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Exam 7: Accounting for Liabilities

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Question 81

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Loans that require payment of interest at regular intervals and payment of principal at maturity are installment notes.

A) True
B) False

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Question 82

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Flora's Flower Market sells eight potted petunias to a customer for $50.00, plus 5% sales tax. Flora's will recognize $52.50 in sales revenue.

A) True
B) False

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Question 83

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If $200,000 of 12% bonds are issued at 101 1/2, what amount of cash will be received by the corporation?

Which of the following correctly describes an installment note?

Eureka Company issued $100,000 in bonds payable on January 1, Year 1. The bonds were issued at face value and carried 5-year term to maturity. They had a 7% stated rate of interest that was payable in cash on January 1st of each year beginning January 1, Year 2. Based on this information, the amount of total liabilities appearing on the December 31, Year 1 balance sheet would be:

Weller Company issued bonds with a face value of $280,000, a 9.50% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Weller uses the effective interest method of amortization. The market rate of interest on the date of issue was 7.50%. Interest is paid annually on December 31.Assuming Weller issued the bonds for $318,438, the carrying value of the bonds on the December 31, Year 3 balance sheet 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, Flagler Corporation borrowed $20,000 on a line-of-credit from City Bank. Show the effects of this transaction on Flagler's financial statements.

Weller Company issued bonds with a face value of $400,000, a 10% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Weller uses the effective interest method of amortization. The market rate of interest on the date of issue was 8%. Interest is paid annually on December 31.Assuming Weller issued the bond for $453,681, the amount of interest expense appearing on the Year 3 income statement would be closest to:

If a company uses the effective interest method of amortizing a bond discount, does the interest expense increase, decrease, or stay the same over time? Explain.

Kier Company issued $200,000 in bonds on January 1, Year 1. The bonds were issued at face value and carried a 4-year term to maturity. They had a 6½% stated rate of interest that was payable in cash on December 31st. Based on this information alone, the amount of interest expense shown on the December 31, Year 1 income statement and the cash flow from operating activities shown on the December 31, Year 1 statement of cash flows would be: $\begin{array}{cc} \text { Interest Expense } & \text { Cash Outflow } \\\end{array}$ A. $\begin{array}{cc}&\$13,000&&&&& \text { Zero } \\\end{array}$ B . $\begin{array}{cc}&\text { Zero } &&&&& \$13,000 \\\end{array}$ C. $\begin{array}{cc}& \$13,000 &&&& \$13,000 \\\end{array}$ D. $\begin{array}{cc}&\text { Zero } &&&&&\text { Zero } \\\end{array}$

Wayne Company issued bonds with a face value of $840,000, a 10% 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.Assuming Wayne issued the bonds for 106, the carrying value of the bonds on the December 31, Year 1 balance sheet would be:

Weller Company issued bonds with a face value of $400,000, a 10% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Weller uses the effective interest method of amortization. The market rate of interest on the date of issue was 8%. Interest is paid annually on December 31.Assuming Weller issued the bonds for $453,681, the carrying value of the bonds on the December 31, Year 3 balance sheet would be closest to:

On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method of amortization. Which of the following answers shows the effect of the bond issuance on January 1, Year 1?

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. The amount of the payment for Year 1 that is interest expense is $4,500.

Zirkle Company borrowed $100,000 from Plains Bank on July 31, Year 1. The note carried a 6% interest rate with a one-year term to maturity. Required:Show the effects of borrowing the money and the December 31, Year 1 adjustment on the accounting equation.What is the amount of interest expense for Year 1?Prepare a statement of cash flows for the Zirkle Company for Year 1.

Victor Company issued bonds with a $250,000 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 cash flow from operating activities on the December 31, Year 3 statement of cash flows would be:

On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method of amortization.Which of the following shows the effect of the interest payment and amortization on December 31, Year 1?

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 = NAGilliam Company repaid a note payable on September 30, Year 1. The 8-month note had been issued on February 1, Year 1. The $20,800 cash payment included a $20,000 repayment of principal and an $800 payment for interest.

Companies that issue bonds are required to pay the face value of the bonds at maturity and to make fluctuating periodic interest payments based on the market rate of interest.

A line of credit typically has an interest rate that is fixed (constant) for the length of the agreement.