
Cash 8
Interest expense 5
Income taxes 10
Net income 16
The debt to assets ratio is
a. 46.9%.
b. 44.4%.
c. 2.13%.
d. 6.2 times.
Solution: $75  $160  46.9%
*211. Oliver Company issued $800,000 of 6%, 5-year bonds at 98. Assuming straight-line
amortization and annual interest payments, how much bond interest expense is recorded
on the next interest date?
a. $48,000
b. $24,000
c. $49,600
d. $51,200
Solution: ($800,000  .06) + [($800,000  .02)  5]  $51,200
*212. Foley Company issued $800,000 of 6%, 5-year bonds at 98, which pays interest annually.
Assuming straight-line amortization, what is the total interest cost of the bonds?
a. $240,000
b. $256,000
c. $224,000
d. $232,000
Solution: ($800,000  .06  5) + ($800,000  .02)  $256,000
*213. Neufeld Company issued $800,000 of 6%, 5-year bonds at 98, which pays interest
annually. Assuming straight-line amortization, what is the carrying value of the bonds after
one year?
a. $784,000
b. $785,600
c. $787,200
d. $790,400
Solution: ($800,000  .98) + [($800,000  .02)  5]  $787,200

*214. Scribner Company issued $400,000 of 8%, 5-year bonds at 106. Assuming straight-line
amortization and annual interest payments, how much bond interest expense is recorded
on the next interest date?
a. $32,000
b. $36,800
c. $27,200
d. $4,800
Solution: ($400,000  .08)  [($400,000  .06)  5]  $27,200
*215. Downs Company issued $400,000 of 8%, 5-year bonds at 106, which pays interest
annually. Assuming straight-line amortization, what is the total interest cost of the bonds?
a. $184,000
b. $136,000
c. $112,000
d. $160,000
Solution: ($400,000  .08  5)  ($400,000  .06)  $136,000
*216. Morales Company issued $400,000 of 8%, 5-year bonds at 106, which pays interest
annually. Assuming straight-line amortization, what is the carrying value of the bonds after
one year?
a. $424,000
b. $421,600
c. $419,200
d. $426,400
Solution: ($400,000  1.06)  [($400,000  .06)  5]  $419,200
*217. Larson Company issued $750,000 of 8%, 5-year bonds at 106. Assuming straight-line
amortization and annual interest payments, what is the amount of the amortization at each
interest payment point?
a. $4,500
b. $9,000
c. $60,000
d. $51,000
Solution: [$750,000  (1.06  1.00)]  5  $9,000
*218. Parker Company issued ten-year, 9%, bonds payable in 2014 at a premium. During 2014,
the company’s accountant failed to amortize any of the bond premium. The omission of
the premium amortization will
a. not affect net income for 2014.
b. cause retained earnings at the end of 2014 to be overstated.
c. cause net income for 2014 to be overstated.
d. cause net income for 2014 to be understated.
Ans: D, LO: 8, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None,
IMA: Reporting

*219. When the straight-line method of amortization is used for a bond premium, the amount of
interest expense for an interest period is calculated by
a. adding the amount of premium amortized for that period to the amount of cash paid for
interest during the period.
b. subtracting the amount of premium amortized for that period from the amount of cash
paid for interest during the period.
c. multiplying the face value of the bonds by the stated interest rate.
d. multiplying the face value of the bonds by the market interest rate.
IMA: FSA
*220. When the straight-line method of amortization is used for a bond discount, the amount of
interest expense for an interest period is calculated by
a. adding the amount of discount amortized for that period to the amount of cash paid for
interest during the period.
b. subtracting the amount of discount amortized for that period from the amount of cash
paid for interest during the period.
c. multiplying the face value of the bonds by the stated interest rate.
d. multiplying the face value of the bonds by the market interest rate.
Ans: A, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
*221. On January 1, Sewell Corporation issues $2,000,000, 5-year, 12% bonds at 96 with
interest payable on January 1. The entry on December 31 to record accrued bond interest
and the amortization of bond discount using the straight-line method will include a
a. debit to Interest Expense, $120,000.
b. debit to Interest Expense, $240,000.
c. credit to Discount on Bonds Payable, $16,000.
d. credit to Discount on Bonds Payable, $8,000.
Solution: [$2,000,000  (1.00  .96)]  5  $16,000
*222. On January 1, Sewell Corporation issues $2,000,000, 5-year, 12% bonds at 96 with
interest payable on January 1. What is the carrying value of the bonds at the end of the
third interest period?
a. $1,968,000
b. $1,952,000
c. $1,888,000
d. $1,856,000
Solution: ($2,000,000  .96) + [($2,000,000  .04)  3/5]  1,968,000
223. If bonds are originally sold at a discount using the straight-line amortization method
a. interest expense in the earlier years of the bond's life will be less that the interest to be
paid.
b. interest expense in the earlier years of the bond's life will be the same as interest to be
paid.
c. unamortized discount is subtracted from the face value of the bond to determine its
carrying value.
d. unamortized discount is added to the face value of the bond to determine its carrying
value.

224. The following partial amortization schedule is available for Courtney Company who sold
$500,000, five-year, 10% bonds on January 1, 2014 for $520,000 and uses annual
straight-line amortization.
BOND AMORTIZATION SCHEDULE
Interest Interest Premium Unamortized Bond Carrying
Interest Periods
to be paid expense Amortization Premium Value
January 1, 2014 $20,000 $520,000
January 1, 2015 (i) (ii) (iii) (iv) (v)
Which of the following amounts should be shown in cell (i)?

a. $52,000
b. $54,000
c. $50,000
d. $10,000
Solution: $500,000  .10  50,000
Interest Periods
January 1, 2014 $20,000 $520,000
Which of the following amounts should be shown in cell (ii)?

a. $54,000
b. $46,000
c. $52,000
d. $40,000
Solution: ($500,000  .10)  ($20,000  5)  $46,000
Interest Periods
January 1, 2014 $20,000 $520,000
Which of the following amounts should be shown in cell (iii)?

a. $10,000
b. $20,000
c. $4,000
d. $2,000
Solution: $20,000  5  $4,000

Interest Periods
January 1, 2014 $20,000 $520,000
Which of the following amounts should be shown in cell (iv)?

a. $22,000
b. $18,000
c. $24,000
d. $16,000
Solution: $20,000  ($20,000  5)  $16,000
Interest Periods
January 1, 2014 $20,000 $520,000
Which of the following amounts should be shown in cell (v)?

a. $524,000
b. $522,000
c. $516,000
d. $518,000
Solution: $520,000  ($20,000  5)  $516,000
229. Which of the following statements regarding the effective interest method of accounting for
bonds characteristics is false?
a. GAAP requires use of the effective interest method.
b. The amount of periodic interest expense decreases over the life of a discounted bond
issue when the effective interest method is used.
c. Over the life of the bond, the carrying value increases for discounted bonds when
using the effective interest method.
d. The effective interest method applies a constant percentage to the bond carrying
value to compute interest expense.
Reporting

