Chapter 10 Liabilities

Chapter 10 - LiabilitiesChapter 10Liabilities

47.U. S. GAAP requires that convertible bonds be classified on the balance sheet as:A.Part liability, part equity.B.A liability.C.Either a liability or equity.D.As an asset.

48.Off balance sheet financing may involve either:A.An operating lease.B.A special purpose entity.C.Both an operating lease and a special purpose entity.D.Neither an operating lease nor a special purpose entity.

49.Employers are required to pay all of the following on the wages paid to each employee except:A.Social security taxes.B.Worker's compensation insurance.C.Medicare taxes.D.Health insurance benefits.

50.In preparing an amortization table, it is necessary to include:A.The original amount of the liability, the amount of periodic payments, and the interest rate.B.The original amount of the liability, the amount of periodic payments, and the amount of past payments.C.The monthly payment, the total amount of past payments, and the original amount of the liability.D.The total amount of past payments, the interest rate, and the amount of periodic payments.51.A company issues $50 million of bonds at par on January 1, 2009. The bonds pay 10% interest semi-annually on 12/31 and 6/30 and mature in 20 years. The journal entry when the bonds are sold is:A.B.C.D.52.The amount of the present value of a future cash receipt will depend upon:A.The length of time until the money is received.B.The amount of money to be received.C.The required rate of return.D.The amount of money to be received, the length of time until the money is received, and the required rate of return.

53.The FICA tax paid by an employer is:A.Greater than the amount paid by the employee.B.Less than the amount paid by the employee.C.Equal to the amount paid by the employee.D.The employer does not pay FICA tax, only the employee pays the tax.

54.When a company sells bonds between interest dates they will pay which of the following at the first interest payment date?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.55.A $1,000 bond that sells for 104 has a selling price of:A.$1,004.B.$1,040.C.$1,400.D.$1,000.56.Which of the following is not an accurate statement regarding the distinction between debt and equity?A.Only equity is considered a source of financing for operations of the business, since debt must be repaid at a specified maturity date.B.If a business ceases operations and liquidates, claims of all creditors have legal priority over claims of the stockholders.C.Most debt requires the borrower to pay interest; equity financing does not obligate the company to make a specified payment.D.The providers of equity are owners of the business; the providers of borrowed funds are creditors.57.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: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.58.If a bond is selling at 103, it is selling at:A.Maturity value and yields a 2% interest rate.B.A discount.C.A premium.D.$103 per bond.59.Which of the following payroll costs are shared equally by the employer and the employee?A.State unemployment taxes.B.Workers' compensation.C.Social security.D.Federal unemployment taxes.60.Interest payable on a loan becomes a liability:A.When the note payable is issued.B.As it accrues.C.At the maturity date.D.When the borrowed money is received.61.An employer's total payroll-related costs always exceed the wages and salaries earned by employees by:A.Amounts withheld from employees' pay.B.Payroll taxes and mandated programs such as workers' compensation insurance.C.50%.D.Employers' payroll-related costs actually are less than the gross wages and salaries earned by employees, because of amounts withheld from employees' checks.62.Bonds, with the same face value, issued at a premium will:A.Have a greater maturity value than a bond issued at a discount.B.Have a lesser maturity value than a bond issued at a discount.C.Have the same maturity value as a bond issued at a discount.D.Have a different maturity value than a bond issued at a discount, depending upon the interest rate and maturity date.63.The amounts that a business withholds as taxes from an employee's earnings:A.Represent payroll taxes expense to the employer.B.Are deposited in an interest-bearing account until the employee is terminated.C.Represent miscellaneous revenue to the employer.D.Represent current liabilities to the employer.64.Unearned revenue:A.Appears on the income statement as income.B.Appears on the income statement as a reduction to income.C.Appears on the income statement as a liability.D.Appears on the balance sheet as a liability.The average employee of Girard Corporation earns gross pay of $75,000 per year. The following table shows the relative size of various payroll amounts by expressing each as a percentage of total wages and salaries expense (gross pay):In addition, Girard pays $425 per month per employee for group health insurance.65.Which of the following is the largest payroll-related expense incurred by Girard?A.Group health insurance premiums.B.Income taxes expense.C.The employer's share of social security taxes.D.Wages and salaries expense.

66.Which of the following represents the second largest payroll related expense incurred by Girard?A.Group health insurance premiums.B.Income taxes expense.C.The employer's share of social security taxes and Medicare taxes.D.Wages and salaries expense.

67.Which of the following represents the largest amount withheld from employees' paychecks?A.Workers' compensation insurance.B.Social Security and Medicare.C.Personal income taxes.D.Group health insurance.

68.When a corporation has a right to redeem bonds in advance of the maturity date, the bond is considered a:A.Convertible bond.B.Callable bond.C.Junk bond.D.Debenture bond.

