Question 1

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 2

Which of the following is an example of a contingent liability?

Accepted Answer

A) A lawsuit pending against a restaurant chain for improper storage of perishable food items. 
B) The liability for future warranty repairs on computers sold during the current period. 
C) A corporation's long-term employment contract with its chief executive officer. 
D) A liability for notes payable with interest included in the face amount. 
A) A lawsuit pending against a restaurant chain for improper storage of perishable food items. 
B) The liability for future warranty repairs on computers sold during the current period. 
C) A corporation's long-term employment contract with its chief executive officer. 
D) A liability for notes payable with interest included in the face amount.

Question 3

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 4

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 5

[The following information applies to the questions displayed below.]
Webster Company issues $1,000,000 face value,6%,5-year bonds payable on December 31,2018.Interest is paid semiannually each June 30 and December 31.The bonds sell at a price of 97;Webster uses the straight-line method of amortizing bond discount or premium.
-The entry made by Webster Company to record issuance of the bonds payable at December 31,2018,includes:

Accepted Answer

A) A debit to Cash of $1,000,000. 
B) A debit to Discount on Bonds Payable of $30,000. 
C) A credit to Bonds Payable of $970,000. 
D) A credit to Bond Interest Payable of $30,000. 
A) A debit to Cash of $1,000,000. 
B) A debit to Discount on Bonds Payable of $30,000. 
C) A credit to Bonds Payable of $970,000. 
D) A credit to Bond Interest Payable of $30,000.

Question 6

Federal unemployment taxes apply to a set dollar amount of employee wages and tend to decline dramatically as the year progresses.

Accepted Answer

A) True 
 B)False

Question 7

Elm Corporation plans to invest $300 million to earn about 15% before income taxes.The company is considering whether it should raise the $300 million by issuing 10% bonds payable or capital stock.If the company issues the bonds,it will probably report:

Accepted Answer

A) Lower net income and lower income taxes expense than if it issues capital stock. 
B) Higher net income and higher income taxes expense than if it issues capital stock. 
C) Lower net income and higher income taxes expense than if it issues capital stock. 
D) Higher net income and lower income taxes expense than if it issues capital stock. 
A) Lower net income and lower income taxes expense than if it issues capital stock. 
B) Higher net income and higher income taxes expense than if it issues capital stock. 
C) Lower net income and higher income taxes expense than if it issues capital stock. 
D) Higher net income and lower income taxes expense than if it issues capital stock.

Question 8

When a company sells bonds between interest dates they will pay which of the following at the first interest payment date?

Accepted Answer

A) An amount less than the stated interest rate times the principal. 
B) An amount more than the stated interest rate times the principal. 
C) An amount equal to the stated interest rate times the principal. 
D) The company may skip the first interest payment date since the appropriate time has not passed. 
A) An amount less than the stated interest rate times the principal. 
B) An amount more than the stated interest rate times the principal. 
C) An amount equal to the stated interest rate times the principal. 
D) The company may skip the first interest payment date since the appropriate time has not passed.

Question 9

[The following information applies to the questions displayed below.]
The current balance sheet of Gamma reports total assets of $30 million,total liabilities of $3 million,and owners' equity of $27 million.Gamma is considering several financing possibilities in order to expand operations.Each question based on this data is independent of any others.
-What will be the effect on Gamma's debt ratio if Gamma's owner invests an additional $5 million to finance its expansion?

Accepted Answer

A) The debt ratio will decrease from 0.1 (3 ÷ 30)to 0.0857 (3 ÷ 35)after the additional investment. 
B) The debt ratio will decrease from 3/27 before to 3/32 after the additional investment. 
C) The debt ratio will increase from 30 before to 35 after the additional investment. 
D) Additional investment by owner will have no effect on the debt ratio. 
A) The debt ratio will decrease from 0.1 (3 ÷ 30)to 0.0857 (3 ÷ 35)after the additional investment. 
B) The debt ratio will decrease from 3/27 before to 3/32 after the additional investment. 
C) The debt ratio will increase from 30 before to 35 after the additional investment. 
D) Additional investment by owner will have no effect on the debt ratio.

Question 10

Which of the following ratios and rates that measure debt-paying ability focuses on the long-term position of a company?

Accepted Answer

A) Quick ratio 
B) Inventory turnover 
C) Current ratio 
D) Debt ratio 
A) Quick ratio 
B) Inventory turnover 
C) Current ratio 
D) Debt ratio

Question 11

When interest rates rise,the price of a given bond issue will fall.

Accepted Answer

A) True 
 B)False

Question 12

[The following information applies to the questions displayed below.]
Stone Corporation has 25 employees and incurs total wages and salaries expense of $900,000 per year.The following table shows various payroll amounts as a percentage of this annual wage and salaries expense: In addition,Stone provides group health insurance for its entire workforce.The cost of this insurance is $350 per month per employee.
   In addition,Stone provides group health insurance for its entire workforce.The cost of this insurance is $350 per month per employee.
-Employees' annual "take-home-pay," totals approximately:

Accepted Answer

A) $672,300. 
B) $762,300. 
C) $675,000. 
D) $741,150. 
A) $672,300. 
B) $762,300. 
C) $675,000. 
D) $741,150.