*230. On January 1, Weatherholt Inc. issued $4,000,000, 9% bonds for $3,756,000. The market
rate of interest for these bonds is 10%. Interest is payable annually on December 31. Jean
Loptein uses the effective-interest method of amortizing bond discount. At the end of the
first year, Weatherholt should report unamortized bond discount of
a. $219,600.
b. $228,400.
c. $206,440.
d. $204,000.
Solution: ($3,756,000  .10)  ($4,000,000  .09)  $15,600; [($4,000,000  $3,756,000)  $15,600]  $228,400
*231. On January 1, Thompson Corporation issued $3,000,000, 14%, 5-year bonds with interest
payable on December 31. The bonds sold for $3,216,288. The market rate of interest for
these bonds was 12%. On the first interest date, using the effective-interest method, the
debit entry to Interest Expense is for
a. $360,000.
b. $376,743.
c. $385,955.
d. $420,000.
Solution: $3,216,288  .12  $385,955
*232. Warner Company issued $4,000,000 of 6%, 10-year bonds on one of its interest dates for
$3,454,800 to yield an effective annual rate of 8%. The effective-interest method of
amortization is to be used. What amount of discount (to the nearest dollar) should be
amortized for the first interest period?
a. $112,710
b. $54,520
c. $72,770
d. $36,384
Solution: ($3,454,800  .08)  ($4,000,000  .06)  $36,384
amortization is to be used. The journal entry on the first interest payment date, to record
the payment of interest and amortization of discount will include a
a. debit to Bond Interest Expense for $240,000.
b. credit to Cash for $276,385.
c. credit to Discount on Bonds Payable for $36,384.
d. debit to Bond Interest Expense for $320,000.
Solution: ($3,454,800  .08)  ($4,000,000  .06)  $36,384

amortization is to be used. How much bond interest expense (to the nearest dollar) should
be reported on the income statement for the end of the first year?
a. $277,110
b. $276,384
c. $275,655
d. $240,000
Solution: $3,454,800  .08  $276,384
amortization is to be used. The journal entry to be recorded at the end of the second year
for the payment of interest and the amortization of discount will include a
a. debit to Bond Interest Expense for $240,000.
b. credit to Cash for $279,295.
c. credit to Discount on Bonds Payable for $36,384.
d. credit to Discount on Bonds Payable for $39,295.
Solution: ($3,454,800  .08)  ($4,000,000  .06)  $36,384; [($3,454,800  $36,384)  .08]  $240,000  $39,295
*236. When the effective-interest method of amortization is used for a bond premium, the
amount of interest expense for an interest period is calculated multiplying the
a. face value of the bonds at the beginning of the period by the contractual interest rate.
b. face value of the bonds at the beginning of the period by the effective interest rate.
c. carrying value of the bonds at the beginning of the period by the contractual interest
rate.
d. carrying value of the bonds at the beginning of the period by the effective interest rate.
Business Economics
*237. The amortization of a bond premium will result in reporting an amount of interest expense
for an interest period that
a. is less than the amount of cash to be paid for interest for the period.
b. exceeds the amount of cash to be paid for interest for the period.
c. equals the amount of cash to be paid for interest for the period.
d. has no predictable relationship with the amount of cash to be paid for interest for the
period.
Ans: A, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
*238. The effective-interest method of amortization of bond premiums and discounts is

considered superior to the straight-line method because it results in a(n)
a. interest rate that is close to the market interest rate.
b. uniform rate of interest.
c. more variable interest rate.
d. interest rate that increases or decreases slightly over time.

*239. Which of the following statements best describes the behavior over time of the
components of equal mortgage payments?
a. The proportion of interest expense to payment of principal remains the same.
b. Interest expense increases and payment of principal decreases.
c. Payment of principal increases and interest expense decreases.
d. Both payment of principal and interest expense decrease.
IMA: FSA
*240. Thayer Company purchased a building on January 2 by signing a long-term $2,520,000

mortgage with monthly payments of $23,100. The mortgage carries an interest rate of 10
percent. The entry to record the mortgage will include a
a. debit to the Cash account for $2,520,000.
b. credit to the Cash account for $2,520,000.
c. debit to the Mortgage Payable account for $2,520,000.
d. credit to the Mortgage Payable account for $2,520,000.
Solution: $2,520,000 face value

percent. The entry to record the first monthly payment will include a
a. debit to the Cash account for $23,100.
b. credit to the Cash account for $21,000.
c. debit to the Interest Expense account for $21,000.
d. credit to the Mortgage Payable account for $23,100.
Solution: $23,100  [($2,520,000  .10)  12]  $21,000

percent. The amount owed on the mortgage after the first payment will be
a. $2,520,000.
b. $2,517,900.
c. $2,499,000.
d. $2,496,900.
Solution: $2,520,000  [$23,100  ($2,520,000  .10  1/12)]  $2,517,900
*243. Collins Company borrowed $750,000 from BankTwo on January 1, 2013 in order to
expand its mining capabilities. The five-year note required annual payments of $195,327
and carried an annual interest rate of 9.5%. What is the amount of expense Collins must
recognize on its 2014 income statement?
a. $71,250.
b. $59,463.
c. $52,693.
d. $46,555.
Solution: $750,000  .095  $71,250; [$750,000  ($195,327  $71,250)]  .095  $59,463

*244. Collins Company borrowed $750,000 from BankTwo on January 1, 2013 in order to
and carried an annual interest rate of 9.5%. What is the balance in the notes payable
account at December 31, 2014?
a. $750,000
b. $490,059
c. $625,923
d. $607,500
Solution: $750,000  .095  $71,250; $750,000  ($195,327  $71,250)  $625,923; $625,923  (195,327  $59,463)  $490,059
*245. Fornelli Corporation borrowed $480,000 from Central Bank on May 31, 2013. The three-
year, 7% note required annual payments of $182,904 beginning May 31, 2014. Interest
expense for the year ended December 31, 2013 was
a. $19,600.
b. $22,400.
c. $33,600.
d. $0.
Solution: $480,000  .07  7/12  $19,600
*246. Fornelli Corporation borrowed $480,000 from Central Bank on May 31, 2013. The three-
year, 7% note required annual payments of $182,904 beginning May 31, 2014. The total
amount of interest to be paid over the life of the loan is
a. $33,600.
b. $68,712.
c. $134,082.
d. $100,800.
Solution: ($182,904  3)  $480,000  $68,712
*247. Wolford Company borrowed $1,000,000 from U.S. Bank on January 1, 2013 in order to
and carried an annual interest rate of 9.5%. What is the amount of expense Wolford must
recognize on its 2014 income statement?
a. $95,000
b. $79,284
c. $70,259
d. $62,073
Solution: $1,000,000  .095  $95,000; [$1,000,000  ($260,436  $95,000)]  .095  $79,284

*248. Wolford Company borrowed $1,000,000 from U.S. Bank on January 1, 2013 in order to
a. $1,000,000
b. $653,412
c. $834,564
d. $810,000
Solution: $1,000,000  .095  $95,000; $1,000,000  ($260,436  $95,000)  $834,564
*249. Sielert Corporation borrowed $900,000 from National Bank on May 31, 2013. The three-
year, 7% note required annual payments of $342,945 beginning May 31, 2014. Interest
expense for the year ended December 31, 2013 was
a. $36,750.
b. $42,000.
c. $63,000.
d. $0.
Solution: $900,000  .07  7/12  $36,750
*250. Sielert Corporation borrowed $900,000 from National Bank on May 31, 2013. The three-
year, 7% note required annual payments of $342,945 beginning May 31, 2014. The total
amount of interest to be paid over the life of the loan is
a. $63,000.
b. $128,835.
c. $251,403.
d. $189,000.
Solution: ($342,945  3)  $900,000  $128,835

