Question 1

The 2010 financial statements of Shadow Co. contain the following selected data (in millions).   The debt to total assets ratio is

Accepted Answer

A)  60.7%. 
B)  53.3%. 
C)  28.6%. 
D)  1.65%. 
A)  60.7%. 
B)  53.3%. 
C)  28.6%. 
D)  1.65%.

Question 2

If bonds are issued at face value (par), it indicates that the ________________ interest rate must be equal to the ________________ interest rate.

Accepted Answer

stated (contractual)

Question 3

Either the straight-line method or the effective-interest method of amortization will always result in

Accepted Answer

A)  the same amount of interest expense being recognized over the term of the bonds. 
B)  the same amount of interest expense being recognized each year. 
C)  more interest expense being recognized than if premium or discounts were not amortized. 
D)  the same carrying value each year during the term of the bonds. 
A)  the same amount of interest expense being recognized over the term of the bonds. 
B)  the same amount of interest expense being recognized each year. 
C)  more interest expense being recognized than if premium or discounts were not amortized. 
D)  the same carrying value each year during the term of the bonds.

Question 4

The present value of a bond is a function of two variables: (1) the payment amounts and (2) the interest (discount) rate.

Accepted Answer

A) True 
 B)False

Question 5

On January 1, Patterson Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report unamortized bond discount of

Accepted Answer

A)  $274,500. 
B)  $285,500. 
C)  $258,050. 
D)  $255,000. 
A)  $274,500. 
B)  $285,500. 
C)  $258,050. 
D)  $255,000.

Question 6

Match the items below by entering the appropriate code letter in the space provided.
A. Serial bonds G. Straight-line method of amortization
B. Debenture bonds H. Bonds
C. Bond indenture I. Debt to total assets ratio
D. Premium on bonds payable J. Capital lease
E. Discount on bonds payable K. Operating lease
F. Effective-interest method of amortization L. Registered bonds
_____ 1. A contractual arrangement which is in effect a purchase of property.
_____ 2. A legal document that sets forth the terms of a bond issue.
_____ 3. Bonds that mature in installments.
_____ 4. Produces a periodic interest expense equal to a constant percentage of the carrying value of the bonds.
_____ 5. Bonds issued in the name of the owner.
_____ 6. A form of interest-bearing notes payable used by corporations.
_____ 7. Occurs when the contractual interest rate is greater than the market interest rate.
_____ 8. Unsecured bonds issued against the general credit of the borrower.
_____ 9. A contractual arrangement that gives the lessee temporary use of property.
_____ 10. A solvency measure that indicates the percentage of assets provided by creditors.
_____ 11. Occurs when the contractual interest rate is less than the market interest rate.
_____ 12. Produces a periodic interest expense that is the same amount each interest period.

Accepted Answer

1. J 7. D
2. C 8. B

Question 7

Which of the following statements concerning leases is true?

Accepted Answer

A)  Capital leases are favored by lessees. 
B)  The appearance of the account, Leased Asset, on the balance sheet, signifies an operating lease. 
C)  The portion of a lease liability expected to be paid in the next year is reported as a current liability. 
D)  Present value is irrelevant in accounting for leases. 
A)  Capital leases are favored by lessees. 
B)  The appearance of the account, Leased Asset, on the balance sheet, signifies an operating lease. 
C)  The portion of a lease liability expected to be paid in the next year is reported as a current liability. 
D)  Present value is irrelevant in accounting for leases.

Question 8

A corporation issued $600,000, 10%, 5-year bonds on January 1, 2010 for 648,666, which reflects an effective-interest rate of 8%. Interest is paid semiannually on January 1 and July 1. If the corporation uses the effective-interest method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1, 2010, is

Accepted Answer

A)  $30,000. 
B)  $24,000. 
C)  $32,434. 
D)  $25,946. 
A)  $30,000. 
B)  $24,000. 
C)  $32,434. 
D)  $25,946.

Question 9

When bonds are converted into common stock,

Accepted Answer

A)  the market price of the stock on the date of conversion is credited to the Common Stock account. 
B)  the market price of the bonds on the date of conversion is credited to the Common Stock account. 
C)  the market price of the stock and the bonds is ignored when recording the conversion. 
D)  gains or losses on the conversion are recognized. 
A)  the market price of the stock on the date of conversion is credited to the Common Stock account. 
B)  the market price of the bonds on the date of conversion is credited to the Common Stock account. 
C)  the market price of the stock and the bonds is ignored when recording the conversion. 
D)  gains or losses on the conversion are recognized.

Question 10

The lessee has substantially all of the benefits and risks of ownership in a(n)

Accepted Answer

A)  apartment lease. 
B)  capital lease. 
C)  operating lease. 
D)  operating lease and a capital lease. 
A)  apartment lease. 
B)  capital lease. 
C)  operating lease. 
D)  operating lease and a capital lease.

