Liabilities are classified on the balance sheet as current or
a. deferred
b. unearned
c. long-term
d. accrued
C
Most companies pay current liabilities
a. out of current assets
b. by issuing interest-bearing notes payable
c. by issuing stock
d. by creating long-term liabilities
A
A current liability is a debt that can reasonably be expected to be paid
a. within one year, or the operating cycle, whichever is longer
b. between 6 months and 18 months
c. out of currently recognized revenues
d. out of cash currently on hand
A
Which of the following most likely would be classified as a current liability?
a. Dividends payable b. Bonds payable in 5 years
c. Three-year notes payable
d. Mortgage payable as a single payment in 10 years
A
With an interest-bearing note, the amount of assets received upon issuance of the note is generally
a. equal to the note’s face value
b. greater than the note’s face value
c. less than the note’s face value
d. equal to the note’s maturity value
A
Very often, failure to record a liability means failure to record a(n)
a. revenue
b. asset conversion
c. footnote
d. expense
D
Current liabilities are due
a. but not receivable for more than one year
b. but not payable for more than one year
c. and receivable within one year. d. and payable within one year
D
Liabilities are classified as current or long-term based on their
a. description
b. payment terms
c. due date
d. amount
C
Which of the following is not a current liability on December 31, 2014?
a. A Note Payable due December 31, 2015
b. An Accounts Payable due January 31, 2015
c. A lawsuit judgment to be decided on January 10, 2015
d. Accrued salaries payable from 2014
C
Interest expense on an interest-bearing note is
a. always equal to zero
b. accrued over the life of the note.
c. only recorded at the time the note is issued
d. only recorded at maturity when the note is paid
B
Failure to record a liability will probably
a. result in an overstated net income
b. result in overstated total liabilities and owner’s equity
c. have no effect on net income
d. result in understated total assets
A
Sales taxes collected by a retailer are recorded by
a. crediting Sales Tax Revenue
b. debiting Sales Tax Expense
c. crediting Sales Taxes Payable
d. debiting Sales Taxes Payable
C
Unearned Rent Revenue is
a. a contra account to Rent Revenue
b. a revenue account
c. reported as a current liability
d. debited when rent is received in advance
C
The amount of sales tax collected by a retail store when making sales is
a. a miscellaneous revenue for the store
b. a current liability
c. not recorded because it is a tax paid by the customer
d. recorded as an operating expense
B
The current portion of long-term debt should
a. be paid immediately
b. be reclassified as a current liability
c. be classified as a long-term liability
d. not be separated from the long-term portion of debt
B
Sales taxes collected by a retailer from a customer are expenses
a. of the retailer
b. of the customers
c. of the government
d. that are not recognized by the retailer until they are submitted to the government
B
A retailer that collects sales taxes is acting as an agent for the
a. wholesaler
b. customer
c. taxing authority
d. chamber of commerce
C
Sales taxes collected by a retailer are reported as
a. contingent liabilities
b. revenues
c. expenses
d. current liabilities
D
Two sisters operate a bed and breakfast on the coast of Maine. As customers make reservations they are required to pay cash in advance equal to one-half of the rate for their stay. How should the sisters account for the cash received as reservations are made?
a. Cash Unearned Service Revenue
b. Cash Service Revenue
c. Unearned Service Revenue Service Revenue
d. Cash Sales Revenue
A
Julie Lambert has a large consulting practice. New clients are required to pay one-half of the consulting fees up front. The balance is paid at the conclusion of the consultation. How does Lambert account for the cash received at the end of the engagement?
a. Cash Unearned Service Revenue
b. Cash Unearned Service Revenue Service Revenue
c. Prepaid Service Revenue Service Revenue
d. No entry is required when the engagement is concluded.