Answers to Multiple Choice Questions

67. c 94. b 121. a 148. d 175. a 202. c *229. b
68. a 95. b 122. c 149. b 176. b 203. d *230. b
69. a 96. d 123. b 150. b 177. b 204. d *231. c
70. a 97. d 124. a 151. d 178. c 205. c *232. d
71. a 98. d 125. a 152. b 179. b 206. b *233. c
72. d 99. b 126. a 153. c 180. c 207. a *234. b
73. d 100. d 127. b 154. b 181. b 208. c *235. d
74. c 101. c 128. b 155. d 182. b 209. d *236. d
75. c 102. b 129. b 156. a *183. c 210. a *237. a
76. a 103. c 130. b 157. c *184. b *211. d *238. b
77. b 104. d 131. d 158. d 185. c *212. b *239. c
78. a 105. d 132. c 159. a 186. b *213. c *240. d
79. b 106. b 133. a 160. b *187. c *214. c *241. c
80. b 107. b 134. b 161. a *188. b *215. b *242. b
81. c 108. b 135. b 162. a 189. b *216. c *243. b
82. b 109. b 136. a 163. d 190. a *217. b *244. b
83. c 110. a 137. c 164. d 191. d *218. d *245. a
84. c 111. b 138 a 165. b 192. a *219. b *246. b
85. b 112. c 139 b 166. c 193. d *220. a *247. b
86. c 113. a 140. b 167. b 194. b *221. c *248. b
87. d 114. b 141. a 168. b 195. c *222. a *249. a
88. a 115. b 142. b 169. b 196. d *223. c *250. b
89. c 116. a 143. d 170. c 197. d *224. c
90. d 117. c 144. c 171. c 198. d *225. b
91. b 118. a 145. d 172. c 199. d *226. c
92. c 119. b 146. a 173. b 200. b *227. d
93. c 120. a 147. a 174. b 201. b *228. c

BRIEF EXERCISES
Be. 251
Steiner Sales Company has the following selected accounts after posting adjusting entries:
Accounts Payable $ 65,000
Notes Payable, 3-month 50,000
Accumulated Depreciation—Equipment 14,000
Notes Payable, 5-year, 6% 80,000
Payroll Tax Expense 4,000
Interest Payable 3,000
Mortgage Payable 120,000
Sales Taxes Payable 38,000
Instructions
Prepare the current liability section of Steiner Sales Company's balance sheet, assuming $15,000
of the mortgage is payable next year.
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution 251 (5-8 min.)

STEINER SALES COMPANY
Current Liabilities
Current portion of long-term debt $ 15,000
Notes payable, 3-month 50,000
Accounts payable 65,000
Sales Taxes payable 38,000
Interest payable 3,000
Total current liabilities $171,000
Be. 252
On April 1, Holton Company borrows $100,000 from West Bank by signing a 6-month, 6%,
interest-bearing note.
Instructions
Prepare the necessary entries below associated with the note payable on the books of Holton
Company.
(a) Prepare the entry on April 1 when the note was issued.
(b) Prepare any adjusting entries necessary on June 30 in order to prepare the semiannual
financial statements. Assume no other interest accrual entries have been made.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA


(a) April 1 Cash ........................................................................... 100,000
Notes Payable.................................................... 100,000
(b) June 30 Interest Expense......................................................... 1,500

Interest Payable................................................. 1,500
($100,000 × 6% × 3 ÷ 12)
Be. 253
Peterson Company billed its customers a total of $840,000 for the month of November. The total
includes a 5% state sales tax.
Instructions
(a) Determine the proper amount of revenue to report for the month.
(b) Prepare the general journal entry to record the revenue and related liabilities for the month.
Solution 253 (5 min.)

(a) $840,000 ÷ 1.05 = $800,000 is the total sales revenue.
(b) $800,000  .05 = $40,000 is the state sales tax liability.
Journal Entry:
Accounts Receivable.................................................................... 840,000
Sales Revenue.................................................................... 800,000
Sales Taxes Payable........................................................... 40,000
Be. 254
Manuel Company had cash sales of $86,800 (including taxes) for the month of June. Sales are
subject to 8.5% sales tax. Prepare the entry to record the sale.
Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA

Cash ............................................................................................ 86,600
Sales Revenue.................................................................... 80,000
Sales Taxes Payable........................................................... 6,800
Be. 255
Mantle Publications publishes a golf magazine for women. The magazine sells for $4.00 a copy
on the newsstand. Yearly subscriptions to the magazine cost $36 per year (12 issues). During
December 2013, Expert Publications sells 4,000 copies of the golf magazine at newsstands and
receives payment for 6,000 subscriptions for 2014. Financial statements are prepared monthly.

Instructions
(a) Prepare the December 2013 journal entries to record the newsstand sales and subscriptions
received.
(b) Prepare the necessary adjusting entry on January 31, 2014. The January 2014 issue has
been mailed to subscribers.

(a) Cash ............................................................................................ 16,000
Sales Revenue.................................................................... 16,000
Cash (6,000  $36)....................................................................... 216,000
Unearned Subscription Revenue......................................... 216,000
(b) $216,000 ÷ 12 months = $18,000

Unearned Subscription Revenue.................................................. 18,000
Subscription Revenue.......................................................... 18,000
Be. 256
The board of directors of Lauber Corporation are considering two plans for financing the purchase
of new plant equipment. Plan #1 would require the issuance of $5,000,000, 6%, 20-year bonds at
face value. Plan #2 would require the issuance of 200,000 shares of $5 par value common stock
that is selling for $25 per share on the open market. Lauber Corporation currently has 100,000
shares of common stock outstanding and the income tax rate is expected to be 30%. Assume
that income before interest and income taxes is expected to be $500,000 if the new factory
equipment is purchased.
Instructions
Prepare a schedule that shows the expected net income after taxes and the earnings per share
on common stock under each of the plans that the board of directors is considering.
Plan #1 Plan #2
Issue Bonds Issue Stock
Income before interest taxes $500,000 $500,000
Interest expense ($5,000,000 × 6%) 300,000 —
Income before taxes 200,000 500,000
Income taxes (30%) 60,000 150,000
Net income $140,000 $350,000
Outstanding shares 100,000 300,000
Earnings per share $1.40 $1.17

Be. 257
On January 1, 2014, Hannigan Company issued bonds with a face value of $600,000. The bonds
carry a stated interest of 7% payable each January 1.
a. Prepare the journal entry for the issuance assuming the bonds are issued at 97.
b. Prepare the journal entry for the issuance assuming the bonds are issued at 102.