69.Sinking funds usually appear on the balance sheet as:A.Current asset.B.Long-term investment.C.Current liability.D.Appropriation of retained earnings.70.A bond that is not secured is also known as:A.A sinking fund.B.A mortgage.C.A debenture.D.A junk bond.71.Management has both the intent and the ability to refinance a liability maturing in four months by taking out a new loan at the due date, which would not be due for several years. How would this situation be reported in financial statements prepared as of today's date?A.The original liability is classified as current, with a footnote describing management's plan for refinancing.B.The original liability is classified as current and the new loan is reported as a long-term liability.C.The original liability is classified as long-term; the new loan is not included in liabilities at this date.D.The original liability need not be reported at all; only the new loan is reported as a long-term liability.72.The pension expense of the current period is equal to:A.Amounts paid to retired workers during the current period.B.The estimated future pension benefits earned by today's workers during the current period.C.The present value of the estimated future pension benefits earned by today's workers during the current period.D.Cash payments made during the period to the trustee of the pension plan.73.When an installment note is structured as a "fully amortizing" loan with equal monthly payments (such as a traditional mortgage):A.The portion of each payment allocated to interest expense is the same each month.B.The sum of the monthly payments is equal to the amount of the installment note (mortgage).C.The difference between the sum of all monthly payments and the principal amount of the note constitutes interest.D.The portion of each payment allocated to repayment of principal decreases each month as the mortgage is paid off.74.In relation to a bond issue, the role of the underwriter is to: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.75.If a bond is issued at par and between interest dates:A.The cash received by the corporation will be less than the face value of the bond.B.The cash received by the corporation will be greater than the face value of the bond.C.The cash received by the corporation will be the same as the face value of the bond.D.Interest receivable will be debited.76.The term "junk bonds" describes bonds with:A.Low interest rates.B.Indefinite maturity dates.C.Low maturity values.D.High risk.77.One advantage of issuing bonds instead of stock is that:A.Interest is tax deductible, whereas dividends are not.B.Bonds have a longer maturity date.C.Interest rates are lower than dividend rates.D.The issuance of bonds does not affect earnings per share.78.Choose the statement that correctly summarizes the tax advantage of raising money by issuing bonds instead of common stock: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.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: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.80.The current portion of long-term debt should be reported:A.Separately in the long-term liabilities section of the balance sheet.B.In the long-term liabilities section of the balance sheet, along with the other long-term debt.C.In the current liabilities section of the balance sheet.D.In a separate section of the balance sheet, between long-term liabilities and shareholders' equity.81.An operating lease:A.Creates an asset and a liability on the balance sheet.B.Is a form of off-balance sheet financing.C.Is always preferable to a capital lease.D.Transfers title to the asset being leased.82.Suppose investors decided to sell their holdings of capital stock in order to purchase outstanding bonds payable and as a result, the prices of bonds payable increased. What would be the likely impact on market interest rates?A.Market interest rates will be unaffected.B.Market interest rates will increase.C.Market interest rates will fall.D.Although interest rates will change, it is impossible to predict the direction of change.83.Which one of the following is not considered a criteria to capitalize a lease?A.The lease contains a bargain purchase option.B.The lease transfers ownership at the end of the lease term.C.The lease term is more than 75% of economic life of the property.D.The present value of minimum lease payments is less than 90% of the fair market value of the asset.84.Which of the following payroll taxes do not stop once an employee reaches a certain level of income?A.Medicare taxes.B.Social security taxes.C.Unemployment taxes.D.Medicare, Social security, and unemployment taxes all have a cap on salaries where the tax ends.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: UnderstandDifficulty: EasyLearning Objective: 10-03 Describe the costs and the basic accounting activities relating to payrolls.Topic: Current Liabilities85.The price at which a bond sells is equal to the: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.

