ACCT 302 Quiz 2 Current Liabilities, Contingencies, Bonds, Long Term Notes solutions complete answer

ACCT 302 Quiz 2 Current Liabilities, Contingencies, Bonds, Long Term Notes solutions complete answers 

 

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M Corp. has an employee benefit plan for compensated absences that gives each employee 15 paid vacation days. Vacation days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days. At December 31, 2021, M's unadjusted balance of liability for compensated absences was $26,400. M estimated that there were 200 total vacation days available at December 31, 2021. M's employees earn an average of $132 per day. After recording any necessary adjustment, in its December 31, 2021, balance sheet, what amount of liability for compensated absences is M required to report?

 

Panther Co. had a quality-assurance warranty liability of $346,000 at the beginning of 2021 and $319,000 at the end of 2021. Warranty expense is based on 5% of sales, which were $49 million for the year. What amount of warranty costs were paid during 2021?

 

In 2021, Holyoak Inc. offers a coupon for $20 off qualifying purchases of its new line of products. Holyoak sold 10,000 of these products during the year. By year-end of 2021, 7,100 coupons had been redeemed and the $20 reduction of purchase price provided to customers. Holyoak's historical experience with such coupons indicates that 85% of customers use the coupon. Holyoak recognizes coupon expense in the period coupons are issued.

 

What is the expense that Holyoak should report for its promotional coupons in its 2021 income statement?

 

Ferris Wheeler Co. issued $10,000 of 20-year bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds.

 

What is the interest expense on the bonds for the year ended December 31, 2022?

 

Gene Poole Co. issued $10,000 of 20-year bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. (Round your answer to nearest whole dollar amount.)

 

What is the book value of the bonds on December 31, 2022?

 

Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%.

 

Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance after its first interest payment on March 31, 2022, rounded up to the nearest thousand?

 

On June 30, 2024, L. N. Bean issued $10 million of its 8% bonds for $8 million. The bonds were priced to yield 10%. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, how much bond interest expense should the company report for the 6 months ended December 31, 2024?

 

Rick's Pawn Shop issued 11% bonds, dated January 1, with a face amount of $400,000 on January 1, 2022. The bonds sold for $370,000. For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Rick's determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2022, the fair value of the bonds was $365,000, with $2,000 of the change due to a change in general interest rates. Rick's statement of comprehensive income will include:

 

 

On February 1, 2020, Pat Weaver Inc. (PWI) issued 9%, $1,100,000 bonds for $1,400,000. PWI retired all of these bonds on January 1, 2021, at 106. Unamortized bond premium on that date was $116,600. How much gain or loss should be recognized on this bond retirement?

 

On March 1, 2021, Doll Co. issued 10-year convertible bonds at 106. During 2024, the bonds were converted into common stock when the market price of Doll's common stock was 500 percent above its par value. Doll prepares its financial statements according to International Financial Reporting Standards (IFRS). On March 1, 2021, cash proceeds from the issuance of the convertible bonds should be reported as:

 

On February 1, 2020, Pat Weaver Inc. (PWI) issued 10%, $1,500,000 bonds for $1,800,000. PWI retired all of these bonds on January 1, 2021, at 103. Unamortized bond premium on that date was $154,500. How much gain or loss should be recognized on this bond retirement?

 

In the current year, Hanna Company reported quality-assurance warranty expense of $194,000 and the warranty liability account increased by $30,000. What amount of warranty costs were paid during the year?

 

Question 

 

On September 1, 2021, Red Co., issued $48 million of its 10% bonds at face value. The bonds are dated June 1, 2021, and mature on May 30, 2031. Interest is payable semiannually on June 1 and December 1. At the time of issuance, Red would receive cash proceeds that would include accrued interest of:

 

Question 

 

Hillside Excursions issues bonds due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 6%. Using a financial calculator or Excel, calculate the issue price of the bonds.

 

Question 

 

Peterson Photoshop sold $1,000 in gift cards on a special promotion on October 15, 2021, and sold $1,500 in gift cards on another special promotion on November 15, 2021. Of the cards sold in October, $100 were redeemed in October, $250 in November, and $300 in December. Of the gift cards sold in November, $150 were redeemed in November and $350 were redeemed in December. Peterson views the probability of redemption of a gift card as remote if the card has not been redeemed within two months. At 12/31/2021, Peterson would show a deferred revenue account for the gift cards with a balance of:

 

Question 

 

On October 31, 2021, Simeon Builders borrowed $16 million cash and issued a 7-month, noninterest-bearing note. The loan was made by Star Finance Co. The stated discount rate is 8%. Sky's effective interest rate on this loan is:

 

Question 

 

Branch Company, a building materials supplier, has $18,100,000 of notes payable due April 12, 2022. At December 31, 2021, Branch signed an agreement with First Bank to borrow up to $18,100,000 to refinance the notes on a long-term basis. The agreement specified that borrowings would not exceed 85% of the value of the collateral that Branch provided. At the date of issue of the December 31, 2021, financial statements, the value of Branch's collateral was $19,400,000. On its December 31, 2021, balance sheet, Branch should classify the notes as follows:

 

Question 

 

Oklahoma Oil Corp. paid interest of $775,000 during 2021, and the interest payable account decreased by $120,500. What was interest expense for the year?

 

Question 

 

Jane's Donut Co. borrowed $192,000 on January 1, 2021, and signed a two-year note bearing interest at 13%. Interest is payable in full at maturity on January 1, 2023. In connection with this note, Jane's should report interest expense at December 31, 2021, in the amount of:

 

Question 

 

Universal Travel Inc. borrowed $508,000 on November 1, 2021, and signed a 12-month note bearing interest at 5%. Interest is payable in full at maturity on October 31, 2022. In connection with this note, Universal Travel Inc. should report interest payable at December 31, 2021, in the amount of: (Round your final answers to the nearest whole dollar.)

 

Question 

 

Lake Co. receives nonrefundable advance payments with special orders for containers constructed to customer specifications. Related information for 2021 is as follows ($ in millions):

 

What amount should Lake report as a current liability for advances from customers in its Dec. 31, 2021, balance sheet?

 

Question 

 

On December 31, 2021, L Inc. had a $1,600,000 note payable outstanding, due July 31, 2022. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $510,000 of the note on January 23, 2022. In February 2022, L completed a $3,100,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2022. On March 13, 2022, L issued its 2021 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2021, balance sheet?

 

Question 

 

At the beginning of 2021, Angel Corporation began offering a two-year warranty on its products. The warranty program was expected to cost Angel 7% of net sales. Net sales made under warranty in 2021 were $218 million. Fifteen percent of the units sold were returned in 2021 and repaired or replaced at a cost of $5.00 million. The amount of warranty expense on Angel's 2021 income statement is:

 

Question 

 

In the current year, Hanna Company reported quality-assurance warranty expense of $190,000 and the warranty liability account increased by $20,000. What amount of warranty costs were paid during the year?

 

Question 

 

On February 1, 2020, Pat Weaver Inc. (PWI) issued 8%, $1,200,000 bonds for $1,500,000. PWI retired all of these bonds on January 1, 2021, at 104. Unamortized bond premium on that date was $124,800. How much gain or loss should be recognized on this bond retirement?

 

Question 

 

Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2021. LPC's accountant has projected the following amortization schedule from issuance until maturity:

 

LPC issued the bonds:

 

Question 

 

Mind Explorers issues bonds with a stated interest rate of 7%, face value of $200,000, and due in 10 years. Interest payments are made semi-annually. The market rate for this type of bond is 6%. Using present value tables, calculate the issue price of the bonds. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

 

Question 

 

A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is 11%. These bonds will sell at a price that is:

 

Question 

 

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

 

What would be the total interest cost of the bonds over their full term?

 

Question 

 

DeKay Dental Supplies issued $10,000 of bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. (Round your answer to nearest whole dollar amount.)

 

What is the stated annual rate of interest on the bonds?

 

Question 

 

On February 1, 2020, Pat Weaver Inc. (PWI) issued 8%, $1,400,000 bonds for $1,700,000. PWI retired all of these bonds on January 1, 2021, at 106. Unamortized bond premium on that date was $148,400. How much gain or loss should be recognized on this bond retirement?

 

 

 

Some liabilities are not contractual obligations and may not be payable in cash. 

 

Amounts withheld from employees in connection with payroll often represent liabilities to third parties. 



A customer advance produces a liability that is satisfied when the product or service is provided. 



Long-term debt that is callable by the creditor in the upcoming year should be classified as a current liability only if the debt is expected to be called. 



The concept of substance over form influences the classification of obligations expected to be refinanced. 



Under IFRS, a liability that is refinanced after the balance sheet date but before the financial statements are issued would typically be classified as a current liability. 



Warranty expense is recorded along with the related liability in the reporting period in which the product under warranty is sold. 



For a loss contingency to be accrued, the claim must have been made before the accounting period ended. 



A company should accrue a liability for a loss contingency if it is at least reasonably possible that assets have been impaired and the amount of potential loss can be reasonably estimated. 



A disclosure note is required for all material loss contingencies for which the probability of loss is reasonably possible. 



Under IFRS, the term "probable" indicates a threshold of probability that is substantially higher than a 50/50 chance. 



Under IFRS, if it is probable that a contingent liability will result in a future payment but there is a range of equally likely amounts that will be paid, the midpoint of the range should be accrued as a loss. 



The cost of promotional offers should be recorded as expenses in the accounting period when the offers are redeemed by customers. 



Unlike the Social security tax there is no maximum wage base for the Medicare portion of the FICA tax. 



State and Federal Unemployment Taxes (SUTA and FUTA) must be withheld from employees' wages. 



Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided. 

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided. 

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided. 

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided. 

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided. 

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase. 

Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2011. 

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms related to accounting for contingent liabilities under IFRS. Match each phrase with the most correct term by placing the letter designating that term in the space provided. 

Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2011. 

The most common type of liability is: 



Which of the following is not a characteristic of a liability? 



Which of the following is the best definition of a current liability? 



Which of the following is not a liability? 



Current liabilities normally are recorded at their: 



Current liabilities are normally recorded at the amount expected to be paid rather than at their present value. This practice can be supported by GAAP according to the concept of: 



The key accounting considerations relating to accounts payable are: 



Classifying liabilities as either current or long-term helps creditors assess: 



When cash is received from customers in the form of a refundable deposit, the cash account is increased with a corresponding increase in: 



A discount on a noninterest-bearing note payable is classified in the balance sheet as: 



The rate of interest printed on the face of a note payable is called the: 



The rate of interest that actually is incurred on a note payable is called the: 



On October 31, 2011, Simeon Builders borrowed $16 million cash and issued a 7-month, noninterest-bearing note. The loan was made by Star Finance Co. whose stated discount rate is 8%. Sky's effective interest rate on this loan is: 



Jane's Donut Co. borrowed $200,000 on January 1, 2011, and signed a two-year note bearing interest at 12%. Interest is payable in full at maturity on January 1, 2013. In connection with this note, Jane's should report interest expense at December 31, 2011, in the amount of: 



What is the effective interest rate (rounded) on a 3-month, noninterest-bearing note with a stated rate of 12% and a maturity value of $200,000? 

 

On September 1, 2011, Hiker Shoes issued a $100,000, 8-month, noninterest-bearing note. The loan was made by Second Commercial Bank whose stated discount rate is 9%. Hiker's effective interest rate on this loan (rounded) is: 



Universal Travel Inc. borrowed $500,000 on November 1, 2011, and signed a 12-month note bearing interest at 6%. Interest is payable in full at maturity on October 31, 2012. In connection with this note, Universal Travel Inc. should report interest payable at December 31, 2011, in the amount of: 



Knique Shoes issued a $100,000, 8-month, "noninterest-bearing note." The loan was made by Second Commercial Bank whose stated "discount rate" is 9%. The effective interest rate on this loan (rounded) is: 



Oklahoma Oil Corp. paid interest of $785,000 during 2011, and the interest payable account decreased by $125,000. What was interest expense for the year? 



On June 1, 2011, Dirty Harry Co. borrowed cash by issuing a 6-month noninterest-bearing note with a maturity value of $500,000 and a discount rate of 6%. What is the carrying value of the note as of September 30, 2011? 

 

At times, businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided. These customer advances represent: 



M Corp. has an employee benefit plan for compensated absences that gives employees 15 paid vacation days. Vacation days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days. At December 31, 2011, M's unadjusted balance of liability for compensated absences was $30,000. M estimated that there were 200 vacation days available at December 31, 2011. M's employees earn an average of $150 per day. In its December 31, 2011, balance sheet, what amount of liability for compensated absences is M required to report? 



Which of the following generally is associated with accounts payable? 
 

Lake Co. receives nonrefundable advance payments with special orders for containers constructed to customer specifications. Related information for 2011 is as follows ($ in millions):   
What amount should Lake report as a current liability for advances from customers in its Dec. 31, 2011, balance sheet? 



All of the following but one represent collections for third parties. Which one of the following is not a collection for a third party? 



When a deposit on returnable containers is forfeited, the firm holding the deposit will experience: 



B Corp. has an employee benefit plan for compensated absences that gives employees 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 2011, B's unadjusted balance of liability for compensated absences was $42,000. B estimated that there were 300 vacation days and 150 sick days available at December 31, 2011. B's employees earn an average of $200 per day. In its December 31, 2011, balance sheet, what amount of liability for compensated absences is B required to report? 



On January 1, 2011, G Corporation agreed to grant its employees two weeks vacation each year, with the stipulation that vacations earned each year can be taken the following year. For the year ended December 31, 2011, G's employees each earned an average of $800 per week. 500 vacation weeks earned in 2011 were not taken during 2011. Wage rates for employees rose by an average of 5 percent by the time vacations actually were taken in 2012. What is the amount of G's 2012 wages expense related to 2011 vacation time? 



Revenue associated with gift card sales should be recognized: 

 

All else equal, a large increase in unearned revenue in the current period would be expected to produce what effect on revenue in a future period? 

 

Peterson Photoshop sold $1000 of gift cards on a special promotion on October 15, 2011, and sold $1500 of gift cards on another special promotion on November 15, 2011. Of the cards sold in October, $100 were redeemed in October, $250 in November, and $300 in December. Of the cards sold in November, $150 were redeemed in November and $350 were redeemed in December. Peterson views the probability of redemption of a gift card as remote if the card has not been redeemed within two months. At 12/31/2011, Peterson would show an unearned revenue account for their gift cards with a balance of: 



When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes: 



Clark's Chemical Company received customer deposits on returnable containers in the amount of $100,000 during 2011. Twelve percent of the containers were not returned. The deposits are based on the container cost marked up 20%. What is cost of goods sold relative to this forfeiture? 



In May of 2011, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2011, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The additional penalties were estimated to be $770,000 but could be as high as $1,170,000. After the year-end, but before the 2011 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2011, balance sheet of: 



Slotnick Chemical received customer deposits on returnable containers in the amount of $300,000 during 2011. Fifteen percent of the containers were not returned. The deposits are based on the container cost marked up 20%. How much profit did Slotnick realize on the forfeited deposits? 

Which of the following is not a current liability? 



Short-term obligations can be reported as long-term liabilities if: 

Of the following, which typically would not be classified as a current liability? 



Large, highly rated firms sometimes sell commercial paper: 

 

Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet? 



A long-term liability should be reported as a current liability in a classified balance sheet if the long-term debt 



On December 31, 2011, L, Inc. had a $1,500,000 note payable outstanding, due July 31, 2012. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23, 2012. In February 2012, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2012. On March 13, 2012, L issued its 2011 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2011, balance sheet? 

 

Liabilities payable within the coming year are classified as long-term liabilities if refinancing is completed before date of issuance of the financial statements under 



Kline Company refinanced current debt as long-term debt on January 5, 2012. Kline's fiscal year ended on December 31, 2011, and its financial statements will be issued sometime in early March, 2012. Under IFRS, how would Kline classify the debt on its December 31, 2011 balance sheet? 



Branch Company, a building materials supplier, has $18,000,000 of notes payable due April 12, 2012. At December 31, 2011, Branch signed an agreement with First Bank to borrow up to $18,000,000 to refinance the notes on a long-term basis. The agreement specified that borrowings would not exceed 75% of the value of the collateral that Branch provided. At the date of issue of the December 31, 2011, financial statements, the value of Branch's collateral was $20,000,000. On its December 31, 2011, balance sheet, Branch should classify the notes as follows: 



Other things being equal, most managers would prefer to report liabilities as noncurrent rather than current. The logic behind this preference is that the long-term classification permits the company to report: 



Footnote disclosure is required for material potential losses when the loss is at least reasonably possible: 



Gain contingencies usually are recognized in a company's income statement when: 



A company should accrue a loss contingency only if the likelihood that a liability has been incurred is: 



A contingent loss should be reported in a footnote to the financial statements rather than being accrued if: 



Which of the following is a contingency that should be accrued? 

 

A loss contingency should be accrued in a company's financial statements only if the likelihood that a liability has been incurred is: 



Paul Company issues a product recall due to an apparently pre-existing and material defect discovered after the end of its fiscal year. Financial statements have not yet been issued. The action required of Paul Company for this reasonably estimable contingency for the year just ended is: 



Accounting for incentive programs for customer purchases:  



Providing a monetary rebate program for purchasing a product: 



The main difference between accounting for rebate and cash discount coupons is: 



Which of the following entail essentially the same accounting treatment? 



Blue Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If the likelihood of expropriation is remote, a loss contingency should be 



Orange Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's asset in that country. If expropriation is reasonably possible, a loss contingency should be 



Red Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If expropriation is probable, a loss contingency should be: 

 

 Z Co. filed suit against W, Inc. in 2011 seeking damages for patent infringement. At December 31, 2011, legal counsel for Z believed that it was probable that Z would be successful against W for an estimated amount in the range of $30 million to $60 million, with each amount in that range considered equally likely. Z was awarded $40 million in April 2012. Z should report this award in its 2011 financial statements, issued in March, 2012 as 



When a material gain contingency is probable and the amount of gain can be reasonably estimated, the gain should be: 



Which of the following is a contingency that would most likely require accrual? 



The cost of customer premium offers should be charged to expense: 



The accounting concept that requires recognition of a liability for customer premium offers is 



Accounting for costs of incentive programs for frequent customer purchases involves: 



A customer of RoughEdge Sharpeners alleges that RoughEdge's new razor sharpener had a defect that resulted in serious injury to the customer. RoughEdge believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under U.S. GAAP, RoughEdge should accrue a liability in the amount of: 



A customer of Razor Sharpeners alleges that Razor's new razor sharpener had a defect that resulted in serious injury to the customer. Razor believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under IFRS, Razor should accrue a liability in the amount of: 



Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs: 



Funzy Cereal includes one coupon in each package of Wheatos that it sells and offers a toy car in exchange for $1.00 and 3 coupons. The cars cost Funzy $1.50 each. Experience indicates that 40% of the coupons eventually will be redeemed. During the last month of 2011, the first month of the offer, Funzy sold 12 million boxes of Wheatos and 2.4 million of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 2011, income statement? 



Captain Cook Cereal includes one coupon in each package of Granola that it sells and offers a puzzle in exchange for $2.00 and 3 coupons. The puzzles cost Captain Cook $3.50 each. Experience indicates that 20% of the coupons eventually will be redeemed. During the last month of 2011, the first month of the offer, Captain Cook sold 6 million boxes of Granola and 900,000 of the coupons were redeemed. What amount should Captain Cook report as a liability for coupons on its December 31, 2011, balance sheet? 



At the beginning of 2011, Angel Corporation began offering a 2-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2011 were $180 million. Fifteen percent of the units sold were returned in 2011 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel's 2011 income statement is: 



During 2011, Deluxe Leather Goods sold 800,000 reversible belts under a new sales promotional program. Each belt carried one coupon, which entitles the customer to a $5.00 cash rebate. Deluxe estimates that 70% of the coupons will be redeemed, even though only 350,000 coupons had been processed during 2011. At December 31, 2011, Deluxe should report a liability for unredeemed coupons of: 



 In 2011, Holyoak Inc. offers a $20 cash rebate coupon to customers who purchased one of its new line of products. Holyoak sold 10,000 of these products during the year. By year end of 2011, 7,600 of the rebates had been claimed, and 7,100 had been paid. Holyoak's historical experience with such rebates indicates that 85% of customers claim the rebates.

 What is the expense that Holyoak should report for its promotional rebates in its 2011 income statement? 



What is the rebate promotion liability that Holyoak should report in its December 31, 2011 balance sheet? 



In the current year, Hanna Company reported warranty expense of $190,000 and the warranty liability account increased by $20,000. What were warranty expenditures during the year? 



Panther Co. had a warranty liability of $350,000 at the beginning of 2011, and $310,000 at end of 2011. Warranty expense is based on 4% of sales, which were $50 million for the year. What were the warranty expenditures for 2011? 



Carpenter Inc. had a balance of $80,000 in its warranty liability account as of December 31, 2010. In 2011, Carpenter's warranty expenditures were $445,000. Its warranty expense is calculated as 1% of sales. Sales in 2011 were $40 million. What was the balance in the warranty liability account as of December 31, 2011? 



What was General's coupon liability as of December 31, 2011? 



What was General's coupon promotion expense in 2011? 



What was General's coupon promotional expense in 2012? 



During the year, L&M Leather Goods sold 1,000,000 reversible belts under a new sales promotional program. Each belt carried one coupon, which entitles the customer to a $4.00 cash rebate. L&M estimates that 70% of the coupons will be redeemed, even though only 500,000 coupons had been processed during the year. At December 31, L&M should report a liability for unredeemed coupons of: 



Which of the following may create employer liabilities in connection with their payrolls? 



Barbara Muller Services (BMS) pays its employees monthly. The payroll information listed below is for January, 2011, the first month of BMS's fiscal year.
  
The journal entry to record payroll for the January 2011 pay period will include a debit to payroll tax expense of 



Ontario Resources, a natural energy supplier, borrowed $80 million cash on November 1, 2011, to fund a geological survey. The loan was made by Quebec Banque under a short-term credit line. Ontario Resources issued a 9-month, 12% promissory note with interest payable at maturity. Ontario Resources' fiscal period is the calendar year.
Required:
(1.) Prepare the journal entry for the issuance of the note by Ontario Resources.
(2.) Prepare the appropriate adjusting entry for the note by Ontario Resources on December 31, 2011. Show calculations.
(3.) Prepare the journal entry for the payment of the note at maturity. Show calculations. 

  

On September 1, 2011, Triton Entertainment borrowed $24 million cash to fund a new Fun Park. The loan was made by Nevada Bank under a noncommitted short-term line of credit arrangement. Triton issued a 9-month, 12% promissory note. Interest was payable at maturity. Triton's fiscal period is the calendar year.
Required:
1. Prepare the journal entry for the issuance of the note by Triton.
2. Prepare the appropriate adjusting entry for the note by Triton on December 31, 2011.
3. Prepare the journal entry for the payment of the note at maturity. 

  

On May 1, Lectric Industries issued 9-month notes in the amount of $60 million. Interest is payable at maturity.
Required:
Determine the amount of interest expense that should be recorded in a year-end adjusting entry under each of the following independent assumptions:
   

Grossman Products began operations in 2011. The following selected transactions occurred from September 2011 through March 2012. Grossman's fiscal year ends on December 31.
2011:
(a.) On September 5, Grossman opened a checking account and negotiated a short-term line of credit of up to $10,000,000 at 10% interest. The company is not required to pay any commitment fees.
(b.) On October 1, Grossman borrowed $8,000,000 cash and issued a 5-month promissory note with 10% interest payable at maturity.
(c.) Grossman received $3,000 of refundable deposits in December for reusable containers.
(d.) For the September through December period, sales totaled $5,000,000. The state sales tax rate is 4% and 75% of sales are subject to sales tax.
(e.) Grossman recorded accrued interest.
2012:
(f.) Grossman paid the promissory note on the March 1 due date.
(g.) Half of the storage containers are returned in March, with the other half expected to be returned over the next 6 months.
Required:
1. Prepare the appropriate journal entries for the 2011 transactions.
2. Prepare the liability section of the balance sheet at December 31, 2011, based on the data supplied.
3. Prepare the appropriate journal entries for the 2012 transactions. 

 

Bencorp issues a $90,000, 6-month, noninterest-bearing note which the bank discounted at a 10% discount rate.
Required:
(1.) Prepare the appropriate journal entry to record the issuance of the note.
(2.) Determine the effective interest rate. 

  

On November 1, 2011, a $216,000, 9-month, noninterest-bearing note is issued at a 10% discount rate.
Required:
(1.) Prepare the appropriate journal entry to record the issuance of the note.
(2.) Determine the effective interest rate.
(3.) Prepare the appropriate journal entry on December 31, 2011, to record interest on the note for the 2011 financial statements.
(4.) Prepare the appropriate journal entry(s) on July 31, 2012, to record interest and the payment of the note. 

  

On November 1, 2011, Ziegler Products issued a $200,000, 9-month, noninterest-bearing note to the bank. Interest was discounted at a 12% discount rate.
Required:
(1.) Prepare the appropriate journal entry by Ziegler to record the issuance of the note.
(2.) Determine the effective interest rate.
(3.) Suppose the note had been structured as a 12% note with interest and principal payable at maturity. Prepare the appropriate journal entry to record the issuance of the note by Ziegler.
(4.) Prepare the appropriate journal entry on December 31, 2011, to accrue interest expense on the note described in 3 for the 2011 financial statements. 

  

 On October 1, 2011, Home Builders Company issued to Carlton Bank a $600,000, 8-month, noninterest-bearing note. Interest was discounted by the bank at a 12% discount rate.
Required:
1. Prepare the appropriate journal entry by Home Builders to record the issuance of the note.
2. Determine the effective interest rate.
3. Suppose the note had been structured as a 12% note with interest and principal payable at maturity. Prepare the appropriate journal entry to record the issuance of the note by Home Builders.
4. Prepare the appropriate journal entry on December 31, 2011, to accrue interest expense on the note described in 3 for the 2011 financial statements. 

  

The following selected transactions relate to liabilities of Rose Dish Corporation. Rose's fiscal year ends on December 31.
Required:
Prepare the appropriate journal entries through the maturity of each liability.
2011
Feb. 3 Negotiated a revolving credit agreement with Second Bank which can be renewed annually upon bank approval. The amount available under the line of credit is $30,000,000 at the bank's prime rate.
April 1 Arranged a 3-month bank loan of $12 million with Second Bank under the line of credit agreement. Interest at the prime rate of 8% was payable at maturity.
July 1 Paid the 8% note at maturity.
Nov. 1 Supported by the credit line, issued $20 million of commercial paper on a nine-month note. Interest was discounted at issuance at a 6% discount rate.
Dec. 31 Recorded any necessary adjusting entry(s).
2012
Aug. 1 Paid the commercial paper at maturity. 

