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Exam 7: Accounting for Liabilities

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Question 71

Multiple Choice

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The carrying value of a bond issued at a premium:

A) decreases by equal amounts each year if straight-line amortization is used.
B) decreases by equal amounts each year if effective interest amortization is used.
C) decreases by larger and larger amounts each year if effective interest amortization is used.
D) decreases by equal amounts each year if straight-line amortization is used and decreases by increasing amounts each year if effective interest amortization is used.

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

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Question 72

Multiple Choice

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Houston Co. borrowed $20,000 from Dallas Co. on March 1, Year 1. Houston is to repay the principal and interest on March 1, Year 2. The interest rate is 8%. If the year-end adjustment is properly recorded, what will be the effects of the accrual on Houston's Year 1 financial statements?

A) Increase liabilities and increase expenses
B) Increase assets and increase revenues
C) Increase assets and increase liabilities
D) No effect

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

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Question 73

Multiple Choice

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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:

Indicate whether each of the following is true or false. Perez Company borrowed money from its bank in July Year 1. The accrual of interest on the loan at the end of Year 1: _____ a) reduces cash flows. _____ b) involves recognition of interest expense. _____ c) does not affect income for Year 1. _____ d) involves recognition of a liability. _____ e) records a cash payment for interest.

In December Year 1, Lucas Corporation sold merchandise for $10,000 cash. Lucas estimated that $700 of warranty claims might be filed in regard to these sales. On February 12, Year 2, warranty work amounting to $550 was performed for one of the customers ($430 labor paid in cash and $120 from the materials inventory) . Which of the following answers correctly shows the effect of the recognition of the warranty obligation at the end of Year 1 on the financial statements of Lucas?

Indicate whether each of the following statements is true or false. _____ a) The extension of a warranty on goods sold normally represents a legal liability to the seller. _____ b) The recognition of the warranty obligation increases the Warranties Payable account and reduces the Revenue account. _____ c) Providing repairs to customers under the terms of product warranties increase Warranties Expense and decrease the Warranties Payable account. _____ d) Net income is not affected when warranty work is completed. _____ e) Total assets are not affected by the recognition of the warranty obligation at the end of the period.