(a) Cash ............................................................................................ 582,000
Discount on Bonds Payable.......................................................... 18,000
Bonds Payable..................................................................... 600,000
(b) Cash ............................................................................................ 612,000
Bonds Payable..................................................................... 600,000
Premium on Bonds Payable................................................ 12,000
Be. 258
On January 1, 2014, Hauke Corporation issued $900,000, 6%, 10-year bonds at face value.
Interest is payable annually on January 1. Hauke Corporation has a calendar year end.
Instructions
Prepare all entries related to the bond issue for 2014.

2014
Jan. 1 Cash .................................................................................... 900,000
Bonds Payable............................................................ 900,000
Dec. 31 Interest Expense.................................................................. 54,000

Interest Payable.......................................................... 54,000
*Be. 259
Mintz Company issued $400,000, 10%, 10-year bonds on January 1, 2014, at 105. Interest is
payable annually. Mintz uses the straight-line method of amortization and has a calendar year
end.
Instructions
Prepare all journal entries made in 2014 related to the bond issue.

*Solution 259 (5-8 min.)

2014
Jan. 1 Cash .................................................................................... 420,000
Bonds Payable............................................................ 400,000
Premium on Bonds Payable........................................ 20,000

Cash........................................................................... 40,000
($400,000 × 10% = $40,000)
($20,000 × 1/10 = $2,000)
*Be. 260
Frye Company issued $700,000, 10%, 10-year bonds on January 1, 2014, at 105. Interest is
payable annually. Frye uses the effective-interest method of amortization and has a calendar year
end and the bonds were issued for an effective interest rate of 8%.
Instructions

2014
Jan. 1 Cash .................................................................................... 735,000
Bonds Payable............................................................ 700,000
Cash........................................................................... 70,000
($735,000 × 8% = $58,800)
($700,000 × 10% = $70,000)
($70,000 – $58,800 = $11,200)

EXERCISES
Ex. 261
Brewer Company has the following selected accounts after posting adjusting entries:
Accounts Payable $ 55,000
Notes Payable, 3-month 90,000
Accumulated Depreciation—Equipment 14,000
Notes Payable, 5-year, 8% 75,000
Payroll Taxes Expense 6,000
Interest Payable 5,000
Mortgage Payable 180,000
Instructions
(a) Prepare the current liability section of Brewer Company's balance sheet, assuming $12,000
of the mortgage is payable next year.
(b) Comment on Brewer’s liquidity, assuming total current assets are $450,000.
Ans: N/A, LO: 1,7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

(a) BREWER COMPANY
Current Liabilities
Current portion of long-term debt $ 12,000
Notes payable, 3-month 90,000
Accounts payable 55,000
Sales taxes payable 23,000
Interest payable 5,000
Total current liabilities $185,000
(b) The liquidity position looks favorable. If all current liabilities are paid out of current assets,
there would still be $265,000 of current assets (working capital). The current ratio is 2.43 : 1
and it appears as though Brewer Company has sufficient current resources to meet current
obligations when due.
Ex. 262
On March 1, Cooper Company borrows $80,000 from New National Bank by signing a 6-month,
6%, interest-bearing note.
Instructions
Prepare the necessary entries below associated with the note payable on the books of Cooper
Company.
(a) Prepare the entry on March 1 when the note was issued.
(b) Prepare any adjusting entries necessary on June 30 in order to prepare the semiannual
(c) Prepare the entry to record payment of the note at maturity.


a) March 1 Cash ........................................................................... 80,000
Notes Payable.................................................... 80,000
(b) June 30 Interest Expense......................................................... 1,600

Interest Payable................................................. 1,600
($80,000 × 6% × 4 ÷ 12)
(c) Sept. 1 Notes Payable............................................................. 80,000

Interest Expense......................................................... 800
Cash................................................................... 82,400
Ex. 263
On June 1, Huntley Company borrows $50,000 from the bank by signing a 60-day, 6%, interest-
bearing note.
Instructions
Prepare the necessary entries below associated with the note payable on the books of Huntley
Company.
(a) Prepare the entry on June 1 when the note was issued.
(b) Prepare any adjusting entries necessary on June 30 in order to prepare the monthly
(c) Prepare the entry to record payment of the note at maturity.

(a) June 1 Cash ........................................................................... 50,000
Notes Payable.................................................... 50,000
(b) June 30 Interest Expense......................................................... 250

Interest Payable................................................. 250
($50,000 × 6% ÷ 12)
(c) July 31 Notes Payable............................................................. 50,000

Interest Payable.......................................................... 250
Interest Expense......................................................... 250
Cash................................................................... 50,500

Ex. 264
On May 15, Holt's Clothiers borrowed some money on a 4-month note to provide cash during the
slow season of the year. The interest rate on the note was 8%. At the time the note was due, the
amount of interest owed was $1,200.
Instructions
(a) Determine the amount borrowed by Holt's.
(b) Assume the amount borrowed was $54,000. What was the interest rate if the amount of
interest owed was $900?
(c) Prepare the entry for the initial borrowing and the repayment for the facts in part (a).

(a) Principal  .08  4/12 = $1,200
Principal = $1,200  (.08  4/12)
Principal = $45,000
(b) $54,000  Interest rate  4/12 = $900

Interest Rate = $900  ($54,000  4/12)
Interest Rate = 5 percent
(c) Initial Borrowing:

May 15 Cash ………………………………… 45,000
Notes Payable………….. 45,000
Repayment:
Sept. 15 Notes Payable …………………..… 45,000
Interest Expense ………………….. 1,200
Cash ……………………. 46,200
Ex. 265
In providing accounting services to small business, you encounter the following situations
pertaining to cash sales.
(1) Kushner Company rings up sales and sales taxes separately on its cash register. On April
10 the register totals are sales $40,000 and sales taxes $2,800.
(2) Grant Company does not segregate sales and sales taxes. Its register total for April 15 is
$22,260, which includes a 6% sales tax.
Instructions
Prepare the entries to record the sales transactions and related taxes for (a) Kushner Company
and (b) Grant Company.


KUSHNER COMPANY
Apr. 10 Cash 42,800
Sales Revenue 40,000
GRANT COMPANY
15 Cash 22,260
Sales Revenue ($22,260  1.06) 21,000
Sales Taxes Payable ($22,260 – $21,000) 1,260
Ex. 266
During the month of March, Preston Company's employees earned wages of $90,000.
Withholdings related to these wages were $6,885 for Social Security (FICA), $14,200 for federal
income tax, $6,200 for state income tax, and $600 for union dues. The company incurred no cost
related to these earnings for federal unemployment tax, but incurred $1,300, for state
unemployment tax.
Instructions
(a) Prepare the necessary March 31 journal entry to record wages expense and wages
payable. Assume that wages earned during March will be paid during April.
(b) Prepare the entry to record the company's payroll tax expense.