 

Stern Corporation borrowed $10 million cash on September 1, 2011, to provide additional working capital for the year's production. Stern issued a 6-month, 10% promissory note to Second State Bank. Interest on the note is payable at maturity. Each firm uses the calendar year as the fiscal year.
Required:
1. Prepare all journal entries from issuance to maturity for Stern Corporation.
2. Prepare all journal entries from issuance to maturity for Second State Bank. 

  

Hot Springs Marine borrowed $20 million cash on December 1, 2011, to provide working capital for year-end inventory. Hot Springs Marine issued a 4-month, 9% promissory note to Third Bank under a prearranged short-term line of credit. Interest on the note was payable at maturity. Each firm's fiscal period is the calendar year.
Required:
1. Prepare the journal entries to record (a) the issuance of the note by Hot Springs Marine and (b) Third Bank's receivable on December 1, 2011.
2. Prepare the journal entries by both firms to record all subsequent events related to the note through March 31, 2012.
3. Suppose the face amount of the note was adjusted to include interest (a noninterest-bearing note) and 9% is the bank's stated "discount rate." Prepare the journal entries to record the issuance of the noninterest-bearing note by Hot Springs Marine on December 1, 2011. What would be the effective interest rate? 

 

On June 30, 2011, Chu Industries issued 9-month notes in the amount of $700,000. Assume that interest is payable at maturity in the following three independent cases:
   
Required:
Determine the amount of interest expense that should be accrued in a year-end adjusting entry under each assumption: 

 

The following selected transactions relate to liabilities of Chicago Glass Corporation (Chicago) for 2011. Chicago's fiscal year ends on December 31.
(1.) On January 15, Chicago received $7,000 from Henry Construction toward the purchase of $66,000 of plate glass to be delivered on February 6.
(2.) On February 3, Chicago received $6,700 of refundable deposits relating to containers used to transport glass components.
(3.) On February 6, Chicago delivered the plate glass to Henry Construction and received the balance of the purchase price.
(4.) First quarter credit sales totaled $700,000. The state sales tax rate is 4% and the local sales tax rate is 2%.
Required:
Prepare journal entries for the above transactions. 

 

In its 2011 annual report to shareholders, Ank-Morpork Times Inc. included the following disclosure:
REVENUE RECOGNITION
· Advertising revenue is recognized when advertisements are published, broadcast or when placed on the Company's Web sites, net of provisions for estimated rebates, credit and rate adjustments and discounts.
· Circulation revenue includes single copy and home-delivery subscription revenue. Single copy revenue is recognized based on date of publication, net of provisions for related returns. Proceeds from home-delivery subscriptions and related costs, principally agency commissions, are deferred at the time of sale and are recognized in earnings on a pro rata basis over the terms of the subscriptions.
· Other revenue is recognized when the related service or product has been delivered.
Also, the following information on its current liabilities was included in its comparative balance sheets:
  
Required:
Assuming that Ank-Morpork Times Inc. collected $440,000,000 in cash for home delivery subscriptions during fiscal year 2011, what amount of revenue did it recognize during 2011 from this source? Show the relevant T-account information to support your answer. 

 

MullerB Company's employees earn vacation time at the rate of 1 hour per 40-hour work period. The vacation pay vests immediately, meaning an employee is entitled to the pay even if employment terminates. During 2011, total wages paid to employees equaled $808,000, including $8,000 for vacations actually taken in 2011, but not including vacations related to 2011 that will be taken in 2012. All vacations earned before 2011 were taken before January 1, 2011. No accrual entries have been made for the vacations.
Required:
Prepare the appropriate adjusting entry for vacations earned but not taken in 2011. 

  

The following facts relate to gift cards sold by Sunbru Coffee Company during 2011. Sunbru's fiscal year ends on December 31.
(a.) In October, 2011 sold $3,000 of gift cards, and redeemed $500 of those gift cards.
(b.) In November, 2011, sold $4,000 of gift cards, and redeemed $1,400 of October gift cards and $700 of November gift cards.
(c.) In December, 2011, sold $3,000 of gift cards, and redeemed $200 of October gift cards, $2,000 of November gift cards, and $400 of December gift cards.
(d.) Sunbru views a gift card to be "broken" (with a remote probability of redemption) two months after the end of the month in which it is sold. Thus, an unredeemed gift card sold at any time during July would be viewed as broken as of September 30.
Required:
1. Prepare all journal entries appropriate to be recorded only during the month of December, 2011 relevant to gift card sales, gift card redemptions, and gift card breakage.
2. Determine the balance of the unearned revenue liability to be reported in the December 31, 2011, balance sheet. Show the relevant T-account information to support your answer. 

 

Diversified Industries sells perishable electronic products. Some must be shipped in reusable containers. Customers pay a deposit for each container. The deposit is equal to the container's cost. Customers receive a refund when the container is returned. During 2011, deposits collected on containers shipped were $700,000. Deposits are forfeited if containers are not returned in 18 months. Containers held by customers on January 1, 2011, were $330,000. During 2011, $410,000 was refunded and deposits of $25,000 were forfeited.
Required:
1. Prepare the appropriate journal entries for the deposits received and returned during 2011.
2. Determine the liability for refundable deposits to be reported in the December 31, 2011, balance sheet. 

  

At December 31, 2011, Cordova Leather's liabilities include the following:
1. $15 million of noncallable 9% notes were issued for $15 million on August 31, 1992. The notes mature on July 31, 2012. Sufficient cash is expected to be available to retire the notes at maturity.
2. $30 million of 8% notes were issued for $30 million on May 31, 2007. The notes mature on May 31, 2017, but investors have the option of calling (demanding payment on) the notes on June 30, 2012. However, the call option is not expected to be exercised, given prevailing market conditions.
3. $18 million of 10% notes are due on March 31, 2013. A debt covenant requires Cordova to maintain current assets at least equal to 150% of its current liabilities. On December 31, 2011, Cordova is in violation of this covenant. Cordova obtained a waiver from Village Bank until June 2012, having convinced the bank that the company's normal 2 to 1 ratio of current assets to current liabilities will be reestablished during the first half of 2012.
Required:
For each of the three liabilities, indicate the portion of the debt that can be excluded from classification as a current liability (that is, reported as a noncurrent liability). Explain. 

 

In its 2011 annual report to shareholders, Border Airlines Inc. presented the following balance sheet information about its liabilities:
  
In addition, Border presented the following among its footnote disclosures:
Maturities of long-term debt (including sinking fund requirements) for the next five years are: 2012 - $421 million; 2013 - $212 million; 2014 - $273 million; 2015 - $1.0 billion; 2016 - $777 million.
Required:
Consider the appropriate classification of these long-term debt obligations. Assuming no more long-term debt will be issued, what are the implications of the information above for Border's liquidity and solvency risk in 2011 and the following years? 

 

Mozart Music Co. began operations in December of 2011. The company sold gift certificates during December in various amounts totaling $1,600. The gift certificates are redeemable for merchandise within 3 years of the purchase date. However, experience within the industry predicts that 90% of gift certificates will be redeemed within one year. Certificates totaling $500 were presented for redemption during 2011 as part of merchandise purchases having a total retail price of $750.
Required:
(1.) Determine the liability for gift certificates to be reported in the December 31, 2011, balance sheet.
(2.) What is the appropriate classification (current or noncurrent) of the liabilities at December 31, 2011? Show calculations. 

  

In 2011, Cap City Inc. introduced a new line of televisions that carry a two-year warranty against manufacturer's defects. Based on past experience with similar products, warranty costs are expected to be approximately 1% of sales during the first year of the warranty and approximately an additional 3% of sales during the second year of the warranty. Sales were $6,000,000 for the first year of the product's life and actual warranty expenditures were $29,000. Assume that all sales are on credit.
Required:
1. Prepare journal entries to summarize the sales and any aspects of the warranty for 2011.
2. What amount should Cap City report as a liability at December 31, 2011? 

  

Albertson Corporation began a special promotion in July 2011 in an attempt to increase sales. A coupon was placed in each box of product. Customers could send in 5 coupons for a free prize. Each prize cost Albertson Corporation $3.00. Albertson's management estimated that 80% of the coupons would be redeemed. For the six months ended December 31, 2011, the following information is available:
  
Required:
What is the estimated liability for the premium offer at December 31, 2011? 

  

Fusion, Inc. introduced a new line of circuits in 2011 that carry a four-year warranty against manufacturer's defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 3% of sales. Sales and actual warranty expenditures for the first year of selling the product were:
  
Required:
1. Does this situation represent a loss contingency? Why or why not? How should it be accounted for?
2. Prepare journal entries that summarize sales of the circuits (assume all credit sales) and any aspects of the warranty that should be recorded during 2011.
3. What amount should Fusion report as a liability at December 31, 2011? 

 

At the beginning of 2011, Scarlet Industries began offering a 3-year warranty on its products. The warranty program was expected to cost Scarlet 2% of net sales, approximately equally over the three-year warranty period. Net sales made under warranty in 2011 were $270 million. Thirteen percent of the units sold were returned in 2011 and repaired or replaced at a cost of $2 million. This amount was debited to warranty expense as incurred.
Required:
Prepare the appropriate adjusting entry to adjust warranty expense on December 31, 2011. Show calculations

 

Yummy Rice Cereal offers an all-star bowl in exchange for 3 return box tops. Yummy Rice estimates that 30% will be redeemed. The bowls cost Yummy Rice $1 each. In 2011, 5,000,000 boxes of cereal were sold. By year-end 900,000 box tops had been redeemed. 
Required:
Calculate the liability that Yummy Rice should report at December 31, 2011. 

  

Sunnyvale Computer Company sells a line of computers that carry a 6-month warranty. Customers are offered the opportunity to buy a 2-year extended warranty for an additional charge. During 2011, Sunnyvale received $320,000 from customers for these extended warranties. All sales are on credit, and funds are received evenly throughout the year and the warranties go into effect immediately after purchase.
Required:
Prepare a summary journal entry to record sales of the extended warranties. Also prepare any other entries associated with the warranties that should be recorded during 2011. 

  

Hardin Widget Manufacturing began operations in January 2011. Hardin sells widgets that carry a two-year manufacturer's warranty against defects in workmanship. Hardin's management project that 2% of the widgets will require repair during the first year of the warranty while approximately 6% will require repair during the second year of the warranty. The widgets sell for $400 each. The average cost to repair a widget is $50. The company sells 60% of the widgets to retail customers who must pay a 6% sales tax. Sales and warranty information for 2011 and 2012 are as follows:
2011: Sold 200 widgets on account; incurred warranty expenditures of $300.
2012: Sold 300 widgets on account; actual warranty expenditures were $500.
Required:
1. Prepare journal entries that summarize the sales and any aspects of the warranty for 2011.
2. Prepare journal entries that summarize the sales and any aspects of the warranty for 2012. 

  

Cracker Corporation began a special promotion in July 2011 in an attempt to increase sales. A coupon was placed in each box of product. Customers could send in 5 coupons for a free prize. Each prize cost Cracker Corporation $2.00. Cracker's management estimated that 70% of the coupons would be redeemed. For the six months ended December 31, 2011, the following information is available:
  
Required:
Record all necessary journal entries for the premium offer for 2011. 

  

Muller Corp. pays its employees monthly. The payroll information listed below is for January, 2011, the first month of Muller's fiscal year.
  
Required:
Prepare the appropriate journal entries to record salaries and wages expense and payroll tax expense for the January 2011 pay period. 

  

Texon Oil is being sued for price fixing and environmental damage. The litigation started this year and is expected to last five years. There is no doubt that Texon is guilty but the settlement cost will be between $3 billion and $22 billion. Briefly explain how Texon would address this in its current year financial statements. 

 

Amber Inc. is one of the largest pharmacy retailers in mid-America. In its 2011 annual report to shareholders, it made the following disclosure:
In 2006, Amber assigned a number of leases to Bell's Inc. and Home Stores, Inc. as part of the sale of the Company's former Eastern divisions. Amber is contingently liable if Bell's and Home are unable to continue making rental payments on these leases. In 2010, Amber recorded a pretax charge to earnings of $42.7 million to recognize the estimated lease liabilities associated with the Bell's and Home bankruptcies and for a single lease from Amber's former Georgia division. In 2011, Bell's began the liquidation process and Home emerged from bankruptcy and, based on the resolution of various leases, Amber reversed $12.1 million of this accrual.
Explain the accounting principle(s) that required Amber to record the $42.7 million charge in 2008 and the $12.1 million reversal in 2011. 

 

Swift Drug Company is being sued this year for a wrongful death due to violation of FDA rules. There is no doubt that Swift is guilty and the settlement is reasonably estimable at $10 billion payable evenly over 10 years starting next year. Briefly explain how Swift would address this in its current year financial statements. 

 

 

All else equal, a large increase in deferred revenue in the current period would be expected to produce what effect on revenue in a future period?
 
 
All of the following but one represent collections for third parties. Which one of the following is not a collection for a third party?
 
 
At the beginning of 2021, Angel Corporation began offering a two-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2021 were $180 million. Fifteen percent of the units sold were returned in 2021 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel's 2021 income statement is:
 
 
Classifying liabilities as either current or long-term helps creditors assess:
 
 
A contingent loss should be reported in a disclosure note to the financial statements rather than being accrued if:
 
 
The cost of promotional offers should always be recorded as expenses in the accounting period when the offers are redeemed by customers.
 
 
A customer of Razor Sharpeners alleges that Razor's new razor sharpener had a defect that resulted in serious injury to the customer. Razor believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under IFRS, Razor should accrue a liability in the amount of:
 
 
A customer of RoughEdge Sharpeners alleges that RoughEdge's new razor sharpener had a defect that resulted in serious injury to the customer. RoughEdge believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under U.S. GAAP, RoughEdge should accrue a liability in the amount of:
 
 
Gain contingencies usually are recognized in a company's income statement when:
 
 
General Product Inc. distributed 100 million coupons in 2021. The coupons are redeemable for 30 cents each. General anticipates that 70% of the coupons will be redeemed. The coupons expire on December 31, 2022. There were 45 million coupons redeemed in 2021 and 30 million redeemed in 2022. General recognizes coupon expense in the period coupons are issued. What was General's coupon promotional expense in 2022?
 
 
In 2021, Holyoak Inc. offers a coupon for $20 off qualifying purchases of its new line of products. Holyoak sold 10,000 of these products during the year. By year-end of 2021, 7,100 coupons had been redeemed and the $20 reduction of purchase price provided to customers. Holyoak's historical experience with such coupons indicates that 85% of customers use the coupon. Holyoak recognizes coupon expense in the period coupons are issued.
What is the expense that Holyoak should report for its promotional coupons in its 2021 income statement?
 
 
In May of 2021, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2021, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The additional penalties were estimated to be $770,000 but could be as high as $1,170,000. After the year-end, but before the 2021 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2021, balance sheet of:
 
 
Kline Company refinanced current debt as long-term debt on January 5, 2022. Kline's fiscal year ended on December 31, 2021, and its financial statements will be issued sometime in early March 2022. Under IFRS, how would Kline classify the debt on its December 31, 2021, balance sheet?
 
 
Oklahoma Oil Corp. paid interest of $785,000 during 2021, and the interest payable account decreased by $125,000. What was interest expense for the year?
 
 
On April 31, 2021, Elkhorn Associates borrowed $10 million cash from Colonial Bank and issued a 5-month, noninterest-bearing note, priced to yield an effective interest rate of 10%. The stated discount rate on this loan is:
 
 
On October 31, 2021, Simeon Builders borrowed $16 million cash and issued a 7-month, noninterest-bearing note. The loan was made by Star Finance Co. The stated discount rate is 8%. Sky's effective interest rate on this loan is:
 
 
On September 1, 2021, Hiker Shoes issued a $100,000, 8-month, noninterest-bearing note. The loan was made by Second Commercial Bank where the stated discount rate is 9%. Hiker's effective interest rate on this loan (rounded) is:
 
 
Peterson Photoshop sold $1,000 in gift cards on a special promotion on October 15, 2021, and sold $1,500 in gift cards on another special promotion on November 15, 2021. Of the cards sold in October, $100 were redeemed in October, $250 in November, and $300 in December. Of the gift cards sold in November, $150 were redeemed in November and $350 were redeemed in December. Peterson views the probability of redemption of a gift card as remote if the card has not been redeemed within two months. At 12/31/2021, Peterson would show a deferred revenue account for the gift cards with a balance of:
 
 
A quality-assurance warranty typically results in the seller:
 
 
The rate of interest that actually is incurred on a note payable is called the:
 
 
Under IFRS, the term "probable" indicates a threshold of probability that is substantially more than a 50 percent chance of occurrence.
 
 
 
 
 
 
 
 
 
 
 
 

When a deposit on returnable containers is forfeited, the firm holding the deposit will experience:
 
 
When a material gain contingency is probable and the amount of gain can be reasonably estimated, the gain should be:
 
 
Which of the following is not a liability?
 
 
Z Co. filed suit against W Inc. in 2021 seeking damages for patent infringement. At December 31, 2021, legal counsel for Z believed that it was probable that Z would be successful against W for an estimated amount in the range of $30 million to $60 million, with each amount in that range considered equally likely. Z was awarded $40 million in April 2022. Z should report this award in its 2021 financial statements, issued in March 2022 as:
 
 
 

 

 
The specific provisions of a bond issue are described in a document called a bond indenture. 
 
 

 

 
Periodic interest expense is the stated interest rate times the amount of debt outstanding during the period. 
 
 

 

 
The carrying value of zero-coupon bonds increases by the periodic amount of interest recognized. 
 


 

 
Bonds will sell for a premium when the market rate of interest exceeds their stated rate. 
 


 

 

 
The initial selling price of bonds represents the sum of all the future cash outflows required by the obligation. 
 
 

6.
Amortization of discount on bonds payable results in interest expense that is less than the actual cash outflow. 
 


 

 
Premium on bonds payable is a contra liability account. 
 


 

 

 
An implicit or imputed rate of interest must be used when long-term notes are issued at a stated rate of interest that is materially different from the market rate of interest. 
 


 

 

 
The interest expense on an installment note decreases with each periodic payment. 
 


 

 

 
Paid-in capital is increased when bonds payable are issued with detachable stock purchase warrants. 
 


 

 

 
Companies are not required to, but have the option to, value some or all of their financial assets and liabilities at fair value. 
 


 

 
If a company chooses the option to report its bonds at fair value, then it reports changes in fair value in its income statement. 
 


 

 

 
The interest rate that is printed on the bond certificate is not referred to as the: 
 



 
 

 
Most corporate bonds are: 
 



 
 

 

 
The method used to pay interest depends on whether the bonds are: 
 


 

 

 
The rate of interest that actually is incurred on a bond payable is called the: 
 


 

 

 
Interest expense is: 
 


 

 

 
Bonds usually sell at their: 
 


 

 
Straight-line amortization of bond discount or premium: 
 


 

 

 
An amortization schedule for bonds issued at a premium: 
 
 

 

 
Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2013. LPC's accountant has projected the following amortization schedule from issuance until maturity:

  
 

 
LPC issued the bonds: 
 
 

 

 
What is the annual stated interest rate on the bonds? 
 


 

 

 
What is the annual effective interest rate on the bonds? 
 



 
 

 

 
LPC calls the bonds at 103 immediately after the interest payment on 12/31/2014 and retires them. What gain or loss, if any, would LPC record on this date? 
 

 
 

 

 
Bonds are issued on June 1 that have interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, 2013, is for a period of: 
 



 
 

 

 
Ordinarily, the proceeds from the sale of a bond issue will be equal to: 
 


 

 

 
A $500,000 bond issue sold for 98. Therefore, the bonds: 
 


 

 

 
When the interest payment dates are March 1 and September 1, and the bonds are issued on July 1, the amount of interest expense reported in the December 31 income statement for the year of issue would be for: 
 


 

 
How would the carrying value of bonds payable be affected by the amortization of each of the following?

   
 

 

 
For the issuer of 20-year bonds, the amount of amortization using the effective interest method would decrease each year if the bonds are sold at a:

   
 

 

 
For a bond issue that sells for more than the bond face amount, the effective interest rate is: 
 


 

 

 
When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is: 
 


 

 
When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is: 
 


 

 

 
When bonds are sold at a discount and the effective interest method is used, at each interest payment date, the interest expense: 
 


 

 

 
When bonds are sold at a premium and the effective interest method is used, at each interest payment date, the interest expense: 
 


 

 

 
When bonds are sold at a discount, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of discount is: 
 


 

 
When bonds are sold at a premium, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of premium is: 
 


 

 

 
Bonds were issued at a discount. In the bond amortization schedule: 
 
 

 

 
On January 1, 2013, Legion Company sold $200,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $177,000, priced to yield 12%. Legion records interest at the effective rate. Legion should report bond interest expense for the six months ended June 30, 2013, in the amount of: 
 


 

 

 
A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is 11%. These bonds will sell at a price that is: 
 



 
 

 

 
On January 1, 2013, Solo Inc. issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2023. Solo paid $50,000 in bond issue costs. Solo uses straight-line amortization. The amount of interest expense for the year is: 
 



 
 

 

 
On January 1, 2013, an investor paid $291,000 for bonds with a face amount of $300,000. The stated rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2013 (assume annual interest payments and amortization)? 
 



 
 

 

 
Zero-coupon bonds: 
 


 

 

 
The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest: 
 


 

 

 
On January 31, 2013, B Corp. issued $600,000 face value, 12% bonds for $600,000 cash. The bonds are dated December 31, 2012, and mature on December 31, 2022. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should B report in its September 30, 2013, balance sheet? 
 
 

 

 
Discount-Mart issued ten thousand $1,000 bonds on January 1, 2013. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

  
 

 
What is the stated annual rate of interest on the bonds? 
 



 
 

 

 
What is the effective annual rate of interest on the bonds? 
 



 
 

 

 
What is the interest expense on the bonds in 2014? 
 



 
 

 
What is the carrying value of the bonds as of December 31, 2014? 
 



 
 

 

 
What would be the total interest cost of the bonds over their full term? 
 



 
 

 

 
Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2013. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

  
 

 
What is the stated annual rate of interest on the bonds? 
 



 
 

 
What is the effective annual rate of interest on the bonds? 
 



 
 

 

 
What is the interest expense on the bonds in 2014? 
 



 
 

 

.
What is the carrying value of the bonds as of December 31, 2014? 
 



 
 

 
What would be the total interest expense recognized for the bond issue over its full term? 
 

 
 

 

 
Auerbach Inc. issued 4% bonds on October 1, 2013. The bonds have a maturity date of September 30, 2023 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2014. The effective interest rate established by the market was 6%.
 

 
Auerbach issued the bonds: 
 



 
 

 

 
How much cash interest does Auerbach pay on March 31, 2014? 
 



 
 

 

 
Assuming that Auerbach issued the bonds for $255,369,000, what interest expense would it recognize in its 2013 income statement? 
 



 
 

 

 
Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance at December 31, 2013, rounded up to the nearest thousand? 
 



 
 

 

 
Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance after its first interest payment on March 31, 2014, rounded up to the nearest thousand? 
 



 
 

 

 
During the year, Hamlet Inc. paid $20,000 to have bond certificates printed and engraved, paid $100,000 in legal fees, paid $10,000 to a CPA for registration information, and paid $200,000 to an underwriter as a commission. What is the amount of bond issue costs? 
 



 
 

 

 
Griggs Co. failed to amortize the premium on an outstanding five-year bond issue. What is the resulting effect on interest expense and the bond carrying value, respectively? 
 
 

 

 
Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each pays interest at 8%. The current market rate of interest is 8% for each. Bond X matures in 7 years while bond Y matures in 10 years. Which of the following is correct? 
 



 
 

 
Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each matures in 10 years. Bond X pays 8% interest while bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct? 
 



 
 

 

 
On June 30, 2013, Hardy Corporation issued $10 million of its 8% bonds for $9.2 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2013, and mature on June 30, 2020. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the six months ended December 31, 2013? 
 



 
 

 

 
On January 1, 2013, Zebra Corporation issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2023. Zebra paid $50,000 in bond issue costs. Zebra uses the straight-line amortization method. What is the bond carrying value reported in the December 31, 2013, balance sheet? 
 



 
 

 

 
On January 1, 2013, an investor paid $291,000 for bonds with a face amount of $300,000. The contract rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2014 (assume annual interest payments and amortization)? 
 



 
 

 

 
Cramer Company sold five-year, 8% bonds on October 1, 2013. The face amount of the bonds was $100,000, while the issue price was $102,000. Interest is payable on April 1 of each year. The fiscal year of Cramer Company ends on December 31. How much interest expense will Cramer Company report in its December 31, 2013, income statement (assume straight-line amortization)? 
 



 
 

 

 
In each succeeding payment on an installment note: 
 


 

 

 
When a long-term note is given in exchange for equipment, the amount considered as paid for the machine is: 
 
 

 

 
When the interest payment dates are March 1 and September 1, and notes are issued on July 1, the amount of interest expense to be accrued at December 31 of the year of issue would: 
 


 

 

 
When an equipment dealer receives a long-term note in exchange for equipment, the present value of the future cash flows received on the notes: 
 


 

 

 
AMC issues a note in exchange for a machine with no stated interest rate. In accounting for the transaction: 
 


 

 

 
To evaluate the risk and quality of an individual bond issue, savvy investors rely heavily on: 
 


 

 

 
Which of the following indicates the margin of safety provided to creditors? 
 