AACSB: Reflective ThinkingAICPA BB: Resource ManagementAICPA FN: MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-07 Explain the concept of present value as it relates to bond prices.Topic: Long-Term Liabilities86.After bonds have been issued, their market value can be expected to: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.87.The amortization of a bond discount:A.Decreases the carrying value of a bond and increases interest expense.B.Decreases the carrying value of a bond and decreases interest expense.C.Increases the carrying value of a bond and increases interest expense.D.Increases the carrying value of a bond and decreases interest expense.88.Which of the following does not affect the market price of an outstanding bond issue?A.Fluctuations in the current market rate of interest.B.The credit rating of the issuing corporation.C.The price at which the bonds were originally issued.D.The length of time remaining until the bonds' maturity date.89.Each of the following must be disclosed in the financial statements, except:A.The total amounts of long-term debt maturing in each of the next five years.B.The company's debt ratio and interest coverage ratio for the current year.C.Loss contingencies, when a reasonable possibility exists that a material loss has been incurred.D.The fair value of long-term liabilities, when this value is significantly different from the amount shown in the balance sheet.90.A capital lease is recorded in the accounting records of the lessee by an entry:A.Debiting Rent Expense and crediting Cash each time a lease payment is made.B.Debiting Cash and crediting Rental Revenue each time a lease payment is received.C.Debiting an asset account and crediting a liability account for the present value of the future lease payments.D.Debiting an asset account and crediting Sales for the present value of the future lease payments.91.The interest coverage ratio:A.Is computed by dividing total liabilities by annual interest expense.B.Is computed by dividing liquid assets by annual required interest payment.C.Indicates the percentage of total assets that are financed with borrowed money.D.Measures the number of times the annual interest expense could be covered by annual income from operations.92.Which of the following is an example of a loss contingency that should be disclosed in a footnote to a company's financial statements?A.The president of the company has threatened to resign if the board of directors does not vote to increase executive salaries.B.A lawsuit has been brought against the company, but the company hopes to prevail in the suit and thereby avoid any liability.C.The allowance for uncollectible accounts receivable is estimated at $200,000.D.The company owns special-purpose machinery which, if sold, would probably bring a price less than its current book value.93.A company with a fully funded pension plan: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.94.The amortization of a bond premium:A.Decreases the carrying value of a bond and increases interest expense.B.Decreases the carrying value of a bond and decreases interest expense.C.Increases the carrying value of a bond and increases interest expense.D.Increases the carrying value of a bond and decreases interest expense.95.In estimating annual pension expense, which of the following factors would not be taken into consideration?A.Current financial condition of the company.B.Expected rate of return to be earned on pension fund assets.C.Employee turnover rates.D.Compensation levels and estimated rate of pay increases.96.The present value of an amount is:A.Always greater than the future value.B.Always less than the future value.C.Always equal to the future value.D.Greater than, less than, or equal to the future value depending upon interest rates and the time period involved.97.Pension expense is:A.The present value of the estimated future pension benefits earned by employees as a result of their services during the period.B.The amount funded to the pension in a given year.C.The future value of rights granted to employees as a result of their services during the period.D.The amount withdrawn from the pension fund to pay retirees during the period.98.Which of the following is not true about postretirement benefits?A.Postretirement costs should be recognized as expense as the workers earn the right to receive the benefits.B.Most corporations have fully funded their postretirement benefits.C.Unfunded postretirement costs are a non-cash expense.D.A corporation's liability for postretirement benefits is equal to the present value of estimated future payments.99.A liability for deferred income taxes represents:A.Income taxes on earnings already reported in the income statement, but that will be taxed in future periods.B.Income taxes already paid on earnings which have not yet been reported in the company's income statement.C.Income tax obligations being disputed with the Internal Revenue Service.D.Income taxes levied in prior years which are now past due.100.In a statement of cash flows, most interest payments are classified as:A.Operating activities.B.Non-operating activities.C.Financing activities.D.Current liabilities.101.Using different accounting methods on financial statements and tax returns will create:A.No effect upon the balance sheet, only the income statement.B.No effect upon the balance sheet nor the income statement.C.A deferred tax liability.D.An illegal situation.102.The interest coverage ratio is computed by dividing:A.Net income by interest expense.B.Operating income by interest expense.C.Interest expense by net income.D.Interest expense by operating income.103.A call provision on a bond:A.Permits the corporation to redeem the bonds at a specified price.B.Allows the corporation to revise the stated interest rate.C.Allows the corporation to revise the maturity date.D.Always creates the lowest price at which the bond will sell for.104.Which of the following statistics is of more significance to a long-term creditor than to a short-term creditor?A.Interest coverage ratio.B.Receivables turnover rate.C.Working capital.D.Quick ratio.105.The basic measure of the amount of leverage being applied within the capital structure of an organization is the:A.Interest coverage ratio.B.Debt ratio.C.Return on assets.D.Return on equity.