B
From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that
a. bond interest is deductible for tax purposes
b. interest must be paid on a periodic basis regardless of earnings
c. income to stockholders may increase as a result of trading on the equity
d. the bondholders do not have voting rights
B
Secured bonds are bonds that
a. are in the possession of a bank
b. can be converted into common stock
c. have specific assets of the issuer pledged as collateral
d. mature in installments
C
A legal document that indicates the name of the issuer, the face value of the bond and such other data is called
a. a bond certificate
b. a bond debenture
c. trading on the equity
d. a convertible bond
A
Stockholders of a company may be reluctant to finance expansion through issuing more equity because
a. leveraging with debt is always a better idea
b. their earnings per share may decrease
c. the price of the stock will automatically decrease
d. dividends must be paid on a periodic basis
B
Which of the following is not an advantage of issuing bonds instead of common stock?
a. Stockholder control is not affected
b. Earnings per share on common stock may be lower
c. Tax savings result
d. Each of these answer choices is an advantage
B
Bonds that are secured by real estate are termed
a. mortgage bonds
b. serial bonds
c. debentures
d. convertible bonds
A
Bonds that may be exchanged for common stock at the option of the bondholders are called
a. options
b. stock bonds
c. convertible bonds
d. callable bonds
C
Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called
a. callable bonds
b. early retirement bonds
c. options
d. debentures
A
Bonds that are issued against the general credit of the borrower are called
a. callable bonds
b. debenture bonds
c. secured bonds
d. term bonds.
B
Corporations are granted the power to issue bonds through
a. tax laws
b. state laws
c. federal security laws
d. bond debentures
B
75. Bonds are not always categorized as
a. callable or convertible
b. term or serial
c. secured or unsecured
d. secured or debenture
A
Which of the following statements concerning bonds is not a true statement?
a. Bonds are generally sold through an investment company
b. The bond indenture is prepared after the bonds are printed
c. The bond indenture and bond certificate are separate documents
d. The trustee keeps records of each bondholder
B
The contractual rate of interest is usually stated as a(n)
a. monthly rate
b. daily rate
c. semiannual rate
d. annual rate
D
When authorizing bonds to be issued, the board of directors does not specify the
a. total number of bonds authorized to be sold
b. contractual interest rate
c. selling price
d. total face value of the bonds
C
All of the following statements regarding convertible bonds are true except
a. if the market price of common stock increases substantially, bondholders with convertible bonds benefit
b. convertible bonds can be converted into common stock at the option of the issuing company
c. bondholders with convertible bonds receive interest on the bonds until conversion
d. convertible bonds sell at a higher price and pay a low rate of interest than those without the conversion option
B
The contractual interest rate on a bond is often referred to as the
a. callable rate
b. the maturity rate
c. market rate
d. stated rate
D
If the market interest rate for a bond is higher than the stated interest rate, the bond will sell at
a. a premium
b. a discount
c. par
d. either a discount or premium
B
If the market rate of interest is greater than the contractual rate of interest, bonds will sell
a. at a premium
b. at face value
c. at a discount
d. only after the stated rate of interest is increased
C
The present value of a bond is also known as its
a. face value
b. market price
c. future value
d. deferred value
B
The interest expense recorded on an interest payment date is increased
a. by the amortization of premium on bonds payable
b. by the amortization of discount on bonds payable
c. only if the bonds were sold at face value
d. only if the market rate of interest is less than the stated rate of interest on that date
B
If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest annually would sell at an amount
a. less than face value
b. equal to face value
c. greater than face value
d. that cannot be determined
C
If the market rate of interest is lower than the contractual interest rate, the bonds will sell at
a. face value
b. a premium
c. a discount
d. an unknown amount
B
If bonds are issued at a premium, the stated interest rate is
a. higher than the market rate of interest