 

 

 
Bonds payable should be reported as a long-term liability in the balance sheet of the issuing corporation at the: 
 


 

 

 
The unamortized balance of discount on bonds payable is reported in the balance sheet as: 
 


 

 

 
Eagle Company issued 10-year bonds at 96 during the current year. In the year-end financial statements, the discount should be: 
 


 

 

 
Liberty Company issued 10-year bonds at 105 during the current year. In the year-end financial statements, the premium should be: 
 


 

 

 
Red Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of retiring debt on these ratios is a(n)

   
 

 
 

 

 
Yellow Corp. issues 10% bonds. Not including any indirect effects on earnings, the issuance will immediately decrease Yellow's:

   
 

 
 

 

 
The times interest earned ratio indicates: 
 


 

 
The debt to equity ratio indicates: 
 


 

 

 
The rate of return on assets indicates: 
 
 
The rate of return on shareholders' equity indicates: 
 


 
 
 
 
 
 

 

 
When bonds are retired prior to their maturity date: 
 


 

 
On June 30, 2013, Blair Industries had outstanding $80 million of 8% convertible bonds that mature on June 30, 2014. Interest is payable each year on June 30 and December 31. The bonds are convertible into 6 million shares of $10 par common stock. At June 30, 2013, the unamortized balance in the discount on bonds payable account was $4 million. On June 30, 2013, half the bonds were converted when Blair's common stock had a market price of $30 per share. When recording the conversion, Blair should credit paid-in capital-excess of par: 
 



 
 

 

 
On February 1, 2012, Pat Weaver Inc. (PWI) issued 10%, $1,000,000 bonds for $1,116,000. PWI retired all of these bonds on January 1, 2013, at 102. Unamortized bond premium on that date was $92,800. How much gain or loss should be recognized on this bond retirement? 
 


 

 

 
On March 31, 2013, MDS, Inc.'s bondholders exchanged their convertible bonds for common stock. The carrying amount of these bonds on Ashley's books was less than the fair value but greater than the par value of the common stock issued. If Ashley used the book value method of accounting for the conversion, which of the following statements correctly states an effect of this conversion? 
 



 
 

 
On March 1, 2013, Doll Co. issued 10-year convertible bonds at 106. During 2016, the bonds were converted into common stock when the market price of Doll's common stock was 500 percent above its par value. On March 1, 2013, cash proceeds from the issuance of the convertible bonds should be reported as: 
 

 
 

 

 
When outstanding bonds are converted into common stock, under either the book value method or the market value method, the same amount would be debited to:

   
 


 

 

 
When bonds include detachable warrants, what is the appropriate accounting for the cash proceeds from the bond issue? 
 


 

 

 
On April 1, 2013, Austere Corporation issued $300,000 of 10% bonds at 105. Each $1,000 bond was sold with 25 detachable stock warrants, each permitting the investor to purchase one share of common stock for $17. On that date, the market value of the common stock was $15 per share and the market value of each warrant was $2. Austere should record what amount of the proceeds from the bond issue as an increase in liabilities? 
 

 
 

 

 
MSG Corporation issued $100,000 of 3-year, 6% bonds outstanding on December 31, 2012 for $106,000. MSG uses straight-line amortization. On May 1, 2013, $10,000 of the bonds were retired at 112. How much, and what type of gain or loss, most likely results from this retirement? 
 



 
 

 
Nickel Inc. bought $100,000 of 3-year, 6% bonds as an investment on December 31, 2012 for $106,000. Nickel uses straight-line amortization. On May 1, 2013, $10,000 of the bonds were redeemed at 110. How much, and what type of gain or loss, most likely results from this redemption? 
 



 
 

 

 
On January 1, 2013, Tiny Tim Industries had outstanding $1,000,000 of 12% bonds with a carrying amount of $966,130. The indenture specified a call price of $981,000. The bonds were issued previously at a price to yield 14%. Tiny Tim called the bonds (retired them) on July 1, 2013. What is the amount of the loss on early extinguishment? 
 



 
 

 

 
On March 1, 2013, E Corp. issued $1,000,000 of 10% nonconvertible bonds at 103, due on February 28, 2023. Each $1,000 bond was issued with 30 detachable stock warrants, each of which entitled the holder to purchase, for $50, one share of Evan's $25 par common stock. On March 1, 2013, the market price of each warrant was $4. By what amount should the bond issue proceeds increase shareholders' equity? 
 



 
 

 

 
On January 1, 2013, Bell Co. issued $10 million of 10-year convertible bonds at 105. On January 1, 2018, the bonds were converted into common stock with a market value of $11 million. Upon conversion, Bell would recognize:

   
 

 
 

 

 
On June 30, 2013, K Co. had outstanding 9%, $10,000,000 face value bonds maturing on June 30, 2018. Interest is payable semiannually every June 30 and December 31. On June 30, 2013, after amortization was recorded for the period, the unamortized bond premium and bond issue costs were $60,000 and $100,000, respectively. On that date, K acquired all its outstanding bonds on the open market at 98 and retired them. At June 30, 2013, what amount should K recognize as gain on redemption of bonds before income taxes? 
 



 
 

 

 
On January 1, 2008, F Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2018, but were callable at 101 any time after December 31, 2011. Interest was payable semiannually on July 1 and January 1. On July 1, 2013, F called all of the bonds and retired them. The bond premium was amortized on a straight-line basis. Before income taxes, F's gain or loss in 2013 on this early extinguishment of debt was: 
 


 

 

 
Crawford Inc. has bonds outstanding during a year in which the general (risk-free) rate of interest has risen. Crawford elected the fair value option for the bonds upon issuance. What will the company report for the bonds in its income statement for the year? 
 


 

 

 
Pierce Company issued 11% bonds, dated January 1, with a face amount of $800,000 on January 1, 2013. The bonds sold for $739,816 and mature in 2032 (20 years). For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Pierce determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2013, the fair value of the bonds was $730,000. Pierce's earnings for the year will include: 
 



 
 

 

 
On March 1, 2013, Doll Co. issued 10-year convertible bonds at 106. During 2016, the bonds were converted into common stock when the market price of Doll's common stock was 500 percent above its par value. Doll prepares its financial statements according to International Financial Reporting Standards (IFRS). On March 1, 2013, cash proceeds from the issuance of the convertible bonds should be reported as: 
 



 
 

 

 
When a company issues bonds between interest dates, the entry to record the issuance of the bonds will: 
 


 

 

 
TMC issued $50 million of its 12% bonds on April 1, 2013, at 98 plus accrued interest. The bonds are dated January 1, 2013, and mature on December 31, 2032. Interest is payable semiannually on June 30 and December 31. What amount did TMC receive from the bond issuance? 
 



 
 

 

 
On September 1, 2013, Sam's Shoe Co. issued $350,000 of 8% bonds. The bonds pay interest semiannually on January 1 and July 1 of each year. The bonds were sold at the face amount. How much cash did Sam's receive upon sale of the bonds? 
 



 
 

 

 
On January 1, 2013, Ozark Minerals issued $10 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Ozark's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99. Upon issuance, Ozark should: 
 


 

 

 
Patrick Roch International issued 5% bonds convertible into shares of the company's common stock. Roch applies U.S. GAAP. Upon issuance, Patrick Roch International should record: 
 


 

 

 
During 2013 Marquis Company was encountering financial difficulties and seemed likely to default on a $300,000, 10%, four-year note dated January 1, 2011, payable to Third Bank. Interest was last paid on December 31, 2012. On December 31, 2013, Third Bank accepted $250,000 in settlement of the note. Ignoring income taxes, what amount should Marquis report as a gain from the debt restructuring in its 2013 income statement? 
 



 
 

 

 
On January 1, 2013, Ozark Minerals issued $20 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Ozark's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99. Ozark applies International Financial Reporting Standards (IFRS). Upon issuance, Ozark should: 
 



 
 

 
Patrick Roch International issued 5% bonds convertible into shares of the company's common stock. Roch applies International Financial Reporting Standards (IFRS). Upon issuance, Patrick Roch International should record: 
 


 

 

 
When bonds and other debt are issued, costs such as legal costs, printing costs, and underwriting fees are referred to as debt issuance costs (called transaction costs under IFRS). If Brown Imports prepares its financial statements using IFRS: 
 


 

 
On January 1, 2013, Morton Sales Co. issued zero-coupon bonds with a face value of $6 million for cash. The bonds mature in 10 years and were issued at a price of $3,050,100.
 

 
Required:

How much interest will Morton Sales Co. pay on these bonds in 2013? 
 



 
 

 
 

 
Required:

What was the annual effective interest rate in the market when the bonds were issued? 
 



 
 

 

 
Required:

What amount of interest expense on these bonds would Morton Sales Co. report in its 2013 income statement? 
 



 
 

 

 
Required:

What will Morton Sales Co. report on these bonds in its December 31, 2013, balance sheet? 
 


 

 

 
Required:

What total interest expense will Morton Sales Co. report over the 10-year life of these bonds? 
 


 

 

 
Determine the price of a $200,000 bond issue under each of the following independent assumptions:

   
 



  
 

 

 
Determine the price of a $500,000 bond issue under each of the following independent assumptions:

   
 



  
 

 
On January 1, 2013, Bishop Company issued 10% bonds dated January 1, 2013, with a face amount of $20 million. The bonds mature in 2022 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.

Required:

1. Determine the price of the bonds at January 1, 2013.
2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2013.
3. Prepare the journal entry to record interest on June 30, 2013, using the effective interest method.
4. Prepare the journal entry to record interest on December 31, 2013, using the effective interest method. 
 



  
 

 

 
On January 1, 2013, Mania Enterprises issued 12% bonds dated January 1, 2013, with a face amount of $20 million. The bonds mature in 2022 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.

Required:

1. Determine the price of the bonds at January 1, 2013.
2. Prepare the journal entry to record the bond issuance by Mania on January 1, 2013.
3. Prepare the journal entry to record interest on June 30, 2013, using the effective interest method.
4. Prepare the journal entry to record interest on December 31, 2013, using the effective interest method. 
 



  
 

 

 
On January 1, 2013, Shirley Corporation purchased 10% bonds dated January 1, 2013, with a face amount of $10 million. The bonds mature in 2022 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.

Required:

1. Determine the price of the bonds at January 1, 2013.
2. Prepare the journal entry to record the bond purchase by Shirley on January 1, 2013.
3. Prepare the journal entry to record interest on June 30, 2013, using the effective interest method.
4. Prepare the journal entry to record interest on December 31, 2013, using the effective interest method. 
 



  
 

 

 
On January 1, 2013, Rare Bird Ltd. purchased 12% bonds dated January 1, 2013, with a face amount of $20 million. The bonds mature in 2022 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.

Required:

1. Determine the price of the bonds at January 1, 2013.
2. Prepare the journal entry to record the bond purchase by Rare Bird on January 1, 2013.
3. Prepare the journal entry to record interest on June 30, 2013, using the effective interest method.
4. Prepare the journal entry to record interest on December 31, 2013, using the effective interest method. 
 



  
 
On January 1, 2013, Cool Universe issued 10% bonds dated January 1, 2013, with a face amount of $20 million. The bonds mature in 2022 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.

Required:

1. Determine the price of the bonds at January 1, 2013.
2. Prepare the journal entry to record the bond issuance by Cool on January 1, 2013.
3. Prepare the journal entry to record interest on June 30, 2013, using the straight-line method.
4. Prepare the journal entry to record interest on December 31, 2013, using the straight-line method. 
 



  
 

 

 
On January 1, 2013, Boomer Universal issued 12% bonds dated January 1, 2013, with a face amount of $200 million. The bonds mature in 2022 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.

Required:

1. Determine the price of the bonds at January 1, 2013.
2. Prepare the journal entry to record the bond issuance by Boomer on January 1, 2013.
3. Prepare the journal entry to record interest on June 30, 2013, using the straight-line method.
4. Prepare the journal entry to record interest on December 31, 2013, using the straight-line method. 
 



  
 

 

 
On January 1, 2013, Club Company purchased 10% bonds, dated January 1, 2013, with a face amount of $20 million. The bonds mature in 2022 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.

Required:

1. Determine the price of the bonds at January 1, 2013.
2. Prepare the journal entry to record the bond purchase by Club on January 1, 2013.
3. Prepare the journal entry to record interest on June 30, 2013, using the straight-line method.
4. Prepare the journal entry to record interest on December 31, 2013, using the straight-line method. 
 



  
 

 

 
On January 1, 2013, Field Company purchased 12% bonds, dated January 1, 2013, with a face amount of $20 million. The bonds mature in 2022 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.

Required:

1. Determine the price of the bonds at January 1, 2013.
2. Prepare the journal entry to record the bond purchase by Field on January 1, 2013.
3. Prepare the journal entry to record interest on June 30, 2013, using the straight-line method.
4. Prepare the journal entry to record interest on December 31, 2013, using the straight-line method. 
 



  
 

 

 
On February 1, 2013, Lagune & Sons issued 9% bonds dated February 1, 2013, with a face amount of $200,000. The bonds sold for $182,841 and mature in 20 years. The effective interest rate for these bonds was 10%. Interest is paid semiannually on July 31 and January 31. Lagune's fiscal year is the calendar year.

Required:

1. Prepare the journal entry to record the bond issuance on February 1, 2013.
2. Prepare the entry to record interest on July 31, 2013, using the effective interest method.
3. Prepare the necessary journal entry on December 31, 2013.
4. Prepare the necessary journal entry on January 31, 2014. 
 



  
 

 

 
On February 1, 2013, Sanford & Son issued 10% bonds dated February 1, 2013, with a face amount of $200,000. The bonds sold for $239,588 and mature in 20 years. The effective interest rate for these bonds was 8%. Interest is paid semiannually on July 31 and January 31. Sanford & Son's fiscal year is the calendar year.

Required:

1. Prepare the journal entry to record the bond issuance on February 1, 2013.
2. Prepare the entry to record interest on July 31, 2013, using the straight-line method.
3. Prepare the necessary journal entry on December 31, 2013.
4. Prepare the necessary journal entry on January 31, 2014. 
 



  
 

 

 
On February 1, 2013, Fox Corporation issued 9% bonds dated February 1, 2013, with a face amount of $200,000. The bonds sold for $182,841 and mature in 20 years. The effective interest rate for these bonds was 10%. Interest is paid semiannually on July 31 and January 31. Fox's fiscal year is the calendar year. Fox uses the straight-line method of amortization.

Required:

1. Prepare the journal entry to record the bond issuance on February 1, 2013.
2. Prepare the entry to record interest on July 31, 2013.
3. Prepare the necessary journal entry on December 31, 2013.
4. Prepare the necessary journal entry on January 31, 2014. 
 



  
 

 

 
On February 1, 2013, Wolf Inc. issued 10% bonds dated February 1, 2013, with a face amount of $200,000. The bonds sold for $239,588 and mature in 20 years. The effective interest rate for these bonds was 8%. Interest is paid semiannually on July 31 and January 31. Wolf's fiscal year is the calendar year. Wolf uses the effective interest method of amortization.

Required:

1. Prepare the journal entry to record the bond issuance on February 1, 2013.
2. Prepare the entry to record interest on July 31, 2013.
3. Prepare the necessary journal entry on December 31, 2013.
4. Prepare the necessary journal entry on January 31, 2014. 
 



  
 

 

 
Miranda Company contracted with Stewart Corporation to construct custom-made equipment. The equipment was completed and ready for use on January 1, 2013. Miranda paid for the machine by issuing a $200,000, three-year note that bears interest at the rate of 4%, payable annually on December 31 each year. Since the machine was custom-built, the cash price was unknown. However, when compared to similar contracts, 10% was deemed to be a reasonable rate of interest.

Required:

1. Prepare the journal entry by Miranda to record the purchase of equipment.
2. Prepare journal entries to record interest for each of the first two years. 
 



   

  
 

 

 
DCL Industries purchased a supply of mechanical components from E Corporation on November 1, 2013. In payment for the $48,000 purchase, DCL issued a one-year installment note to be paid in equal monthly payments at the end of each month. The payments include interest at the rate of 12%.

Required:

1. Prepare the journal entry for DCL's purchase of the components on November 1, 2013.
2. Prepare the journal entry for the first installment payment on November 30, 2013.
3. What is the amount of interest expense that DCL will report in its income statement for the year ended December 31, 2013? 
 



  
 

 

 
 

 
Required:

Explain why the estimated fair value of the debentures exceeds their carrying amount at the end of fiscal year 2013. 
 



 
 

 

 
Required:

Why did the carrying amount of the debentures increase during fiscal year 2013? 
 



 
 

 

 
Required:

What amount of interest expense will Health Foods accrue on the debentures during fiscal year 2014? 
 



 
 

 

 
Required:

Determine the gain or loss that Health Foods would have reported in its 2013 income statement if it had redeemed (and retired) the debentures at fair value at the end of the fiscal year. 
 



 
 

 

 
Required:

Suppose that half of the bondholders had converted them into Health Foods' stock at the end of the 2013 fiscal year when the stock price is $90 per share. What gain or loss from this conversion would Health Foods have recorded on the transaction using the book value method? The market value method? 
 



 
 

 

 
On August 1, 2014, United Corporation issued $10 million of 8% convertible bonds at 105. The bonds mature in 20 years. Each $1,000 bond was issued with 20 detachable stock warrants, each of which entitled the bondholder to purchase, for $50, one share of United $5 par common stock. World Company purchased 10% of the bond issue. On August 1, 2014, the market value per share for United stock was $56 and the market value of each warrant was $6. In March 2020, when United common stock had a market price of $70 per share and the unamortized premium balance was $300,000, World exercised the warrants it held.

Required:

1. Prepare the journal entries on August 1, 2014, to record (A) the issuance of the bonds by United and (B) the investment by World.
2. Prepare the journal entries for both companies in March 2020 to record the exercise of the warrants. 
 



  
 

 

 
On January 1, 2012, Slug Corporation issued $6 million of 8%, 10-year convertible bonds at 102. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of $1 par common stock. Fuzz Company purchased 20% of the issue as an investment. On July 1, 2016, Fuzz converted all of its bonds into common stock of Slug. The market price per share for Slug was $32 at the time of the conversion. Both companies use the straight-line method for amortization.

Required:

1. Prepare journal entries for the issuance of the bonds on the issuer and the investor books.
2. Prepare the journal entries for the conversion on the books of the issuer and the investor. 
 



  
 

 

 
The December 31, 2012, balance sheet of Ming Inc. included 12% bonds with a face amount of $100 million. The bonds were issued in 2002and had a remaining discount of $3,400,000 at December 31, 2012. On January 1, 2013, Ming called the bonds at a price of 102.

Required:

Prepare the journal entry by Ming to record the retirement of the bonds on January 1, 2013. 
 



  
 

 

 
On January 1, 2013, Whittington Stoves issued $800 million of its 8% bonds for $736 million. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. Whittington records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2013, the fair value of the bonds was $752 million as determined by their market value on the NYSE.

Required:

1. Prepare the journal entry to record interest on June 30, 2013 (the first interest payment).
2. Prepare the journal entry to record interest on December 31, 2013 (the second interest payment).
3. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2013, balance sheet. 
 



  
 

 

 
On January 1, 2013, BBX issued $400,000 of its 8% bonds for $368,000. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. BBX records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2013, the fair value of the bonds was $370,000 as determined by their market value on the NYSE.

Required:

1. Prepare the journal entry to record interest on June 30, 2013 (the first interest payment).
2. Prepare the journal entry to record interest on December 31, 2013 (the second interest payment).
3. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2013, balance sheet. 
 



  
 

 

 
On January 1, 2013, Ouachita Airlines issued $400,000 of its 20-year, 8% bonds. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. Ouachita Airlines records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2013, the fair value of the bonds was $335,000 as determined by their fair value in the over-the-counter market.

Required:

1. Determine the price of the bonds at January 1, 2013, and prepare the journal entry to record their issuance. Show calculations.
2. Prepare the journal entry to record interest on June 30, 2013 (the first interest payment). Show calculations.
3. Prepare the journal entry to record interest on December 31, 2013 (the second interest payment). Show calculations.
4. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2013, balance sheet. Show calculations. 
 



  
 

 

 
On May 1, 2013, Green Corporation issued $1,000,000 of 12% bonds, dated January 1, 2013, for $975,000 plus accrued interest. The bonds mature on December 31, 2027, and pay interest semiannually on June 30 and December 31. Green's fiscal year ends on December 31 each year.

Required:

1. Determine the amount of accrued interest that was included in the proceeds received from the bond sale. Show calculations.
2. Prepare the journal entry for the issuance of the bonds. 
 



 
 

 

 
At January 1, 2013, ICN, Inc., was indebted to First Bank under a $480,000, 10% unsecured note. The note was signed January 1, 2009, and was due December 31, 2014. Annual interest was last paid on December 31, 2011. ICN was experiencing severe financial difficulties and negotiated a restructuring of the terms of the debt agreement. First Bank agreed to reduce last year's interest and the remaining two years' interest payments to $23,110 each and delay all payments until December 31, 2014, the maturity date.

Required:

Prepare the journal entries by ICN, Inc., necessitated by the restructuring of the debt at (A) January 1, 2013, (B) December 31, 2013, and (C) December 31, 2014. 
 



  
 

 

 
At January 1, 2013, BB Industries, Inc., owed Second Bank $24 million, under a 10% note due December 31, 2014. Interest was paid last on December 31, 2011. BB was experiencing severe financial difficulties and asked Second Bank to modify the terms of the debt agreement. After negotiation Second Bank agreed to:

• Forgive the interest accrued for the year just ended.
• Reduce the remaining two years' interest payments to $2 million each and delay the first payment until December 31, 2014, and
• Reduce the principal amount to $22 million.

Required:

Prepare the journal entries by BB Industries, Inc. necessitated by the restructuring of the debt at (A) January 1, 2013, (B) December 31, 2014, and (C) December 31, 2015. 
 


 

 

 
At January 1, 2013, TD owed First Bank $300,000, under an 11% note with three years remaining to maturity. Due to financial difficulties, TD was unable to pay the previous year's interest. First Bank agreed to settle TD's debt in exchange for land having a fair value of $225,000. TD purchased the land in 2009 for $162,000.

Required:

Prepare the journal entry(s) to record the restructuring of the debt by TD. 
 



  
 

 

 
On January 1, 2013, Fowl Products issued $80 million of 6%, 10-year convertible bonds at a net price of $81.6 million. Fowl recently issued similar, but nonconvertible, bonds at 99 (that is, 99% of face amount). The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 30 shares of Fowl's no par common stock. Fowl records interest by the straight-line method.
On June 1, 2015, Fowl notified bondholders of its intent to call the bonds at face value plus a 1% call premium on July 1, 2015. By June 30 all bondholders had chosen to convert their bonds into shares as of the interest payment date. On June 30, Fowl paid the semiannual interest and issued the requisite number of shares for the bonds being converted.

Required:

1. Prepare the journal entry for the issuance of the bonds by Fowl.
2. Prepare the journal entry for the June 30, 2013, interest payment.
3. Prepare the journal entries for the June 30, 2015, interest payment by Fowl and the conversion of the bonds (book value method). 
 



  
 

 

 
Comet Products prepares its financial statements according to International Financial Reporting Standards (IFRS). On January 1, 2013, Comet Products issued $40 million of 6%, 10-year convertible bonds at a net price of $40.8 million. Comet recently issued similar, but nonconvertible, bonds at 99 (that is, 99% of face amount). The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 30 shares of Comet's no par common stock. Comet records interest by the straight-line method.

On June 1, 2015, Comet notified bondholders of its intent to call the bonds at face value plus a 1% call premium on July 1, 2015. By June 30 all bondholders had chosen to convert their bonds into shares as of the interest payment date. On June 30, Comet paid the semiannual interest and issued the requisite number of shares for the bonds being converted.

Required:

1. Prepare the journal entry for the issuance of the bonds by Comet.
2. Prepare the journal entry for the June 30, 2013, interest payment.
3. Prepare the journal entries for the June 30, 2015, interest payment by Comet and the conversion of the bonds (book value method). 
 



 
 

 

 
On February 28, 2013, Pujols Industries issued 10% bonds, dated January 1, with a face amount of $48 million. The bonds were priced at $42 million (plus accrued interest) to yield 12%. Interest is paid semiannually on June 30 and December 31. Pujols' fiscal year ends October 31.

Required:

1. What would be the amount(s) related to the bonds Pujols would report in its balance sheet at October 31, 2013?
2. What would be the amount(s) related to the bonds that Pujols would report in its income statement for the year ended October 31, 2013?
3. What would be the amount(s) related to the bonds that Pujols would report in its statement of cash flows for the year ended October 31, 2013? 
    
 

 

 

A $500,000 bond issue sold at 98. Therefore, the bonds: 

A. Sold at a discount because the stated rate of interest was lower than the effective rate. 

B. Sold for the $500,000 face amount less $10,000 of accrued interest. 

C. Sold at a premium because the stated rate of interest was higher than the yield rate. 

D. Sold at a discount because the effective interest rate was lower than the face rate.
 
 
AMC issues a note with no stated interest rate in exchange for a machine. In accounting for the transaction: 

A. The machine should be depreciated over the note's term to maturity. 

B. If fair values of the note and machine are unavailable, the note should be recorded at its present value, discounted at the market rate of interest. 

C. Both the note and machine are recorded at the face amount of the note or the fair value of the machine, whichever is more clearly determinable. 

D. The note is recorded at its face amount unless the fair value of the machine is readily available.
 
 
An amortization schedule for bonds issued at a premium: 

A. Summarizes the amortization of the premium, a contra-asset account with a credit balance. 

B. Is reported in the balance sheet. 

C. Is a schedule that reflects the changes in the debt over its term to maturity. 

D. All of these answer choices are correct.
 
 
Auerbach Inc. issued 4% bonds on October 1, 2016. The bonds have a maturity date of September 30, 2026 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2017. The effective interest rate established by the market was 6%.
Auerbach issued the bonds: 

A. At par. 

B. At a premium. 

C. At a discount. 

D. Cannot be determined from the given information.
 
 
Bonds are issued on June 1 that have interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, 2016, is for a period of: 

A. Three months. 

B. Four months. 

C. Six months. 

D. Seven months.
 
 
Bonds payable should be reported as a long-term liability in the balance sheet of the issuing corporation at the: 

A. Face amount price less any unamortized discount or plus any unamortized premium. 

B. Current bond market price. 

C. Face amount less any unamortized premium or plus any unamortized discount. 

D. Face amount less accrued interest since the last interest payment date.
 
 
Bonds usually sell at their: 

A. Maturity value. 

B. Face value. 

C. Present value. 

D. Statistical expected value.
 
 
Bonds were issued at a discount. In the bond amortization schedule: 

A. The interest expense is less with each successive interest payment. 

B. The total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid. 

C. The outstanding balance (book value) of the bonds declines eventually to face value. 

D. The reduction in the discount is less with each successive interest payment.
 
 
Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each matures in 10 years. Bond X pays 8% interest while bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct?

A. Both bonds sell for the same amount. 

B. Bond X sells for more than bond Y. 

C. Bond Y sells for more than bond X. 

D. Both bonds sell at a discount.
 
 
 
 
 
 
 
 
 
 
 

Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each pays interest at 8%. The current market rate of interest is 8% for each. Bond X matures in 7 years while bond Y matures in 10 years. Which of the following is correct? 