AACSB: Reflective ThinkingAICPA BB: Resource ManagementAICPA FN: MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-09 Evaluate the safety of creditors' claims.Topic: Evaluating the Safety of Creditors' Claims106.The principal amount of a bond is:A.The total future interest charges.B.The unpaid balance exclusive of any interest charges.C.The unpaid balance plus any future interest charges.D.The maturity value less any currently unpaid balances.107.Which of the following is not a characteristic of an estimated liability?A.The liability is known to exist.B.The precise dollar amount cannot be determined until a later date.C.The liability should not be recorded in the accounting records until future events have determined the exact amount.D.The liability stems from past transactions.108.Commitments, such as contracts for future transactions:A.Are classified as liabilities.B.Are classified as assets.C.Are footnoted in financial statements, if material.D.Are only disclosed if negative due to the principle of conservatism.109.Which of the following is an example of a contingent liability?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.110.Which of the following ratios and rates that measure debt-paying ability focuses on the long-term position of a company?A.Quick ratio.B.Inventory turnover.C.Current ratio.D.Debt ratio.111.Ultimate Company is a defendant in a lawsuit alleging damages of $3 billion. The litigation is expected to continue for several years, and no reasonable estimate can be made at this time of Ultimate Company's ultimate financial responsibility. This situation is an example of:A.Off-balance-sheet financing.B.A loss contingency which should be disclosed in notes to Ultimate Company's financial statements.C.An estimated liability which must appear in Ultimate Company's balance sheet.D.A loss in purchasing power caused by inflation.112.The Music House issues a contract to a new recording artist to produce a number of albums over the next five years at $1 million per album. This situation is an example of:A.A contingent liability which should be recorded in the accounting records.B.A contingent liability requiring footnote disclosure.C.An estimated liability, since the number of albums to be produced is not yet determined.D.A commitment which, if material, may be disclosed in a footnote.113.A discount on bonds payable is best described as:A.An element of future interest expense.B.A bonus paid by the bondholders to the issuing corporation because of the unusually high interest rate stated in the bonds.C.The present value of the future interest payments of bond interest and principal.D.An amount below par which the bondholders may be called upon to make good.114.Deferred taxes are classified as:A.Only a liability.B.Only an asset.C.Either an asset or liability, depending upon the situation.D.A non-operating expense.115.Amortizing a discount on bonds payable:A.Increases interest expense.B.Increases periodic cash payments to bondholders.C.Decreases interest expense.D.Decreases periodic cash payments to bondholders.116.Premium on bonds payable:A.Is an asset account.B.Increases the carrying value of the liability.C.Is a contra-asset account.D.Is disclosed by a footnote.117.Amortizing a premium on bonds payable:A.Increases interest expense.B.Increases periodic cash payments to bondholders.C.Decreases interest expense.D.Decreases periodic cash payments to bondholders.118.On November 1, Metro Corporation borrowed $55,000 from a bank and signed a 12%, 90-day note payable in the amount of $55,000. The November 30 adjusting entry will be: (assume 360 days in year)A.Debit Interest Expense $550 and credit Notes Payable $550.B.Debit Interest Expense $550 and credit Interest Payable $550.C.Debit Discount on Notes Payable $1,100 and credit Interest Payable $1,100.D.Debit Interest Expense $550 and credit Cash $550.$55,000 x 12% x 30/360 = $550The current balance sheet of Apex reports total assets of $20 million, total liabilities of $2 million, and owners' equity of $18 million. Apex is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others.119.What will be the effect on Apex's debt ratio if Apex's owner invests an additional $2 million to finance its expansion?A.The debt ratio will decrease from .1 (2/20) to .0909 (2/22) after the additional investment.B.The debt ratio will decrease from 2/9 before to 2/11 after the additional investment.C.The debt ratio will increase from 20 before to 22 after the additional investment.D.Additional investment by owner will have no effect on the debt ratio.

120.Assume Apex borrows $2 million to finance its expansion. Apex's debt ratio immediately after the borrowing will be:A..10.B..20.C..33 (rounded).D..18.$4/$22 = .18121.What is the approximate maximum amount Apex can borrow and not exceed a debt ratio of .3?A.$4,000,000.B.$5,500,000.C.$5,000,000.D.$600,000.$7.5/$25.5 = 2.94On November 1, Year 1, Noble Co. borrowed $80,000 from South Bank and signed a 12%, six-month note payable, all due at maturity. The interest on this loan is stated separately.122.How much must Noble pay South Bank on May 1, Year 2, when the note matures?A.$80,000.B.$89,600.C.$84,800.D.$82,400.$80,000 x 12% x 6/12 = $4,800 + $80,000 = $84,800123.How much interest expense will Noble recognize on this note in Year 2?A.$9,600.B.$4,800.C.$2,400.D.$3,200.$80,000 x 12% x 4/12 = $3,200124.At December 31, Year 1, Noble Co.'s overall liability for this loan amounts to:A.$80,000.B.$81,600.C.$83,200.D.$84,800.$80,000 + ($80,000 x 12% x 2/12) = $81,600125.At December 31, Year 1, the adjusting entry with respect to this note includes a:A.Credit to Interest Payable for $1,600.B.Credit to Notes Payable for $1,600.C.Debit to Interest Expense for $3,200.D.Credit to Cash for $3,200.On September 1, 2009, Able Company purchased a building from Regal Corporation by paying $200,000 cash and issuing a one-year note payable for the balance of the purchase price. Interest on the note is stated at an annual rate of 9% and is paid at maturity. In its December 31, 2009, balance sheet, Able correctly presented the note and interest payable as follows:126.How much must Able pay Regal Corporation on September 1, 2010, when the note matures?A.$600,000.B.$618,000.C.$654,000.D.Some other amount.$600,000 + ($600,000 x .09) = $654,000127.What is the amount of the interest expense Able will recognize on this note in 2010?A.$18,000.B.$31,500.C.$36,000.D.$54,000.$600,000 x .09 x 8/12 = $36,000

128.What is the total cash (including interest) paid for the building purchased by Able?A.$800,000.B.$836,000.C.$854,000.D.$816,000.$200,000 + $600,000 + $54,000 = $854,000129.The adjusting entry at December 31, 2009, with respect to this note included:A.A debit to Interest Expense for $18,000.B.A credit to Cash for $18,000.C.A credit to Notes Payable for $18,000.D.A credit to Interest Expense for $18,000.On September 1, 2011, Select Company borrowed $600,000 from a bank and signed a 12%, six-month note payable, with interest on the note due at maturity.

