Chapter 10 - Liabilities

1.Which method gives higher interest expense in the last year when the bonds are issued for less than par?

straight-line method of accounting for interest expense on bonds

None of the other alternatives are correct

effective interest method of accounting for interest expense on bonds

All the three statements about bonds are correct

declining balance method of accounting for interest expense on bonds

2.On January 2012, Lower Under Co announced an offer to issue bonds with a $200,000 par value, a 10% annual contract rate with interest payable semi-annually, and with a three-year life to gain some liquidity given the current market conditions. Interest payments are due on April 1 and October 1 of each year. Lower Under agrees to make six payments over the three years of the bond. Bonds are issue on April 1st 2012, maturity date is April 1, 2015 and the market rate on April 1st 2012 is 8%. Lower Under Co. closes its books annually on December 31 and uses the effective interest method.

When the bonds were issue what is the amount of cash that was received (round to the nearest dollar):

None of the other alternatives are correct

$200,000

$210,481

$175,129

$184,531

3.On October 1, 2015 Magic Marker Incorporated issued twenty-year bonds with a face value of $1,000,000. The proceeds of the bond issue amounts to $1,060,000. The bonds bear interest at 10% per year, payable semi-annually on April 1 and October 1. The effective interest rate is 9.3% and the company uses the effective interest method. Magic Marker Incorporated has a December 31 year-end date. What is the journal entry that will be recorded on December 31, 2015?

Dr. Interest expense on bonds $26,500. Cr. Interest Payable $26,500

Dr. Interest expense on bonds $24,645. Dr. Premium on Bonds $355. Cr. Interest Payable $25,000

Dr. Interest expense on bonds $24,645. Cr. Interest Payable $24,645

Dr. Interest expense on bonds $26,500. Cr. Premium on Bonds $1,500. Cr Interest Payable $25,000

Dr. Cash 1,060,000. Cr. Bond payable $1,000,000. Cr. Premium on Bond $60,000

4.Company A sells a machine to Company B on September 1 for $27,000. The down payment to be paid by Company B is $3,000. Company B must pay monthly minimum payments of $265. 12% interest rate per annum on the unpaid balance is deducted from each payment and the balance is applied to reduce the principal outstanding.

Company B makes the following payments to Company A:

October 1 $500

November 1 $500

December 1 $1,000

January 2 $500

Use a partial amortization schedule in order to answer the following question.

In preparing an amortization schedule, what is the balance on the loan to be used on September 1?

426,880

$27,000

$24,000

.$30,000

None of the other alternatives are correct

5.Which of the following statements is incorrect with respect to Bonds Payable?

Convertible bonds can be converted into cash at the discretion of the bondholder

A group of banks which undertakes to underrite a bond issue is called an Investment Syndicate or Underwriting Syndicate

Coupon bonds actually have perforated coupons attached which should be presented to receive interest payment

Debenture bonds are unsecured

Mortgage bonds are normally secured by real estate property

6.If the contract rate on the bond is 13% and the market interest rate at the time of sale is 13.2%, then the bond will sell at:

Cannot be sold in the market

Unable to answer with the data provided

Premium

Discount

Par

7.Which of the following meets the criteria of a liability? How would the liabilities be valued?

Product warranties.

None of the other alternatives are correct

Contractual promises to purchase natural gas for each of the next ten years.

Damages the company must pay if a pending lawsuit is lost.

Fifteen-year cancellable lease on an office building.

8.Company A sells a machine to Company B on September 1 for $30,000. The down payment to be paid by Company B is $5,000. Company B must pay monthly minimum payments of $200. 12% interest rate per annum on the unpaid balance is deducted from each payment and the balance is applied to reduce the principal outstanding.

Company B makes the following payments to Company A:

October 1$500November 1$500December 1$1,000January 2$500

Use a partial amortization schedule in order to answer the following question.

In preparing an amortization schedule, what is the amount of interest paid for December?

$260

$240

$500

$250

None of the other alternatives are correct

9.Needy Company wants to raise money from the issue of bonds and the Board of Directors authorizes the issue of $9,000,000 of bonds in $1,000 denominations with interest paid semi-annually to run for a term of 12 years until maturity. At the time of issue the stated rate of interest on the bonds is 6% and the market rate of interest is 4%. The proceeds from the bond issue will be:

$9,885,340

Some other amount

$9,000,000

$11,110,230

$10,702,241

10.The payroll details for Excelsior Company at the end of March 31 shows salaries for $80,000. The company portions of CPP and EI contributions are $3,960 and $1,695 respectively. A total of $ 18,000 in income taxes is withheld. The company also pays a monthly cost of $2,500 for a vision and dental plan for its employees. How much would Excelsior Company record at the end of March regarding its related expenses?

None of the other alternatives are correct

$103,655

$106,155

$ 88,155

$ 85,655