Questions and Answers
A measure of a company's solvency is the:
The times interest earned is computed by dividing:
Liquidity ratios measure a company's:
The relationship between current assets and current liabilities is:
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Parker Company issued ten-year, 9%, bonds payable in 2014 at a premium. During 2014, the company's accountant failed to amortize any of the bond premium. The omission of the premium amortization will:
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When the straight-line method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated by:
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When the straight-line method of amortization is used for a bond discount, the amount of interest expense for an interest period is calculated by:
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If bonds are originally sold at a discount using the straight-line amortization method:
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Which of the following statements regarding the effective interest method of accounting for bonds characteristics is false?
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When the effective-interest method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated by multiplying the:
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The amortization of a bond premium will result in reporting an amount of interest expense for an interest period that:
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The effective-interest method of amortization of bond premiums and discounts is considered superior to the straight-line method because it results in a(n):
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Which of the following statements best describes the behavior over time of the components of equal mortgage payments?
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Liabilities are classified on the balance sheet as current or:
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Most companies pay current liabilities:
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A current liability is a debt that can reasonably be expected to be paid:
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Which of the following most likely would be classified as a current liability?
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Failure to record a liability will probably:
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Very often, failure to record a liability means failure to record a(n):
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Current liabilities are due:
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Liabilities are classified as current or long-term based on their:
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Which of the following is not a current liability on December 31, 2014?
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With an interest-bearing note, the amount of assets received upon issuance of the note is generally:
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As interest is recorded on an interest-bearing note, the Interest Expense account is:
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The interest charged on a $250,000 note payable, at the rate of 6%, on a 90-day note would be:
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The interest charged on a $250,000 note payable, at the rate of 6%, on a 60-day note would be:
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The interest charged on a $250,000 note payable, at the rate of 6%, for a year would be:
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Interest expense on an interest-bearing note is:
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Sales taxes collected by a retailer are recorded by:
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Unearned Rent Revenue is:
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The amount of sales tax collected by a retail store when making sales is:
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A company receives $176, of which $16 is for sales tax. The journal entry to record the sale would include a:
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A company receives $261, of which $21 is for sales tax. The journal entry to record the sale would include a:
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The current portion of long-term debt should:
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Sales taxes collected by a retailer from a customer are expenses of the:
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A retailer that collects sales taxes is acting as an agent for the:
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Sales taxes collected by a retailer are reported as:
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Morgan Company does not ring up sales taxes separately on the cash register. Total receipts for February amounted to $25,440. If the sales tax rate is 6%, what amount must be remitted to the state for February's sales taxes?
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From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that:
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Secured bonds are bonds that:
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A legal document that indicates the name of the issuer, the face value of the bond and such other data is called:
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Stockholders of a company may be reluctant to finance expansion through issuing more equity because:
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Which of the following is not an advantage of issuing bonds instead of common stock?
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Bonds that are secured by real estate are termed:
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Bonds that may be exchanged for common stock at the option of the bondholders are called:
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Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called:
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Bonds that are issued against the general credit of the borrower are called:
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Corporations are granted the power to issue bonds through:
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Bonds are not always categorized as:
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Which of the following statements concerning bonds is not a true statement?