130.The total amount of the current liability (including interest payable) for this loan that appears in Select Company's balance sheet at December 31, 2011, is:A.$600,000.B.$624,000.C.$636,000.D.$672,000.$600,000 + ($600,000 x 12% x 4/12) = $624,000131.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?A.Total liabilities are overstated.B.Net income is overstated.C.Owners' equity is understated.D.Interest Payable is overstated.132.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:A.$90,000.B.$90,450.C.$90,900.D.$91,800.$90,000 + ($90,000 x 12% x 1/12) = $90,900133.On November 1 of the current year, Garcia Company borrowed $50,000 by issuing a 9%, six-month note payable, all due at maturity date. Interest expense on this note to be recognized during the current year amounts to:A.$500.B.$750.C.$1,500.D.$4,500.$50,000 x .09 x 2/12 = $750Stone 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 for each employee.134.The company's annual payroll-related expenses amount to approximately:A.$1,085,600.B.$1,181,850.C.$1,250,700.D.$900,000.$900,000 + (.05 x $900,000) + (.0765 x $900,000) + (.05 x $900,000) + (.02 x $900,000) + ($350 x 12 x 25) = $1,181,850135.Employees' annual "take-home-pay," totals approximately:A.$672,300.B.$762,300.C.$675,000.D.$741,150.$900,000 - ($900,000 x .0765) - ($900,000 x .10) = $741,150136.Some of the payroll-related expenses incurred by Stone Corporation are mandated by law, rather than negotiated with employees. During the current year, these mandated amounts increased Stone's payroll-related expenses by approximately:A.$68,850.B.$200,700.C.$131,850.D.$176,850.($900,000 x .05) + ($900,000 x .0765) + ($900,000 x .02) = $131,850137.Assume that the federal government implements a 10% payroll tax upon employers to finance health insurance for all citizens and residents. Stone will pay this tax instead of purchasing group health insurance. This will cause Stone's total annual payroll-related expenses to:A.Decrease by $15,000.B.Increase by $15,000.C.Decrease by $32,500.D.No change, because payroll taxes are withheld from employees' pay.($900,000 x .10) - ($350 x 12 x 25) = $(15,000)On December 1, Year 1, Bradley Corporation incurs a 15-year $200,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $2,400, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, Year 1.138.Compute the total amount to be paid by Bradley over the 15-year life of the mortgage.A.$200,000.B.$562,000.C.$432,000.D.$474,000.$2,400 x 12 x 15 = $432,000139.How much of the first payment made on December 31, Year 1, represents interest expense?A.$2,400.B.$400.C.$2,304.D.$2,000.1% x $200,000 = $2,000140.The total liability related to this mortgage reported in Bradley's balance sheet at December 31, Year 1, is:A.$432,100.B.$199,600.C.$194,923.D.$200,000.200,000 - 400 = 199,600141.Over the 15-year life of the mortgage, the total amount Bradley will pay for interest charges is:A.$232,000.B.$360,000.C.$200,000.D.$432,060.$432,000 - $200,000 = $232,000142.The portion of the second monthly payment made on January 31, Year 2, which represents repayment of principle is:A.$400.B.$404.C.$2,400.D.$1,996.$2,400 - (1% x $199,600) = $404143.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: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.$500,000 x 10% x 1/12 = $4,167144.At the end of 2010 it is discovered that the accountant for Gower Company failed to record $60,000 of interest payable which had accrued since the last interest payment date. The current ratio, quick ratio, and debt ratio, as well as the financial statements, had already been computed using the erroneous data. Correction of the accounting records will have which of the following effects?A.Net income as formerly computed will not be affected by the correction of the error.B.The interest coverage ratio as formerly computed will not change as a result of the correction.C.The debt ratio as formerly computed will decrease as a result of the correction.D.The quick ratio as formerly computed will decrease as a result of the correction.On April 1, year 1, Cricket Corporation issues $60 million of 12%, 10-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.

145.The amount of cash paid to bondholders for interest during Year 1, is:A.$6,600,000.B.$5,400,000.C.$3,600,000.D.$1,800,000.$60,000,000 x .06 = $3,600,000146.Interest expense on this bond issue reported in Cricket's Year 1, income statement is:A.$2,400,000.B.$4,800,000.C.$5,400,000.D.$7,200,000.$60,000,000 x 12% x 9/12 = $5,400,000147.The adjustment necessary at December 31, Year 1 (if any), related to this bond issue involves:A.Recognition of interest expense of $3,600,000.B.Recognition of interest expense of $1,800,000.C.Payment of cash of $1,800,000.D.There is no adjustment necessary.$60,000,000 x 12% x 3/12 = $1,800,000148.With respect to this bond issue, Cricket Corporation's balance sheet at December 31, Year 1, will include:A.Bonds payable of $61,800,000.B.Bonds payable of $63,600,000.C.Bonds payable of $60 million, as well as interest payable of $1,800,000.D.Bonds payable of $60 million, as well as interest payable of $3,600,000.On April 1, Year 1, Greenway Corporation issues $20 million of 10%, 20-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.