A. Both bonds sell for the same amount. 

B. Both bonds sell for more than $100,000. 

C. Bond X sells for more than bond Y. 

D. Bond Y sells for more than bond X.
 
 
Crawford Inc. has bonds outstanding during a year in which the general (risk-free) rate of interest has risen. Crawford elected the fair value option for the bonds upon issuance. What will the company report for the bonds in its income statement for the year?

A. Interest expense and a gain. 

B. Interest expense and a loss. 

C. A gain and no interest expense. 

D. Interest expense and no gain or loss.
 
 
The debt to equity ratio indicates: 

A. The margin of safety provided to creditors. 

B. The extent of "trading on the equity" or financial leverage. 

C. Profitability without regard to how resources are financed. 

D. The effectiveness of employing resources provided by owners.
 
 
Eagle Company issued 10-year bonds at 96 during the current year. In the year-end financial statements, the discount should be:

A. Deducted from bonds payable. 

B. Added to bonds payable. 

C. Included as an expense in the year of issue. 

D. Reported as a deferred charge.
 
 
For a bond issue that sells for more than the bond face amount, the effective interest rate is: 

A. The rate printed on the face of the bond. 

B. The Wall Street Journal prime rate. 

C. More than the rate stated on the face of the bond. 

D. Less than the rate stated on the face of the bond.
 
 
For the issuer of 20-year bonds, the amount of amortization using the effective interest method would decrease each year if the bonds are sold at a: 

Discount -- Premium

A. No -- No

B. No -- Yes

C. Yes -- Yes

D. Yes -- No
 
 
Griggs Co. failed to amortize the premium on an outstanding five-year bond issue. What is the resulting effect on interest expense and the bond book value, respectively? 

A. Understated, understated. 

B. Understated, overstated. 

C. Overstated, understated. 

D. Overstated, overstated.
 
 
How would the book value of bonds payable be affected by the amortization of each of the following? 

Premium -- Discount
A. No effect -- No effect

B. No effect -- Increase

C. Increase -- Decrease

D. Decrease -- Increase
 
 
In each succeeding payment on an installment note: 

A. The amount of interest paid increases. 

B. The amount of principal paid increases. 

C. The amount of principal paid decreases. 

D. The amounts paid for both interest and principal increase proportionately.
 
 
 
 
 
 
 
 

Interest expense is: 

A. The effective interest rate times the amount of the debt outstanding during the interest period. 

B. The stated interest rate times the amount of the debt outstanding during the interest period. 

C. The effective interest rate times the face amount of the debt. 

D. The stated interest rate times the face amount of the debt.
 
 
The interest rate that is printed on the bond certificate is referred to as any of the following except: 

A. Stated rate. 

B. Contract rate. 

C. Nominal rate. 

D. Effective rate.
 
 
Liberty Company issued 10-year bonds at 105 during the current year. In the year-end financial statements, the premium should be:

A. Reported as an intangible asset. 

B. Included in revenue for the year of sale. 

C. Deducted from bonds payable. 

D. Added to bonds payable.
 
 
Markel Inc. has bonds outstanding during a year in which the general (risk-free) rate of interest has not changed. Markel elected the fair value option for the bonds upon issuance. What will the company report for the bonds in its income statement for the year? 

A. Interest expense and a gain. 

B. Interest expense and a loss. 

C. A gain and no interest expense. 

D. Interest expense and no gain or loss.
 
 
The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest: 

A. Less the present value of all future interest payments at the rate of interest stated on the bond. 

B. Plus the present value of all future interest payments at the rate of interest stated on the bond. 

C. Plus the present value of all future interest payments at the market (effective) rate of interest. 

D. Less the present value of all future interest payments at the market (effective) rate of interest.
 
 
The method used to pay interest depends on whether the bonds are:

A. Registered or coupon. 

B. Mortgaged or unmortgaged. 

C. Indentured or debentured. 

D. Callable or redeemable.
 
 
Most corporate bonds are: 

A. Mortgage bonds. 

B. Debenture bonds. 

C. Secured bonds. 

D. Collateral bonds.
 
 
 
 
 
 
 
 

On January 1, 2016, Bell Co. issued $10 million of 10-year convertible bonds at 105. On January 1, 2021, the bonds were converted into common stock with a market value of $11 million. Upon conversion, Bell would recognize: 

Book value metho -- Market value method

A. no gain or loss -- no gain or loss

B. no gain or loss -- loss

C. loss -- no gain or loss

D. loss -- loss
 
 
On January 1, 2016, Ozark Minerals issued $10 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Ozark's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99. Upon issuance, Ozark should:

A. Debit discount on bonds payable $100,000. 

B. Credit premium on bonds payable $100,000. 

C. Credit equity $100,000. 

D. Credit bonds payable $10,100,000.
 
 
On March 1, 2016, Doll Co. issued 10-year convertible bonds at 106. During 2019, the bonds were converted into common stock when the market price of Doll's common stock was 500 percent above its par value. Doll prepares its financial statements according to International Financial Reporting Standards (IFRS). On March 1, 2016, cash proceeds from the issuance of the convertible bonds should be reported as: 

A. A liability for the entire proceeds.

B. Paid-in capital for the entire proceeds.

C. Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance. 

D. A liability for the face amount of the bonds and paid-in capital for the premium over the par value.
 
 
On March 1, 2016, Doll Co. issued 10-year convertible bonds at 106. During 2019, the bonds were converted into common stock when the market price of Doll's common stock was 500 percent above its par value. On March 1, 2016, cash proceeds from the issuance of the convertible bonds should be reported as:

A. A liability for the entire proceeds. 

B. Paid-in capital for the entire proceeds. 

C. Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance. 

D. A liability for the face amount of the bonds and paid-in capital for the premium over the par value.
 
 
On March 31, 2016, Ashley, Inc.'s bondholders exchanged their convertible bonds for common stock. The book value of these bonds on Ashley's books was less than the fair value but greater than the par value of the common stock issued. If Ashley used the book value method of accounting for the conversion, which of the following statements correctly states an effect of this conversion? 

A. Shareholders' equity is increased. 

B. Additional paid-in capital is decreased.

C. Retained earnings is increased. 

D. A loss is recognized
 
 
Ordinarily, the proceeds from the sale of a bond issue will be equal to: 

A. The face amount of the bond. 

B. The total of the face amount plus all interest payments. 

C. The present value of the face amount plus the present value of the stream of interest payments. 

D. The face amount of the bond plus the present value of the stream of interest payments.
 
 
Patrick Rach International issued 5% bonds convertible into shares of the company's common stock. Rach applies International Financial Reporting Standards (IFRS). Upon issuance, Patrick Rach International should record: 

A. The proceeds of the bond issue as part debt and part equity. 

B. The proceeds of the bond issue entirely as debt. 

C. The proceeds of the bond issue entirely as equity. 

D. The proceeds of the bond issue entirely as debt if the bonds are mandatorily redeemable.
 
 
 
 
 
 
 
 

Patrick Rach International issued 5% bonds convertible into shares of the company's common stock. Rach applies U.S. GAAP. Upon issuance, Patrick Rach International should record: 

A. The proceeds of the bond issue as part debt and part equity. 

B. The proceeds of the bond issue entirely as debt. 

C. The proceeds of the bond issue entirely as equity. 

D. The proceeds of the bond issue entirely as debt if the bonds are mandatorily redeemable.
 
 
Pierce Company issued 11% bonds, dated January 1, with a face amount of $800,000 on January 1, 2016. The bonds sold for $739,816 and mature in 2035 (20 years). For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Pierce determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2016, the fair value of the bonds was $730,000. The entire change in fair value was due to a change in the general (risk-free) rate of interest. Pierce's net income for the year will include: 

A. An unrealized gain from change in the fair value of debt of $10,617.

B. An unrealized loss from change in the fair value of debt of $10,617.

C. A gain from change in the fair value of debt of $10,204.

D. A loss from change in the fair value of debt of $10,204.
 
 
The rate of interest that actually is incurred on a bond payable is called the: 

A. Face rate. 

B. Contract rate. 

C. Effective rate. 

D. Stated rate.
 
 
The rate of return on assets indicates: 

A. The margin of safety provided to creditors. 

B. The extent of "trading on the equity" or financial leverage. 

C. Profitability without regard to how resources are financed. 

D. The effectiveness of employing resources provided by owners.
 
 
The rate of return on shareholders' equity indicates: 

A. The margin of safety provided to creditors. 

B. The extent of "trading on the equity" or financial leverage. 

C. Profitability without regard to how resources are financed. 

D. The effectiveness of employing resources provided by owners.
 
 
Red Corp. has a rate of return on assets of 10% and a debt to equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of retiring debt on these ratios is a(n):

Return on Assets -- Debt to Equity
A. increase -- increase

B. decrease -- decrease

C. increase -- decrease

D. decrease -- increase
 
 
 
 
 
 
 
 

Rick's Pawn Shop issued 11% bonds, dated January 1, with a face amount of $400,000 on January 1, 2017. The bonds sold for $370,000. For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Rick's determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2017, the fair value of the bonds was $365,000, with $2,000 of the change due to a change in general interest rates. Rick's statement of comprehensive income will include: 

A. An unrealized gain from change in the fair value of debt of $5,412. 

B. An unrealized loss from change in the fair value of debt of $3,412. 

C. An unrealized gain from change in the fair value of debt of $2,000.

D. An unrealized gain from change in the fair value of debt of $3,412.
 
 
Straight-line amortization of bond discount or premium: 

A. Can be used for amortization of discount or premium in all cases and circumstances. 

B. Provides the same amount of interest expense each period as does the effective interest method. 

C. Is appropriate for deep discount bonds. 

D. Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method.
 
 
The times interest earned ratio indicates: 

A. The margin of safety provided to creditors. 

B. The extent of "trading on the equity" or financial leverage. 

C. Profitability without regard to how resources are financed. 

D. The effectiveness of employing resources provided by owners.
 
 
To evaluate the risk and quality of an individual bond issue, savvy investors rely heavily on: 

A. Bond ratings provided by financial investment services such as Moody's. 

B. Newspaper articles. 

C. Bond interest payments. 

D. The company's audit report.
 
 
The unamortized balance of discount on bonds payable is reported in the balance sheet as:

A. A prepaid expense. 

B. An expense account. 

C. A current liability. 

D. A contra-liability.
 
 
When a company issues bonds between interest dates, the entry to record the issuance of the bonds will: 

A. Include a credit to interest payable. 

B. Include a debit to interest expense. 

C. Include a debit to cash that has been reduced by interest accrued from the last interest date. 

D. Include a debit to cash that has been increased by interest that will accrue from sale to the next interest date.
 
 
When a company issues bonds between interest dates the entry to record the issuance of the bonds will: 

A. Include a debit to cash that has been reduced by accrued interest from the last interest date. 

B. Include a credit to accrued interest payable. 

C. Include a debit to interest expense. 

D. Be unaffected by the timing of issue.
 
 
 
 
 
 
 
 

When a long-term note is given in exchange for equipment, the amount considered as paid for the machine is: 

A. The invoice price. 

B. The wholesale price. 

C. The present value of cash outflows discounted at the stated rate. 

D. The present value of the note payments discounted at the market rate.
 
 
When an equipment dealer receives a long-term note in exchange for equipment, and the stated rate of interest is indicative of the market rate of interest at the time of the transaction, the present value of the future cash flows received on the notes: 

A. Is treated as a current liability at the exchange date. 

B. Is recorded as interest revenue at the exchange date. 

C. Is recorded as interest receivable at the exchange date. 

D. Is credited to sales revenue at the exchange date.
 
 
When bonds and other debt are issued, costs such as legal costs, printing costs, and underwriting fees are referred to as debt issuance costs (called transaction costs under IFRS). If Brown Imports prepares its financial statements using IFRS: 

A. The increase in the effective interest rate caused by the transaction costs is reflected in the interest expense. 

B. The decrease in the effective interest rate caused by the transaction costs is reflected in the interest expense. 

C. The transaction costs are recorded separately as an asset. 

D. The recorded amount of the debt is increased by the transaction costs.
 
 
When bonds are retired prior to their maturity date: 

A. GAAP has been violated. 

B. The issuing company probably will report an ordinary gain or loss. 

C. The issuing company probably will report a gain. 

D. The issuing company will report a non-operating gain or loss.
 
 
When bonds are sold at a discount and the effective interest method is used, at each interest payment date, the interest expense: 

A. Increases. 

B. Decreases. 

C. Remains the same. 

D. Is equal to the change in book value.
 
 
When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is: 

A. More than the effective interest. 

B. Less than the effective interest. 

C. Equal to the effective interest. 

D. More than if the bonds had been sold at a premium.
 
 
When bonds are sold at a discount, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of discount is: 

A. Higher than the effective interest amount every year. 

B. Higher than the effective interest amount in the early years and less than the effective interest amount in the later years. 

C. Less than the effective interest amount in the early years and more than the effective interest amount in the later years. 

D. Less than the effective interest amount every year.
 
 
When bonds are sold at a premium and the effective interest method is used, at each interest payment date, the interest expense: 

A. Remains constant. 

B. Is equal to the change in book value. 

C. Increases. 

D. Decreases.
 
 
When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is: 

A. Less than the effective interest. 

B. Equal to the effective interest. 

C. Greater than the effective interest. 

D. More than if the bonds had been sold at a discount.
 
 
 
 
 
 
 
 

When bonds are sold at a premium, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of premium is: 

A. Higher than the effective interest amount in the early years and less than the effective interest amount in the later years. 

B. Less than the effective interest amount in the early years and more than the effective interest amount in the later years. 

C. Higher than the effective interest amount every year. 

D. Less than the effective interest amount every year.
 
 
When bonds include detachable warrants, what is the appropriate accounting for the cash proceeds from the bond issue? 

A. The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative market values. 

B. The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative face values. 

C. A nominal amount is allocated to the warrants. 

D. All of the proceeds are allocated to the bonds.
 
 
When outstanding bonds are converted into common stock, under either the book value method or the market value method, the same amount would be debited to: 

Bonds Payable -- Bond Premium

A. Yes -- Yes

B. No -- Yes

C. No -- No

D. Yes -- No
 
 
When the interest payment dates are March 1 and September 1, and notes are issued on July 1, the amount of interest expense to be accrued at December 31 of the year of issue would: 

A. Not be required. 

B. Be for six months. 

C. Be for four months. 

D. Be for 10 months.
 
 
When the interest payment dates are March 1 and September 1, and the bonds are issued on July 1, the amount of interest expense reported in the December 31 income statement for the year of issue would be for: 

A. Six months.

B. Four months. 

C. 10 months. 

D. 12 months.
 
 
Which of the following indicates the margin of safety provided to creditors? 

A. Rate of return on shareholders' equity. 

B. Times interest earned ratio. 

C. Gross margin. 

D. Debt to equity ratio.
 
 
Yellow Corp. issues 10% bonds. Not including any indirect effects on earnings, the issuance will immediately decrease Yellow's:

Return on Assets -- Debt to Equity Ratio

A. yes -- yes

B. no -- no

C. yes -- no

D. no -- yes
 
 
Zero-coupon bonds: 

A. Offer a return in the form of a deep discount off the face value. 

B. Result in zero interest expense for the issuer. 

C. Result in zero interest revenue for the investor. 

D. Are reported as shareholders' equity by the issuer.
 
 
 
 
 
 
 
 


 

The enhancing qualitative characteristic of understandability means that information should be understood by:

 

The FASB's standard-setting process includes, in the correct order:

 

Four different competent accountants independently agree on the amount and method of reporting an economic event. The concept demonstrated is:

 

Land was acquired in 2021 for a future building site at a cost of $40,000. The assessed valuation for tax purposes is $27,000, a qualified appraiser placed its value at $48,000, and a recent firm offer for the land was for a cash payment of $46,000. The land should be reported in the financial statements at:

 

The primary professional organization for those accountants working in industry is the:

 

The FASB's conceptual framework's qualitative characteristics of accounting information include:

 

Recording revenue before it is collected is an example of:

 

Permanent accounts do not include:

 

A sale on account would be recorded by:

 

Temporary accounts do not include:

 

Rent collected in advance is:

 

Consider the following items:

How many of the items listed above are generally long-term assets?

 

A company may compare the amount of receivables in the current year to the amount of receivables in the previous year to estimate a trend in the company's ability to collect cash from customers. This type of analysis is known as:

 

Which of the following is not a required segment reporting disclosure according to International Financial Reporting Standards (IFRS)?

 

Notes payable that are due in two years are:

 

Hulkster's 2021 average collection period is:

 

Hulkster's 2021 profit margin is (rounded):

 

The principal benefit of separately reporting discontinued operations is to enhance:

 

Non-GAAP earnings:

 

Hulkster's 2021 profit margin is (rounded):

 

The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS has no experience estimating uncollectible accounts associated with these sorts of notes. RS can recognize:

 

Assume that Steffi paid the $50,000 in cash when she signed the agreement. RS can recognize revenue associated with the $50,000:

 

For a typical manufacturing company, the most common critical point for recognizing revenue is the date:

 

On July 15, 2021, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $90,000. The system included finely tuned scales that fit into EverFresh's automated assembly line, Ortiz's proprietary software modified to allow the weighing system to function in EverFresh's automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz's systems.) If Ortiz was to provide these goods or services separately, it would charge $60,000 for the scales, $10,000 for the software, and $30,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2021, and the calibration service commenced on that date.How many performance obligations exist in this contract?

 

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2020, Lake began operations and sold jet skis with a total price of $930,000 that cost Lake $465,000. Lake collected $310,000 in 2020, $310,000 in 2021, and $310,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $2,010,000 that cost Lake $1,206,000. Lake collected $670,000 in 2021, $536,000 in 2022, and $536,000 in 2023 associated with those sales. In 2023, Lake also repossessed $268,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $100,500 at the time they were repossessed. In 2022, Lake would recognize realized gross profit of:

 

As of January 1, 2021, Barley Co. had a credit balance of $536,000 in its allowance for uncollectible accounts. Based on experience, 1% of Barley's gross accounts receivable have been uncollectible. During 2021, Barley wrote off $666,000 of accounts receivable. Barley's gross accounts receivable as December 31, 2021 is $18,800,000.

How much bad debt expense should Barley record for 2021?

 

Huckabee's 2021 receivables turnover (rounded to 2 decimal places) is:

 

Frankenstein Enterprises received two notes from customers for sales that Frankenstein made in 2021. The notes included:Note A: Dated 5/31/2021, principal of $120,000 and interest due 3/31/2022.Note B: Dated 7/1/2021, principal of $200,000 and interest at 8% annually, due on 4/1/2022.Frankenstein had accrued a total of $14,400 interest receivable from these notes in its 12/31/2021 balance sheet.The annual interest rate on Note A is closest to:

 

Chen Inc. accepted a two-year noninterest-bearing note for $605,000 on January 1, 2021. The note was accepted as payment for merchandise with a fair value of $500,000. The effective interest rate is 10%.The cash collection on December 31, 2022, would be recorded as:

 

False Value Hardware began 2021 with a credit balance of $32,000 in the refund liability account. Sales and cash collections from customers during the year were $650,000 and $610,000, respectively. False Value estimates that 6% of all sales will be returned. During 2021, customers returned merchandise for credit of $28,000 to their accounts.

 

False Value Hardware's 2021 income statement would report net sales of:

 

A company uses the dollar-value LIFO method to report inventory. In the current year, the cost index for inventory has increased. If the company reports ending inventory at its year-end cost, which of the following statements is correct?

 

Fulbright Corp. uses the periodic inventory system. During its first year of operations, Fulbright made the following purchases (listed in chronological order of acquisition):

 

One difference between periodic and perpetual inventory systems is:

 

A company has decided that because it employs a perpetual system, a physical count of inventory at the end of the year is not needed. Which of the following choices most likely identifies a flaw with this decision?

 

During periods when costs are rising and inventory quantities are stable, ending inventory will be:

 

Which of the following is not a potential benefit of accrual accounting, compared to cash-basis accounting?

 

Tri Fecta, a partnership, had revenues of $367,000 in its first year of operations. The partnership has not collected on $45,200 of its sales and still owes $38,100 on $200,000 of merchandise it purchased. There was no inventory on hand at the end of the year. The partnership paid $32,200 in salaries. The partners invested $49,000 in the business and $22,000 was borrowed on a five-year note. The partnership paid $1,980 in interest that was the amount owed for the year and paid $9,000 for a two-year insurance policy on the first day of business. Ignore income taxes. Compute the cash balance at the end of the first year for Tri Fecta.

 

Which of the following is not true about net operating cash flow?

 

According to the conceptual framework, verifiability implies:

 

Which of the following best demonstrates the full disclosure principle?

 

Permanent accounts do not include:

 

On December 31, 2020, Coolwear, Inc. had a balance in its prepaid insurance account of $55,400. During 2021, $93,000 was paid for insurance. At the end of 2021, after adjusting entries were recorded, the balance in the prepaid insurance account was $45,500. Insurance expense for 2021 was:

 

Disclosure notes would not include:

 

A subsequent event for an entity with a December 31, 2021, year-end would not include:

 

What would Symphony report as total current assets?

 

Cash equivalents would not include:

 

Notes payable that are due in two years are:

 

In a statement of cash flows prepared under International Financial Reporting Standards (IFRS), each of the following items is typically classified as a financing cash flow except:

 

When a material error is discovered in prior financial statements:

 

Earnings quality refers to:

 

In the income statement for the year ended December 31, 2021, Foxtrot Co. would report income from discontinued operations of:

 

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2020, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2020, $300,000 in 2021, and $300,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2021, $400,000 in 2022, and $400,000 in 2023 associated with those sales. In 2023, Lake also repossessed $200,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $75,000 at the time they were repossessed.In 2020, Lake would recognize realized gross profit of:

 

Orange Inc. offers a discount on an extended warranty on its oPhone when the warranty is purchased at the time the oPhone is purchased. The warranty normally has a price of $150, but Orange offers it for $120 when purchased along with an oPhone. Orange anticipates a 75% chance that a customer will purchase the extended warranty along with the oPhone. Assume Orange sells to 1,000 oPhones with the extended warranty discount offer. What is the total stand-alone selling price that Orange would use for the extended warranty discount option for purposes of allocating revenue among the performance obligations in those 1,000 oPhone contracts?

 

SDH uses the cost recovery method under IFRS to recognize revenue.In its December 31, 2020, balance sheet, SDH would report:

 

Mary signed up and paid $1200 for a 6 month ceramics course on June 1st with Choplet Ceramics. As of August 1st, Choplet's accounting records would indicate:

 

Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there). Sweeney recently transferred a painting on consignment to a local barbershop.After Sweeney has transferred a painting to a barbershop, the painting:

 

During 2021, Jacobsen wrote off $18,000 in receivables and recovered $6,000 that had been written off in prior years. Jacobsen's December 31, 2020, allowance for uncollectible accounts was $40,000. Using the balance sheet approach, what amount of allowance for uncollectible accounts should Jacobsen report at December 31, 2021?

 

Brewer Inc. is owed $215,000 by Carol Co. under a 10% note with two years remaining to maturity. Due to financial difficulties Carol Co. did not pay the prior year's interest. Brewer agrees to settle the receivable (and accrued interest) in exchange for a cash payment of $165,000. The journal entry that Brewer would make to record this transaction would include a loss on troubled debt restructuring as bad debt expense in the amount of:

 

The Nile Group is owed $1,170,000 by Scorpion Enterprises under an 12% note with three years remaining to maturity. The prior year of interest was unpaid. Nile estimates credit losses with respect to this receivable and calculates that it will only receive amounts equal to a present value of $965,000. The journal entry that O'Hara would make to record this transaction would include a credit loss as bad debt expense in the amount of:

 

A company's investment in receivables is influenced by several variables, including:

 

Under the gross method, purchase discounts taken are:

 

What is Nu's net income if it elects FIFO?

 

How much more will Nueva report in income tax if it elects FIFO instead of LIFO?

 

The use of LIFO in accounting for a firm's inventory:

 

The ending inventory assuming LIFO and a periodic inventory system is:

 

When there is agreement between a measure or description and the phenomenon it purports to represent, information possesses which characteristic?

 

Which of the following is not an identified valuation technique in GAAP regarding fair value measurement?

 

Porite Company recognizes revenue in the period in which it records an asset for the related account receivable, rather than in the period in which the account receivable is collected in cash.

Porite's practice is an example of:

 

Tri Fecta, a partnership, had revenues of $375,000 in its first year of operations. The partnership has not collected on $46,500 of its sales and still owes $38,900 on $155,000 of merchandise it purchased. There was no inventory on hand at the end of the year. The partnership paid $28,900 in salaries. The partners invested $42,000 in the business and $21,000 was borrowed on a five-year note. The partnership paid $1,890 in interest that was the amount owed for the year and paid $9,200 for a two-year insurance policy on the first day of business. Compute net income for the first year for Tri Fecta

 

Compute the income before income tax for Amazon.

 

Eve's Apples opened its business on January 1, 2021, and paid for two insurance policies effective that date. The policy for equipment damage was $36,000 for 18 months, and the crop damage policy was $12,000 for a two-year term. What is the balance in Eve's prepaid insurance as of December 31, 2021?

 

The purpose of closing entries is to transfer:

 

On November 1, 2021, Tim's Toys borrows $30,900,000 at 11% to finance the holiday sales season. The note is for a six-month term and both principal and interest are payable at maturity. What is the balance of interest payable for the loan as of December 31, 2021?

 

Examples of internal transactions include all of the following except:

 

Assume a company's liquidity ratios all are less than 1.0 before it purchases inventory on credit. When it makes the purchase:

 

The balance sheet reports:

 

What is the amount of total shareholders' equity?

 

Which of the following is a primary reason a company's book value is less than its market value?

 

Managers may engage in classification shifting by:

 

Nevada Boot Co. reported net income of $216,000 for its year ended December 31, 2021. Purchases totaled $152,000. Accounts payable balances at the beginning and end of the year were $36,000 and $33,000, respectively. Beginning and ending inventory balances were $44,000 and $46,000, respectively. Assuming that all relevant information has been presented, Nevada Boot would report operating cash flows of:

 

On May 1, Tango Co. agreed to sell the assets of its Formal Wear Division to Top Hat Inc.

 

A likely method that managers use for classification shifting is to report certain operating expenses as:

 

Dowling's average total assets for 2021 is

 

The Fremont (Ireland) Flyers were a semi-professional carriage racing team that competed up until the early 1930's. Mary Smith owns the Fremont Fliers' trademark, and recently licensed it to the Fremont (California) Flyers roller derby team. The license allows the roller derby team to use the trademark for five years for a total of $15,000.