(a) Mar. 31 Salaries and Wages Expense............................... 90,000
FICA Taxes Payable........................................ 6,885
Federal Income Taxes Payable..................... 14,200
State Income Taxes Payable........................... 6,200
Union Dues Payable........................................ 600
Salaries and Wages Payable.......................... 62,115
(b) Mar. 31 Payroll Tax Expense............................................. 8,185

FICA Taxes Payable........................................ 6,885
State Unemployment Taxes Payable............. 1,300

Ex. 267
Presented below are two independent situations:
(a) Morten Corporation purchased $480,000 of its bonds on June 30, 2014, at 102 and
immediately retired them. The carrying value of the bonds on the retirement date was
$431,100. The bonds pay annual interest and the interest payment due on June 30, 2014,
has been made and recorded.
(b) McEvoy, Inc., purchased $330,000 of its bonds at 96 on June 30, 2014, and immediately
retired them. The carrying value of the bonds on the retirement date was $321,000. The
bonds pay annual interest and the interest payment due on June 30, 2014, has been made
and recorded.
Instructions
For each of the independent situations, prepare the journal entry to record the retirement or
conversion of the bonds.

(a) June 30 Bonds Payable ............................................................ 480,000
Loss on Bond Redemption .......................................... 58,500
Discount on Bonds Payable .............................. 48,900
Cash .................................................................. 489,600
($480,000 – $431,100 = $48,900)
($480,000 × 1.02 = $489,600)
(b) June 30 Bonds Payable ............................................................ 330,000

Discount on Bonds Payable .............................. 9,000
Gain on Bond Redemption ................................ 4,200
Cash .................................................................. 316,800
($330,000 – $321,000 = $9,000)
($330,000 × 96% = $316,800)
Ex. 268
The adjusted trial balance for Helton Corporation at the end of 2014 contained the following
accounts:
Bonds payable, 10%............................................................ $500,000
Interest payable................................................................... 20,000
Discount on bonds payable.................................................. 30,000
Notes payable, 9%, due 2016.............................................. 70,000
Accounts payable................................................................ 120,000
Instructions
(a) Prepare the long-term liabilities section of the balance sheet.
(b) Indicate the proper balance sheet classification for the accounts listed above that do not
belong in the long-term liabilities section.


(a) Long-term liabilities
Bonds payable 10% $500,000
Less: Unamortized bond discount 30,000 $470,000
Notes payable, 9% 70,000
Total long-term liabilities $540,000
(b) Interest payable and accounts payable should be classified as current liabilities.
Ex. 269
Hensley, Inc. reports the following liabilities (in thousands) on its January 31, 2014, balance sheet
and notes to the financial statements.
Accounts payable $3,463.9

Accrued pension liability 1,215.2
Property taxes payable 1,158.1
Bonds payable 1,961.2
Current portion of long-term debt 1,992.2
Income taxes payable 235.2
Notes payable—long-term 9,246.7
Operating leases 1,641.7
Mortgage payable 435.6
Federal income taxes payable 558.1
Salaries and wages payable 2,563.6
Unused operating line of credit 3,337.6
Warranty liability— current 1,617.3
Instructions
Prepare the liabilities section of Hensley's balance sheet as at January 31, 2014.

HENSLEY INC.
(Partial) Balance Sheet
January 31, 2014
(in thousands)
Current liabilities
Accounts payable............................................... $3,463.9
Salaries and wages payable............................... 2,563.6
Current portion of long-term debt........................ 1,992.2
Warranty liability................................................. 1,617.3
Property taxes payable....................................... 1,158.1
Federal income taxes payable............................ 558.1
Income taxes payable......................................... 235.2
Total current liabilities.................................. $11,588.4

Solution 269 (Cont.)

Long-term liabilities
Notes payable, long-term.................................... $9,246.7
Bonds payable.................................................... 1,961.2
Accrued pension liability..................................... 1,215.2
Mortgage payable............................................... 435.6
Total long-term liabilities.............................. 12,858.7
Total liabilities................................................................. $24,447.1
Ex. 270
McDonald's financial statements contain the following selected data (in millions).
Current assets $ 3,881.9

Total assets 29,391.7
Current liabilities 4,498.5
Total liabilities 13,611.9
Interest expense $ 410.1

Income taxes 1,237.1
Net Income 2,395.1
Instructions
(a) Compute the following values and provide a brief interpretation of each.
(1) Working capital. (3) Debt to assets ratio.
(2) Current ratio. (4) Times interest earned.
(b) The notes to McDonald's financial statements show that subsequent to this year the
company will have future minimum lease payments under operating leases of $10,513.8
million. If these assets had been purchased with debt, assets and liabilities would rise by
approximately $9,400 million. Recompute the debt to assets ratio after adjusting for this.
Discuss your result.
Ans: N/A, LO: 7, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

(a) (1) Working capital = $3,881.9 – $4,498.5 = - $616.6
(2) Current ratio = $3,881.9  $4,498.5 = .86:1
(3) Debt to assets ratio = $13,611.9  $29,391.7 = 46%
(3) Times interest earned = ($2,395.1 + $1,237.1 + $410.1)  $410.1 = 9.86 times
A current ratio that is less than 1.00 indicates lower liquidity. The debt to assets ratio indicates
that $.46 of each dollar of asset have been financed by creditors. The times interest earned of
almost 10 times indicated that McDonald's income is large enough to make required interest
payments as they come due.
(b) Debt to assets ratio, adjusted for off-balance-sheet lease obligations.

$13,611.9 + $9,400
= 59%
$29,391.7 + $9,400
By including these off-balance-sheet obligations the debt to assets ratio increases

from 46% to 59%, suggesting that McDonald's is not as solvent as it first appears.

*Ex. 271
Renfro Company issued $300,000 of 8%, 10-year bonds at 102. Interest is paid annually, and the
straight-line method is used for amortization. Assume that the market rate for similar investments
is 7%. The bonds are issued on the date of the bonds.
a. What amount was received for the bonds?

b. How much interest is paid each interest period?
c. What is the premium amortization for the first interest period?
d. How much interest expense is recorded on the first interest date?
e. What is the carrying value of the bonds after the first interest date?
Ans: N/A, LO: 5,8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA

a. $306,000 ($300,000 × 1.02)
b. $24,000 ($300,000 × .08)
c. $600 [($306,000 – $300,000)/10]
d. $23,400 ($24,000 – $600)
e. $305,400 ($306,000 – $600)
*Ex. 272
On January 1, 2014, Powell Corporation issued $600,000, 5%, 5-year bonds dated January 1,
2014, at 95. The bonds pay annual interest on January 1. The company uses the straight-line
method of amortization and has a calendar year end.
Instructions
Prepare all the journal entries that Powell Corporation would make related to this bond issue
through January 1, 2015. Be sure to indicate the date on which the entries would be made.
*Solution 272 (5 min.)