Question 13

Amortizing a premium on bonds payable:

Accepted Answer

A) Increases interest expense. 
B) Increases periodic cash payments to bondholders. 
C) Decreases interest expense. 
D) Decreases periodic cash payments to bondholders. 
A) Increases interest expense. 
B) Increases periodic cash payments to bondholders. 
C) Decreases interest expense. 
D) Decreases periodic cash payments to bondholders.

Question 14

Sanford Corporation borrowed $90,000 by issuing a 12%,six-month note payable,all due at the maturity date.After one month,the company's total liability for this loan amounts to:

Accepted Answer

A) $90,000. 
B) $90,450. 
C) $90,900. 
D) $91,800. 
A) $90,000. 
B) $90,450. 
C) $90,900. 
D) $91,800.

Question 15

Bonds that may be exchanged for a specified number of shares of capital stock are called:

Accepted Answer

A) Junk bonds. 
B) Convertible bonds. 
C) Debenture bonds. 
D) Mortgage bonds. 
A) Junk bonds. 
B) Convertible bonds. 
C) Debenture bonds. 
D) Mortgage bonds.

Question 16

Choose the statement that correctly summarizes the tax advantage of raising money by issuing bonds instead of common stock:

Accepted Answer

A) The amount paid by the corporation to redeem bonds at maturity date is deductible in computing income subject to corporate income tax. 
B) Interest payments are deductible in determining income subject to corporate income tax;dividends are not deductible. 
C) A corporation must pay tax on the sales price of stock issued,but is not taxed on the amount received when bonds are issued. 
D) Both interest and dividends paid are deductible in computing taxable income,but since interest must be paid annually,the corporation usually gets a larger tax deduction over the life of the bonds payable. 
A) The amount paid by the corporation to redeem bonds at maturity date is deductible in computing income subject to corporate income tax. 
B) Interest payments are deductible in determining income subject to corporate income tax;dividends are not deductible. 
C) A corporation must pay tax on the sales price of stock issued,but is not taxed on the amount received when bonds are issued. 
D) Both interest and dividends paid are deductible in computing taxable income,but since interest must be paid annually,the corporation usually gets a larger tax deduction over the life of the bonds payable.

Question 17

What is the maximum amount Gamma can borrow and not exceed a debt ratio of 0.2?

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 18

In relation to a bond issue,the role of the underwriter is to:

Accepted Answer

A) Guarantee payment to bondholders of both the periodic interest payments and the maturity value. 
B) Purchase the entire bond issue from the issuing corporation and then sell the bonds to the public. 
C) Represent the interests of the bondholders and,if necessary,to take legal action on their behalf. 
D) Maintain a subsidiary ledger of individual bondholders and mail out the periodic interest checks. 
A) Guarantee payment to bondholders of both the periodic interest payments and the maturity value. 
B) Purchase the entire bond issue from the issuing corporation and then sell the bonds to the public. 
C) Represent the interests of the bondholders and,if necessary,to take legal action on their behalf. 
D) Maintain a subsidiary ledger of individual bondholders and mail out the periodic interest checks.

Question 19

Accounting terminology
Listed below are nine technical accounting terms introduced in this chapter:   Each of the following statements may (or may not)describe one of these technical terms.In the space provided beside each statement,indicate the accounting term described,or answer "None" if the statement does not correctly describe any of the terms.
________ (a)Operating income divided by annual interest expense
________ (b)The amount paid during the current period to retired employees.
________ (c)A lease agreement that is viewed as equivalent to the lessee purchasing the leased asset.
________ (d)Using borrowed money to finance business operations.
________ (e)The risk of a loss occurring in a future period.
________ (f)A permanent reduction in the amount of income taxes owed which results from the tax deductions for depreciation.
________ (g)The amount that must be paid to settle a liability at the date it becomes due.

Accepted Answer

(a)Interest coverage ratio, (b)None (Pos

Question 20

Net pay equals gross pay minus withholding tax minus worker's compensation.

Accepted Answer

A) True 
 B)False

Exam 10: Liabilities

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

Which of the following is an example of a contingent liability?

A company with a fully funded pension plan:

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.

Federal unemployment taxes apply to a set dollar amount of employee wages and tend to decline dramatically as the year progresses.

Elm Corporation plans to invest $300 million to earn about 15% before income taxes.The company is considering whether it should raise the $300 million by issuing 10% bonds payable or capital stock.If the company issues the bonds,it will probably report:

When a company sells bonds between interest dates they will pay which of the following at the first interest payment date?

Which of the following ratios and rates that measure debt-paying ability focuses on the long-term position of a company?

When interest rates rise,the price of a given bond issue will fall.

Amortizing a premium on bonds payable:

Sanford Corporation borrowed $90,000 by issuing a 12%,six-month note payable,all due at the maturity date.After one month,the company's total liability for this loan amounts to:

Bonds that may be exchanged for a specified number of shares of capital stock are called:

Choose the statement that correctly summarizes the tax advantage of raising money by issuing bonds instead of common stock:

What is the maximum amount Gamma can borrow and not exceed a debt ratio of 0.2?

In relation to a bond issue,the role of the underwriter is to:

Net pay equals gross pay minus withholding tax minus worker's compensation.

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

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

the Time Value of Money: Future Amounts and Present Values

Forms of Business Organization

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