Under IFRS, how much revenue would Mary recognize in year 1 of the license?

 

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2020, Lake began operations and sold jet skis with a total price of $1,050,000 that cost Lake $525,000. Lake collected $350,000 in 2020, $350,000 in 2021, and $350,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,620,000 that cost Lake $972,000. Lake collected $540,000 in 2021, $450,000 in 2022, and $450,000 in 2023 associated with those sales. In 2023, Lake also repossessed $180,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $67,500 at the time they were repossessed.In 2020, Lake would recognize realized gross profit of:

 

Flapper Jack's Pancake Restaurants Inc. sells franchises for an initial fee of $43,000 plus operating fees of $1,200 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2020, Tim Cruise signed a franchise contract, paying the standard $7,400 down with the balance due over five years with interest.Assume that at the time of signing the contract, collection of the receivable was assured and that service obligations were substantial. However, by October 20, 2020, substantially all continuing obligations had been met. The journal entry required at October 20, 2020 would include a:

 

Wilson Links Products sells a product that involves two separate performance obligations: the SwingRight golf club weight and the SwingCoach teaching software. SwingRight has a stand-alone selling price of $175. Wilson sells both the SwingRight and the SwingCoach as a package deal for $250. The SwingCoach software is not sold separately. Wilson is aware that other vendors charge $150 for similar software, and Wilson's prices are generally 10% lower than what is charged by those vendors. Wilson estimates that it incurs approximately $90 of cost per copy of the software, and usually charges 50% above cost on similar products.Estimate the stand-alone selling price of the software using the expected cost plus margin approach.

 

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2020, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2020, $300,000 in 2021, and $300,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2021, $400,000 in 2022, and $400,000 in 2023 associated with those sales. In 2023, Lake also repossessed $200,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $75,000 at the time they were repossessed.In 2020, Lake would recognize realized gross profit of:

 

Frankenstein Enterprises received two notes from customers for sales that Frankenstein made in 2021. The notes included:Note A: Dated 5/31/2021, principal of $125,000 and interest due 3/31/2022.Note B: Dated 7/1/2021, principal of $211,000 and interest at 7% annually, due on 4/1/2022.Frankenstein had accrued a total of $15,300 interest receivable from these notes in its 12/31/2021 balance sheet. The annual interest rate on Note A is closest to:

 

For 2021, Rahal's Auto Parts estimates bad debt expense at 1% of credit sales. The company reported accounts receivable and an allowance for uncollectible accounts of $86,500 and $2,100, respectively, at December 31, 2020. During 2021, Rahal's credit sales and collections were $404,000 and $408,000, respectively, and $2,340 in accounts receivable were written off.Rahal's 2021 bad debt expense is:

 

Trell Corporation transferred $59,000 of accounts receivable to a local bank. The transfer was made without recourse. The local bank remits 80% of the factored amount to Trell and retains the remaining 20%. When the bank collects the receivables, it will remit to Trell the retained amount less a fee equal to 3% of the total amount factored. Trell estimates a fair value of its 20% interest in the receivables of $12,500 (not including the 3% fee). Trell will show an amount receivable from factor of:

 

Harvey's Wholesale Company sold supplies of $46,000 to Northeast Company on April 12 of the current year, with terms 1/15, n/60. Harvey uses the net method of accounting for sales discounts.What entry would Harvey's make on April 23, assuming the customer made the correct payment on that date?

 

Brewer Inc. is owed $200,000 by Carol Co. under a 10% note with two years remaining to maturity. Due to financial difficulties Carol Co. did not pay the prior year's interest. Brewer agrees to settle the receivable (and accrued interest) in exchange for a cash payment of $150,000. The journal entry that Brewer would make to record this transaction would include a loss on troubled debt restructuring as bad debt expense in the amount of:

 

Company C is identical to Company D in every respect except that Company C uses LIFO and Company D uses average costs. In an extended period of rising inventory costs, Company C's gross profit and inventory turnover ratio, compared to Company D's, would be:

 

The largest expense on a retailer's income statement is typically:

 

The company makes an adjusting entry with a debit to Cost of Goods Sold and a credit to LIFO Reserve for $130,000 at the end of 2021 ($480,000 − $350,000). Which of the following statements is correct?

 

During 2021, WW Inc. reduced its LIFO eligible inventory quantities due to a problem with its major supplier. The effect of this liquidation was to increase its cost of goods sold by approximately $40 million. WW has a 25% income tax rate. If WW had not experienced these supplier problems and the resulting liquidation:

 

Compared to dollar-value LIFO, unit LIFO is:

 

Mama's Pizza Shoppe borrowed $8,000 at 9% interest on May 1, 2021, with principal and interest due on October 31, 2022. The company's fiscal year ends June 30, 2021. What adjusting entry is necessary on June 30, 2021?

 

Prepayments occur when:

 

Permanent accounts do not include:

 

The employees of Neat Clothes work Monday through Friday. Every other Friday the company issues payroll checks totaling $32,000. The current pay period ends on Friday, July 3. Neat Clothes is now preparing quarterly financial statements for the three months ended June 30. What is the adjusting entry to record accrued salaries at the end of June?

 

Tummy Foods purchased a two-year fire and extended coverage insurance policy on August 1, 2021, and charged the $4,200 premium to Prepaid insurance. At its December 31, 2021, year-end, Tummy Foods would record which of the following adjusting entries?

 

Pronouncements issued by the Committee on Accounting Procedures:

 

What was the total amount of cash paid by Castle for insurance premiums during the year?

 

When converting an income statement from a cash basis to an accrual basis, cash received for services:

 

Of the following, the most important objective for financial reporting is to provide information useful for:

 

Which of the following is not a provision of the Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley)? The Act:

 

The main issue in the debate over accounting for employee stock options was:

 

Fink Insurance collected premiums of $18,000,000 from its customers during the current year. The adjusted balance in the Deferred premiums revenue account increased from $6 million to $8 million dollars during the year. What is Fink's revenue from insurance premiums recognized for the current year?

 

The possibility that the capital markets' focus on periodic profits may tempt a company's management to bend or even break accounting rules to inflate reported net income is an example of:

 

Roy Wilton is a CPA who recently made a poor investment. When researching the investment, Roy examined the financial statements of the firm, but did not read the accompanying footnotes, and therefore didn't comprehend the broader context underlying those financial statements. Which of the following is true with respect to the enhancing qualitative characteristic of understandability in this case?

 

The FASB's conceptual framework's qualitative characteristics of accounting information include:

 

Elements of financial statements do not include:

 

Mega Loan Company has very stringent credit requirements and, accordingly, has negligible losses from uncollectible accounts. The company's independent accountants did not protest when, contrary to GAAP, the company recorded bad debt expense only when specific accounts were determined to be uncollectible, rather than use an allowance for uncollectible accounts. The concept demonstrated is:

 

Compared to the accrual basis of accounting, the cash basis of accounting produces a higher amount of income by the net decrease during the accounting period of:

 

Ford Motor Company purchases services from suppliers on account and sells its products to distributors on short-term credit. As a result, do each of these events affect net income faster than they affect net operating cash flows?

 

When a magazine company collects cash for selling a subscription, it is an example of:

 

Enhancing qualitative characteristics of accounting information include:

 

If a company has declared bankruptcy, its financial statements likely violate:

 

Under federal securities laws, the SEC has the authority to set accounting standards in the United States.

 

The most recent example of the political process at work in standard-setting is the heated debate that occurred on the issue of:

 

Management has recently purchased new equipment but is uncertain about its useful life. For the initial year, management estimated a useful life of 10 years. However, due to a major accident during the first year, management is now uncertain about the equipment's functionality and has revised its estimate to 5 years and included a description of their uncertainty and of this change in estimated useful life in financial statement disclosures. Which of the following is an accurate statement regarding this approach?

 

The primary professional organization for those accountants working in industry is the:

 

The FASB's conceptual framework's qualitative characteristics of accounting information include:

 

Fundamental qualitative characteristics of accounting information are:

 

Alpaca Corporation had revenues of $220,000 in its first year of operations. The company has not collected on $19,600 of its sales and still owes $26,700 on $85,000 of merchandise it purchased. The company had no inventory on hand at the end of the year. The company paid $11,000 in salaries. Owners invested $17,000 in the business and $17,000 was borrowed on a five-year note. The company paid $4,100 in interest that was the amount owed for the year, and paid $7,500 for a two-year insurance policy on the first day of business. Alpaca has an effective income tax rate of 30%. Compute net income for the first year for Alpaca Corporation.

 

The FASB's due process invites various interested parties to indicate their opinions about whether financial accounting standards should be changed.

 

Tummy Foods purchased a two-year fire and extended coverage insurance policy on August 1, 2021, and charged the $4,200 premium to Prepaid insurance. At its December 31, 2021, year-end, Tummy Foods would record which of the following adjusting entries?

 

Mama's Pizza Shoppe borrowed $8,000 at 9% interest on May 1, 2021, with principal and interest due on October 31, 2022. The company's fiscal year ends June 30, 2021. What adjusting entry is necessary on June 30, 2021?

 

Examples of external transactions include all of the following except:

 

An economic resource of an entity is:

 

The debits and credits from the journal entries are posted to the general ledger accounts only for:

 

When the amount of revenue collected in advance decreases during an accounting period:

 

When converting an income statement from a cash basis to an accrual basis, cash received for services:

 

Prepayments occur when:

 

On December 31, 2021, the end of Larry's Used Cars' first year of operations, the accounts receivable was $53,600. The company estimates that $1,200 of the year-end receivables will not be collected. Accounts receivable in the 2021 balance sheet will be valued at:

 

Fink Insurance collected premiums of $18,000,000 from its customers during the current year. The adjusted balance in the Deferred premiums revenue account increased from $6 million to $8 million dollars during the year. What is Fink's revenue from insurance premiums recognized for the current year?

 

An example of an error would be:

 

Which of the following would be an amount computed using horizontal analysis?

 

A classified balance sheet _______________:

 

Which of the following is not a characteristic that defines a reportable operating segment according to U.S. GAAP?

 

The following information is provided for Sacks Company before closing entries.

Cash$12,000

Supplies 4,500

Prepaid rent 2,000

Salaries expense 4,500

Equipment 65,000

Service revenue 30,000

Miscellaneous expenses 20,000

Dividends 3,000

Accounts payable 5,000

Common stock 68,000

Retained earnings 8,000

What is the amount of total shareholders' equity?

 

Working capital is:

 

Patents, copyrights, franchises, and trademarks are examples of:

 

Rent collected in advance is:

 

An omission in the notes to the financial statements that is so serious that even a qualified opinion is not justified would result in:

 

What amount should be included in the current assets section of Janson's December 31, 2021, balance sheet?

 

Bird Brain Co. reported net income of $45,000 for the year ended December 31, 2021. January 1 balances in accounts receivable and accounts payable were $23,000 and $26,000 respectively. Year-end balances in these accounts were $22,000 and $28,000, respectively. Assuming that all relevant information has been presented, Bird Brain's cash flows from operating activities would be:

 

The Maytag Corporation's income statement includes income from continuing operations and a loss on discontinued operations. Earnings per share information would be provided for:

 

Reporting comprehensive income according to International Financial Reporting Standards (IFRS) can be accomplished by each of the following methods except:

 

Non-GAAP earnings:

 

The statement of cash flows reports cash flows from the activities of:

 

Rowdy's would report net cash inflows (outflows) from financing activities in the amount of:

 

Rowdy's would report net cash inflows (outflows) from investing activities in the amount of:

 

Dowling's average total assets for 2021 is:

 

Cash flows from investing do not include cash flows from:

 

A change in accounting principle that is implemented using the modified retrospective approach includes:

 

SDH uses the cost recovery method under IFRS to recognize revenue.In its December 31, 2020, balance sheet, SDH would report:

 

Indiana Co. began a construction project in 2021 with a contract price of $150 million to be received when the project is completed in 2023. During 2021, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.In 2022, Indiana incurred additional costs of $58.5 million and estimated an additional $40.5 million in costs to complete the project. Indiana:

 

Slick's Used Cars sells pre-owned cars on the installment basis and carries its own notes because its customers typically cannot qualify for a bank loan. Default rates tend to be high or unpredictable. However, in the event of nonpayment, Slick's can usually repossess the cars without loss. The revenue method Slick would use is the:

 

On November 1, 2021, Taylor signed a one-year contract to provide handyman services on an as-needed basis to King Associates, with the contract to start immediately. King agreed to pay Taylor $4,680 for the one-year period. Taylor is confident that King will pay that amount, but payment is not scheduled to occur until 2022. Taylor should recognize revenue in 2021 in the amount of

 

Which of the following is not true about accounting for long-term construction contracts?

 

The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS can recognize revenue associated with the $50,000:

 

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2020, Lake began operations and sold jet skis with a total price of $630,000 that cost Lake $315,000. Lake collected $210,000 in 2020, $210,000 in 2021, and $210,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,560,000 that cost Lake $936,000. Lake collected $520,000 in 2021, $440,000 in 2022, and $440,000 in 2023 associated with those sales. In 2023, Lake also repossessed $160,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $60,000 at the time they were repossessed.In 2023, Lake would record a loss on repossession of:

 

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2020, Lake began operations and sold jet skis with a total price of $690,000 that cost Lake $345,000. Lake collected $230,000 in 2020, $230,000 in 2021, and $230,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2021, $310,000 in 2022, and $310,000 in 2023 associated with those sales. In 2023, Lake also repossessed $380,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $142,500 at the time they were repossessed.In 2020, Lake would recognize realized gross profit of:

 

"VSOE" is necessary to separately recognize revenue in multiple-element contracts for:

 

A rationale for recognizing revenue over the life of a contract rather than at a single point in time is that:

 

Wilson Company had the following cash balance items listed in its trial balance at 12/31/2021:

Peterson Savings and Loan:$50,000 Right Bank: (5,000)Clinton County Trust Bank: 10,000

If Wilson reports under IFRS, its 12/31/2021 balance sheet would show what cash balance?

 

Which of the following is not true regarding accounting for transfers of receivables under IFRS?

 

Which of the following is true about accounting for a troubled debt restructuring?

 

A note receivable Mild Max Cycles discounted with recourse was dishonored on its maturity date. Mild Max would debit

 

For 2021, Rahal's Auto Parts estimates bad debt expense at 1% of credit sales. The company reported accounts receivable and an allowance for uncollectible accounts of $86,500 and $2,100, respectively, at December 31, 2020. During 2021, Rahal's credit sales and collections were $404,000 and $408,000, respectively, and $2,340 in accounts receivable were written off.

Rahal's accounts receivable at December 31, 2021, are:

 

As of December 31, 2021, Amy Jo's Appliances had unadjusted account balances in accounts receivable of $311,000 and $970 in the allowance for uncollectible accounts, following 2021 write-offs of $6,450 in bad debts. An analysis of Amy Jo's December 31, 2021, accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for 2021 should be:

 

Frasquita acquired equipment from the manufacturer on 6/30/2021 and gave a noninterest-bearing note in exchange. Frasquita is obligated to pay $550,000 on 4/30/2022 to satisfy the obligation in full.

If Frasquita accrued interest of $15,000 on the note in its 2021 year-end financial statements, what would the manufacturer record in its 2021 income statement for this transaction?

 

In the balance sheet at the end of its first year of operations, Dinty Inc. reported an allowance for uncollectible accounts of $83,900. During the year, Dinty wrote off $31,900 of accounts receivable it had attempted to collect and failed. Credit sales for the year were $2,230,000, and cash collections from credit customers totaled $1,860,000. What accounts receivable balance would Dinty report in its first year-end balance sheet?

 

Oswego Clay Pipe Company sold $46,000 of pipe to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. Oswego uses the gross method of accounting for sales discounts.

 

What entry would Oswego make on June 10, assuming the customer made the correct payment on that date?

 

Galaxy sells used video games for cash and provides a one-week return right. Returns are material and reasonably predictable. Galaxy should:

 

Northwest Fur Co. started 2021 with $106,000 of merchandise inventory on hand. During 2021, $480,000 in merchandise was purchased on account with credit terms of 2/15, n/45. All discounts were taken. Purchases were all made f.o.b. shipping point. Northwest paid freight charges of $7,900. Merchandise with an invoice amount of $4,400 was returned for credit. Cost of goods sold for the year was $380,000. Northwest uses a perpetual inventory system.Assuming Northwest uses the gross method to record purchases, what is the cost of goods available for sale?

 

The use of LIFO during a long inflationary period can result in:

 

A company implements the following policy regarding inventory in transit: Goods purchased are included in inventory records, while goods sold are not included in inventory records. Management feels this policy is reasonable because it assigns inventory in transit to the party that initiated the transactions. Which of the following concepts is management not considering in implementing this policy?

 

When reported in financial statements, a LIFO allowance account usually:

 

Cinnamon Buns Co. (CBC) started 2021 with $52,000 of merchandise on hand. During 2021, $280,000 in merchandise was purchased on account with credit terms of 2/10, n/30. All discounts were taken. Purchases were all made f.o.b. shipping point. CBC paid freight charges of $9,000. Merchandise with an invoice amount of $4,000 was returned for credit. Cost of goods sold for the year was $316,000. CBC uses a perpetual inventory system.Assuming CBC uses the gross method to record purchases, ending inventory would be:

 

ATC's gross profit ratio (rounded) in 2021 is:

 

Fulbright Corp. uses the periodic inventory system. During its first year of operations, Fulbright made the following purchases (listed in chronological order of acquisition):

 

Sales for the year totaled 267 units, leaving 24 units on hand at the end of the year.

Ending inventory using the FIFO method is:

 

Ending inventory is equal to the cost of items on hand plus:

 

Buckeye Corporation adopted dollar-value LIFO on January 1, 2021, when the inventory value was $500,000 and the cost index was 1.0. On December 31, 2021, the inventory value at year-end costs was $535,000 and the cost index was 1.06. Buckeye would report a LIFO inventory of:

 

For the year ended 12/31/2021, the company reported inventory of $274,540 ($259,000 × 1.06). Which of the following statements is correct?

 

Sales for the year totaled 1,000 units, leaving 300 units on hand at the end of the year. The company reported cost of goods sold as $3,120,000 [(400 units @ $3,000) + (600 units @ $3,200)]. Which of the following is correct?

 

The largest expense on a retailer's income statement is typically:

 

Fulbright Corp. uses the periodic inventory system. During its first year of operations, Fulbright made the following purchases (listed in chronological order of acquisition):

45 units at $93 per unit

75 units at $88 per unit

170 units at $54 per unit

Sales for the year totaled 275 units, leaving 15 units on hand at the end of the year.

Ending inventory using the LIFO method is:

 

Alison's dress shop buys dresses from McGuire Manufacturing. Alison purchased dresses from McGuire on July 17 and received an invoice with a list price amount of $6,000 and payment terms of 2/10, n/30. Alison uses the net method to record purchases. Alison should record the purchase at:

 

Cinnamon Buns Co. (CBC) started 2021 with $52,000 of merchandise on hand. During 2021, $280,000 in merchandise was purchased on account with credit terms of 2/10, n/30. All discounts were taken. Purchases were all made f.o.b. shipping point. CBC paid freight charges of $9,000. Merchandise with an invoice amount of $4,000 was returned for credit. Cost of goods sold for the year was $316,000. CBC uses a perpetual inventory system.What is cost of goods available for sale, assuming CBC uses the gross method?

 

Which of the following is false regarding the FIFO inventory method?

 

When reported in financial statements, a LIFO allowance account usually:

 

Thompson's 2021 inventory turnover ratio is:

 

Fulbright Corp. uses the periodic inventory system. During its first year of operations, Fulbright made the following purchases (listed in chronological order of acquisition):

40 units at $100 per unit

70 units at $80 per unit

170 units at $60 per unit

Sales for the year totaled 270 units, leaving 10 units on hand at the end of the year.

Ending inventory using the average cost method (rounded) is:

 

A company's correct ending balance for the inventory account at the end of Year 1 should be $57,000, but the company incorrectly reported it as $43,000. In Year 2, the company correctly recorded its ending balance of the inventory account. Which one of the following is true?

 

If a company overstates its ending balance of inventory in Year 1 and it reports inventory correctly in Year 2, which one of the following is true?

 

In applying the lower of cost or net realizable value rule, the inventory of surgical equipment would be valued at:

 

Poppy Co. uses a periodic inventory system. Beginning inventory on January 1 was understated by $30,300, and its ending inventory on December 31 was understated by $16,900. In addition, a purchase of merchandise costing $20,500 was incorrectly recorded as a $2,050 purchase. None of these errors were discovered until the next year. As a result, Poppy's cost of goods sold for this year was:

 

To the nearest thousand, estimated ending inventory is:

 

In applying the lower of cost or net realizable value rule, the inventory of rehab equipment would be valued at:

 

In applying the lower of cost or market rule, the inventory of rehab supplies would be valued at:

 

On July 10, 2021, Johnson Corporation signed a purchase commitment to purchase inventory for $200,000 on or before February 15, 2022. The company's fiscal year-end is December 31. The contract was exercised on February 1, 2022, and the inventory was purchased for cash at the contract price. On the purchase date of February 1, the market price of the inventory was $210,000. The market price of the inventory on December 31, 2021, was $180,000. The company uses a perpetual inventory system.How much loss on purchase commitment will Johnson recognize in 2021?

 

Howard's Supply Co. suffered a fire loss on April 20, 2021. The company's last physical inventory was taken January 30, 2021, at which time the inventory totaled $220,000. Sales from January 30 to April 20 were $600,000 and purchases during that time were $450,000. Howard's consistently reports a 30% gross profit. The estimated inventory loss is:

Beginning inventory $220,000

Plus: Net purchases 450,000

Goods available for sale 670,000 Less:Cost of goods sold:

 

Harlequin Co. adopted the dollar-value LIFO retail method at the beginning of 2021 (its base year). Its beginning inventory for 2021 was $36,000 at cost and $72,000 at retail prices. At the end of 2021, it computed its estimated ending inventory at retail to be $110,000. Assuming its cost-to-retail percentage for 2021 transactions was 60%, and that the retail price index at the end of 2021 was 1.10, what is the inventory balance that Harlequin Co. would report in its 12/31/2021 balance sheet?

 

Land was acquired in 2021 for a future building site at a cost of $41,600. The assessed valuation for tax purposes is $28,600, a qualified appraiser placed its value at $49,800, and a recent firm offer for the land was for a cash payment of $44,600. The land should be reported in the financial statements at:

 

Tri Fecta, a partnership, had revenues of $378,000 in its first year of operations. The partnership has not collected on $47,000 of its sales and still owes $38,800 on $215,000 of merchandise it purchased. There was no inventory on hand at the end of the year. The partnership paid $26,400 in salaries. The partners invested $45,000 in the business and $28,000 was borrowed on a five-year note. The partnership paid $2,520 in interest that was the amount owed for the year and paid $9,300 for a two-year insurance policy on the first day of business. Ignore income taxes. Compute the cash balance at the end of the first year for Tri Fecta.

 

Which of the following is not true about net operating cash flow?

 

Somerset Leasing received $36,000 for 12 months' rent in advance. How should Somerset record this transaction?

 

Yummy Foods purchased a two-year fire and extended coverage insurance policy on August 1, 2021, and charged the $4,080 premium to Insurance expense. At its December 31, 2021, year-end, Yummy Foods would record which of the following adjusting entries?

 

Which of the following potentially limit the usefulness of the balance sheet?

 

What would Symphony report as total shareholders' equity?

 

Investments consist of treasury bills that were purchased in November, 2021, and mature in January, 2022. The balance of prepaid insurance represents coverage over the next two years. What amount should be included in the current assets section of Janson's December 31, 2021, balance sheet?

 

Quick assets total:

 

HHF's debt to equity ratio is

 

All income statement items are subject to a 25% income tax rate. In its 2021 income statement, Freda's separately stated income tax expense and total income tax expense would be:

 

On October 28, 2021, a company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2021, the end of the company's fiscal year. The division's loss from operations for 2021 was $1,950,000.

The division's book value and fair value less cost to sell on December 31 were $3,040,000 and $2,430,000, respectively. What before-tax amount(s) should the company report as loss on discontinued operations in its 2021 income statement?

 

On May 1, Tango Co. agreed to sell the assets of its Formal Wear Division to Top Hat Inc.The following additional facts pertain to the transaction:

The Formal Wear Division qualifies as a component of the entity according to GAAP regarding discontinued operations.

The book value of Formal Wear's assets totaled $48 million on December 31, 2021.

Formal Wear's operating income was a pre-tax loss of $10 million in 2021.

Tango's income tax rate is 25%.

Suppose that the Formal Wear Division's assets had not been sold by December 31, 2021, but were considered held for sale. Assume that the fair value of these assets was $80 million at December 31, 2021. In the income statement for the year ended December 31, 2021, Tango Co., would report discontinued operations of a:

 

Shady Lane's income tax payable account decreased from $15.9 million to $11.4 million during 2021. If its income tax expense was $81.2 million, what was shown as an operating cash flow under the direct method?

 

Shady Lane's income tax payable account decreased from $14 million to $12 million during 2021. If its income tax expense was $80 million, what was shown as an operating cash flow under the direct method?

 

Rowdy's would report net cash inflows (outflows) from financing activities in the amount of:

 

Frasquita acquired equipment from the manufacturer on 6/30/2021 and gave a noninterest-bearing note in exchange. Frasquita is obligated to pay $590,000 on 4/30/2022 to satisfy the obligation in full. If Frasquita accrued interest of $27,000 on the note in its 2021 year-end financial statements, what amount would it have recorded the equipment for on 6/30/2021?

 

Ireland Corporation obtained a $40,000 note receivable from a customer on June 30, 2021. The note, along with interest at 6%, is due on June 30, 2022. On September 30, 2021, Ireland discounted the note at Cloverdale bank. The bank's discount rate is 10%. What amount of cash did Ireland receive from Cloverdale Bank?

 

The numerator for the current period's cost-to-retail percentage is:

 

The estimated ending inventory at retail is:

 

Lacy's Linen Mart uses the average cost retail method to estimate inventories. Data for the first six months of 2021 include: beginning inventory at cost and retail were $66,000 and $124,000, net purchases at cost and retail were $316,000 and $484,000, and sales during the first six months totaled $494,000. The estimated inventory at June 30, 2021, would be:

 

What amount should be reported as cost of goods sold for the year?

 

Current period cost-to-retail percentage is:

 

What amount will Cashmere Soap include in its year-end balance sheet as cash and cash equivalents?