b. lower than the market rate of interest
c. too low to attract investors
d. adjusted to a higher rate of interest
A
The present value of a $10,000, 5-year bond, will be less than $10,000 if the
a. contractual rate of interest is less than the market rate of interest
b. contractual rate of interest is greater than the market rate of interest
c. bond is convertible
d. contractual rate of interest is equal to the market rate of interest
A
The market value (present value) of a bond is a function of all of the following except the
a. dollar amounts to be received
b. maturity date
c. market interest rate
d. type of bonds
D
The market rate of interest is often called the
a. stated rate
b. effective rate
c. coupon rate
d. contractual rate
B
If bonds are issued at a discount, it means that the
a. financial strength of the issuer is suspect
b. market interest rate is higher than the contractual interest rate
c. market interest rate is lower than the contractual interest rate
d. bondholder will receive effectively less interest than the contractual rate of interest
B
Selling the bonds at a premium has the effect of
a. causing the total cost of borrowing to be higher than the bond interest paid
b. causing the total cost of borrowing to be lower than the bond interest paid
c. raising the effective interest rate above the state interest rate
d. increasing the amount of cash paid for interest each 6 months
B
When bonds are issued at a premium, the total interest cost of the bonds over the life of the bonds is equal to the amount of
a. interest paid over the life of the bond
b. interest paid over the life of the bond plus the amount of premium at sale point
c. interest paid over the life of the bond minus the amount of premium at sale point
d. premium at sale point
C
The statement “Bond prices vary inversely with changes in the market rate of interest” means that if the
a. market rate of interest increases, the contractual interest rate will decrease
b. contractual interest rate increases, then bond prices will go down
c. market rate of interest decreases, then bond prices will go up
d. contractual interest rate increases, the market rate of interest will decrease
C
The carrying value of bonds will equal the market price a. at the close of every trading day
b. at the end of the fiscal period
c. on the date of issuance
d. every six months on the date interest is paid
C
Over the term of the bonds, the balance in the Discount on Bonds Payable account will
a. fluctuate up and down if the market is volatile
b. decrease
c. increase
d. be unaffected until the bonds mature
B
The sale of bonds above face value
a. is a rare occurrence
b. will cause the total cost of borrowing to be less than the bond interest paid
c. will cause the total cost of borrowing to be more than the bond interest paid
d. will have no net effect on interest expense by the time the bonds mature
B
In the balance sheet, the account Premium on Bonds Payable is
a. added to bonds payable
b. deducted from bonds payable
c. classified as a stockholders’ equity account
d. classified as a revenue account
A
In the balance sheet, the account Discount on Bonds Payable is
a. added to bonds payable
b. deducted from bonds payable
c. classified as a stockholders’ equity account
d. classified as a revenue account
B
Bond discount should be amortized to comply with
a. the historical cost principle
b. the expense recognition principle
c. the revenue recognition principle
d. conservatism
B
The journal entry to record the issuance of bonds at a discount will include a a. debit to Cash for the face amount of the bonds. b. debit to Cash for the face amount of the bonds plus the amount of the discount. c. debit to Cash for the face amount of the bonds minus the amount of the discount. d. credit to Cash for the face amount of the bonds
C
If bonds have been issued at a discount, then over the life of the bonds the
a. carrying value of the bonds will decrease
b. carrying value of the bonds will increase
c. interest expense will increase, if the discount is being amortized on a straight-line basis
d. unamortized discount will increase
B
When bonds are retired before maturity,
a. only a loss on redemption can be recorded
b. only a gain on redemption can be recorded
c. either a gain or a loss on redemption can be recorded
d. neither a gain nor a loss on redemption can be recorded
C
Restoration Company issued bonds that had the following data associated with them: Interest to be paid is $40,000. Interest expense to be recorded is $45,000. Which of the following characteristics is true?