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The contractual rate of interest is usually stated as a(n):
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When authorizing bonds to be issued, the board of directors does not specify the:
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Bonds with a face value of $300,000 and a quoted price of 102¼ have a selling price of:
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The present value of a bond is also known as its:
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All of the following statements regarding convertible bonds are true except:
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The contractual interest rate on a bond is often referred to as the:
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If the market interest rate for a bond is higher than the stated interest rate, the bond will sell at:
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If the market rate of interest is greater than the contractual rate of interest, bonds will sell:
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The interest expense recorded on an interest payment date is increased:
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If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest annually would sell at an amount:
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If the market rate of interest is lower than the contractual interest rate, the bonds will sell at:
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If bonds are issued at a premium, the stated interest rate is:
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The present value of a $10,000, 5-year bond will be less than $10,000 if the:
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The market value (present value) of a bond is a function of all of the following except the:
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The market rate of interest is often called the:
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If bonds are issued at a discount, it means that the:
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Selling the bonds at a premium has the effect of:
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When bonds are issued at a premium, the total interest cost of the bonds over the life of the bonds is equal to the amount of:
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The statement 'Bond prices vary inversely with changes in the market rate of interest' means that if the:
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The carrying value of bonds will equal the market price:
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Over the term of the bonds, the balance in the Discount on Bonds Payable account will:
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The sale of bonds above face value:
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In the balance sheet, the account Premium on Bonds Payable is:
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In the balance sheet, the account Discount on Bonds Payable is:
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Bond discount should be amortized to comply with:
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The journal entry to record the issuance of bonds at a discount will include a:
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If bonds have been issued at a discount, then over the life of the bonds the:
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When bonds are retired before maturity:
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Restoration Company issued bonds that had the following data associated with them: interest to be paid is $40,000. Interest expense to be recorded is $45,000. Which of the following characteristics is true?
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Study Notes
Liabilities Overview
- Liabilities are classified as current or long-term based on their due date.
- Current liabilities are debts expected to be settled within one year or the operating cycle.
Current Liabilities
- Common examples include accounts payable and dividends payable.
- The current portion of long-term debt is reclassified as a current liability when due.
- Current liabilities are typically settled using current assets.
Recording Liabilities
- Failing to record a liability may result in overstated net income.
- Unrecorded liabilities often correlate with unrecorded expenses.
- Important journal entries for liabilities include recognizing interest expenses and sales taxes payable.
Interest and Notes
- Interest on notes payable is recorded as an increase in Interest Payable.
- Calculating interest involves the principal amount, interest rate, and duration.
- Interest expense accumulates over the life of the note, impacting financial statements.
Sales Tax Management
- Sales taxes collected by retailers are recorded as current liabilities.
- Retailers act as agents for the government when collecting taxes.
- Proper entry for sales tax includes crediting Sales Taxes Payable.
Bonds Overview
- Bonds can be secured by assets or unsecured (debenture bonds).
- Bonds may also be callable or convertible based on issuer options.
- The contractual interest rate is a fixed percentage, while market rates can affect bond pricing.
Amortization of Discounts and Premiums
- Discount bonds require amortization to match interest expense to actual payments.
- Premium bonds reduce the total interest cost over their life compared to interest payments.
- Carrying values of bonds adjust according to the amortization method used.
Financial Ratios and Analysis
- Times interest earned measures solvency by comparing income to interest expenses.
- Liquidity ratios assess a company’s short-term debt paying ability using current assets and liabilities.
- Solvency ratios indicate a company's long-term financial health.
Importance of Accurate Reporting
- Accurate recording of liabilities affects net income and retained earnings.
- Any discrepancies between recorded and actual liabilities can mislead investors and stakeholders.
- Regular assessments and adjustments are vital for maintaining accurate financial statements.### Amortization Methods for Bonds
- Interest expense in the straight-line amortization method equals cash paid for interest plus the amortized discount.
- For a bond sold at a discount, the unamortized discount is subtracted from the face value for carrying value.
- Interest expenses in the initial years are equal to paid interest when using the straight-line method.
Effective Interest Method
- GAAP mandates the effective interest method for bond accounting.
- Interest expenses decrease over time for discounted bonds using this method.
- Carrying value of discounted bonds increases as they mature when adopting the effective interest method.
- This method applies a constant percentage to carrying value for calculating interest expense.
Bond Premium Amortization
- For the effective-interest method applied to bond premiums, interest expense is calculated by using the carrying value and effective interest rate.
- Amortization of bond premium leads to reported interest expense being less than cash paid for interest.
Comparison of Amortization Methods
- The effective-interest method is preferred over the straight-line method as it yields a more uniform interest rate throughout the bond's life.
Behavior of Mortgage Payments
- With equal mortgage payments, the share of principal repayment grows while interest expense decreases over time.
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Description
This quiz provides an overview of liabilities, distinguishing between current and long-term classifications. It covers examples of current liabilities, the importance of accurate recording, and the implications of interest expenses. Test your understanding of how liabilities impact financial statements.