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Exam 7: Accounting for Liabilities

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Question 101

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Peak Enterprises issued bonds with a face value of $500,000, receiving cash of $508,000. To record this event, Bonds Payable should be increased for $500,000.

A) True
B) False

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Question 102

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Park Enterprises issued bonds with a term of 5 years and a face value of $500,000, receiving cash of $508,000. The bonds pay interest once a year, with an annual rate of 7%. Assuming straight-line amortization, the amount of interest expense for the first year would be $31,600.

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B) False

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Question 103

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Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = I Decrease = D Not Affected = NAOn December 31, Year 1, Briand Company paid cash for interest on bonds it had issued on January 1, Year 1 at 98, and amortized part of the discount on bonds. Briand Company uses the straight-line method of amortizing bond discounts. Indicate the effects of the amortization of the discount only.

Baby Beach Company experienced an event that had the following effects on its financial statements. -Which of the following events could have caused these effects?

Broward Company estimated that its warranty expense would be $6,250 for the current year. During the year Broward paid $3,920 to repair merchandise that was returned by customers. Required:What is the amount of warranty expense for the current year?If this is the first year of operations, what is the amount of warranty liability that will be shown on the balance sheet at the end of the year?

The following is a list of balance sheet accounts (in random order) and balances for the Premium Office Supply Company. They have been updated as of December 31, Year 1. $\begin{array}{lr}\text { Building } & \$240,000 \\\text { Land } & 80,000 \\\text { Retained earnings } & 320,000 \\\text { Notes payable (due in 10 years) } & 136,000\\\text { Inventory } & 480,000 \\\text { Equipment } & 96,000 \\\text { Accounts payable } & 112,000 \\\text { Common stock } & 480,000 \\\text { Accumulated Depreciation - Building } & 80,000 \\\text { Accumulated Depreciation - Equipment } & 32,000\\\text { Cash}&80,000\\\text { Unearned revenue}&16,000\\\text { Accomts receivable }&200,000\end{array}$ Required: Prepare a classified balance sheet for Premium Office Supply Company at December 31, Year 1.

Victor Company issued bonds with a $725,000 face value and a 6% stated rate of interest on January 1, Year 1. The bonds carried a 5-year term and sold for 95. Victor uses the straight-line method of amortization. Interest is payable on December 31 of each year.The carrying value of the bond liability on the December 31, Year 3 balance sheet was:

Baird Manufacturing Company issued $150,000 of 7%, 5-year bonds for $144,000, on January 1, Year 1. Interest is payable on January 1 of each year. Baird uses the straight-line method of amortization. The first interest payment is to be made on January 1, Year 2. Required:Show the effects of the following events on the accounting equation. Event 1. The issuance of the bonds. Event 2. Accrual of interest at December 31, Year 1. Event 3. Amortization of discount at December 31, Year 1. Event 4. Payment of interest on January 1, Year 2. What is the carrying value of the bond on December 31, Year 1?What is the amount of interest paid in (1) Year 1? (2) Year 2?What is the amount of interest expense shown on the income statement in Year 1?

Victor Company issued bonds with a $450,000 face value and a 6% stated rate of interest on January 1, Year 1. The bonds carried a 5-year term and sold for 95. Victor uses the straight-line method of amortization. Interest is payable on December 31 of each year.The amount of interest expense appearing on the December 31, Year 3 income statement would be:

On May 1, Year 1, Arrow Company borrowed $10,000 from the State Bank at 9 percent annual interest. The note issued by Arrow had a one-year term. In addition, Arrow reported cash revenue of $3,400 in Year 1 and $800 in Year 2 from sales. Interest is paid when the note is due. -The cash flow from operating activities Arrow would report on the Year 1 and Year 2 statements of cash flows would be

On November 1, Year 1 Claire Company borrowed $5,000 cash from Shelter Company. The one-year note carried a 5% rate of interest. Which of the following shows how the loan will affect Claire's financial statements on November 1, Year 1?

Jones Company issued bonds with a $160,000 face value on January 1, Year 1. The five-year term bonds were issued at 97 and had a 8.50% stated rate of interest that is payable in cash on December 31^st of each year. Jones amortizes the bond discount using the straight-line method. Based on this information:The amount of interest expense shown on Jones's December 31, Year 1 income statement would be:

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = I Decrease = D Not Affected = NAPearl Company sold merchandise to a customer for $800 cash in a state where the sales tax rate is 5%. (Ignore the effect of cost of goods sold.)

Madison Company issued an interest-bearing note payable with a face amount of $25,200 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term.The amount of cash flow from operating activities on the Year 1 statement of cash flows would be:

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = I Decrease = D Not Affected = NASierra Mining is the defendant in a $3 million lawsuit involving damage to the environment. Sierra's attorneys have advised the company that the outcome of the lawsuit is reasonably possible, but not probable.

On August 1, Year 1 Gin Company borrowed $50,000 cash. The one-year note carried a 5% rate of interest. Which of the following shows how the accrual of interest expense in Year 2 will affect Gin's financial statements?

Regardless of the specific type of long-term debt, which of the following is normally required with debt transactions?

The Gordon Corporation issued $70,000 of 6%, 5-year bonds on January 1, Year 1 at 98. The interest payments are due on December 31 each year. Gordon uses the straight-line method of amortization.On December 31, Year 5, Gordon Corporation records interest and amortization. Immediately after that, Gordon pays off the bonds as scheduled. Which of the following answers shows the effect of the bond payoff on the financial statements?

Under what condition is a pending lawsuit recognized as a liability on a company's balance sheet?

If bonds are issued at a premium, the bond issuer will pay the bondholders an amount lower than the issue price at maturity.