 

Ireland Corporation obtained a $58,000 note receivable from a customer on June 30, 2021. The note, along with interest at 5%, is due on June 30, 2022. On September 30, 2021, Ireland discounted the note at Cloverdale bank. The bank's discount rate is 8%. What amount of cash did Ireland receive from Cloverdale Bank?

 

On June 1, Parson Assoc. sold equipment to Arleo and agreed to accept a 3-month, $56,000, 10% interest-bearing note in payment at a time when the prevailing rate of interest for similar transactions was 10%. When the note was collected upon maturity, Parson would recognize interest revenue of:

 

Which of the following is considered a sale of receivables?

 

On April 1 of the current year, Troubled Company factored receivables with a carrying value of $85,000 for $60,000 in cash from Scrooge Lenders. The transfer was made without recourse. The arrangement also includes a factoring fee equal to 4% of the total factored amount. On April 1, Troubled would:

 

Trell Corporation transferred $69,000 of accounts receivable to a local bank. The transfer was made without recourse. The local bank remits 70% of the factored amount to Trell and retains the remaining 30%. When the bank collects the receivables, it will remit to Trell the retained amount less a fee equal to 2% of the total amount factored. Trell estimates a fair value of its 10% interest in the receivables of $17,500 (not including the 2% fee). Trell will show an amount receivable from factor of:

 

Trell Corporation transferred $50,000 of accounts receivable to a local bank. The transfer was made without recourse. The local bank remits 80% of the factored amount to Trell and retains the remaining 20%. When the bank collects the receivables, it will remit to Trell the retained amount less a fee equal to 3% of the total amount factored. Trell estimates a fair value of its 20% interest in the receivables of $8,000 (not including the 3% fee). Trell will show an amount receivable from factor of:

 

Enhancing qualitative characteristics of accounting information include each of the following except:

 

Fundamental qualitative characteristics of accounting information are:

 

Roy Wilton is a CPA who recently made a poor investment. When researching the investment, Roy examined the financial statements of the firm, but did not read the accompanying footnotes, and therefore didn't comprehend the broader context underlying those financial statements. Which of the following is true with respect to the enhancing qualitative characteristic of understandability in this case?

 

Recognizing expected losses immediately, but deferring expected gains, is an example of:

 

Which of the following is typically characterized as a principle, rather than an assumption?

 

Rothbart Manufacturing agrees to manufacture bumper cars for 12 Banners Amusement Parks. Under the terms of the contract, 12 Banners will pay Rothbart a total of $74,000, and 12 Banners can cancel the contract if it so chooses but must pay Rothbart for work completed. Rothbart believes that, if 12 Banners cancelled the contract, Rothbart could sell the bumper cars to another amusement park and still make a profit. The manufacturing contract is expected to last six months, and as of December 31, 2021, the job is 50% complete. How much revenue should Rothbart recognize in 2021 for this contract?

 

Minarski Electronics sells computers and provides hardware maintenance services. On April 1st, Minarski sold a package deal containing a computer and a one-year unlimited maintenance/repair service for the computer at a bundle price of $1,000. If sold separately, the computer costs $786 and the one-year unlimited maintenance/repair service costs $414. How much revenue does Minarski Electronics recognize for the month ended April 30th, assuming that revenue is accrued monthly?

 

In 2021, JRE2 would report gross profit (loss) of:

 

In 2022, JRE2 would report gross profit (loss) of:

 

Indiana Co. began a construction project in 2021 with a contract price of $163 million to be received when the project is completed in 2023. During 2021, Indiana incurred $33 million of costs and estimates an additional $81 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed. Suppose that, in 2022, Indiana incurred additional costs of $63 million and estimated an additional $54 million in costs to complete the project. Indiana

 

Minarski Electronics sells computers and provides hardware maintenance services. On April 1st, Minarski sold a package deal containing a computer and a one-year unlimited maintenance/repair service for the computer at a bundle price of $1,000. If sold separately, the computer costs $732 and the one-year unlimited maintenance/repair service costs $468. How much revenue does Minarski Electronics recognize for the month ended April 30th, assuming that revenue is accrued monthly?

 

On July 15, 2021, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $86,400. The system included finely tuned scales that fit into EverFresh's automated assembly line, Ortiz's proprietary software modified to allow the weighing system to function in EverFresh's automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz's systems.) If Ortiz was to provide these goods or services separately, it would charge $57,000 for the scales, $10,000 for the software, and $33,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2021, and the calibration service commenced on that date. Assume that the scales, software and calibration service are all separate performance obligations. How much revenue will Ortiz recognize in 2021 for this contract?

 

Which of the following is true about accounting for a troubled debt restructuring?

 

Brewer Inc. is owed $207,000 by Carol Co. under a 12% note with two years remaining to maturity. Due to financial difficulties Carol Co. did not pay the prior year's interest. Brewer agrees to settle the receivable (and accrued interest) in exchange for a cash payment of $157,000. The journal entry that Brewer would make to record this transaction would include a loss on troubled debt restructuring as bad debt expense in the amount of:

 

The Nile Group is owed $1,000,000 by Scorpion Enterprises under an 8% note with three years remaining to maturity. The prior year of interest was unpaid. Nile estimates credit losses with respect to this receivable and calculates that it will only receive amounts equal to a present value of $880,000. The journal entry that O'Hara would make to record this transaction would include a credit loss as bad debt expense in the amount of:

 

In a perpetual inventory system, the cost of purchases is debited to:

 

Ending inventory assuming LIFO in a perpetual inventory system would be:

 

Under the dollar-value LIFO method, the inventory at December 31, 2022, should be

 

Tiger Inc. adopted dollar-value LIFO on January 1, 2021, when the inventory value was $377,000 and the cost index was 1.45. On December 31, 2021, the inventory was valued at year-end cost of $412,000 and the cost index was 1.50. Tiger would report a LIFO inventory of:

 

Under IFRS, the conceptual framework:

 

Surefeet Corporation changed its inventory valuation method. Which characteristic is jeopardized by this change?

 

Under IFRS, the role of the conceptual framework:

 

A firm's comprehensive income always

 

Cal Farms reported supplies expense of $2,000,000 this year. The supplies account decreased by $200,000 during the year to an ending balance of $400,000. What was the cost of supplies the Cal Farms purchased during the year?

 

ILP Services purchased a three-year fire insurance policy on September 1, 2021, and charged the $72,000 premium to Prepaid insurance. At its December 31, 2021, year-end, ILP Services would record an adjusting entry that includes which of the following?

 

A company would classify a six-month prepaid insurance policy as:

 

If a company records cash received for services to be provided in the future with a debit to Cash and a credit to Service Revenue, how will this error affect net income for the current period?

 

Liquidity refers to:

 

Martel Co. had supplies of $24,000 and $33,000 at the end of 2020 and 2021, respectively. During 2021, Howard paid $128,000 for supplies. Supplies expense in the 2021 income statement was:

 

Which of the following most likely would be classified as restructuring costs?

 

Which of the following is not true about EPS?

 

On July 15, 2021, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $97,200. The system included finely tuned scales that fit into EverFresh's automated assembly line, Ortiz's proprietary software modified to allow the weighing system to function in EverFresh's automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz's systems.) If Ortiz was to provide these goods or services separately, it would charge $66,000 for the scales, $10,000 for the software, and $24,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2021, and the calibration service commenced on that date. Assume that the scales, software and calibration service are all separate performance obligations. How much revenue will Ortiz recognize in 2021 for this contract?

 

Sullivan Software sells packages of a software program and one year's worth of technical support for $500. Its packaging lists the $500 sales price as comprised of a software program at a price of $450 and technical support with a price of $100, with a $50 discount for the package deal. All of Sullivan's sales are for cash, and there are no returns. Sullivan sells the software program separately for $475 and offers a year of technical support separately for $75.Sullivan should recognize revenue for the two parts of the arrangement as follows:

 

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2020, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2020, $300,000 in 2021, and $300,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2021, $400,000 in 2022, and $400,000 in 2023 associated with those sales. In 2023, Lake also repossessed $200,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $75,000 at the time they were repossessed.In 2023, Lake would record a loss on repossession of:

 

On June 1, 2021, Emmet Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2021. Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and will receive an additional 15% of the fixed fee at the end of each year provided that building occupancy exceeds 90%. Emmet estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract.Assume Emmet estimates variable consideration as the most likely amount. How much revenue should Emmet recognize on this contract in 2021?

 

Revenue on a long-term contract should not be recognized according to the proportion of the performance obligation that has been completed if:

 

What amount will Cashmere Soap include in its year-end balance sheet as cash and cash equivalents?

 

Calistoga Produce estimates bad debt expense at 0.20% of credit sales. The company reported accounts receivable and allowance for uncollectible accounts of $473,000 and $1,600 respectively, at December 31, 2020. During 2021, Calistoga's credit sales and collections were $332,000 and $311,000, respectively, and $1,760 in accounts receivable were written off. Calistoga's final balance in its allowance for uncollectible accounts at December 31, 2021, is:

 

Chez Fred Bakery estimates the allowance for uncollectible accounts at 3% of the ending balance of accounts receivable. During 2021, Chez Fred's credit sales and collections were $125,000 and $131,000, respectively. What was the balance of accounts receivable on January 1, 2021, if $180 in accounts receivable were written off during 2021 and if the allowance account had a balance of $750 on December 31, 2021?

 

In deciding whether financing with receivables is a secured borrowing or a sale under IFRS, the critical element is the extent to which:

 

Ending inventory assuming LIFO in a periodic inventory system would be:

 

Cinnamon Buns Co. (CBC) started 2021 with $52,000 of merchandise on hand. During 2021, $280,000 in merchandise was purchased on account with credit terms of 2/10, n/30. All discounts were taken. Purchases were all made f.o.b. shipping point. CBC paid freight charges of $9,000. Merchandise with an invoice amount of $4,000 was returned for credit. Cost of goods sold for the year was $316,000. CBC uses a perpetual inventory system.

 

Linguini Inc. adopted dollar-value LIFO (DVL) as of January 1, 2021, when it had an inventory of $800,000. Its inventory as of December 31, 2021, was $811,200 at year-end costs and the cost index was 1.04. What was DVL inventory on December 31, 2021?

 

In a perpetual inventory system, the cost of inventory sold is:

 

What is Nu's gross profit ratio if it elects LIFO?

 

On July 1, 2021, Larkin Co. purchased a $410,000 tract of land that is intended to be the site of a new office complex. Larkin incurred additional costs and realized salvage proceeds during 2021 as follows:

 

In computing capitalized interest, average accumulated expenditures:

 

Vijay Inc. purchased a three-acre tract of land for a building site for $240,000. On the land was a building with an appraised value of $125,000. The company demolished the old building at a cost of $11,900, but was able to sell scrap from the building for $1,670. The cost of title insurance was $820 and attorney fees for reviewing the contract were $460. Property taxes paid were $3,200, of which $240 covered the period subsequent to the purchase date. The capitalized cost of the land is:

 

On January 1, 2021, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:

 

Average accumulated expenditures for 2021 was:

 

Under International Financial Reporting Standards (IFRS), development expenditures are:

 

Braxwell Corporation acquired the following assets associated with a manufacturing facility for a lump-sum price of $10,300,000. According to independent appraisals, the fair values were $1,325,000, $3,975,000, $3,975,000, and $3,975,000 for the building, patent, land, and equipment, respectively. The initial value of the patent would be:

 

When one company acquires another company, any acquired "in-process research and development" is recorded as:

 

Research and development expense for a given period includes:

 

A company incurred the follow costs related to research and development for the current year:

 

On January 1, 2021, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:

January 1, 2021$300,000 September 1, 2021$420,000 December 31, 2021$420,000 March 31, 2022$420,000 September 30, 2022$300,000

Kendall borrowed $790,000 on a construction loan at 8% interest on January 1, 2021. This loan was outstanding throughout the construction period. The company had $4,700,000 in 8% bonds payable outstanding in 2021 and 2022.

Average accumulated expenditures for 2022 was:

 

Based on the above information, what is the total amount of impairment loss that Alou should record at year-end?

 

In 2020, Antle Inc. had acquired Demski Co. and recorded goodwill of $345 million as a result. The net assets (including goodwill) from Antle's acquisition of Demski Co. had a 2021 year-end book value of $680 million. Antle assessed the fair value of the Demski reporting unit at this date to be $800 million, while the fair value of all of Demski's identifiable tangible and intangible assets (excluding goodwill) was $727 million. The amount of the impairment loss that Antle would record for goodwill at the end of 2021 is:

 

At the end of its 2021 fiscal year, a triggering event caused Janero Corporation to perform an impairment test for one of its manufacturing facilities. The following information is available:

 

An asset was acquired on September 30, 2021, for $110,000 with an estimated five-year life and $28,000 residual value. The company uses double-declining-balance depreciation. Calculate the gain or loss if the asset was sold on December 31, 2022, for $55,000. Partial-year depreciation is to be calculated.

 

In January 2021 Vega Corporation purchased a patent at a cost of $217,000. Legal and filing fees of $54,000 were paid to acquire the patent. The company estimated a 10-year useful life for the patent and uses the straight-line amortization method for all intangible assets. In January 2024, Vega spent $35,000 in legal fees for an unsuccessful defense of the patent and the patent is no longer usable. The amount charged to income (expense and loss) in 2024 related to the patent should be:

 

A change from the straight-line method to the double-declining-balance method of depreciation is handled as:

 

On September 30, 2021, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.Depreciation (to the nearest dollar) for 2022, using sum-of-the-years'-digits method, would be:

 

Which of the following is true about the initial journal entry used to record extended warranties?

 

The rate of interest printed on the face of a note payable is called the:

 

After the end of the 2021 fiscal year but before financial statements were issued, an accident occurred at KPN's manufacturing facility that probably will result in material losses to KPN. KPN has relatively precise estimates of those losses. KPN should:

 

Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs:

 

Red Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If expropriation is probable, a loss contingency should be:

 

Which of the following is not true about deferred revenue?

 

Short-term obligations can be reported as long-term liabilities if:

 

Panther Co. had a quality-assurance warranty liability of $358,000 at the beginning of 2021 and $318,000 at the end of 2021. Warranty expense is based on 2% of sales, which were $51 million for the year. What amount of warranty costs were paid during 2021?

 

A long-term liability should be reported as a current liability in a classified balance sheet if the long-term debt:

 

A loss contingency should be accrued in a company's financial statements only if the likelihood that a liability has been incurred is:

 

The interest rate that is printed on the bond certificate is referred to as any of the following except:

 

Most corporate bonds are:

 

The method used to pay interest depends on whether the bonds are:

 

The rate of interest that actually is incurred on a bond payable is called the:

 

An investor purchases a 20-year, $1,000 par value bond that pays semiannual interest of $40. If the semiannual market rate of interest is 5%, what is the current market value of the bond? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

 

For a bond issue that sells for more than the bond face amount, the effective interest rate is:

 

Bonds usually sell at their:

 

Ordinarily, the proceeds from the sale of a bond issue will be equal to:

 

The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest:

 

Seaside issues a bond that has a stated interest rate of 10%, face amount of $50,000, and is due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 12%. What is the issue price of the bond? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and

 

Haste Enterprises issues 20-year, $1,000,000 bonds that pay semiannual interest of $40,000. If the effective annual rate of interest is 10%, what is the issue price of the bonds? Some relevant and irrelevant present value factors:

 

On January 1, 2021, Anne Teak Furniture issued $100,000 of 8% bonds, dated January 1. Interest is payable semiannually on June 30 and December 31. The bonds mature in 10 years. The annual market rate for bonds of similar risk and maturity is 10%. What was the issue price of the bonds? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

 

Kelly Industries issued 11% bonds, dated January 1, with a face value of $100,000 on January 1, 2021. The bonds mature in 2031 (10 years). Interest is paid semiannually on June 30 and December 31. For bonds of similar risk and maturity the market yield is 12%. What was the issue price of the bonds? FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

 

Scottie Adams Bird Supplies issued 10% bonds, dated January 1, with a face amount of $240,000 on January 1, 2021. The bonds mature in 2031 (10 years). For bonds of similar risk and maturity the market yield is 12%. Interest is paid semiannually on June 30 and December 31. What is the price of the bonds at January 1, 2021? Some relevant and irrelevant present value factors:

 

Ocean Adventures issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 7%. Using a financial calculator or Excel, calculate the issue price of the bonds.

 

Ocean Adventures issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 5%. Using a financial calculator or Excel, what is the issue price of the bonds?

 

Mountain Excursions issues bonds due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 8%. Using a financial calculator or Excel, calculate the issue price of the bonds.

 

Hillside Excursions issues bonds due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 6%. Using a financial calculator or Excel, calculate the issue price of the bonds.

 

Air Destinations issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 7%. Using present value tables, calculate the issue price of the bonds. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

 

Roman Destinations issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 5%. Using present value tables, calculate the issue price of the bonds. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

 

Sand Explorers issues bonds due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 8%. Using present value tables, calculate the issue price of the bonds. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

 

Mind Explorers issues bonds with a stated interest rate of 7%, face value of $200,000, and due in 10 years. Interest payments are made semi-annually. The market rate for this type of bond is 6%. Using present value tables, calculate the issue price of the bonds. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

 

Interest expense is:

 

Straight-line amortization of bond discount or premium:

 

An amortization schedule for bonds issued at a premium:

 

When bonds are sold at their face amount (no discount, no premium) and the effective interest method is used, at each interest payment date, the interest expense:

 

Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2021. LPC's accountant has projected the following amortization schedule from issuance until maturity:

LPC issued the bonds:

 

What is the annual stated interest rate on the bonds?

 

What is the annual effective interest rate on the bonds?

 

LPC calls the bonds at 103 immediately after the interest payment on 12/31/2022 and retires them. What gain or loss, if any, would LPC record on this date?

 

A $500,000 bond issue sold at 98. Therefore, the bonds:

 

Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%.

Auerbach issued the bonds:

 

Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each pays interest at 8%. The current market rate of interest is 8% for each. Bond X matures in 7 years while bond Y matures in 10 years. Which of the following is correct?

 

Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each matures in 10 years. Bond X pays 8% interest while bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct?

 

A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is 11%. These bonds will sell at a price that is:

 

A bond is issued with a face amount of $500,000 and a stated interest rate of 10%. The current market rate of interest is 8%. These bonds will sell at a price that is:

 

Interest expense is:

 

How would the outstanding balance (book value) of bonds payable be affected by the amortization of each of the following?

 

For the issuer of 20-year bonds, the amount of amortization using the effective interest method would decrease each year if the bonds are sold at a:

 

Bonds were issued at a discount. In the bond amortization schedule:

 

The interest rate that determines the amount of cash interest paid each interest date is referred to as the:

 

The interest rate that determines the amount of interest expense each interest date is referred to as the:

 

When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is:

 

When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is:

 

When bonds are sold at a discount and the effective interest method is used, at each interest payment date, the interest expense:

 

When bonds are sold at a premium and the effective interest method is used, at each interest payment date, the interest expense:

 

Tim Burr Lumber issued bonds at a premium. In the bond amortization schedule:

 

When bonds are sold at a discount, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of discount is:

 

When bonds are sold at a premium, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of premium is:

 

Cramer Company sold five-year, 8% bonds on October 1, 2021. The face amount of the bonds was $100,000, while the issue price was $102,000. Interest is payable on April 1 of each year. The fiscal year of Cramer Company ends on December 31. How much interest expense will Cramer Company report in its December 31, 2021, income statement (assume straight-line amortization)?

 

On January 1, 2021, Legion Company sold $200,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $177,000, priced to yield 12%. Legion records interest at the effective rate.

Legion should report bond interest expense for the six months ended June 30, 2021, in the amount of:

 

Legion should pay cash interest for the six months ended June 30, 2021, in the amount of:

 

On January 1, 2021, an investor paid $291,000 for bonds with a face amount of $300,000. The contract rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2022 (assume annual interest payments and amortization)?

 

On June 30, 2021, L. N. Bean issued $10 million of its 8% bonds for $9 million. The bonds were priced to yield 10%. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, how much bond interest expense should the company report for the 6 months ended December 31, 2021?

 

On January 1, 2021, an investor paid $291,000 for bonds with a face amount of $300,000. The stated rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2021 (assume annual interest payments and amortization)?

 

Shaq Corporation issued $10,000 of bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds.

What is the effective annual rate of interest on the bonds?

 

DeKay Dental Supplies issued $10,000 of bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. (Round your answer to nearest whole dollar amount.)

What is the stated annual rate of interest on the bonds?

 

Earl Lee Riser Alarm Co. issued $10,000 of bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds.

What would be the total interest expense recognized for the bond issue over its full term?

 

Gene Poole Co. issued $10,000 of bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. (Round your answer to nearest whole dollar amount.)

What is the book value of the bonds on December 31, 2022?

 

On January 31, 2021, B Corp. issued $600,000 face value, 12% bonds for $600,000 cash. The bonds are dated December 31, 2020, and mature on December 31, 2030. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should B report in its September 30, 2021, balance sheet?

 

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What is the stated annual rate of interest on the bonds?

 

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What is the effective annual rate of interest on the bonds?

 

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What is the interest expense on the bonds for the year ended December 31, 2022?

 

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What is the book value of the bonds as of December 31, 2022?

 

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What would be the total interest cost of the bonds over their full term?

 

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What is the stated annual rate of interest on the bonds?

 

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What is the effective annual rate of interest on the bonds?

 

Griggs Co. failed to amortize the premium on an outstanding five-year bond issue. What is the resulting effect on interest expense and the bond outstanding balance (book value), respectively?

 

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What is the interest expense on the bonds for the year 2022?

 

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What is the book value of the bonds as of December 31, 2022?

 

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What would be the total interest expense recognized for the bond issue over its full term?

 

When bonds are sold at a discount and the straight-line interest method is used, at each interest payment date, the interest expense:

 

Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%. How much cash interest does Auerbach pay on March 31, 2022?

 

Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%. Assuming that Auerbach issued the bonds for $255,369,000, what interest expense would it recognize in its 2021 income statement?

 

Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance at December 31, 2021, rounded up to the nearest thousand?

 

Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance after its first interest payment on March 31, 2022, rounded up to the nearest thousand?

 

During the year, Hamlet Inc. paid $20,000 to have bond certificates printed and engraved, paid $100,000 in legal fees, paid $10,000 to a CPA for registration information, and paid $200,000 to an underwriter as a commission. What is the amount of bond issue costs?

 

When issuing bonds or notes, Papaya Company incurs costs, such as legal and accounting fees, printing costs, and registration and underwriting fees. Papaya records these costs by combining them with any discount (or subtracting them from any premium) on the debt. Which of the following is an accurate statement regarding the company's policy?

 

When bonds and other debt are issued, costs such as legal costs, printing costs, and underwriting fees are referred to as debt issue costs. When debt issue costs are incurred:

 

Zero-coupon bonds:

 

On June 30, 2021, Moran Corporation issued $4 million of its 8% bonds for $3.5 million. The bonds were priced to yield 9.4%. The bonds are dated June 30, 2021. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the six months ended December 31, 2021?

 

On January 1, 2021, Solo Inc. issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2031. Solo paid $50,000 in bond issue costs. Solo uses straight-line amortization.

The amount of interest expense for 2021 is:

 

What is the carrying value of the bonds reported in the December 31, 2021, balance sheet?

 

Mango Corporation issues new long-term bond offerings several times a year. The company follows a policy of using straight-line amortization for all of those issues. Which of the following is an accurate statement regarding the company's policy?

 

When the interest payment dates are March 1 and September 1, and notes are issued on July 1, the amount of interest expense to be accrued at December 31 of the year of issue would:

 

When a long-term note is given in exchange for equipment, the amount considered as paid for the machine is:

 

When an equipment dealer receives a long-term note in exchange for equipment, and the stated rate of interest is indicative of the market rate of interest at the time of the transaction, the present value of the future cash flows received on the notes:

 

Warren Peace Bookstore issues a note with no stated interest rate in exchange for a building. In accounting for the transaction:

 

AMC issues a note with no stated interest rate in exchange for a machine. In accounting for the transaction:

 

In each succeeding payment on an installment note:

 

Green Industries purchased a machine from Cyan Corporation on October 1, 2021. In payment for the $144,000 purchase, Green issued a one-year installment note to be paid in equal monthly payments at the end of each month. The payments include interest at the rate of 12%. Monthly installment payments are closest to: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

 

Magenta Company purchased a machine from Pink Corporation on October 31, 2021. In payment for the $288,000 purchase, Magenta issued a one-year installment note to be paid in equal monthly payments of $25,588 at the end of each month. The payments include interest at the rate of 12%. The amount of interest expense that Magenta will report in its income statement for the year ended December 31, 2021, is:

 

On January 1, 2021, Red, Inc. borrowed cash by issuing a $500,000, 5-year note that specified 6% interest to be paid on December 31 of each year and the $500,000 to be paid at maturity. If the note had instead been an installment note to be paid in four equal payments at the end of each year beginning December 31, 2021, which of the following would be true?

 

In a ten-year installment note, the portion of the periodic installment payment in the third year that represents interest is:

 

Bonds payable should be reported as a long-term liability in the balance sheet of the issuing corporation at the:

 

The unamortized balance of discount on bonds payable is reported in the balance sheet as:

 

Eagle Company issued 10-year bonds at 96 during the current year. In the year-end financial statements, the discount should be:

 

Liberty Company issued 10-year bonds at 105 during the current year. In the year-end financial statements, the premium should be:

 

To evaluate the risk and quality of an individual bond issue, savvy investors rely heavily on:

 

Which of the following indicates the margin of safety provided to creditors?

 

Red Corp. has a rate of return on assets of 10% and a debt to equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of retiring debt on these ratios is a(n):

 

Yellow Corp. issues 10% bonds. Not including any indirect effects on earnings, the issuance will immediately decrease Yellow's:

 

The times interest earned ratio indicates:

 

The debt to equity ratio indicates:

 

The rate of return on assets indicates:

 

The rate of return on shareholders' equity indicates:

 

When bonds are retired prior to their maturity date:

 

On February 1, 2020, Pat Weaver Inc. (PWI) issued 10%, $1,000,000 bonds for $1,116,000. PWI retired all of these bonds on January 1, 2021, at 102. Unamortized bond premium on that date was $92,800. How much gain or loss should be recognized on this bond retirement?