149.The journal entry to record the first cash payment to bondholders on October 1, year 1, will include:A.A credit to Cash of $2,000,000.B.A debit to Bonds Payable of $1,000,000.C.A debit to Interest Expense of $1,000,000D.A credit to Interest Payable of $1,000,000.$20,000,000 x 10% x 6/12 = $1,000,000150.The adjusting entry (if any) required on December 31, Year 1, related to this bond issue involves:A.Recognition of interest expense of $1,000,000.B.Recognition of interest expense of $500,000.C.A credit to Interest Payable of $2,000,000.D.A credit to Cash of $500,000.$20,000,000 x 10% x 3/12 = $500,000151.In Year 2, Greenway's income statement will report interest expense arising from this bond issue of:A.$1,000,000.B.$2,000,000.C.$500,000.D.$1,500,000.$20,000,000 x 10% = $2,000,000152.On April 1, Year 1, the journal entry to record issuance of the bonds will include:A.A credit to Interest Payable of $1,000,000.B.A debit to Cash of $20,000,000.C.A credit to Bonds Payable of $2,100,000.D.A debit to Cash of $21,000,000.153.With respect to this bond issue, Greenway's balance sheet at December 31, Year 1, will include:A.Bonds payable of $20,500,000.B.Bonds payable of $19,500,000.C.Bonds payable of $20 million, as well as interest payable of $1,500,000.D.Bonds payable of $20 million, as well as interest payable of $500,000.Austin Corporation issues $6,000,000 of 10%, 10-year bonds, dated December 31, Year 1. The bonds are issued on April 30, Year 2, at 100 plus accrued interest. Interest on the bonds is payable semiannually each June 30 and December 31.154.The total amount of cash received by Austin Corporation upon issuance of the bonds on April 30, Year 2, is:A.$6,000,000.B.$6,200,000.C.$6,150,000.D.$6,300,000.$6,000,000 + ($6,000,000 x 10% x 4/12) = $6,200,000155.The entry to record the issuance of bonds payable on April 30, Year 2, includes:A.A credit to Premium on Bonds Payable of $200,000.B.A debit to Cash of $150,000.C.A debit to Bond Interest Expense of $200,000.D.A credit to Bond Interest Payable of $200,000.156.The journal entry made by Austin Corporation to record the first semiannual interest payment on the bonds includes:A.A debit to Bond Interest Expense of $300,000.B.A debit to Bond Interest Payable of $100,000.C.A debit to Bond Interest Expense of $100,000.D.A debit to Bond interest Expense of $200,000.157.The amount of Austin's interest expense on this bond issue during Year 2 amounts to:A.$400,000.B.$450,000.C.$360,000.D.$600,000.$6,000,000 x 10% x 8/12 = $400,000Salem Co. has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94.158.If Salem Co. retires $10 million of these bonds by purchasing them from bondholders at current market price, the company will report:A.A $600,000 gain.B.A $500,000 loss.C.An unrealized gain.D.Neither gains nor losses are recognized on early retirements of debt.$10,000,000 - $9,400,000 = $600,000159.If Salem Co. calls $10 million of these bonds it will report:A.A $700,000 gain.B.A $400,000 loss.C.An unrealized gain.D.Neither gains nor losses are recognized on early retirements of debt.$10,000,000 - $10,400,000 = $(400,000)160.If Salem Co. retires $10 million of these bonds by purchasing them from bondholders at current market price, the company will report:A.A $600,000 cash receipt from operating activities.B.A $9.4 million cash payment for operating activities.C.A $600,000 cash receipt from financing activities.D.A $9.4 million cash payment for financing activities.161.On February 28, 2011, $5,000,000 of 6%, 10-year bonds payable, dated December 31, 2010, are issued. Interest on the bonds is payable semiannually each June 30 and December 31. If the total amount received (including accrued interest) by the issuing corporation is $5,060,000, which of the following is correct?A.The bonds were issued at a premium.B.The amount of cash paid to bondholders on the next interest date, June 30, 2011, is $300,000.C.The amount of cash paid to bondholders on the next interest date, June 30, 2011, is $50,000.D.The bonds were issued at a discount.$5,060,000 - ($5,000,000 x 6% x 2/12) = $10,000 premiumWebster Company issues $1,000,000 face value, 6%, 5-year bonds payable on December 31, 2011. 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.