January 1, 2014
Cash .......................................................................................... 570,000
Discount on Bonds Payable.......................................................... 30,000
Bonds Payable..................................................................... 600,000
(To record sale of bonds at a discount)
December 31, 2014

Interest Expense.......................................................................... 36,000
Discount on Bonds Payable................................................. 6,000
Interest Payable................................................................... 30,000
(To record annual accrued bond interest and amortization of
bond discount)
January 1, 2015
Interest Payable .......................................................................... 30,000
Cash ................................................................................... 30,000
(To record payment of bond interest liability)

*Ex. 273
Grand Company issued $800,000, 10%, 20-year bonds on January 1, 2014, at 104. Interest is
payable annually on January 1. Grand uses the straight-line method of amortization and has a
calendar year end.
Instructions

2014
Jan. 1 Cash .................................................................................... 832,000
Bonds Payable............................................................ 800,000

($800,000 × 10% = $80,000)
($32,000 × 1/20 = $1,600)
*Ex. 274
Garrison Company issued $2,000,000, 7%, 20-year bonds on January 1, 2014, at 105. Interest is
payable annually on January 1. Garrison uses straight-line amortization for bond premium or
discount.
Instructions
Prepare the journal entries to record the following events.
(a) The issuance of the bonds.
(b) The accrual of interest and the premium amortization on December 31, 2014.
(c) The payment of interest on January 1, 2015.
(d) The redemption of the bonds at maturity, assuming interest for the last interest period has
been paid and recorded.
Ans: N/A, LO: 5,6,8, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA

2014
(a) Jan. 1 Cash ($2,000,000  105%)........................ 2,100,000
Bonds Payable................................... 2,000,000
Premium on Bonds Payable................ 100,000
(b) Dec. 31 Interest Expense......................................... 135,000

Premium on Bonds Payable
($100,000  1/20)....................................... 5,000
Interest Payable
($2,000,000  7%)........................... 140,000

*Solution 274 (Cont.)

2015
(c) Jan. 1 Interest Payable............................................ 140,000
Cash..................................................... 140,000
2034
(d) Jan. 1 Bonds Payable.............................................. 2,000,000
Cash..................................................... 2,000,000
*Ex. 275
Shannon Company issued $1,000,000, 8%, 10-year bonds on December 31, 2013, for $960,000.
Interest is payable annually on December 31. Shannon uses the straight-line method to amortize
bond premium or discount.
Instructions
Prepare the journal entries to record the following events.
(a) The issuance of the bonds.
(b) The payment of interest and the discount amortization on December 31, 2014.
(c) The redemption of the bonds at maturity, assuming interest for the last interest period has
been paid and recorded.
Ans: N/A, LO: 5,6,8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA

2013
(a) Dec. 31 Cash............................................................. 960,000
Discounts of Bonds Payable.......................... 40,000
Bonds Payable................................... 1,000,000
2014
(b) Dec. 31 Interest Expense........................................... 84,000
Discount on Bonds Payable
($40,000  1/10)................................. 4,000
Cash ($1,000,000  8%)........................ 80,000
2023
(c) Dec. 31 Bond Payable............................................... 1,000,000
Cash.................................................... 1,000,000
*Ex. 276
Wynne Company issued $900,000 of 10%, 5-year bonds at 108. Interest is paid annually, and the
effective interest method is used for amortization. Assume that the market rate for similar
investments is 8%. The bonds are issued on the date of the bonds.
a. What amount was received for the bonds?

b. How much interest is paid each interest period?
c. What is the premium amortization for the first interest period?
d. How much interest expense is recorded on the first interest date?
e. What is the carrying value of the bonds after the first interest date?
Ans: N/A, LO: 3, 9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA


a. $972,000 ($900,000 × 1.08)
b. $90,000 ($900,000 ×.10)
c. $12,240 [$90,000 – ($972,000 × .08)]
d. $77,760 ($972,000 × .08)
e. $959,760 ($972,000 – $12,240)
*Ex. 277
Moon Company issued $500,000, 10%, 5-year bonds on January 1, 2014, at 106. Interest is
payable annually on January 1. Moon uses the effective-interest method of amortization and has
a calendar year end and the bonds were issued for an effective interest rate of 8%.
Instructions

2014
Jan. 1 Cash .................................................................................... 530,000
Bonds Payable............................................................ 500,000

($530,000 × 8% = $42,400)
($500,000 × 10% = $50,000)
($50,000 – $42,400 = $7,600)
*Ex. 278
Perez Co. receives $2,200,000 when it issues a $2,200,000, 8%, mortgage note payable to
finance the construction of a building at December 31, 2014. The terms provide for semiannual
installment payments of $140,820 on June 30 and December 31.
Instructions
Prepare the journal entries to record the mortgage loan and the first two installment payments.

Issuance of Note
2014 Dec. 31 Cash................................................... 2,200,000
Mortgage Payable......................... 2,200,000
First Installment Payment

2015 June 30 Interest Expense
($2,200,000  8%  6/12)................... 88,000
Mortgage Payable.................................. 52,820
Cash............................................... 140,820

*Solution 278 (Cont.)

Second Installment Payment
Dec. 31 Interest Expense
[($2,200,000 – $52,820)  8%  6/12)] 85,887
Mortgage Payable.................................. 54,933
Cash............................................... 140,820
COMPLETION STATEMENTS
279. A current liability is a debt that can be expected to be paid within ____________ year(s)
or the ______________, whichever is longer.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None,
IMA: Reporting
280. Liabilities are classified on the balance sheet as being _______________ liabilities or
______________ liabilities.
IMA: Reporting
281. Obligations in written form are called ______________ and usually require the borrower
to pay interest.
IMA: Reporting
282. With an interest-bearing note, a borrower must pay the ________________ of the note
plus _________________ at maturity.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
None, IMA: Business Economics
283. Sales taxes collected from customers are a ______________ of the business until they
are remitted to the taxing agency.
IMA: Reporting
284. Payroll taxes include the employer’s share of ________________ taxes and both state
and federal ________________ taxes.
None, IMA: FSA
285. Bonds that mature at a single specified future date are called _________________ bonds,
whereas bonds that mature in installments are called __________________ bonds.
None, IMA: FSA
286. The terms of a bond issue are set forth in a formal legal document called a bond
________________.
IMA: Reporting
287. Unsecured bonds that are issued against the general credit of the borrower are called
________________ bonds.

288. The market price of bonds is obtained by computing the present value of the
________________ paid at maturity, and all ________________ payments to be made
over the term of the bond.
None, IMA: FSA
289. If bonds are issued at face value (par), it indicates that the ________________ rate of
interest must be equal to the ________________ rate of interest.
IMA: Reporting
290. If a $1 million, 10%, 10-year bond issue was sold at 97, the cash proceeds from the
issuance of the bonds amounted to $________________.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
291. If bonds were issued at a premium, then the contractual rate of interest was
_______________ than the market rate of interest.
292. Discount on Bonds Payable is ________________ (“deducted from” or “added to”) bonds
payable on the balance sheet. Premium on Bonds Payable is ________________
(“deducted from” or “added to”) bonds payable on the balance sheet.
IMA: Reporting
293. The ________________ provides an indication of a company’s ability to meet interest

payments as they come due.
*294. A method of amortizing bond discount or premium that allocates an equal amount each
period is the ________________ method.
Answers to Completion Statements
279. one, operating cycle 287. debenture

280. current, long-term 288. principal, interest
281. notes payable 289. stated (contractual), market (effective)
282. face value, interest 290. 970,000
283. current liability 291. greater
284. FICA, unemployment 292. deducted from, added to
285. term, serial 293. times interest earned
286. indenture *294. straight-line

MATCHING
295. Match the items below by entering the appropriate code letter in the space provided.
A. Serial bonds F. Current ratio

B. Debenture bonds G. Straight-line method of amortization
C. Bond indenture H. Times interest earned
D. Market interest rate I. Callable bonds
E. Discount on bonds payable J. Maturity date
____ 1. Bonds subject to retirement at a stated dollar amount prior to maturity.