 

MSG Corporation issued $100,000 of 3-year, 6% bonds outstanding on December 31, 2020 for $106,000. The bonds pay interest annually and MSG uses straight-line amortization. On May 1, 2021, $10,000 of the bonds were retired at 112. As a result of the retirement, MSG will report:

 

Nickel Inc. bought $100,000 of 3-year, 6% bonds as an investment on December 31, 2020 for $106,000. The investment receives interest annually and Nickel uses straight-line amortization. On May 1, 2021, the issuer retired $10,000 of the bonds at 110. As a result of the retirement, Nickel will report a:

 

On January 1, 2021, Tiny Tim Industries had outstanding $1,000,000 of 12% bonds with a book value of $966,130. The indenture specified a call price of $981,000. The bonds were issued previously at a price to yield 14% and interest payable semi-annually on July 1 and January 1. Tiny Tim called the bonds (retired them) on July 1, 2021. What is the amount of the loss on early extinguishment?

 

On March 1, 2021, E Corp. issued $1,000,000 of 10% nonconvertible bonds at 103, due on February 28, 2031. Each $1,000 bond was issued with 30 detachable stock warrants, each of which entitled the holder to purchase, for $50, one share of Evan's $25 par common stock. On March 1, 2021, the market price of each warrant was $4. By what amount should the bond issue proceeds increase shareholders' equity?

 

On June 30, 2021, K Co. had outstanding 9%, $10,000,000 face value bonds maturing on June 30, 2026. Interest is payable semiannually every June 30 and December 31. On June 30, 2021, after amortization was recorded for the period, the unamortized bond premium was $60,000. On that date, K acquired all its outstanding bonds on the open market at 98 and retired them. At June 30, 2021, what amount should K Co. recognize as gain on redemption of bonds before income taxes?

 

On January 1, 2016, F Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2026, but were callable at 101 any time after December 31, 2019. Interest was payable semiannually on July 1 and January 1. On July 1, 2021, F called all of the bonds and retired them. The bond premium was amortized on a straight-line basis. Before income taxes, F Corp.'s gain or loss in 2021 on this early extinguishment of debt was:

 

On June 30, 2021, Blair Industries had outstanding $80 million of 8% convertible bonds that mature on June 30, 2022. Interest is payable each year on June 30 and December 31. The bonds are convertible into 6 million shares of $10 par common stock. At June 30, 2021, the unamortized balance in the discount on bonds payable account was $4 million. On June 30, 2021, half the bonds were converted when Blair's common stock had a market price of $30 per share. When recording the conversion, Blair should credit paid-in capital-excess of par:

 

On March 31, 2021, Ashley, Inc.'s bondholders exchanged their convertible bonds for common stock. The book value of these bonds on Ashley's books was less than the fair value but greater than the par value of the common stock issued. If Ashley used the book value method of accounting for the conversion, which of the following statements correctly states an effect of this conversion?

 

On March 1, 2021, Doll Co. issued 10-year convertible bonds at 106. During 2024, the bonds were converted into common stock when the market price of Doll's common stock was 500 percent above its par value. On March 1, 2021, cash proceeds from the issuance of the convertible bonds should be reported as:

 

When outstanding bonds are converted into common stock, under either the book value method or the market value method, the same amount would be debited to:

 

On January 1, 2021, Bell Co. issued $10 million of 10-year convertible bonds at 105. On January 1, 2026, the bonds were converted into common stock with a market value of $11 million. Upon conversion, Bell would recognize:

 

On January 1, 2021, Ozark Minerals issued $10 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Ozark's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99. Upon issuance, Ozark should:

 

Patrick Rach International issued 5% bonds convertible into shares of the company's common stock. Rach applies U.S. GAAP. Upon issuance, Patrick Rach International should record:

 

Harrell's Barrels issued $100 million of 6% convertible bonds at 101. Each $1,000 bond is convertible into 45 shares of Harrell's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 98.

 

Harrell applies U.S. GAAP. Recording the issuance of the bonds would cause an increase in Harrell's:

 

On March 1, 2021, Doll Co. issued 10-year convertible bonds at 106. During 2024, the bonds were converted into common stock when the market price of Doll's common stock was 500 percent above its par value. Doll prepares its financial statements according to International Financial Reporting Standards (IFRS). On March 1, 2021, cash proceeds from the issuance of the convertible bonds should be reported as:

 

On January 1, 2021, Ozark Minerals issued $20 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Ozark's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99. Ozark applies International Financial Reporting Standards (IFRS). Upon issuance, Ozark should:

 

Patrick Rach International issued 5% bonds convertible into shares of the company's common stock. Rach applies International Financial Reporting Standards (IFRS). Upon issuance, Patrick Rach International should record:

 

Harrell's Barrels issued $100 million of 6% convertible bonds at 101. Each $1,000 bond is convertible into 45 shares of Harrell's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 98. Harrell applies International Financial Reporting Standards. Recording the issuance of the bonds would cause an increase in Harrell's:

 

When bonds include detachable warrants, what is the appropriate accounting for the cash proceeds from the bond issue?

 

On April 1, 2021, Austere Corporation issued $300,000 of 10% bonds at 105. Each $1,000 bond was sold with 25 detachable stock warrants, each permitting the investor to purchase one share of common stock for $17. On that date, the market value of the common stock was $15 per share and the market value of each warrant was $2. Austere should record what amount of the proceeds from the bond issue as an increase in liabilities?

 

Crawford Inc. has bonds outstanding during a year in which the general (risk-free) rate of interest has risen. Crawford elected the fair value option for the bonds upon issuance. What will the company report for the bonds in its income statement for the year?

 

Pierce Company issued 11% bonds, dated January 1, with a face amount of $800,000 on January 1, 2021. The bonds sold for $739,816 and mature in 2040 (20 years). For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Pierce determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2021, the fair value of the bonds was $730,000. The entire change in fair value was due to a change in the general (risk-free) rate of interest. Pierce's net income for the year will include:

 

Markel Inc. has bonds outstanding during a year in which the general (risk-free) rate of interest has not changed. Markel elected the fair value option for the bonds upon issuance. What will the company report for the bonds in its income statement for the year?

 

Rick's Pawn Shop issued 11% bonds, dated January 1, with a face amount of $400,000 on January 1, 2022. The bonds sold for $370,000. For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Rick's determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2022, the fair value of the bonds was $365,000, with $2,000 of the change due to a change in general interest rates. Rick's statement of comprehensive income will include:

 

On January 31, 2021, B Corp. issued $600,000 face value, 12% bonds for $600,000 cash. The bonds are dated December 31, 2020, and mature on December 31, 2030. Interest will be paid semiannually on June 30 and December 31. For how many months will there be interest expense for the year ended September, 30, 2021?

 

When the interest payment dates are March 1 and September 1, and the bonds are issued on July 1, the amount of interest expense reported in the December 31 income statement for the year of issue would be for:

 

Bonds are issued on June 1, 2021 that have interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, 2021, is for a period of:

 

When a company issues bonds between interest dates, the entry to record the issuance of the bonds will:

 

TMC issued $50 million of its 12% bonds on April 1, 2021 at 96, reflecting a market rate of interest of 14%, plus accrued interest. The bonds are dated January 1, 2021, and mature on December 31, 2040. Interest is payable semiannually on June 30 and December 31. What amount did TMC receive from the bond issuance? (Round your final answer to 2 decimal places.)

 

On September 1, 2021, Sam's Shoe Co. issued $350,000 of 8% bonds. The bonds pay interest semiannually on January 1 and July 1 of each year. The bonds were sold at the face amount. How much cash did Sam's receive upon sale of the bonds?

 

When a company issues bonds between interest dates the entry to record the issuance of the bonds will:

 

Brown Co. issued $100 million of its 11% bonds on April 1, 2021 at 90 ($90 million) plus accrued interest. The bonds are dated January 1, 2021 and have an effective interest rate of 12%. Interest is payable semiannually on June 30 and December 31. What amount did Brown receive from the bond issuance? (Round your final answer to 2 decimal places.)

 

On September 1, 2021, Blue Co., issued $1,600,000 of its 10% bonds at 98 plus accrued interest. The bonds are dated June 1, 2021 and have an effective interest rate of 11%. Interest is payable semiannually on June 1 and December 1. At the time of issuance, Blue would receive cash of:

 

On September 1, 2021, Red Co., issued $48 million of its 10% bonds at face value. The bonds are dated June 1, 2021, and mature on May 30, 2031. Interest is payable semiannually on June 1 and December 1. At the time of issuance, Red would receive cash proceeds that would include accrued interest of:

 

During 2021, Marquis Company was encountering financial difficulties and seemed likely to default on a $300,000, 10%, four-year note dated January 1, 2019, payable to Third Bank. Interest was last paid on December 31, 2020. On December 31, 2021, Third Bank accepted $250,000 in settlement of the note. Ignoring income taxes, what amount should Marquis report as a gain from the debt restructuring in its 2021 income statement?

 

The specific provisions of a bond issue are described in a document called a bond indenture

 

Periodic interest expense is the stated interest rate times the amount of debt outstanding during the period.

 

The outstanding balance (book value) of zero-coupon bonds increases by the periodic amount of interest recognized

 

Bonds will sell for a premium when the market rate of interest exceeds their stated rate.

 

The initial selling price of bonds represents the sum of all the future cash outflows required by the obligation.

 

Amortization of discount on bonds payable results in interest expense that is less than the actual cash outflow

 

Premium on bonds payable is a contra liability account

 

An implicit or imputed rate of interest must be used when long-term notes are issued at a stated rate of interest that is materially different from the market rate of interest.

 

The interest expense on an installment note decreases with each periodic payment

 

Paid-in capital is increased when bonds payable are issued with detachable stock purchase warrants.

 

Companies are not required to, but have the option to, value some or all of their financial assets and liabilities at fair value.

 

If a company chooses the option to report its bonds at fair value, then it reports changes in fair value in its income statement unless the changes are attributable to changes in credit risk.

 

Some liabilities are not contractual obligations and may not be payable in cash.

 

A customer advance produces a liability that is satisfied when the product or service is provided.

 

The concept of substance over form influences the classification of obligations expected to be refinanced.

 

Warranty expense is recorded along with the related liability in the reporting period in which the product under warranty is sold.

 

For a loss contingency to be accrued, the claim must have been made before the accounting period ended.

 

A disclosure note is required for all material loss contingencies for which the probability of loss is reasonably possible.

 

Under IFRS, the term "probable" indicates a threshold of probability that is substantially more than a 50 percent chance of occurrence.

 

Under IFRS, if it is probable that a contingent liability will result in a future payment but there is a range of equally likely amounts that will be paid, the midpoint of the range should be accrued as a loss.

 

Unlike the Social Security tax there is no maximum wage base for the Medicare portion of the FICA tax.

 

State and Federal Unemployment Taxes (SUTA and FUTA) must be withheld from employees' wages.

 

The most common type of liability is:

 

Which of the following is not a characteristic of a liability?

 

Which of the following is the best definition of a current liability?

 

Current liabilities normally are recorded at their:

 

The key accounting considerations relating to accounts payable are:

 

When cash is received from customers in the form of a refundable deposit, the cash account is increased with a corresponding increase in:

 

The rate of interest printed on the face of a note payable is called the:

 

On October 31, 2013, Simeon Builders borrowed $16 million cash and issued a 7-month, noninterest-bearing note. The loan was made by Star Finance Co. The stated discount rate is 8%. Simeon's effective interest rate on this loan is:

 

On September 1, 2013, Hiker Shoes issued a $100,000, 8-month, noninterest-bearing note. The loan was made by Second Commercial Bank where the stated discount rate is 9%. Hiker's effective interest rate on this loan (rounded) is:

 

On June 1, 2013, Dirty Harry Co. borrowed cash by issuing a 6-month noninterest-bearing note with a maturity value of $500,000 and a discount rate of 6%. Assuming straight-line amortization of the discount, what is the carrying value of the note as of September 30, 2013?

 

At times, businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided. These customer advances represent:

 

M Corp. has an employee benefit plan for compensated absences that gives each employee 15 paid vacation days. Vacation days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days. At December 31, 2013, M's unadjusted balance of liability for compensated absences was $30,000. M estimated that there were 200 total vacation days available at December 31, 2013. M's employees earn an average of $150 per day. In its December 31, 2013, balance sheet, what amount of liability for compensated absences is M required to report?

 

Lake Co. receives nonrefundable advance payments with special orders for containers constructed to customer specifications. Related information for 2013 is as follows ($ in millions):

 

What amount should Lake report as a current liability for advances from customers in its Dec. 31, 2013, balance sheet?

 

All of the following but one represent collections for third parties. Which one of the following is not a collection for a third party?

 

B Corp. has an employee benefit plan for compensated absences that gives each employee 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 2013, B's unadjusted balance of liability for compensated absences was $42,000. B estimated that there were 300 total vacation days and 150 sick days available at December 31, 2013. B's employees earn an average of $200 per day. In its December 31, 2013, balance sheet, what amount of liability for compensated absences is B required to report?

 

Revenue associated with gift card sales should be recognized:

 

Peterson Photoshop sold $1,000 in gift cards on a special promotion on October 15, 2013, and sold $1,500 in gift cards on another special promotion on November 15, 2013. Of the cards sold in October, $100 were redeemed in October, $250 in November, and $300 in December. Of the cards sold in November, $150 were redeemed in November and $350 were redeemed in December. Peterson views the probability of redemption of a gift card as remote if the card has not been redeemed within two months. At 12/31/2013, Peterson would show an unearned revenue account for the gift cards with a balance of:

 

Clark's Chemical Company received customer deposits on returnable containers in the amount of $100,000 during 2013. Twelve percent of the containers were not returned. The deposits are based on the container cost marked up 20%. What is cost of goods sold relative to this forfeiture?

 

In May of 2013, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2013, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The additional penalties were estimated to be $770,000 but could be as high as $1,170,000. After the year-end, but before the 2013 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2013, balance sheet of:

 

Slotnick Chemical received customer deposits on returnable containers in the amount of $300,000 during 2013. Fifteen percent of the containers were not returned. The deposits are based on the container cost marked up 20%. How much profit did Slotnick realize on the forfeited deposits?

 

Which of the following is not a current liability?

 

Short-term obligations can be reported as long-term liabilities if:

 

Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet?

 

On December 31, 2013, L Inc. had a $1,500,000 note payable outstanding, due July 31, 2014. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23, 2014. In February 2014, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2014. On March 13, 2014, L issued its 2013 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2013, balance sheet?

 

Branch Company, a building materials supplier, has $18,000,000 of notes payable due April 12, 2014. At December 31, 2013, Branch signed an agreement with First Bank to borrow up to $18,000,000 to refinance the notes on a long-term basis. The agreement specified that borrowings would not exceed 75% of the value of the collateral that Branch provided. At the date of issue of the December 31, 2013, financial statements, the value of Branch's collateral was $20,000,000. On its December 31, 2013, balance sheet, Branch should classify the notes as follows:

 

Financial statement note disclosure is required for material potential losses when the loss is at least reasonably possible:

 

Gain contingencies usually are recognized in a company's income statement when:

 

A company should accrue a loss contingency only if the likelihood that a liability has been incurred is:

 

Which of the following is a contingency that should be accrued?

 

Paul Company issues a product recall due to an apparently preexisting and material defect discovered after the end of its fiscal year. Financial statements have not yet been issued. The action required of Paul Company for this reasonably estimable contingency for the year just ended is:

 

Accounting for costs of incentive programs for customer purchases:

 

Providing a monetary rebate program for purchasing a product:

 

The main difference between accounting for rebate and cash discount coupons is:

 

Which of the following entail essentially the same accounting treatment?

 

Orange Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's asset in that country. If expropriation is reasonably possible, a loss contingency should be:

 

Red Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If expropriation is probable, a loss contingency should be:

 

When a material gain contingency is probable and the amount of gain can be reasonably estimated, the gain should be:

 

Which of the following is a contingency that would most likely require accrual?

 

The cost of customer premium offers should be charged to expense:

 

Accounting for costs of incentive programs for frequent customer purchases involves:

 

A customer of RoughEdge Sharpeners alleges that RoughEdge's new razor sharpener had a defect that resulted in serious injury to the customer. RoughEdge believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under U.S. GAAP, RoughEdge should accrue a liability in the amount of:

 

A customer of Razor Sharpeners alleges that Razor's new razor sharpener had a defect that resulted in serious injury to the customer. Razor believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under IFRS, Razor should accrue a liability in the amount of:

 

Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs:

 

At the beginning of 2013, Angel Corporation began offering a two-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2013 were $180 million. Fifteen percent of the units sold were returned in 2013 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel's 2013 income statement is:

 

During 2013, Deluxe Leather Goods sold 800,000 reversible belts under a new sales promotional program. Each belt carried one coupon, which entitles the customer to a $5.00 cash rebate. Deluxe estimates that 70% of the coupons will be redeemed, even though only 350,000 coupons had been processed during 2013. At December 31, 2013, Deluxe should report a liability for unredeemed coupons of:

 

In 2013, Holyoak Inc. offers a $20 cash rebate coupon to customers who purchased one of its new line of products. Holyoak sold 10,000 of these products during the year. By year-end of 2013, 7,600 of the rebates had been claimed, and 7,100 had been paid. Holyoak's historical experience with such rebates indicates that 85% of customers claim the rebates.

What is the expense that Holyoak should report for its promotional rebates in its 2013 income statement?

 

What is the rebate promotion liability that Holyoak should report in its December 31, 2013, balance sheet?

 

Panther Co. had a warranty liability of $350,000 at the beginning of 2013 and $310,000 at the end of 2013. Warranty expense is based on 4% of sales, which were $50 million for the year. What were the warranty expenditures for 2013?

 

Carpenter Inc. had a balance of $80,000 in its warranty liability account as of December 31, 2012. In 2013, Carpenter's warranty expenditures were $445,000. Its warranty expense is calculated as 1% of sales. Sales in 2013 were $40 million. What was the balance in the warranty liability account as of December 31, 2013?

 

Barbara Muller Services (BMS) pays its employees monthly. The payroll information listed below is for January 2013, the first month of BMS's fiscal year.

 

The journal entry to record payroll for the January 2013 pay period will include a debit to payroll tax expense of:

 

Jane's Donut Co. borrowed $195,000 on January 1, 2013, and signed a two-year note bearing interest at 14%. Interest is payable in full at maturity on January 1, 2015. In connection with this note, Jane's should report interest expense at December 31, 2013, in the amount of:

 

On September 1, 2013, Hiker Shoes issued a $112,000, 6-month, noninterest-bearing note. The loan was made by Second Commercial Bank where the stated discount rate is 8%. Hiker's effective interest rate on this loan (rounded) is (Do not round intermediate calculations. Round your final answer to two decimal places, e.g., .1234 as 12.34%.):

 

M Corp. has an employee benefit plan for compensated absences that gives each employee 15 paid vacation days. Vacation days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days. At December 31, 2013, M's unadjusted balance of liability for compensated absences was $25,200. M estimated that there were 200 total vacation days available at December 31, 2013. M's employees earn an average of $126 per day. In its December 31, 2013, balance sheet, what amount of liability for compensated absences is M required to report?

 

B Corp. has an employee benefit plan for compensated absences that gives each employee 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 2013, B's unadjusted balance of liability for compensated absences was $36,000. B estimated that there were 300 total vacation days and 150 sick days available at December 31, 2013. B's employees earn an average of $194 per day. In its December 31, 2013, balance sheet, what amount of liability for compensated absences is B required to report?

 

Peterson Photoshop sold $1,100 in gift cards on a special promotion on October 15, 2013, and sold $1,650 in gift cards on another special promotion on November 15, 2013. Of the cards sold in October, $110 were redeemed in October, $275 in November, and $330 in December. Of the cards sold in November, $165 were redeemed in November and $385 were redeemed in December. Peterson views the probability of redemption of a gift card as remote if the card has not been redeemed within two months. At 12/31/2013, Peterson would show an unearned revenue account for the gift cards with a balance of:

 

On December 31, 2013, L Inc. had a $2,400,000 note payable outstanding, due July 31, 2014. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $590,000 of the note on January 23, 2014. In February 2014, L completed a $3,900,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2014. On March 13, 2014, L issued its 2013 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2013, balance sheet?

 

Funzy Cereal includes one coupon in each package of Wheatos that it sells and offers a toy car in exchange for $1.10 and 2 coupons. The cars cost Funzy $1.60 each. Experience indicates that 35% of the coupons eventually will be redeemed. During the last month of 2013, the first month of the offer, Funzy sold 13.50 million boxes of Wheatos and 2.10 million of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 2013, income statement?

 

Panther Co. had a warranty liability of $356,000 at the beginning of 2013 and $301,000 at the end of 2013. Warranty expense is based on 4% of sales, which were $57 million for the year. What were the warranty expenditures for 2013?

 

Life.com issued $7 million of commercial paper on April 1 on a nine-month note. Interest was discounted at issuance at a 8% discount rate.

Complete the below table to calculate the effective interest rate on the commercial paper. (Enter your answers in whole dollars.)

 

In Lizzie Shoes' experience, gift cards that have not been redeemed within 12 months are not likely to be redeemed. Lizzie Shoes sold gift cards for $20,550 during August of 2013. $4,200 of cards were redeemed in September of 2013, $3,740 in October, $3,270 in November, and $2,090 in December of 2013. In 2014 an additional $1,590 of cards were redeemed in January and $800 in February.

How much gift card revenue associated with the August 2013 gift card sales would Lizzie get to recognize in 2013 and 2014?

 

Right Medical introduced a new implant that carries a five-year warranty against manufacturer's defects. Based on industry experience with similar product introductions, warranty costs are expected to approximate 1% of sales. Sales were $19 million and actual warranty expenditures were $39,750 for the first year of selling the product. What amount should Right report as a liability at the end of the year? (Enter your answers in whole dollars.)

 

Consultants notified management of Goo Goo Baby Products that a crib toy poses a potential health hazard. Counsel indicated that a product recall is probable and is estimated to cost the company $4.8 million.

How will this affect the company's income statement and balance sheet this period? (Enter your answers in millions. Round your answers to 1 decimal place.)

 

Revenue is recognized upon sale of gift cards, rather than being deferred.

 

Under the equity method of accounting for a stock investment, cash dividends received are considered a reduction of the investee's net assets.

 

Amounts withheld from employees in connection with payroll often represent liabilities to be remitted to third parties.

 

The equity method of accounting for investments in voting common stock is appropriate when:

 

All investment securities are initially recorded at:

 

When an investor accounts for an investment in common stock at fair value through net income, cash dividends are classified by the investor as:

 

If the fair value of equity securities is not determinable and the equity method is not appropriate, the securities should be reported at:

 

When the equity method of accounting for investments is used by the investor, the amortization of additional depreciation due to differences between book values and fair values of investee assets on the date of acquisition:

 

When the investor's level of influence changes, it may be necessary to change to the equity method from another method. When the level of ownership rises from less than 20% to a range of 20% to 50%, the equity method typically would become appropriate and the investment account balance should be:

 

Which of the following is not a liability?

 

M Corp. has an employee benefit plan for compensated absences that gives each employee 15 paid vacation days. Vacation days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days. At December 31, 2018, M's unadjusted balance of liability for compensated absences was $30,000. M estimated that there were 200 total vacation days available at December 31, 2018. M's employees earn an average of $150 per day. In its December 31, 2018, balance sheet, what amount of liability for compensated absences is M required to report?

 

Which of the following is not a characteristic of a liability?

 

decreased by $125,000. What was interest expense for the year?

 

All of the following but one represent collections for third parties. Which one of the following is not a collection for a third party?

 

Universal Travel Inc. borrowed $500,000 on November 1, 2018, and signed a 12-month note bearing interest at 6%. Interest is payable in full at maturity on October 31, 2019. In connection with this note, Universal Travel Inc. should report interest payable at December 31, 2018, in the amount of:

 

On January 1, 2021, Laramie Inc. acquired land for $8.6 million. Laramie paid $2.4 in cash and signed a 6% note requiring the company to pay the remaining $6.2 million plus interest on December 31, 2022. An interest rate of 6% properly reflects the time value of money for this type of loan agreement. For what amount should Laramie record the purchase of land?

 

On March 1, 2021, Shipley Resources entered into an agreement with the state of Alaska to obtain the rights to operate a mineral mine for $6 million. The mine is expected to produce 115,000 tons of mineral. As part of the agreement, Shipley agrees to restore the land to its original condition after mining operations are completed in approximately five years. Management has provided the following possible outflows for the restoration costs that will occur five years from now: (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.)

Cash Outflow Probability

$360,000 20%

475,000 30%

590,000 50%

Shipley's credit-adjusted risk-free interest rate is 9%. During 2021, Shipley extracted 20,700 tons of ore from the mine. How much accretion expense will the company record in its income statement for the 2021 fiscal year?

 

Wolf Computer exchanged a machine with a book value of $40,000 and a fair value of $45,000 for a patent. In addition, Wolf paid $6,000 as part of the exchange. Wolf should recognize:

 

Under International Financial Reporting Standards, research expenditures are

 

On June 1, 2020, the Crocus Company began construction of a new manufacturing plant. The plant was completed on October 31, 2021. Expenditures on the project were as follows ($ in millions):

July 1-66, October 1-34, February 1-42, April 1-27, September 1-26, October 1-12

On July 1, 2020, Crocus obtained a $82 million construction loan with a 7% interest rate. The loan was outstanding through the end of October, 2021. The company's only other interest-bearing debt was a long-term note for $100 million with an interest rate of 9%. This note was outstanding during all of 2020 and 2021. The company's fiscal year-end is December 31.What is the amount of interest that Crocus should capitalize in 2021, using the specific interest method?

 

When one company acquires another company, any acquired "developed technology" is recorded as:

 

On June 17, the Lattern Company issued 120,000 shares of its $0.10 par value common stock in exchange for land. On the date of the transaction, the fair value of the common stock, evidenced by its market price, was $10 per share. The journal entry to record this transaction includes

 

The balance sheets of Davidson Corporation reported net fixed assets of $332,000 at the end of 2021. The fixed-asset turnover ratio for 2021 was 4.0, and sales for the year totaled $1,540,000. Net fixed assets at the end of 2020 were:

 

Montana Mining Co. (MMC) paid $200 million for the right to explore and extract rare metals from land owned by the state of Montana. To obtain the rights, MMC agreed to restore the land to a suitable condition for other uses after its exploration and extraction activities. MMC incurred exploration and development costs of $60 million on the project.MMC has a credit-adjusted risk free interest rate is 9%. It estimates the possible cash flows for restoring the land, three years after its extraction activities begin, as follows: (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.)

