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Exam 7: Accounting for Liabilities

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Question 41

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Straight-line interest amortization of a premium or discount on bonds payable:

A) assigns variable amounts of interest over the term of the liability.
B) uses compound interest principles.
C) assigns the same amount of interest to each interest period over the term of the liability.
D) is required for U.S. income tax reporting.

E) None of the above
F) C) and D)

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Question 42

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How does a classified balance sheet enhance the usefulness of accounting information?

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Classified balance sheets are ...

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Question 43

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How does the amortization of the principal balance on an installment note payable affect the amount of interest expense recorded each succeeding year?

Alexander Corporation issued 20-year bonds payable at a discount in Year 1. Will Alexander's net income for Year 1 be higher, lower, or the same as it would have been had the bonds been issued at face value? Why?

West Company borrowed $26,000 on September 1, Year 1 from the Valley Bank. West agreed to pay interest annually at the rate of 9% per year. The note issued by West carried an 18-month term. Based on this information the amount of interest expense appearing on West's Year 1 income statement would be:

At the beginning of Year 1, McKee, Incorporated had a balance in the Warranty Payable account of $15,600. During the year McKee sold for $650,000 several products that carried a two-year warranty. McKee estimated that warranty expense would be 3% of sales for the year. Required: If McKee's paid warranty claims in the amount of $12,500 during Year 1, what is the balance in the Warranties Payable account after the warranty obligation is recognized?

Franklin Company obtained a $160,000 line of credit from the State Bank on January 1, Year 1. The company agreed to accept a variable interest rate that was set at 2% above the bank's prime lending rate. The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of Year 1 are shown in the following table. Assume that Franklin borrows or repays on the first day of each month. Borrowing is shown as a positive amount and repayments are shown as negative amounts indicated by parentheses. $\begin{array}{lrr}&\text { Amount Borrowed (Repaid) }&\text { Prime Rate for the Month }\\1 \text {-January } & \$ 40,000 & 4.0 \% \\\text { 1-February } & (10,000) & 4.5\% \\\text { 1-March } & 40.000 & 5.0 \%\end{array}$ Based on this information alone, the amount of interest expense recognized in March would be closest to:

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, Ravenswood Company issued a long-term installment note. Show how the issuance of the note affected the financial statements.

Jones Company issued bonds with a $170,000 face value on January 1, Year 1. The five-year term bonds were issued at 98 and had a 7.00% 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:

On January 1, Year 1, Sheffield Company issued bonds with a face value of $200,000, a term of ten years, and a stated interest rate of 6%. The bonds were issued at 105, and interest is payable each December 31. Sheffield uses the straight-line method to amortize the bond discount. The carrying value of the bonds that would be reported on the December 31, Year 4 balance sheet is:

Maitland Corporation issued ten-year, $200,000, 8% bonds on July 1, Year 1. The bonds pay interest semiannually. On December 31, Year 1, Maitland made its first interest payment. The company decreased the cash account by $8,000, decreased the premium on bonds payable account by $240, and increased the interest expense account by $7,760. Required: Assuming that Maitland amortizes bond premiums using the straight line method, how much cash did Maitland receive for the issuance of the bond on July 1, Year 1?

Greenwood Company issued 150 $1,000, 6% bonds that mature in ten years. Interest is paid annually. The bonds were sold at 103 ½, and Greenwood amortizes bond discounts and premiums using the straight-line method. Required: Calculate the amount of annual interest expense for Greenwood Co.

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.The amount of cash flow from operating activities on the Year 1 statement of cash flows would be:

For a long-term note payable, repaying a portion of principal along with interest payments is called loan amortization.

Jacobs Company issued bonds with $300,000 face value on January 1, Year 1. The bonds were issued at 102 and carried a 5-year term to maturity. They had a 9% stated rate of interest that was payable in cash on December 31st of each year. Jacobs uses the straight-line method of amortization. Based on this information alone, the recognition of interest expense on December 31, Year 1 would act to:

When a warranty repair job is completed, what is the effect on the accounting equation?

On January 1, Year 1, Sheffield Company issued bonds with a face value of $200,000, a term of ten years, and a stated interest rate of 5%. The bonds were issued at 104, and interest is payable each December 31. Sheffield uses the straight-line method to amortize the bond discount. The carrying value of the bonds that would be reported on the December 31, Year 4 balance sheet is:

Davis Corporation borrowed $50,000 on January 1, Year 1. The loan is for a ten-year period and has an annual interest rate of 9%. At the end of each year, Davis will make a payment of $7,791, which includes both principal and interest. With this loan, the amount of interest expense that Davis reports on its income statement will be the same for each year of the loan.

Madison Company issued an interest-bearing note payable with a face amount of $11,400 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:

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, Morris Company issued $100,000 of bonds at the face value. Indicate the effects of issuing these bonds.