Question 1

The amount of FICA tax and Medicare tax withheld from an employee is used to pay the employer's percentage of the tax and is mailed to the government quarterly.

Accepted Answer

A) True 
 B)False

Question 2

The amortization of a bond premium:

Accepted Answer

A)  Decreases the carrying value of a bond and increases interest expense. 
B)  Decreases the carrying value of a bond and decreases interest expense. 
C)  Increases the carrying value of a bond and increases interest expense. 
D)  Increases the carrying value of a bond and decreases interest expense. 
A)  Decreases the carrying value of a bond and increases interest expense. 
B)  Decreases the carrying value of a bond and decreases interest expense. 
C)  Increases the carrying value of a bond and increases interest expense. 
D)  Increases the carrying value of a bond and decreases interest expense.

Question 3

Which of the following statistics is of more significance to a long-term creditor than to a short-term creditor?

Accepted Answer

A)  Interest coverage ratio. 
B)  Receivables turnover rate. 
C)  Working capital. 
D)  Quick ratio. 
A)  Interest coverage ratio. 
B)  Receivables turnover rate. 
C)  Working capital. 
D)  Quick ratio.

Question 4

If Salem Co. retires $10 million of these bonds by purchasing them from bondholders at current market price, the company will report:

Accepted Answer

A)  A $600,000 gain. 
B)  A $500,000 loss. 
C)  An unrealized gain. 
D)  Neither gains nor losses are recognized on early retirements of debt. 
A)  A $600,000 gain. 
B)  A $500,000 loss. 
C)  An unrealized gain. 
D)  Neither gains nor losses are recognized on early retirements of debt.

Question 5

The account Discount on Bonds Payable has a debit balance and should appear on the balance sheet as an asset; the account Premium on Bonds Payable has a credit balance and should be classified as a liability.

Accepted Answer

A) True 
 B)False

Question 6

Compute the company's cash outlays during the year for payroll-related costs. Assume short-term obligations such as insurance premiums and payroll taxes have been paid.

Accepted Answer

A)  $2,750,000. 
B)  $3,070,000. 
C)  $1,930,000. 
D)  $3,510,000. 
A)  $2,750,000. 
B)  $3,070,000. 
C)  $1,930,000. 
D)  $3,510,000.

Question 7

The account Discount on Bonds Payable actually represents interest expense and will be amortized over the life of the bond.

Accepted Answer

A) True 
 B)False

Question 8

After bonds have been issued, their market value can be expected to:

Accepted Answer

A)  Rise as any premium is amortized. 
B)  Fall if interest rates rise. 
C)  Fall as any discount is amortized. 
D)  Rise if interest rates rise. 
A)  Rise as any premium is amortized. 
B)  Fall if interest rates rise. 
C)  Fall as any discount is amortized. 
D)  Rise if interest rates rise.

Question 9

A primary means used by credit rating agencies to evaluate a company's ability to pay its debts is to compare total assets to total liabilities.

Accepted Answer

A) True 
 B)False

Question 10

Interest expense on this bond issue reported in Cricket's Year 1, income statement is:

Accepted Answer

A)  $2,400,000. 
B)  $4,800,000. 
C)  $5,400,000. 
D)  $7,200,000. 
A)  $2,400,000. 
B)  $4,800,000. 
C)  $5,400,000. 
D)  $7,200,000.

Question 11

Fully amortizing installment notes
When Sue Meadow purchased a home, she signed a $150,000, 12%, fully amortizing mortgage note, payable at $1,543 per month. After making the first monthly payment, Meadow received a notice from the bank stating that $1,500 of the payment had applied to interest, and only $43 reduced the principal amount of the loan. Meadow does not understand how this loan is fully amortizing over a period of 30 years. She computes that at $43 per month, it will take approximately 3,488 months (or 290 years) to repay this loan. Evaluate Meadow's analysis.

Accepted Answer

Meadow's analysis is incorrect, because

Question 12

The current portion of long-term debt should be reported:

Accepted Answer

A)  Separately in the long-term liabilities section of the balance sheet. 
B)  In the long-term liabilities section of the balance sheet, along with the other long-term debt. 
C)  In the current liabilities section of the balance sheet. 
D)  In a separate section of the balance sheet, between long-term liabilities and shareholders' equity. 
A)  Separately in the long-term liabilities section of the balance sheet. 
B)  In the long-term liabilities section of the balance sheet, along with the other long-term debt. 
C)  In the current liabilities section of the balance sheet. 
D)  In a separate section of the balance sheet, between long-term liabilities and shareholders' equity.

Question 13

Deferred income taxes result from:

Accepted Answer

A)  The fact that bond interest is deductible in the computation of taxable income. 
B)  Depositing income taxes due in future years in a special fund managed by an independent trustee. 
C)  Timing differences between when income is recognized in financial statements and in income tax returns. 
D)  The inability of a bankrupt company to pay its income tax liability on schedule. 
A)  The fact that bond interest is deductible in the computation of taxable income. 
B)  Depositing income taxes due in future years in a special fund managed by an independent trustee. 
C)  Timing differences between when income is recognized in financial statements and in income tax returns. 
D)  The inability of a bankrupt company to pay its income tax liability on schedule.

Question 14

The amount of cash paid to bondholders for interest during Year 1, is:

Accepted Answer

A)  $6,600,000. 
B)  $5,400,000. 
C)  $3,600,000. 
D)  $1,800,000. 
A)  $6,600,000. 
B)  $5,400,000. 
C)  $3,600,000. 
D)  $1,800,000.

Question 15

Fully amortizing installment note payable (mortgage)
On October 31, 2011, Seldon Company incurs a 30-year $600,000 mortgage liability in conjunction with the purchase of a motel. This mortgage is payable in equal monthly installments of $6,485, which include interest computed at an annual rate of 12%. The first monthly payment is made on November 30, 2011. This mortgage is fully amortizing over 360 months.
Complete the amortization table for the first two payments by entering the correct dollar amounts in the blank spaces provided. In addition, answer the questions which follow.
 
(a) With respect to this mortgage, Seldon's 2011 income statement includes interest expense of $_______________, and Seldon's balance sheet at December 31, 2011, includes a total liability for this mortgage of _______________. (Do not separate into current and long-term portions.)
(b) The aggregate monthly cash payments Seldon will make over the 30-year life of the mortgage amount to $_______________.
(c) Over the 30-year life of the mortgage, the amount Seldon will pay for interest amounts to $_______________.

Accepted Answer

@#IMG-DLM&
1 $600,000 x .12 x 1/12 = 6,000 
2. $6,

Question 16

The journal entry to record the first cash payment to bondholders on October 1, year 1, will include:

Accepted Answer

A)  A credit to Cash of $2,000,000. 
B)  A debit to Bonds Payable of $1,000,000. 
C)  A debit to Interest Expense of $1,000,000 
D)  A credit to Interest Payable of $1,000,000. 
A)  A credit to Cash of $2,000,000. 
B)  A debit to Bonds Payable of $1,000,000. 
C)  A debit to Interest Expense of $1,000,000 
D)  A credit to Interest Payable of $1,000,000.

Question 17

The amount of bond interest expense recognized by Trego Company in 2012 with respect to these bonds is:

Accepted Answer

A)  $40,000. 
B)  $42,000. 
C)  $60,000. 
D)  $44,000. 
A)  $40,000. 
B)  $42,000. 
C)  $60,000. 
D)  $44,000.

Question 18

A company with a fully funded pension plan:

Accepted Answer

A)  Recognizes no pension expense. 
B)  Reports no long-term liability for future pension payments. 
C)  Does not utilize the services of a trustee to operate the pension plan. 
D)  Recognizes pension expense equal to the cash payments made to retirees during the current period. 
A)  Recognizes no pension expense. 
B)  Reports no long-term liability for future pension payments. 
C)  Does not utilize the services of a trustee to operate the pension plan. 
D)  Recognizes pension expense equal to the cash payments made to retirees during the current period.