Question 11

Corporations are granted the power to issue bonds through

Accepted Answer

A)  tax laws. 
B)  state laws. 
C)  federal security laws. 
D)  bond debentures. 
A)  tax laws. 
B)  state laws. 
C)  federal security laws. 
D)  bond debentures.

Question 12

The straight-line method of amortization allocates the same amount to _______________ in each interest period.

Accepted Answer

The answer of The straight-line method of amortization allocates the...

Question 13

Delta Company issued bonds with a face amount of $1,500,000 in 2005. As of January 1, 2010, the balance in Discount on Bonds Payable is $4,800. At that time, Delta redeemed the bonds at 101.
Instructions
Assuming that no interest is payable, make the entry to record the redemption.

Accepted Answer

The answer of Delta Company issued bonds with a face...

Question 14

Four thousand bonds with a face value of $1,000 each, are sold at 103. The entry to record the issuance is

Accepted Answer

The answer of Four thousand bonds with a face value...

Question 15

Riley Company issued a $2,500,000, 10%, 10-year mortgage note payable to finance the construction of a building at December 31, 2010. The terms provide for semiannual installment payments of $200,608.
Instructions
Prepare the entry to record:
(a) the mortgage loan on December 31, 2010.
(b) the first installment payment.

Accepted Answer

The answer of Riley Company issued a $2,500,000, 10%, 10-year...

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

Shaffer Inc. is considering two alternatives to finance its construction of a new $5 million plant.
(a) Issuance of 500,000 shares of common stock at the market price of $10 per share.
(b) Issuance of $5 million, 8% bonds at par.
Instructions

Accepted Answer

The answer of Shaffer Inc. is considering two alternatives to...

Question 18

Each payment on a mortgage note payable consists of

Accepted Answer

A)  interest on the original balance of the loan. 
B)  reduction of loan principal only. 
C)  interest on the original balance of the loan and reduction of loan principal. 
D)  interest on the unpaid balance of the loan and reduction of loan principal. 
A)  interest on the original balance of the loan. 
B)  reduction of loan principal only. 
C)  interest on the original balance of the loan and reduction of loan principal. 
D)  interest on the unpaid balance of the loan and reduction of loan principal.

Question 19

The times interest earned ratio is computed by dividing

Accepted Answer

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 income taxes and interest expense by interest expense. 
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 income taxes and interest expense by interest expense.

Question 20

Each bondholder may vote for the board of directors in proportion to the number of bonds held.

Accepted Answer

A) True 
 B)False

Exam 15: Long-Term Liabilities

The 2010 financial statements of Shadow Co. contain the following selected data (in millions). The debt to total assets ratio is

If bonds are issued at face value (par), it indicates that the ________________ interest rate must be equal to the ________________ interest rate.

Either the straight-line method or the effective-interest method of amortization will always result in

The present value of a bond is a function of two variables: (1) the payment amounts and (2) the interest (discount) rate.

Which of the following statements concerning leases is true?

When bonds are converted into common stock,

The lessee has substantially all of the benefits and risks of ownership in a(n)

Corporations are granted the power to issue bonds through

The straight-line method of amortization allocates the same amount to _______________ in each interest period.

Delta Company issued bonds with a face amount of $1,500,000 in 2005. As of January 1, 2010, the balance in Discount on Bonds Payable is $4,800. At that time, Delta redeemed the bonds at 101. Instructions Assuming that no interest is payable, make the entry to record the redemption.

Four thousand bonds with a face value of $1,000 each, are sold at 103. The entry to record the issuance is

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.

Shaffer Inc. is considering two alternatives to finance its construction of a new $5 million plant. (a) Issuance of 500,000 shares of common stock at the market price of $10 per share. (b) Issuance of $5 million, 8% bonds at par. Instructions

Each payment on a mortgage note payable consists of

The times interest earned ratio is computed by dividing

Each bondholder may vote for the board of directors in proportion to the number of bonds held.

Accounting in Action

The Recording Process

Adjusting the Accounts

Completing the Accounting Cycle

Accounting for Merchandising Operations

Inventories

Accounting Information Systems

Fraud, Internal Control, and Cash

Accounting for Receivables

Plant Assets, Natural Resources, and Intangible Assets

Current Liabilities and Payroll Accounting

Accounting for Partnerships

Corporations: Organization and Capital Stock Transactions

Corporations: Dividends, Retained Earnings, and Income Reporting

Investments

Statement of Cash Flows

Financial Analysis: the Big Picture

Managerial Accounting

Job Order Costing

Process Costing

Cost-Volume-Profit

Incremental Analysis

Budgetary Planning

Budgetary Control and Responsibility Accounting

Standard Costs and Balanced Scorecard

Filters

If bonds are issued at face value (par), it indicates that the interest rate must be equal to the interest rate.