____ 2. A legal document that sets forth the terms of a bond issue.
____ 3. Bonds that mature in installments.
____ 4. A measure of a company’s short-term liquidity.
____ 5. The time that the final payment on a bond is due from the bond issuer.
____ 6. A measure of a company’s solvency.
____ 7. The rate investors demand for loaning funds to a corporation.
____ 8. Unsecured bonds issued against the general credit of the borrower.
____ 9. Occurs when the contractual rate of interest is less than the market rate of interest.
____ 10. Produces a periodic interest expense that is the same amount each interest period.
Ans: N/A, LO: 4,5,7,8, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Answers to Matching
1. I 6. H
2. C 7. D
3. A 8. B
4. F 9. E
5. J 10. G
SHORT-ANSWER ESSAY QUESTIONS
S-A E 296
(a) Identify three taxes commonly paid by employers on employees' salaries and wages.
(b) Where in the financial statements does the employer report taxes withheld from employees'
pay?
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement,
AICPA PC: Communications, IMA: Business Economics

Solution 296
(a) Three taxes commonly paid by employers on employees' salaries and wages are (1) Social
Security (FICA) taxes, (2) state unemployment taxes, and (3) federal unemployment taxes.
(b) Taxes withheld from employees' gross pay and not yet remitted to the appropriate
government agency are reported in the balance sheet as current liabilities.
S-A E 297
(a) What is a convertible bond?
(b) Discuss the advantages of a convertible bond from the standpoint of the bondholders and
of the issuing corporation.
Solution 297
(a) A convertible bond permits bondholders to convert it into common stock at the option of the
bondholders.
(b) For bondholders, the conversion option gives an opportunity to benefit if the market price of
the common stock increases substantially. For the issuer, convertible bonds usually have:
(1) a lower rate of interest than other debt securities, (2) a higher selling price.
S-A E 298
When determining the value of a bond using present value, what are the two components used in
the calculation?
Solution 298
One component is the periodic interest payments over the life of the bonds discounted using the
market interest rate to calculate its present value. The other component is the present value of
the single payment at maturity also based on the market interest rate.
S-A E 299
When a bond sells at a discount, what is probably true about the market interest rate versus the
stated interest rate? Discuss.
Solution 299
For someone to purchase a bond at a discount, the stated interest rate normally must be below
the market interest rate for similar bonds. Investors will need to make up the difference by paying
less than the face value for the bonds.
S-A E 300
Bonds are frequently issued at amounts greater or less than face value. Describe how the market
rate of interest, relative to the contractual rate of interest, affects the selling price of bonds.
Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement,

Solution 300
The market rate of interest often is different from the contractual rate of interest and therefore
bonds are frequently issued at amounts greater or less than face value. When the market rate of
interest is higher than the contractual rate, investors can find better investments elsewhere and
consequently there is less demand for the bonds. So, to make the bonds more attractive, the
issue price will be lowered and the bonds will be issued at a discount. Conversely, if the market
rate of interest is less than the contractual rate, there will be greater demand for the bonds
because of the higher rate of interest. Thus, the issue price will be greater than face value and
the bonds will be issued at a premium.
S-A E 301
Bonds may be redeemed (retired) before maturity by the issuing corporation. Explain why a
company would decide to retire bonds before maturity and the necessary steps to record the
redemption.
Solution 301
A company may decide to retire bonds before maturity to reduce interest cost and remove debt
from its balance sheet. A company will retire debt early only if it has sufficient cash resources.
When bonds are retired before maturity, it is necessary to eliminate the carrying value of the
bonds at the redemption date and recognize a gain or loss on redemption. The gain or loss is the
difference between the cash paid and the carrying value of the bonds.
S-A E 302
(a) In general, what are the requirements for the financial statement presentation of long-term
liabilities?
(b) What ratios may be computed to evaluate a company's liquidity and solvency?
Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA
PC: Communications, IMA: Reporting
Solution 302
(a) The nature and the amount of each long-term liability should be presented in the balance
sheet or in schedules in the accompanying notes to the financial statements. The notes
should also indicate the interest rates, maturity dates, conversion privileges, and assets
pledged as collateral.
(b) To evaluate liquidity a company may compute the current ratio. To evaluate long-run
solvency a company may compute a debt to total assets ratio, and a times interest earned
ratio.
S-A E 303
Maria Gomez is discussing the advantages of the effective-interest method of bond amortization
with her accounting staff. What do you think Maria is saying?

Solution 303
Maria is probably indicating that since the borrower has the use of the bond proceeds over the
term of the bonds, the borrowing rate in each period should be the same. The effective-interest
method results in a varying amount of interest expense but a constant rate of interest on the
balance outstanding. Accordingly, it results in a better matching of expenses with revenues than
the straight-line method.
S-A E 304 (Ethics)

Wishbone Company maintains two separate accounts payable computer systems. One is known
to all the users, and is used to process payments to vendors. Employees enter the vendor code,
or the name and address of new vendors, the amount, the account, and so on. The other system
is a secret one. It is used to cross-check the vendors against an approved vendor list. If a vendor
is not listed as approved, the payment process is halted. Internal audit employees seek to verify
the existence of a bona fide claim by the vendor. All inquiries are made at the top management
level, and very discreetly. No one but top management, the internal audit staff, and the Board of
Directors of the company is even aware of the second system.
Required:
Is it ethical for a company to have a secret system like the one described? Explain.
Ans: N/A, LO: 1, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC:
Communications, IMA: Internal Controls
Solution 304
Secret systems that seek to verify the integrity of the non-secret primary system are certainly
ethical. In fact, nearly all fraud and theft detection systems are secret. It is only the misuse of
these systems, such as to obtain unauthorized information, or to commit some other crime, that is
unethical.
S-A E 305 (Communication)

Susan Jones works for Trend Press, a fairly large book publishing firm. Her best friend and rival,
Diane Nilson, works for Lifeline Books, a smaller publisher. Both companies issue $100,000 in
bonds on July 1. Trend's bonds were issued at a discount, while Lifeline's were issued at a
premium. Diane sent Susan a fax the next day. She told Susan that it was obvious who the better
publisher was and the market had shown its preference! She reminded Susan again of her recent
increase in salary as further proof of the superiority of Lifeline Books.
Required:
Draft a short note for Susan to send to Diane. Explain how such a result could occur.