 

The asset retirement obligation (rounded) that should be reported on MMC's balance sheet one year after the extraction activities begin is

 

Suppose a company spends $200,000 in the current year to research and develop a navigation device for hikers. By the end of the year, the company estimates that the new navigation device has a 70% chance of generating $500,000 in revenues from sales to customers over the next four years. For what amount would the company report research and development expense in the current year?

 

Asset retirement obligations:

 

A company has the following expenditures during the year.

Advertising$600,000

Employee training 75,000

Customer outreach and consultation 525,000

The company believes that these efforts have increased the fair value of the entire company by $150,000. How much goodwill can the company recognize at the end of the year associated with these expenditures?

 

A company purchased a 3-acre tract of land for a building site for $540,000. The company demolished the old building at a cost of $31,000, but was able to sell scrap from the building for $3,400. The cost of title transfer was $1,850 and attorney fees for reviewing the contract was $880. Property taxes paid were $12,500, of which $1,200 covered the period after the purchase date. The capitalized cost of the land is:

 

The capitalized cost of equipment excludes:

 

On January 1, 2021, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2022. Expenditures on the project were as follows:

January 1, 2021 $280,000

September 1, 2021 $360,000

December 31, 2021 $360,000

March 31, 2022 $360,000

September 30, 2022 $280,000

Kendall borrowed $770,000 on a construction loan at 10% interest on January 1, 2021. This loan was outstanding throughout the construction period. The company had $4,600,000 in 10% bonds payable outstanding in 2021 and 2022.Interest (using the specific interest method) capitalized for 2022 was:

 

On September 30, 2021, Corso Steel acquired a patent from Thermo Steel. The agreement specified that Corso will pay Thermo $1,225,000 immediately and then another $1,225,000 on September 30, 2023. An interest rate of 9% reflects the time value of money for this type of loan agreement. (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.) What amount of interest expense, if any, would Corso record on December 31, 2022, the company's fiscal year end?

 

Braxwell Corporation acquired the following assets associated with a manufacturing facility for a lump-sum price of $9,700,000. According to independent appraisals, the fair values were $3,525,000, $1,175,000, $5,875,000, and $1,175,000 for the building, patent, land, and equipment, respectively. The initial value of the patent would be:

 

During 2021, the Longhorn Oil Company incurred $5,100,000 in exploration costs for each of 20 oil wells drilled in 2021 in west Texas. Of the 20 wells drilled, 14 were dry holes. Longhorn uses the successful efforts method of accounting. Assuming that none of the oil found is depleted in 2021, what oil exploration expense would Longhorn charge for this activity in its 2021 income statement?

 

On September 30, 2021, Corso Steel acquired a patent from Thermo Steel. The agreement specified that Corso will pay Thermo $1,500,000 immediately and then another $1,500,000 on September 30, 2023. An interest rate of 8% reflects the time value of money for this type of loan agreement. (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.) What amount of interest expense, if any, would Corso record on December 31, 2021, the company's fiscal year end? (Round your answer to nearest whole dollar amount.)

 

The initial cost of land would include all of the following except:

 

Productive assets that are physically consumed in operations are:

 

Research and development costs should be:

 

A company incurred the following costs associated with the purchase of a piece of land that it will use to re-build an office building:

Purchase price of the land$400,000

Sale of salvaged parts already on land$20,000

Demolition of the old building$30,000

Ground-breaking ceremony (food and supplies)$1,500

Land preparation and leveling$7,500

What amount should be recorded for the purchase of the land?

 

Goodwill is:

 

On July 1, 2021, Markwell Company acquired equipment. Markwell paid $187,500 in cash on July 1, 2021, and signed a $750,000 noninterest-bearing note for the remaining balance which is due on July 1, 2022. An interest rate of 7% reflects the time value of money for this type of loan agreement. (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.)Which of the following should be included in the journal entry on July 1, 2021?

 

Which of the following best justifies the FASB's approach to reporting research and development costs?

 

A company purchased a piece of equipment by paying $15,000 cash. A shipping cost of $900 to get the equipment to its factory was also incurred. The fair value of the equipment was $9,000 at the time of the purchase. For what amount should the company record the equipment?

 

Savings Mart is a national retail chain. To entice the company to open a mega store in its jurisdiction, the city of Populationville donated a 20-acre tract of land to be used for construction. The land was originally purchased by the city for $270,000 three years ago. The appraisal value at the time of the donation was $320,000. For what amount should Savings Mart record the donated land?

 

A company purchased land, a building, and equipment for one price of $1,800,000. The estimated fair values of the land, building, and equipment are $225,000, $1,575,000, and $450,000, respectively. At what amount would the company record the land?

 

Scenario 1:In the current year, a toy manufacturer spends $900,000 on R&D costs to develop a new toy. By the end of the year, the design for the new toy has been patented. Legal and filing fees associated with the patent are $50,000. The patent has a fair value $1,500,000 and an estimated useful life of 10 years.

 

Under which scenario would the company report greater research and development expense in the current year?

 

Cebrex Software began a new development project in 2020. The project reached technological feasibility on June 30, 2021, and was available for release to customers at the beginning of 2022. Development costs incurred prior to June 30, 2021, were $3,460,000 and costs incurred from June 30 to the product release date were $1,660,000. The economic life of the software is estimated at four years. For what amount will software be capitalized in 2021?

 

Liddy Corp. began constructing a new warehouse for its operations during the current year. In the year Liddy incurred interest of $30,000 on a working capital loan, and interest on a construction loan for the warehouse of $80,000. Interest computed on the average accumulated expenditures for the warehouse construction was $40,000. What amount of interest should Liddy expense for the year?

 

A company incurred the following costs related to research and development (R&D) for the current year:

R&D salaries$136,000

R&D supplies consumed 256,000

Equipment used in R&D projects 616,000

Payment for services to others for R&D projects 176,000

Purchase of in-process R&D in a business acquisition 96,000

The equipment will be used in other projects. Depreciation in the current year is $86,000. For what amount should the company report research and development expense?

 

A company acquired an office building, land, and equipment in a single basket purchase. The fair values were $1,440,000, $1,920,000, and $1,440,000 for the building, land, and equipment, respectively. The company recorded the building for $1,410,000. What was the total purchase cost for all three assets?

 

A company incurred the following costs associated with the purchase of a piece of land that it will use to re-build an office building:

Purchase price of the land$406,000

Sale of salvaged parts already on the land$26,000

Demolition of the old building$36,000

Ground-breaking ceremony (food and supplies)$1,800

Land preparation and leveling$7,800

What amount should be recorded for the purchase of the land?

 

Axcel Software began a new development project in 2020. The project reached technological feasibility on June 30, 2021, and was available for release to customers at the beginning of 2022. Development costs incurred prior to June 30, 2021, were $3,310,000, and costs incurred from June 30 to the product release date were $1,510,000. The 2022 revenues from the sale of the new software were $4,599,000, and the company anticipates additional revenues of $5,621,000. The economic life of the software is estimated at four years. Amortization of the software development costs for the year 2022 would be:

 

On January 1, 20X1, the Holloran Corporation purchased a machine at a cost of $55,000. The machine was expected to have a service life of 10 years and a $5,000 residual value. The straight-line depreciation method was used. In 20X3, the company switched to the double-declining-balance depreciation method. Depreciation for 20X3 should be:

 

Cutter Enterprises purchased equipment for $48,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $7,200. Using the sum-of-the-years'-digits method, depreciation for 2021 and book value at December 31, 2021, would be:

 

A company made an ordinary repair to a delivery truck at a cost of $1,500. The company's accountant debited the asset account, Equipment. Was this treatment an error, and if so, what will be the effect on the financial statements?

 

Granite Enterprises acquired a patent from Southern Research Corporation on January 1, 2021, for $4 million. The patent will be used for five years, even though its legal life is 20 years. Rocky Corporation has made a commitment to purchase the patent from Granite for $200,000 at the end of five years. Compute Granite's patent amortization for 2021, assuming the straight-line method is used.

 

A machine is purchased on September 30, 20X1, for $60,000. Useful life is estimated at four years and no residual value is anticipated. The straight-line depreciation method is used. The company's fiscal year ends on December 31. Depreciation expense for 20X1 should be:

 

A delivery van that cost $40,000 has an expected service life of eight years and a residual value of $4,000. Depreciation expense for the second year of the asset's life using the straight-line method is:

 

Russell Enterprises acquired a franchise from Michael Incorporated for $318,000. The franchise agreement is for a period of six years. Russell uses straight-line to amortize all intangible assets. What would be the reported book value of the franchise two years after the purchase?

 

Cutter Enterprises purchased equipment for $90,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $5,400. Using the double-declining-balance method, depreciation for 2022 would be:

 

In 2018, Martin Corp. acquired Glynco and recorded goodwill of $105 million. Martin considers Glynco a separate reporting unit. By the end of 2021, the net assets (including goodwill) of Glynco are $325 million and its estimated fair value is $268 million. The amount of the impairment loss that Martin would record for goodwill at the end of 2021 is:

 

The cost of an engine tune-up is an example of which of the following expenditures taking place after acquisition of the asset:

 

Felix Mining acquired a copper mine at a total cost of $3,000,000. The mine is expected to produce 6,000,000 tons of copper over its five-year useful life and have no residual value. During the first year of operations, 750,000 tons of copper was extracted. Depletion for the first year should be:

 

Robertson Inc. prepares its financial statements according to International Financial Reporting Standards (IFRS). At the end of its 2021 fiscal year, the company chooses to revalue its equipment. The equipment cost $565,000, had accumulated depreciation of $248,000 at the end of the year after recording annual depreciation, and had a fair value of $338,000. After the revaluation, the accumulated depreciation account will have a balance of

 

Micropolis Technology began a new development project in 2020. The project reached technological feasibility on September 1, 2021, and was available for release to customers at the beginning of 2022. Development costs incurred prior to September 1, 2021, were $4,200,000, and costs incurred from June 30 to the product release date were $1,800,000. The 2022 revenues from the sale of the new software were $3,000,000, and the company anticipates additional revenues of $12,000,000. The economic life of the software is estimated at three years. Amortization of the software development costs for the year 2022 would be:

 

In testing for recoverability of property, plant, and equipment, an impairment loss is required if the:

 

A delivery van that cost $40,000 has an expected service life of 180,000 miles and a residual value of $4,000. The van was driven 24,000 miles in the first year and 36,000 miles in the second year. Accumulated depreciation by the end of the second year of the asset's life using the units-of-production method is:

 

Jasper Inc. prepares its financial statements according to International Financial Reporting Standards. At the end of its fiscal year, the company chooses to revalue its equipment. The equipment cost $810,000, had accumulated depreciation of $360,000 at the end of the year after recording annual depreciation, and had a fair value of $495,000. After the revaluation, the equipment account will have a balance of:

 

After the end of the 2022 fiscal year but before financial statements were issued, Palladin Company learned that an arbitrator had made a $15 million judgment in a litigation case against it. The claim had been made in 2021 for alleged defects of products sold in 2020. Prior to learning of the judgment, Palladin had not accrued any litigation loss, and does not plan to appeal. For the 2022 fiscal year, Palladin should:

 

A company should accrue a loss contingency only if the likelihood that a liability has been incurred is:

 

Accounting for incentive programs for customer purchases:

 

Peterson Photoshop sold $2,800 in gift cards on a special promotion on October 15, 2021, and sold $4,200 in gift cards on another special promotion on November 15, 2021. Of the cards sold in October, $280 were redeemed in October, $700 in November, and $840 in December. Of the gift cards sold in November, $420 were redeemed in November and $980 were redeemed in December. Peterson views the probability of redemption of a gift card as remote if the card has not been redeemed within two months. At 12/31/2021, Peterson would show a deferred revenue account for the gift cards with a balance of:

 

Red Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If expropriation is probable, a loss contingency should be:

 

In 2021, Holyoak Inc. offers a coupon for $20 off qualifying purchases of its new line of products. Holyoak sold 10,000 of these products during the year. By year-end of 2021, 7,100 coupons had been redeemed and the $20 reduction of purchase price provided to customers. Holyoak's historical experience with such coupons indicates that 85% of customers use the coupon. Holyoak recognizes coupon expense in the period coupons are issued. What is the coupon promotion liability that Holyoak should report in its December 31, 2021, balance sheet?

 

Which of the following is not true about deferred revenue?

 

On January 1, 2016, Yukon Company agreed to grant its employees two weeks vacation each year, with the provision that vacations earned in a particular year could be taken the following year. For the year ended December 31, 2016, all twelve of Yukon's employees earned $1,200 per week each. Eight of these vacation weeks were not taken during 2016. In Yukon's 2016 income statement, how much expense should be reported for compensated absences?

 

A quality-assurance warranty typically results in the seller:

 

On November 1, Shearer Shoes borrowed $18 million cash and issued a 6-month, "noninterest-bearing note." The loan was made by Third Commercial Bank whose stated "discount rate" is 9%. Shearer's effective interest rate on this loan is:

 

General Product Inc. distributed 240 million coupons in 2021. The coupons are redeemable for 25 cents each. General anticipates that 70% of the coupons will be redeemed. The coupons expire on December 31, 2022. There were 42 million coupons redeemed in 2021 and 26 million redeemed in 2022. General recognizes coupon expense in the period coupons are issued.What was General's coupon liability as of December 31, 2021?

 

All else equal, a large increase in deferred revenue in the current period would be expected to produce what effect on revenue in a future period?

 

As part of a promotion campaign, Funzy Cereal includes one coupon in each issue of various national magazines and offers a toy car in exchange for $1.10 and four coupons. The cars cost Funzy $1.60 each. Experience indicates that 40% of the coupons eventually will be redeemed. During the last month of 2021, the first month of the offer, 12.50 million coupons were distributed and 3.00 million of the coupons were redeemed. Funzy recognizes coupon promotion expense in the period coupons are issued. What amount should Funzy report as coupon promotion expense on its December 31, 2021, income statement?

 

An extended warranty typically results in the seller:

 

When a deposit on returnable containers is forfeited, the firm holding the deposit will experience:

 

Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet?

 

In its financial statements, an enterprise should accrue a liability for a loss contingency involving a possible cash payment if certain conditions exist. Each of the following is a condition for accrual except:

 

Clark's Chemical Company received refundable deposits on returnable containers in the amount of $100,000 during 2021. Twelve percent of the containers were not returned. The deposits are based on the container cost marked up 20%. What is cost of goods sold relative to this forfeiture?

 

Financial statement note disclosure is required for material potential losses when the loss is at least reasonably possible:

 

Paul Company issues a product recall due to an apparently preexisting and material defect discovered after the end of its fiscal year. Financial statements have not yet been issued. The action required of Paul Company for this reasonably estimable contingency for the year just ended is:

 

When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes:

 

In May of 2021, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2021, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The additional penalties were estimated to be $770,000 but could be as high as $1,170,000. After the year-end, but before the 2021 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2021, balance sheet of:

 

During 2021, Deluxe Leather Goods issued 757,000 coupons which entitles the customer to a $5.70 cash refund when the coupon is submitted at the time of any future purchase. Deluxe estimates that 72% of the coupons will be redeemed. 383,000 coupons had been processed during 2021. Deluxe recognizes coupon expense in the period coupons are issued. At December 31, 2021, Deluxe should report a liability for unredeemed coupons of:

 

Blue Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If the likelihood of expropriation is remote, a loss contingency should be:

 

The essential characteristics of a liability do not include:

 

Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs:

 

On November 1, Epic Distributors borrowed $24 million cash to fund an expansion of its facilities. The loan was made by WW BancCorp under a short-term line of credit. Epic issued a 9-month, 12% promissory note. Interest was payable at maturity. Epic's fiscal period is the calendar year. In Epic's adjusting entry for the note on December 31, interest expense will be:

 

Clark's Chemical Company received refundable deposits on returnable containers in the amount of $109,000 during 2021. Eleven percent of the containers were not returned. The deposits are based on the container cost marked up 20%. What is cost of goods sold relative to this forfeiture?

 

Reunion BBQ has $4,000,000 of notes payable due on March 11, 2017, which Reunion intends to refinance. On January 5, 2017, Reunion signed a line of credit agreement to borrow up to $3,500,000 cash on a two-year renewable basis. On the December 31, 2016, balance sheet, Reunion should classify:

 

Which of the following would most likely require initial recording as deferred revenue?

 

A contingent loss should be reported in a disclosure note to the financial statements rather than being accrued if:

 

On January 1, 2021, an investor paid $292,000 for bonds with a face amount of $312,000. The contract rate of interest is 10% while the current market rate of interest is 13%. Using the effective interest method, how much interest income is recognized by the investor in 2022 (assume annual interest payments and amortization)? (Round your answer to the nearest dollar amount.)

 

Nickel Inc. bought $100,000 of 3-year, 6% bonds as an investment on December 31, 2020 for $106,000. The investment receives interest annually and Nickel uses straight-line amortization. On May 1, 2021, the issuer retired $10,000 of the bonds at 110. As a result of the retirement, Nickel will report a:

 

On January 1, 2021, Morton Sales Co. issued zero-coupon bonds with a face value of $5.6 million for cash. The bonds mature in 6 years and were issued at a price of $3,528,952.

Required: What total interest expense will Morton Sales Co. report over the 6 year life of these bonds?

 

During 2021 Belair Company was encountering financial difficulties and seemed likely to default on a $600,000, 10%, four-year note dated January 1, 2019, payable to Second Bank. Interest was last paid on December 31, 2020. On December 31, 2021, Second Bank accepted $500,000 in settlement of the note. Ignoring income taxes, what amount should Belair report as a gain from the debt restructuring in its 2021 income statement?

 

On January 31, 2021, B Corp. issued $600,000 face value, 12% bonds for $600,000 cash. The bonds are dated December 31, 2020, and mature on December 31, 2030. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should B report in its September 30, 2021, balance sheet?

 

Magenta Company purchased a machine from Pink Corporation on October 31, 2021. In payment for the $318,000 purchase, Magenta issued a one-year installment note to be paid in equal monthly payments of $28,254 at the end of each month. The payments include interest at the rate of 12%. The amount of interest expense that Magenta will report in its income statement for the year ended December 31, 2021, is:

 

On September 1, 2021, Blue Co., issued $1,450,000 of its 11% bonds at 98 plus accrued interest. The bonds are dated June 1, 2021 and have an effective interest rate of 12%. Interest is payable semiannually on June 1 and December 1. At the time of issuance, Blue would receive cash of:

 

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

Payment,Cash, Effective Int, Dec in Balance, Outstanding Balance

8,640,967

1, 300k, 345,639, 45,639, 8,686,606

2 300k 347,464 47,464 8,734,070

3 300k 349,363 49,363 8,783,433

4 300k

What is the interest expense on the bonds for the year ended December 31, 2022?

 

Auerbach Inc. issued 8% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $475 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 10%. How much cash interest does Auerbach pay on March 31, 2022? (Round your answer to 2 decimal places.)

 

Cramer Company sold five-year, 8% bonds on October 1, 2021. The face amount of the bonds was $100,000, while the issue price was $102,000. Interest is payable on April 1 of each year. The fiscal year of Cramer Company ends on December 31. How much interest expense will Cramer Company report in its December 31, 2021, income statement (assume straight-line amortization)?

 

On June 30, 2021, L. N. Bean issued $10 million of its 8% bonds for $9 million. The bonds were priced to yield 10%. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, how much bond interest expense should the company report for the 6 months ended December 31, 2021?

 

On January 1, 2021, Morton Sales Co. issued zero-coupon bonds with a face value of $6 million for cash. The bonds mature in 10 years and were issued at a price of $3,050,100.

Required: What amount of interest expense on these bonds would Morton Sales Co. report in its 2021 income statement?

 

On September 1, 2021, Expert Materials, issued at 98 plus accrued interest, $800,000 of its 10% bonds. The bonds are dated June 1, 2021, and mature on May 30, 2029. Interest is payable semiannually on June 1 and December 1. At the time of issuance, Expert would receive cash of:

 

During the year, Hamlet Inc. paid $20,000 to have bond certificates printed and engraved, paid $100,000 in legal fees, paid $10,000 to a CPA for registration information, and paid $200,000 to an underwriter as a commission. What is the amount of bond issue costs?

 

On January 1, 2016, F Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2026, but were callable at 101 any time after December 31, 2019. Interest was payable semiannually on July 1 and January 1. On July 1, 2021, F called all of the bonds and retired them. The bond premium was amortized on a straight-line basis. Before income taxes, F Corp.'s gain or loss in 2021 on this early extinguishment of debt was:

 

On April 1, 2021, Austere Corporation issued $300,000 of 10% bonds at 105. Each $1,000 bond was sold with 25 detachable stock warrants, each permitting the investor to purchase one share of common stock for $17. On that date, the market value of the common stock was $15 per share and the market value of each warrant was $2. Austere should record what amount of the proceeds from the bond issue as an increase in liabilities?

 

On January 1, 2021, Solo Inc. issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2031. Solo paid $50,000 in bond issue costs. Solo uses straight-line amortization. What is the carrying value of the bonds reported in the December 31, 2021, balance sheet?

 

On June 30, 2021, Moran Corporation issued $4 million of its 8% bonds for $3.5 million. The bonds were priced to yield 9.4%. The bonds are dated June 30, 2021. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the six months ended December 31, 2021?

 

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

Payment,Cash, Effective Int, Dec in Balance, Outstanding Balance

11,487,747

1, 400k, 344,632, 55,368, 11,432,379

2 400k 342,971 57,029 11,375,350

3 400k 341,261 58,739 11,316,611

4 400k

What is the book value of the bonds as of December 31, 2022?

 

In its 2021 annual report to shareholders, Health Foods, Inc., disclosed the following information about some of its indebtedness:

The fair value of convertible subordinated debentures is estimated using quoted market prices. Book amounts and estimated fair values of our financial instruments other than those for which book amounts approximate fair values as noted above are as follows (in thousands)

Convertible subordinated debentures:

Book Amount, Estimated Fair Value,

2021 158,791 295,923

2020 151,449 200,396

In addition, the company disclosed the following: We have outstanding zero coupon convertible subordinated debentures which had a book amount of approximately $158.8 million and $151.4 million at September 26, 2021, and September 28, 2020, respectively. The debentures have an effective yield to maturity of 5 percent and a principal amount at maturity on March 2, 2035, of approximately $308.8 million. The debentures are convertible at the option of the holder, at any time on or prior to maturity, unless previously redeemed or otherwise purchased. The debentures have a conversion rate of 10.64 shares per $1,000 principal amount at maturity, representing 3,285,632 shares. The debentures may be redeemed at the option of the holder on March 2, 2025, or March 2, 2030, at the issue price plus accrued original discount totaling approximately $188 million and $241 million, respectively. Required:

What amount of interest expense will Health Foods accrue on the debentures during fiscal year 2022?

 

On June 30, 2021, Mabry Corporation issued $5 million of its 8% bonds for $4.6 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2021. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the 6 months ended December 31, 2021?

 

TMC issued $55 million of its 12% bonds on April 1, 2021 at 99, reflecting a market rate of interest of 14%, plus accrued interest. The bonds are dated January 1, 2021, and mature on December 31, 2040. Interest is payable semiannually on June 30 and December 31. What amount did TMC receive from the bond issuance? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

On March 1, 2021, E Corp. issued $1,000,000 of 10% nonconvertible bonds at 103, due on February 28, 2031. Each $1,000 bond was issued with 30 detachable stock warrants, each of which entitled the holder to purchase, for $50, one share of Evan's $25 par common stock. On March 1, 2021, the market price of each warrant was $4. By what amount should the bond issue proceeds increase shareholders' equity?

 

National Storage issued $90 million of its 10% bonds on April 1, 2021, at 99 plus accrued interest. The bonds are dated January 1, 2021, and mature on December 31, 2038. Interest is payable semiannually on June 30 and December 31. What amount did National receive from the bond issuance?

 

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

PaymentCashEffectiveInterestDecrease inBalanceOutstandingBalance 11,487,747 1 400,000 344,632 55,368 11,432,379 2 400,000 342,971 57,029 11,375,350 3 400,000 341,261 58,739 11,316,611 4 400,000

What is the stated annual rate of interest on the bonds?

 

Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $430 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%. Assuming that Auerbach issued the bonds for $366,029,000, what would the company report for its net bond liability balance after its first interest payment on March 31, 2022?

 

On September 1, 2021, Sam's Shoe Co. issued $350,000 of 8% bonds. The bonds pay interest semiannually on January 1 and July 1 of each year. The bonds were sold at the face amount. How much cash did Sam's receive upon sale of the bonds?

 

Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%.Assuming that Auerbach issued the bonds for $255,369,000, what interest expense would it recognize in its 2021 income statement?

 

On February 1, 2020, Pat Weaver Inc. (PWI) issued 10%, $1,000,000 bonds for $1,116,000. PWI retired all of these bonds on January 1, 2021, at 102. Unamortized bond premium on that date was $92,800. How much gain or loss should be recognized on this bond retirement?

 

On January 1, 2021, Legion Company sold $200,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $177,000, priced to yield 12%. Legion records interest at the effective rate.Legion should report bond interest expense for the six months ended June 30, 2021, in the amount of:

 

Rick's Pawn Shop issued 11% bonds, dated January 1, with a face amount of $400,000 on January 1, 2022. The bonds sold for $370,000. For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Rick's determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2022, the fair value of the bonds was $365,000, with $2,000 of the change due to a change in general interest rates. Rick's statement of comprehensive income will include:

 

Earl Lee Riser Alarm Co. issued $10,000 of bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds.

Payment, Cash, Effective Rate, Dec in Balance, Outstanding Balance

9,080

1 400 409 9 9,089

2 400 409 9 9,089

3 400 409 9 9,107

4 400

What would be the total interest expense recognized for the bond issue over its full term?

 

Shaq Corporation issued $10,000 of bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds.

Payment, Cash, Effective Rate, Dec in Balance, Outstanding Balance

9,080

1 400 409 9 9,089

2 400 409 9 9,098

3 400 409 9 9,107

4 400 410 10 9,117

What is the effective annual rate of interest on the bonds?

 

On January 1, 2021, Morton Sales Co. issued zero-coupon bonds with a face value of $5.6 million for cash. The bonds mature in 6 years and were issued at a price of $3,528,952. Required: What was the annual effective interest rate in the market when the bonds were issued?

 

On September 1, 2021, Red Co., issued $48 million of its 10% bonds at face value. The bonds are dated June 1, 2021, and mature on May 30, 2031. Interest is payable semiannually on June 1 and December 1. At the time of issuance, Red would receive cash proceeds that would include accrued interest of: