Question 1

How much of the first payment made on December 31, Year 1, represents interest expense?

Accepted Answer

A)  $2,400. 
B)  $400. 
C)  $2,304. 
D)  $2,000. 
A)  $2,400. 
B)  $400. 
C)  $2,304. 
D)  $2,000.

Question 2

The most common types of payroll deductions are taxes, insurance premiums, employee savings, and union dues.

Accepted Answer

A) True 
 B)False

Question 3

Notes payable
On September 1, 2009, George Hanby borrowed $100,000 from The Actors Credit Union and signed a 6%, one-year note payable, all due at maturity. The interest on this loan is stated separately.

Accepted Answer

(a) $100,000 + ($100,000 x .06

Question 4

The carrying value of this liability in Trego Company's December 31, 2012, balance sheet is:

Accepted Answer

A)  $1,000,000. 
B)  $1,016,000. 
C)  $1,020,000. 
D)  $1,024,000. 
A)  $1,000,000. 
B)  $1,016,000. 
C)  $1,020,000. 
D)  $1,024,000.

Question 5

Assume Select made no adjusting entry with respect to this note before preparing the financial statements at December 31, 2011. What is the effect of this error on the financial statements for 2011?

Accepted Answer

A)  Total liabilities are overstated. 
B)  Net income is overstated. 
C)  Owners' equity is understated. 
D)  Interest Payable is overstated. 
A)  Total liabilities are overstated. 
B)  Net income is overstated. 
C)  Owners' equity is understated. 
D)  Interest Payable is overstated.

Question 6

Temple Corporation purchased a piece of real estate, paying $400,000 cash and financing $700,000 of the purchase price with a 10-year, 15% installment note. The note calls for equal monthly payments that will result in the debt being completely repaid by the end of the tenth year. In this situation:

Accepted Answer

A)  The aggregate amount of the monthly payments is $700,000. 
B)  Each monthly payment is greater than the amount of interest accruing each month. 
C)  The portion of each payment representing interest expense will increase over the 10-year period, since principal is being paid off, yet the payment amount does not decrease. 
D)  The portion of each monthly payment representing repayment of principal remains the same throughout the 10-year period. 
A)  The aggregate amount of the monthly payments is $700,000. 
B)  Each monthly payment is greater than the amount of interest accruing each month. 
C)  The portion of each payment representing interest expense will increase over the 10-year period, since principal is being paid off, yet the payment amount does not decrease. 
D)  The portion of each monthly payment representing repayment of principal remains the same throughout the 10-year period.

Question 7

The total amount of cash received by Austin Corporation upon issuance of the bonds on April 30, Year 2, is:

Accepted Answer

A)  $6,000,000. 
B)  $6,200,000. 
C)  $6,150,000. 
D)  $6,300,000. 
A)  $6,000,000. 
B)  $6,200,000. 
C)  $6,150,000. 
D)  $6,300,000.

Question 8

Bonds issued at discount or premium
On March 31, 2011 Louis Company issued $20,000,000 face amount of 7%, 5-year bonds payable, with interest payable each June 30 and December 31. The company received cash of $20,200,000, including the accrued interest from December 31, 2010. Louis uses the straight-line method of amortizing any discount or premium over the remaining life of the bonds-57 months.
(a) What was the amount of accrued interest received by Louis on March 31, 2011 when the bonds were issued? (Do not assume the bonds were issued at par.)
$_______________
(b) What was the amount of discount or premium on the bonds at issuance date?
(Indicate discount or premium.)
$_______________
(c) What amount of cash is paid to bondholders for interest during year 2011?
$_______________
(d) What is Louis' total interest expense for year 2011 related to this bond issue?
$_______________
(e) What is the carrying value of this bond issue as of December 31, year 2011?
$_______________

Accepted Answer

(a) Accrued interest: $20,000,000 x 7% x

Question 9

The basic measure of the amount of leverage being applied within the capital structure of an organization is the:

Accepted Answer

A)  Interest coverage ratio. 
B)  Debt ratio. 
C)  Return on assets. 
D)  Return on equity. 
A)  Interest coverage ratio. 
B)  Debt ratio. 
C)  Return on assets. 
D)  Return on equity.

Question 10

In a long-term capital lease, the lessor views a portion of each lease payment as interest expense.

Accepted Answer

A) True 
 B)False

Question 11

The portion of the second monthly payment made on January 31, Year 2, which represents repayment of principle is:

Accepted Answer

A)  $400. 
B)  $404. 
C)  $2,400. 
D)  $1,996. 
A)  $400. 
B)  $404. 
C)  $2,400. 
D)  $1,996.

Question 12

What is the maximum amount Gamma can borrow and not exceed a debt ratio of .2?

Accepted Answer

A)  $3,750,000. 
B)  $600,000. 
C)  $6,000,000. 
D)  $5,750,000. 
A)  $3,750,000. 
B)  $600,000. 
C)  $6,000,000. 
D)  $5,750,000.

Question 13

How much interest expense will Noble recognize on this note in Year 2?

Accepted Answer

A)  $9,600. 
B)  $4,800. 
C)  $2,400. 
D)  $3,200. 
A)  $9,600. 
B)  $4,800. 
C)  $2,400. 
D)  $3,200.

