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Exam 7: Accounting for Liabilities

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Question 1

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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 amount of interest expense shown on Jones's December 31, Year 1 income statement would be:

A) $16,200.
B) $21,000.
C) $15,000.
D) $13,800.

E) A) and B)
F) B) and C)

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A

Question 2

Multiple Choice

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

A) Choice A
B) Choice B
C) Choice C
D) Choice D

E) B) and D)
F) A) and B)

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Question 3

Multiple Choice

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

On January 1, Year 1, Sheffield Co. 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:

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions. The amount of total liabilities that would appear on Riley's December 31 balance sheets for Year 1 and Year 2, respectively, would be:

Indicate whether each of the following statements about bonds is true or false. _____ a) The carrying value of a bond increases over time if the bond was issued at a premium. _____ b) At the end of the term of the bonds, the carrying value of a bond issue is equal to the issue price. _____ c) If bonds are sold below face value, the difference between the issue price and the face value is called the bond discount. _____ d) The payment of interest is an operating activity on the statement of cash flows. _____ e) The issuance of bonds does not appear on the statement of cash flows.

Which of the following items would be least likely to appear in the current liabilities section of a classified balance sheet?

On January 1, Year 1, Daniels Company issued bonds with a face value of $500,000, receiving $496,000 cash. These bonds were issued at a discount.

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 reduction of principal is $3,587.

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:

The party who borrows money in a note payable is known as the:

Contingent liabilities are only recognized if they arise from past events.

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 amount of cash outflow from operating activities shown on Jones's December 31, Year 2 statement of cash flows would be:

Vogle Company purchased $8,000 of equipment by making a $500 down payment and issuing a note for the remainder. As a result of this event, assets increased by $8,000.

The effective interest rate method of amortizing bond premium or discount results in a constant amount of interest expense every period.

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 interest expense appearing on the December 31, Year 3 income statement would be:

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.

If a company uses the effective interest method of amortizing a bond premium, the carrying value of the bond will:

Which of the following is a claims exchange transaction?

If a company has issued bonds at a premium, the amount of interest expense reported on the income statement each year will be greater than the amount of cash paid to bondholders for interest.