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Exam 7: Accounting for Liabilities

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Question 31

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How are interest rates normally set for lines of credit?

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Interest rates on lines of credit normal...

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Question 32

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King Company experienced an accounting event that affected its financial statements as indicated below: Which of the following accounting events could have caused these effects on King's statements?

A) Repaid a bond issued at a discount.
B) Borrowed funds through a line-of-credit.
C) Made a payment on an installment loan.
D) Issued a bond at a discount.

E) A) and C)
F) A) and D)

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Question 33

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Vacation pay is considered a contingent liability to the extent that the obligation exists due to work already performed.

The reason bonds are sometimes issued at a discount is:

Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Wayne uses the straight-line method of amortization. Interest is paid annually on December 31.If Wayne issued the bonds for 96, the:

North Woods Company has a line of credit with the Olympia State Bank. North Woods agreed to pay interest at an annual rate equal to 2% above the bank's prime rate. Funds are borrowed or repaid on the first day of each month and interest is paid in cash on the last day of each month. Borrowing is shown as a positive amount, and repayments are shown as negative amounts indicated by parentheses. Activity to date is given as follows: $\begin{array}{lrr}\text { Month}&\text { Amount Borrowed (Repaid) }&\text { Prime Rate for the }\\&&\text { Month}\\\text { January } & \$40,000 & 6\% \\\text { February } &60,000 & 5\% \\\text { March } & (40,000) & 3 \%\end{array}$ The amount of interest paid at the end of March would be:

On August 1, Year 1 Gin Company borrowed $50,000 cash. The one-year note carried a 6% rate of interest. Which of the following shows how the December 31, Year 1 recognition of accrued interest will affect Gin's financial statements?

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term.Based on this information alone, the amount of total liabilities appearing on Madison's Year 1 balance sheet would be:

Jones Company issued bonds with a $200,000 face value on January 1, Year 1. The five-year term bonds were issued at 97 and had a 7½% 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 total amount of liabilities shown on Jones's December 31, Year 2 balance sheet 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 = NAOn January 1, Year 1, Briand Company issued $200,000 of bonds payable at 98. Indicate the effects of issuing the bonds.

Johansen Company issued a bond at a discount. Which of the following choices accurately reflects how the issue would affect Johansen's financial statements?

If a bond is sold at 101, its stated rate of interest would be:

Why does interest expense decrease during the life of an installment note payable? How is the amount of interest expense computed?

When do the effects of product warranties appear on the statement of cash flows?

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 January 1, Year 1, Kirkland Company issued $200,000 of bonds payable at 101 1/2. Indicate the effects of issuing these bonds.

When calculating interest expense on a 6-month note, multiply the principal by the interest rate, and then multiply by 6/12.

Benitez Company had sales of $680,000 in Year 1. The company expects to incur warranty expenses amounting to 3% of sales. There were $18,300 of warranty obligations paid in cash during Year 1. Based on this information:

If a company is located in an area where floods or earthquakes are deemed to be possible, the company should record a contingent liability.

The Platte Corporation issues a 5-year note payable on January 1, Year 1 for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal.Which of the following shows the effect of the December 31, Year 1 payment?

On January 1, Year 1, Burton Corporation recorded an event that increased its cash account by $196,000, increased its discount on bonds payable account by $4,000, and increased its bonds payable account by $200,000. Which of the following correctly describes that event?