Question 14

Assume Gamma borrows $5 million to finance its expansion. Gamma's debt ratio immediately after the borrowing will be (rounded):

Accepted Answer

A)  .11. 
B)  .23. 
C)  .30 (rounded). 
D)  .35. 
A)  .11. 
B)  .23. 
C)  .30 (rounded). 
D)  .35.

Question 15

Gross pay less withholding tax and less worker's compensation is considered net pay.

Accepted Answer

A) True 
 B)False

Question 16

Bonds issued at par-basic concepts
On April 1, Year 1, Olsen Products, Inc. issued at par $25 million of 10%, 10-year bonds payable. Interest is payable semiannually each April 1 and October 1.
(a) What is the amount of cash paid to bondholders for interest during Year 1?
$_______________
(b) Give the adjusting entry necessary at December 31, Year 1 (if any), regarding this bond issue.
(c) Interest expense on this bond issue reported in Olsen Products' Year 1 income statement is $_______________
(d) With respect to this bond issue, Olsen Products' balance sheet at December 31, Year 1, includes bonds payable of $__________________ and interest payable of $_______________ (indicate $0 or "none" if the item is not reported.
(e) Give the journal entry made by Olsen Products on April 1, Year 2, to record the semiannual payment of interest to bondholders.

Accepted Answer

(a) $1,250,000 (Oct. 1 payment

Question 17

On October 1, 2011, Master's Co. borrows $500,000 from its bank for five years at an annual interest rate of 10%. According to the terms of the loan, the principal amount will not be due for five years. Interest is to be paid monthly on the first day of each month, beginning November 1, 2011. With respect to this borrowing, Master's December 31, 2011, balance sheet included only a long-term note payable of $500,000. As a result:

Accepted Answer

A)  The December 31, 2011, financial statements are accurate. 
B)  Liabilities are understated by $12,500 accrued interest payable. 
C)  Liabilities are understated by $4,167 accrued interest payable. 
D)  Liabilities are understated by the amount of interest for the five-year term of the note that has not yet been paid. 
A)  The December 31, 2011, financial statements are accurate. 
B)  Liabilities are understated by $12,500 accrued interest payable. 
C)  Liabilities are understated by $4,167 accrued interest payable. 
D)  Liabilities are understated by the amount of interest for the five-year term of the note that has not yet been paid.

Question 18

Assume Apex borrows $2 million to finance its expansion. Apex's debt ratio immediately after the borrowing will be:

Accepted Answer

A)  .10. 
B)  .20. 
C)  .33 (rounded). 
D)  .18. 
A)  .10. 
B)  .20. 
C)  .33 (rounded). 
D)  .18.

Question 19

The price at which a bond sells is equal to the:

Accepted Answer

A)  Maturity value of the bonds plus the present value to investors of the future interest payments. 
B)  Sum of the future interest payments, minus the maturity value of the bonds. 
C)  Present value to investors of the future principal and interest payments. 
D)  Sum of the future interest payments, plus the maturity value of the bonds. 
A)  Maturity value of the bonds plus the present value to investors of the future interest payments. 
B)  Sum of the future interest payments, minus the maturity value of the bonds. 
C)  Present value to investors of the future principal and interest payments. 
D)  Sum of the future interest payments, plus the maturity value of the bonds.

Question 20

Which of the following represents the largest amount withheld from employees' paychecks?

Accepted Answer

A)  Workers' compensation insurance. 
B)  Social Security and Medicare. 
C)  Personal income taxes. 
D)  Group health insurance. 
A)  Workers' compensation insurance. 
B)  Social Security and Medicare. 
C)  Personal income taxes. 
D)  Group health insurance.

Exam 10: Liabilities

How much of the first payment made on December 31, Year 1, represents interest expense?

The most common types of payroll deductions are taxes, insurance premiums, employee savings, and union dues.

Notes payable On September 1, 2009, George Hanby borrowed $100,000 from The Actors Credit Union and signed a 6%, one-year note payable, all due at maturity. The interest on this loan is stated separately.

The carrying value of this liability in Trego Company's December 31, 2012, balance sheet is:

Assume Select made no adjusting entry with respect to this note before preparing the financial statements at December 31, 2011. What is the effect of this error on the financial statements for 2011?

The total amount of cash received by Austin Corporation upon issuance of the bonds on April 30, Year 2, is:

The basic measure of the amount of leverage being applied within the capital structure of an organization is the:

In a long-term capital lease, the lessor views a portion of each lease payment as interest expense.

The portion of the second monthly payment made on January 31, Year 2, which represents repayment of principle is:

What is the maximum amount Gamma can borrow and not exceed a debt ratio of .2?

How much interest expense will Noble recognize on this note in Year 2?

Assume Gamma borrows $5 million to finance its expansion. Gamma's debt ratio immediately after the borrowing will be (rounded):

Gross pay less withholding tax and less worker's compensation is considered net pay.

Assume Apex borrows $2 million to finance its expansion. Apex's debt ratio immediately after the borrowing will be:

The price at which a bond sells is equal to the:

Which of the following represents the largest amount withheld from employees' paychecks?

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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