162.The entry made by Webster Company to record issuance of the bonds payable at December 31, 2011, includes: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.$1,000,000 - ($1,000,000 x .97) = $30,000163.Webster's entry at June 30, 2012, to record the first semiannual payment of interest and amortization of discount on the bonds includes a:A.Debit to Bond Interest Expense of $30,000.B.Credit to Cash of $33,000.C.Debit to Discount on Bonds Payable of $3,000.D.Debit to Bond Interest Expense of $33,000.$1,000,000 x 3% + $30,000/10 = $33,000164.The amount of bond interest expense recognized by Webster Company in 2012 with respect to these bonds is:A.$60,000.B.$63,000.C.$120,000.D.$66,000.$1,000,000 x .06 + 2($30,000/10) = $66,000165.The carrying value of this liability in Webster Company's December 31, 2012, balance sheet is:A.$1,000,000.B.$970,000.C.$976,000.D.$967,000.$970,000 + $6,000 = $976,000Rockland Corporation has 22 employees and incurs total wages and salaries expense of $800,000 per year. The following table shows various payroll amounts as a percentage of this annual wage and salaries expense:In addition, Rockland provides group health insurance for its entire workforce. The cost of this insurance is $450 per month for each employee.166.The company's annual payroll-related expenses amount to approximately:A.$1,137,200.B.$1,076,000.C.$980,000.D.$800,000.$800,000 + (.05 x $800,000) + (.0765 x $800,000) + (.05 x $800,000) + (.02 x $800,000) + ($450 x 12 x 22) = $1,076,000167.Employees' annual "take-home-pay," totals approximately:A.$642.800.B.$760,000.C.$681,200.D.$658,800.$800,000 - ($800,000 x .0765) - ($800,000 x .10) = $658,800

168.Some of the payroll-related expenses incurred by Rockland Corporation are mandated by law, rather than negotiated with employees. During the current year, these mandated amounts increased Rockland's payroll-related expenses by approximately:A.$101,200.B.$96,000.C.$117,200.D.$118,800.($800,000 x .05) + ($800,000 x .0765) + ($800,000 x .02) = $117,200The 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.

169.What will be the effect on Gamma's debt ratio if Gamma's owner invests an additional $5 million to finance its expansion?A.The debt ratio will decrease from .1 (3/30) to .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.170.Assume Gamma borrows $5 million to finance its expansion. Gamma's debt ratio immediately after the borrowing will be (rounded):A..11.B..23.C..30 (rounded).D..35.$8/$35 = .23171.What is the maximum amount Gamma can borrow and not exceed a debt ratio of .2?A.$3,750,000.B.$600,000.C.$6,000,000.D.$5,750,000..2 = ($3 + X)/($30 + X); X = 3.75Trego Company issued, payable on December 31, 2011, $1,000,000 face value, 4%, 5-year bonds. Interest will be paid semiannually each June 30 and December 31. The bonds sold at a price of 102; Trego uses the straight-line method of amortizing bond discount or premium.172.The entry made by Trego Company to record issuance of the bonds payable at December 31, 2011, includes:A.A debit to Cash of $1,000,000.B.A credit to Premium on Bonds Payable of $20,000.C.A credit to Bonds Payable of $1,020,000.D.A credit to Bond Interest Payable of $20,000.$1,000,000 - ($1,000,000 x 1.02) = $20,000 premium173.Trego's entry at June 30, 2012, to record the first semiannual payment of interest and amortization of discount/premium on the bonds includes a:A.Debit to Bond Interest Expense of $20,000.B.Credit to Cash of $22,000.C.Credit to Premium on Bonds Payable of $2,000.D.Debit to Bond Interest Expense of $22,000.$1,000,000 x 2% + $20,000/10 = $22,000174.The amount of bond interest expense recognized by Trego Company in 2012 with respect to these bonds is:A.$40,000.B.$42,000.C.$60,000.D.$44,000.$1,000,000 x .04 + 2($20,000/10) = $44,000175.The carrying value of this liability in Trego Company's December 31, 2012, balance sheet is:A.$1,000,000.B.$1,016,000.C.$1,020,000.D.$1,024,000.$1,020,000-$4,000 = $1,016,000195.The December 31, 2010, adjusting entry for this note includes:A.A credit to Cash for $1,400.B.A credit to Interest Payable for $8,400.C.A credit to Interest Payable for $1,400.D.A credit to Interest Payable for $700.196.The total liabilities related to this note reported in Central Food's December 31, 2010, balance sheet is:A.$140,000.B.$148,400.C.$140,700.D.$141,400.197.What is the amount of interest expense Central Food's recognizes on this note in 2011?A.$700.B.$8,400.C.$7,700.D.$1,400.198.How much must Central Food pay the lender upon maturity of this note?A.$140,700.B.$140,000.C.$147,700.D.$148,400.199.The liability for this loan as of December 31, 2010:A.Is equal to its maturity value.B.Is equal to the book value of the two trucks that were acquired in exchange.C.Is classified as a long-term liability, since it was used to acquire non-current assets.D.Is classified as a long-term liability if Central Food has the intent and ability to refinance by taking out a new loan not due for several years.200.Rose Company's total payroll-related expense for the year is:A.$2,250,000.B.$3,510,000.C.$2,840,000.D.$3,190,000.201.Compute the company's cash outlays during the year for payroll-related costs. Assume short-term obligations such as insurance premiums and payroll taxes have been paid.A.$2,750,000.B.$3,070,000.C.$1,930,000.D.$3,510,000.202.The annual "take-home-pay" of Rose' employees is:A.$2,520,000.B.$2,250,000.C.$1,930,000.D.$2,750,000.203.Amounts paid during the year to retirees for pension and other postretirement benefits total:A.$140,000.B.$350,000.C.$230,000.D.None of above.204.When a company has a fully-funded pension plan:A.The dollar amounts paid to retirees are greater than the amounts recognized as pension expense by the employer.B.Pension expense is equal to the cash payments made to retirees during the current period.C.No pension expense is recognized in the income statement.D.It does not use the services of a trustee to operate the pension plan.