Solution 305
Many answers are possible. The format should be fairly informal, and the point that a discount or
premium is not necessarily a judgment on the strength or weakness of a company should be
addressed. A suggested note follows:
Diane —
I can't believe that Lifeline can survive with people like you handling their money! I also
can't believe their lack of judgment in giving you a raise! Just kidding! Seriously, though,
you can't prove that Trend is a bad company just by the bond price.
Our bonds were issued at a discount, not because of the market's evaluation of our
company, but because we underestimated interest rates. Lifeline got a premium because it
overestimated interest rates. You'll have to find some other evidence to prove your
company is better, (which you can't, because it isn't.)
Seriously (again), congratulations on your raise. Shall we still meet for lunch on
Wednesday? Your treat. How about trying our luck with chopsticks at the Chinese Panda?
Let me know if your plans change.
(signed)

IFRS QUESTIONS
1. Wittebury Corporation retires its £3,000,000 face value bonds at 105 on January 1,
following the payment of annual interest. The carrying value of the bonds at the
redemption date is $3,112,350. The entry to record the redemption will include
a. a credit of £37,650 to Gain on Bond Redemption.
b. a debit of £37,650 to Loss on Bond Redemption.
c. a credit of £15,000 to Bonds Payable.
d. a credit of £37,650 to Bonds Payable.
Ans: b, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA
2. Chang Company retired bonds with a face amount of ¥60,000,000 at 98 when the carrying
value of the bond was ¥59,780,000. The entry to record the retirement would include a
a. gain on bond redemption of ¥980,000.
b. loss on bond redemption of ¥980,000.
c. loss on bond redemption of ¥1,200,000.
d. gain on bond redemption of ¥1,420,000.
Ans: b, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA
3. Herman Company received proceeds of ₤471,250 on 10-year, 8% bonds issued on

January 1, 2012. The bonds had a face value of ₤500,000, pay interest semi-annually on
June 30 and December 31, and have a call price of 101. Herman uses the straight-line
method of amortization.
Herman Company decided to redeem the bonds on January 1, 2014. What amount of
gain or loss would Herman report on its 2014 income statement?
a. ₤23,000 gain
b. ₤28,000 gain
c. ₤28,000 loss
d. ₤23,000 loss
Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting
4. Finney Company borrowed €1,600,000 from BankTwo on January 1, 2013 in order to

expand its mining capabilities. The five-year note required annual payments of €416,698
a. €1,600,000
b. €1,045,458
c. €1,335,302
d. €1,296,000
Ans: b, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting
5. On January 1, 2014, Michelin Company, a calendar-year company, is issued €9,000,000

of mortgage notes payable, of which €3,000,000 is due on January 1 for each of the next
three years. The proper statement of financial position presentation on December 31,
2014, is
a. Current liabilities, €9,000,000.
b. Long-term Debt, €9,000,000.
c. Current liabilities, €4,500,000; Long-term Debt, €4,500,000.
d. Current liabilities, €3,000,000; Long-term Debt, €6,000,000.
IMA: Reporting

6. Whitmore Corporation Issues a £1,800,000, 10%, 10-year mortgage on December 31,

2014. The terms call for semi-annual installment payments of £144,435.The entry to
record the first installment payment will include
a. a debit to Interest Payment of £144,435.
b. a debit to Mortgage Notes Payable of £54,435.
c. a debit to Interest Expense of £180,000.
d. a credit to cash of £144,435.
IMA: Reporting
7. The adjusted trial balance for Beneteau Corporation at the end of the 2014 included the
following accounts:
5-year Bonds Payable 8% €6,620,000

Bond Interest Payable 240,000
Notes Payable (3 mo.) 50,000
Notes Payable (5 yr.) 1,650,000
Mortgage Payable (€150,000 due currently) 2,000,000
Salaries and Wages Payable 68,000
Taxes Payable (due 3/15 of next year) 85,000
The total non-current liabilities reported on the statement of financial position at December
31, 2014 are
a. €9,880,000
b. €10,030,000
c. €10,120,000
d. €10,360,000
Ans: c, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting
8. Selected data from 2014 financial statements of Xi Corporation include the following
(amount in millions):
Current assets ¥ 759

Total assets 1,200
Current liabilities 400
Total liabilities 750
Cash 80
Interest expense 50
income taxes 100
Net income 160
The debt to assets ratio is

a. 62.5%.
b. 52.7%.
c. 1.60%.
d. 6.2 times.
Ans: a, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

a
9. ¥2 billion, 8%, 10-year bonds are issued at face value. Interest will be paid semi-annually.
When calculating the market price of the bond, the present value of
a. ¥160,000,000 received for 10 periods must be calculated.
b. ¥2 billion received in 10 periods must be calculated.
c. ¥2 billion received in 20 periods must be calculated.
d. ¥80,000,000 received for 10 periods must be calculated.
Ans: c, LO: 9, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA
a
10. On January 1, 2014, Asianic Inc. issued 10-year bonds with a face amount of ¥25,000,000
and a contract rate of 8% payable annually on January 1. The effective-interest rate on
the bonds is 10%. Present value factors are as follows:
At 8% At 10%
PV of 1 for 10 periods 0.463 0.386
PV of an ordinary annuity if 1 for 10 periods 6.710 6.145
Total issue price of the bonds was

a. ¥25,000,000.
b. ¥24,500,000.
c. ¥23,000,000.
d. ¥21,940,000.
Ans: c, LO: 9, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

CH 10

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CHAPTER 10

REPORTING AND ANALYZING LIABILITIES

FOR INSTRUCTOR USE ONLY

Multiple Choice Questions (Cont.)

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

Note: TF = True-False C = Completion

CHAPTER LERANING OBJECTIVES

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

6. Notes payable usually require the borrower to pay interest.

7. Notes payable are often used instead of accounts payable.

8. A note payable must always be paid before an account payable.

10. Most notes are not interest bearing.

12. Interest expense on a note payable is only recorded at maturity.

FOR INSTRUCTOR USE ONLY

25. Generally, convertible bonds do not pay interest.

27. Bonds are a form of interest-bearing notes payable.

FOR INSTRUCTOR USE ONLY

30. Convertible bonds are often called callable bonds.

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

67. Liabilities are classified on the balance sheet as current or

68. Most companies pay current liabilities

69. A current liability is a debt that can reasonably be expected to be paid

FOR INSTRUCTOR USE ONLY

71. Failure to record a liability will probably

73. Current liabilities are due

74. Liabilities are classified as current or long-term based on their

FOR INSTRUCTOR USE ONLY

Solution: $300,000 face value

Solution: $300,000  .06  6/12  $9,000

Solution: $300,000  .06  9/12  $13,500

Solution: $200,000 face value

Solution: $200,000  .06  3/12  $3,000

Solution: $200,000  .06  6/12  $6,000

83. As interest is recorded on an interest-bearing note, the Interest Expense account is

Solution: $100,000  .04  3/12  $1,000

Solution: $100,000  .04  3/12  $1,000

Solution: $250,000  .06  90/360  $3,750

FOR INSTRUCTOR USE ONLY

Solution: $250,000  .06  60/360  $2,500

Solution: $250,000  .06  $15,000

Solution: $70,000  .06  90/360  $1,050

Solution: $70,000  .06  60/360  $700

91. Interest expense on an interest-bearing note is

92. Sales taxes collected by a retailer are recorded by

FOR INSTRUCTOR USE ONLY

93. Unearned Rent Revenue is

Solution: ($252,000  1.05)  .05  $12,000

FOR INSTRUCTOR USE ONLY

Solution: ($420,000  1.05)  .05  $20,000

99. The current portion of long-term debt should

100. On January 1, 2014, Ermler Company, a calendar-year company, issued $1,000,000 of

Solution: $1,000,000  $250,000  $750,000

101. On January 1, 2014, Keisler Company, a calendar-year company, issued $700,000 of

102. Sales taxes collected by a retailer from a customer are expenses

FOR INSTRUCTOR USE ONLY

104. Sales taxes collected by a retailer are reported as