Question 19

An operating lease:

Accepted Answer

A)  Creates an asset and a liability on the balance sheet. 
B)  Is a form of off-balance sheet financing. 
C)  Is always preferable to a capital lease. 
D)  Transfers title to the asset being leased. 
A)  Creates an asset and a liability on the balance sheet. 
B)  Is a form of off-balance sheet financing. 
C)  Is always preferable to a capital lease. 
D)  Transfers title to the asset being leased.

Question 20

When an installment note is structured as a "fully amortizing" loan with equal monthly payments (such as a traditional mortgage):

Accepted Answer

A)  The portion of each payment allocated to interest expense is the same each month. 
B)  The sum of the monthly payments is equal to the amount of the installment note (mortgage). 
C)  The difference between the sum of all monthly payments and the principal amount of the note constitutes interest. 
D)  The portion of each payment allocated to repayment of principal decreases each month as the mortgage is paid off. 
A)  The portion of each payment allocated to interest expense is the same each month. 
B)  The sum of the monthly payments is equal to the amount of the installment note (mortgage). 
C)  The difference between the sum of all monthly payments and the principal amount of the note constitutes interest. 
D)  The portion of each payment allocated to repayment of principal decreases each month as the mortgage is paid off.

Exam 10: Liabilities

The amount of FICA tax and Medicare tax withheld from an employee is used to pay the employer's percentage of the tax and is mailed to the government quarterly.

The amortization of a bond premium:

Which of the following statistics is of more significance to a long-term creditor than to a short-term creditor?

If Salem Co. retires $10 million of these bonds by purchasing them from bondholders at current market price, the company will report:

The account Discount on Bonds Payable has a debit balance and should appear on the balance sheet as an asset; the account Premium on Bonds Payable has a credit balance and should be classified as a liability.

Compute the company's cash outlays during the year for payroll-related costs. Assume short-term obligations such as insurance premiums and payroll taxes have been paid.

The account Discount on Bonds Payable actually represents interest expense and will be amortized over the life of the bond.

After bonds have been issued, their market value can be expected to:

A primary means used by credit rating agencies to evaluate a company's ability to pay its debts is to compare total assets to total liabilities.

Interest expense on this bond issue reported in Cricket's Year 1, income statement is:

The current portion of long-term debt should be reported:

Deferred income taxes result from:

The amount of cash paid to bondholders for interest during Year 1, is:

The journal entry to record the first cash payment to bondholders on October 1, year 1, will include:

The amount of bond interest expense recognized by Trego Company in 2012 with respect to these bonds is:

A company with a fully funded pension plan:

An operating lease:

When an installment note is structured as a "fully amortizing" loan with equal monthly payments (such as a traditional mortgage):

Accounting: Information for Decision Making

Basic Financial Statements

The Accounting Cycle: Capturing Economic Events

The Accounting Cycle: Accruals and Deferrals

The Accounting Cycle: Reporting Financial Results

Merchandising Activities

Financial Assets

Inventories and the Cost of Goods Sold

Plant and Intangible Assets

Stockholders Equity: Paid-In Capital

Income and Changes in Retained Earnings

Statement of Cash Flows

Financial Statement Analysis

Global Business and Accounting

Management Accounting: a Business Partner

Job Order Cost Systems and Overhead Allocations

Process Costing

Costing and the Value Chain

Cost-Volume-Profit Analysis

Incremental Analysis

Responsibility Accounting and Transfer Pricing

Operational Budgeting

Standard Cost Systems

Rewarding Business Performance

Capital Budgeting

Forms of Business Organization

The Time Value of Money: Future Amounts and Present Values Answer Key

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