a. The bonds are sold at a premium
b. After recording the interest expense, the amortization will decrease the bond carrying value
c. The difference between the interest expense and the interest to be paid is the bond’s par value
d. After recording the interest expense, the amortization will increase the bond carrying value
D
All of the following are true regarding financial statement analysis ratios associated with liabilities except
a. a high times interest earned ratio indicates that a company is more likely to meet interest payments as scheduled
b. high liquidity ratios mean that lines of credit should be high to compensate
c. if a company’s current ratio is lower than the industry average, then it may lack liquidity
d. unrecorded obligations causing sizeable differences between liquidity and solvency ratios can be ignored
B
From an accounting standpoint, all of the following are contingencies that must be evaluated for off-balance sheet purposes except
a. product warranties
b. general business risks
c. money-back guarantees for products
d. environmental cleanup obligations
B
A measure of a company’s solvency is the
a. acid-test ratio
b. current ratio
c. times interest earned
d. asset turnover ratio
C
The times interest earned is computed by dividing
a. net income by interest expense
b. income before income taxes by interest expense
c. income before interest expense by interest expense
d. income before interest expense and income taxes by interest expense
D
Liquidity ratios measure a company’s
a. operating cycle
b. revenue-producing ability
c. short-term debt paying ability
d. long-range solvency
C
The relationship between current assets and current liabilities is
a. useful in determining income
b. useful in evaluating a company’s liquidity
c. called the matching principle
d. useful in determining the amount of a company’s long-term debt
B
Parker Company issued ten-year, 9%, bonds payable in 2014 at a premium. During 2014, the company’s accountant failed to amortize any of the bond premium. The omission of the premium amortization will
a. not affect net income for 2014
b. cause retained earnings at the end of 2014 to be overstated
c. cause net income for 2014 to be overstated
d. cause net income for 2014 to be understated
D
When the straight-line method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated by
a. adding the amount of premium amortized for that period to the amount of cash paid for interest during the period
b. subtracting the amount of premium amortized for that period from the amount of cash paid for interest during the period
c. multiplying the face value of the bonds by the stated interest rate
d. multiplying the face value of the bonds by the market interest rate
B
When the straight-line method of amortization is used for a bond discount, the amount of interest expense for an interest period is calculated by
a. adding the amount of discount amortized for that period to the amount of cash paid for interest during the period
b. subtracting the amount of discount amortized for that period from the amount of cash paid for interest during the period
c. multiplying the face value of the bonds by the stated interest rate
d. multiplying the face value of the bonds by the market interest rate
A
If bonds are originally sold at a discount using the straight-line amortization method
a. interest expense in the earlier years of the bond’s life will be less that the interest to be paid
b. interest expense in the earlier years of the bond’s life will be the same as interest to be paid
c. unamortized discount is subtracted from the face value of the bond to determine its carrying value
d. unamortized discount is added to the face value of the bond to determine its carrying value
C
Which of the following statements regarding the effective interest method of accounting for bonds characteristics is false?
a. GAAP requires use of the effective interest method
b. The amount of periodic interest expense decreases over the life of a discounted bond issue when the effective interest method is used
c. Over the life of the bond, the carrying value increases for discounted bonds when using the effective interest method
d. The effective interest method applies a constant percentage to the bond carrying value to compute interest expense
B
When the effective-interest method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated multiplying the
a. face value of the bonds at the beginning of the period by the contractual interest rate
b. face value of the bonds at the beginning of the period by the effective interest rate
c. carrying value of the bonds at the beginning of the period by the contractual interest rate
d. carrying value of the bonds at the beginning of the period by the effective interest rate
D
The amortization of a bond premium will result in reporting an amount of interest expense for an interest period that
a. is less than the amount of cash to be paid for interest for the period
b. exceeds the amount of cash to be paid for interest for the period
c. equals the amount of cash to be paid for interest for the period
d. has no predictable relationship with the amount of cash to be paid for interest for the period
A
The effective-interest method of amortization of bond premiums and discounts is considered superior to the straight-line method because it results in a(n)
a. interest rate that is close to the market interest rate
b. uniform rate of interest
c. more variable interest rate
d. interest rate that increases or decreases slightly over time
B
Which of the following statements best describes the behavior over time of the components of equal mortgage payments?
a. The proportion of interest expense to payment of principal remains the same
b. Interest expense increases and payment of principal decreases
c. Payment of principal increases and interest expense decreases
d. Both payment of principal and interest expense decrease
C
x

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