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Exam 10: Liabilities

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Question 51

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When the effective interest method of amortization is used,what happens to interest expense as a bond moves toward maturity?

A) Interest expense falls for bonds sold at either a discount or a premium.
B) Interest expense rises for bonds sold at a discount and falls for bonds sold at a premium.
C) Interest expense rises for bonds sold at either a discount or a premium.
D) Interest expense falls for bonds sold at a discount and rises for bonds sold at a premium.

E) A) and B)
F) A) and C)

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Question 52

Multiple Choice

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Your company issued bonds at a discount.Which of the following statements is not true?

A) The contra liability account,discount on bonds payable,is amortized each year by shifting part of its balance to interest expense.
B) As the current date approaches the maturity date,the carrying value of the bond approaches the face value of the bond.
C) At the date of issuance,the market interest rate was higher than the stated interest rate on the bond.
D) At the date of issuance,the market interest rate was lower than the stated interest rate on the bond.

E) C) and D)
F) B) and D)

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Question 53

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A discount on a bond reduces the amount that the issuer has to repay to the lenders. BT: Comprehension

GST is charged to all customers. BT: Knowledge

A company is always considered a serious credit risk if its Quick ratio is below one. BT: Comprehension

Your company issued bonds at a premium.Which of the following statements is true?

A company has liquid assets of $5 million and net income of $10 million.Current liabilities total $2.5 million,interest expense is $2 million,and income tax expense is $3 million.What is the Quick ratio for the company?

Using straight-line amortization,when a bond is sold at a discount:

On October 1,you borrow $200,000 for 10 years at 7% interest in order to build a new facility.In April and again in October of the following year,you pay half the annual interest to your creditors.The journal entry to record the issuance of the promissory note should:

Multiple terms or descriptions are used to present the same idea in the area of bonds.Match all the appropriate terms or concepts that could be used to the blanks in the following. The cash payments made to creditors who have bought a company's bond are determined by multiplying the 1)_____________ times the 2)_____________ rate. The interest expense to the company,in the first period a bond is outstanding,is determined by multiplying the 3)_____________ times the 4)_____________ rate. A.Yield B.Coupon C.face value D.issue price E.effective interest F.par value G.Contract H.stated interest I.actual money received by issuer J.market interest

Accrued payroll includes such liabilities as retirement and health benefits not yet paid. BT: Comprehension

A secured loan means that the borrower has a pre-approved line of credit backing the debt. BT: Comprehension

Contingent liabilities arise from past transactions or events but also depend on future events. BT: Knowledge

At the beginning of the quarter,your company borrows $20,000 using a four-year promissory note that states an annual interest rate of 8% plus principal repayments of $5,000 each year.Interest is paid at the end of the second and fourth quarter,whereas principal payments are due at the end of each year.How does this new promissory note affect the amounts of current and non-current liabilities reported on the balance sheet at the end of the first quarter?

The principal of a loan does not include any interest charges. BT: Knowledge

A company's balance sheet at the end of year is as follows: The quick ratio for this company is:

A company issues a 5-year bond with a $7,500 discount.Using straight-line amortization,the company should:

IBM is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15,2012.Interest rates rise in the economy so that similar financial investments pay 9%.IBM will:

When bonds payable are accounted for net of discount,the initial amount recorded in the Bonds Payable,Net account is the issue price of the bond. BT: Comprehension

A company has bonds outstanding with a face value of $100,000.The unamortized premium on these bonds is $2,700.If the company retired these bonds at a call price of 99.How much would be the gain or loss?