Multiple Choice Questions211.Which of the following is characteristic of liabilities, rather than of equity? (More than one answer may be correct.)A.The obligation matures.B.Interest paid to the provider of the capital is deductible in the determination of taxable income.C.The capital providers' claims are residual in the event of liquidation of the business.D.The capital providers normally have the right to exercise control over business operations.212.On October 1, Dalton Corp. borrows $100,000 from National Bank, signing a six-month note payable for that amount, plus interest to be computed at a rate of 9% per annum. Indicate all correct answers.A.Dalton's liability at October 1 is only $100,000.B.The maturity value of this note is $104,500.C.At December 31, Dalton will have a liability for accrued interest payable in the amount of $4,500.D.Dalton's total liability for this loan at November 30 is $101,500.213.Identify all correct statements concerning payrolls and related payroll costs:A.Both employers and employees pay Social Security and Medicare taxes.B.Workers' compensation premiums are withheld from employees' wages.C.An employer's total payroll costs usually exceed total wages expense by about 7 1/2%.D.Under current law, employers are required to pay Social Security taxes on employees' earnings, but are not required to pay for health insurance.214.Identify those types of information that can readily be determined from an amortization table for an installment loan. (More than one answer may be correct.)A.Interest expense on this liability for the current year.B.The present value of the future payments under current market conditions.C.The unpaid balance remaining after each payment.D.The portion of the unpaid balance that is a current liability.

215.Which of the following statements is (are) correct? (More than one statement may be correct.)A.A bond issue is a technique for subdividing a very large loan into a great many small, transferable units.B.Bond interest payments are contractual obligations, whereas the board of directors determines whether or not dividends will be paid.C.As interest rates rise, the market prices of bonds fall; as interest rates fall, bond prices tend to rise.D.Bond interest payments are deductible in determining income subject to income taxes, whereas dividends paid to stockholders are not deductible.216.Identify all statements that are consistent with the concept of present value. (More than one answer may be correct.)A.The present value of a future amount is always less than that future amount.B.An amount of money available today is considered more valuable than the same sum which will not become available until a future date.C.A bond's issue price is equal to the present value of its future cash flows.D.The liability for an installment note payable is recorded at only the principal amount, rather than the sum of the scheduled payments.217.Identify those trends that are unfavorable from the viewpoint of a bondholder (More than one answer may be correct.)A.Market interest rates are steadily rising.B.The issuing company's interest coverage ratio is steadily rising.C.The issuing company's net cash flow from operating activities is steadily declining.D.The issuing company's debt ratio is steadily declining.218.A basic difference between loss contingencies and "real" liabilities is:A.Liabilities stem from past transactions; loss contingencies stem from future events.B.Liabilities always are recorded in the accounting records, whereas loss contingencies never are.C.The extent of uncertainty involved.D.Liabilities can be large in amount, whereas loss contingencies are immaterial.

219.Which of the following situations require recording a liability in 2011? (More than one answer may be correct.)A.In 2011, a company manufactures and sells stereo equipment which carries a three-year warranty.B.In 2011, a theater group receives payments in advance from season ticket holders for productions to be performed in 2012.C.A company is a defendant in a legal action. At the end of 2011, the company's attorney feels it is possible the company will lose, and that the amount of the loss might be material.D.During 2011, a midwest agricultural co-operative is concerned about the risk of loss if inclement weather destroys the crops.220.Silverado maintains a fully funded pension plan. During 2011, $1 million was paid to retired workers, and workers currently employed by the company earned a portion of the right to receive pension payments expected to total $6 million over their lifetimes. Silverado's pension expense for 2011 amounts to:A.$1 million.B.$6 million.C.$7 million.D.Some other amount.221.Deferred income taxes result from:A.The fact that bond interest is deductible in the computation of taxable income.B.Depositing income taxes due in future years in a special fund managed by an independent trustee.C.Timing differences between when income is recognized in financial statements and in income tax returns.D.The inability of a bankrupt company to pay its income tax liability on schedule.10-1