ACCT 112 Ch 11 Long-Term Liabilities PDF

ACCT 112: Ch 11 CHAPTER 11 LONG-TERM LIABILITIES MULTIPLE CHOICE QUESTIONS 43. Each of the following is correct regarding bonds except they are a. a form of interest-bearing notes paya...

ACCT 112: Ch 11 CHAPTER 11 LONG-TERM LIABILITIES MULTIPLE CHOICE QUESTIONS 43. Each of the following is correct regarding bonds except they are a. a form of interest-bearing notes payable. b. attractive to many investors. c. issued by corporations and governmental agencies. d. sold in large denominations. Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 44. The contractual interest rate is always stated as a(n) a. monthly rate. b. daily rate. c. semiannual rate. d. annual rate. Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 45. Secured bonds are bonds that a. are in the possession of a bank. b. are registered in the name of the owner. c. have specific assets of the issuer pledged as collateral. d. have detachable interest coupons. Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 46. A legal document which summarizes the rights and privileges of bondholders as well as the obligations and commitments of the issuing company is called a. a bond indenture. b. a bond debenture. c. trading on the equity. d. a term bond. Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 47. Shareholders of a company may be reluctant to finance expansion through issuing more equity because a. leveraging with debt is always a better idea. b. their earnings per share may decrease. c. the price of the stock will automatically decrease. d. dividends must be paid on a periodic basis. Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 48. Which of the following is not an advantage of issuing bonds instead of ordinary shares? a. Shareholder control is not affected. b. Earnings per share may be lower. c. Income to shareholders may increase. d. Tax savings result. Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics Page 1 of 11 ACCT 112: Ch 11 49. Bonds that are secured by real estate are termed a. mortgage bonds. b. serial bonds. c. debentures. d. bearer bonds. Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 50. Bonds issued against the general credit of the borrower are called a. callable bonds. b. debenture bonds. c. mortgage bonds. d. sinking fund bonds. Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 51. Bonds that may be exchanged for ordinary shares at the option of the bondholders are called a. options. b. share bonds. c. convertible bonds. d. callable bonds. Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 52. Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called a. callable bonds. b. early retirement bonds. c. options. d. debentures. Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 53. Bonds that have specific assets of the issuer pledged as collateral are a. secured bonds. b. callable bonds. c. convertible bonds. d. debenture bonds. Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 54. A bond secured by specific assets set aside to redeem the bonds is called a a. convertible bond. b. sinking fund bond. c. mortgage bond. d. secured bond. Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 55. The interest rate investors demand for loaning funds is the a. market interest rate. b. stated rate. c. contractual interest rate. d. bond interest rate. Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics Page 2 of 11 ACCT 112: Ch 11 56. Companies with good credit ratings use ___________________ bonds extensively. a. callable bonds. b. convertible bonds. c. mortgage bonds. d. debenture bonds. Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 57. Corporations are granted the power to issue bonds through a. tax laws. b. state laws. c. federal security laws. d. bond debentures. Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 58. Bonds will always fall into which one of the following pairs of categories? a. Secured or unsecured b. Mortgage or sinking fund c. Debenture or unsecured d. Callable or convertible Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 59. Which of the following statements concerning bonds is not a true statement? a. Bonds are generally sold through an investment company. b. The bond indenture is prepared after the bonds are printed. c. The bond indenture and bond certificate are separate documents. d. The trustee keeps records of each bondholder. Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 60. A corporation recognizes a gain or loss a. only when bonds are converted into ordinary shares. b. only when bonds are redeemed before maturity. c. when bonds are redeemed at or before maturity. d. when bonds are converted into ordinary shares and when they are redeemed before maturity. Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 61. If there is a loss on bonds redeemed early, the a. loss is debited directly to Retained Earnings. b. bonds’ carrying value was less than the redemption price. c. bonds’ carrying value was greater than the redemption price. d. loss is debited to Interest Expense, as a cost of financing. Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 62. A HK $600,000 bond was retired at 98 when the carrying value of the bond was HK $590,000. The entry to record the retirement would include a a. gain on bond redemption of HK $10,000. b. loss on bond redemption of HK $10,000. c. loss on bond redemption of HK $2,000. d. gain on bond redemption of HK $2,000. Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: HK $590,000 − (HK $600,000 .98) = HK $2,000 gain Page 3 of 11 ACCT 112: Ch 11 [Carry. val. B/P – (Face val. B/P x Sell. price) = Gain on redemp.] 63. A €1,000 face value bond with a quoted price of 98 is selling for a. €1,000. b. €980. c. €908. d. €98. Ans: b, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €1,000 .98 = €980 (Face val. B/P x Sell. price = Sale price) 64. A bond with a face value of HK $200,000 and a quoted price of 102⅛ has a selling price of a. HK $240,225. b. HK $204,025. c. HK $200,225. d. HK $204,250. Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: HK $200,000  1.02125 = HK $204,250 (Face val. B/P x Sell. price = Sale price) 65. If the market interest rate is greater than the contractual interest rate, bonds will sell a. at a premium. b. at face value. c. at a discount. d. only after the stated interest rate is increased. Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 66. The total cost of borrowing is increased only if the a. bonds were issued at a premium. b. bonds were issued at a discount. c. bonds were sold at face value. d. market interest rate is less than the contractual interest rate on that date. Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 67. If the market interest rate is 5%, a €10,000, 6%, 10-year bond that pays interest annually would sell at an amount a. less than face value. b. equal to face value. c. greater than face value. d. that cannot be determined. Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 68. The selling price of a €10,000, 5-year bond, will be less than €10,000 if the a. contractual interest rate is less than the market interest rate. b. contractual interest rate is greater than the market interest rate. c. bond is convertible. d. contractual interest rate is equal to the market interest rate. Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics Page 4 of 11 ACCT 112: Ch 11 69. Martinez Corporation issues 2,000, 10-year, 8%, €1,000 bonds dated January 1, 2020, at 98. The journal entry to record the issuance will show a a. debit to Cash of €2,000,000. b. debit to Bonds Payable for €40,000. c. credit to Bonds Payable for €2,040,000. d. debit to Cash for €1,960,000. Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €1,000  2,000 .98 = €1,960,000 (Face val. B/P x Nmbr. B/P iss. x Sell. price = Dr. to cash) 70. The market interest rate is often called the a. stated rate. b. effective rate. c. coupon rate. d. contractual rate. Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 71. If bonds are issued at a discount, it means that the a. financial strength of the issuer is suspect. b. market interest rate is higher than the contractual interest rate. c. market interest rate is lower than the contractual interest rate. d. bondholder will receive effectively less interest than the contractual interest rate. Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 72. The statement that "Bond prices vary inversely with changes in the market interest rate" means that if the a. market interest rate increases, the contractual interest rate will decrease. b. contractual interest rate increases, then bond prices will go down. c. market interest rate decreases, then bond prices will go up. d. contractual interest rate increases, the market interest rate will decrease. Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 73. The carrying value of bonds will equal the market price a. at the close of every trading day. b. at the end of the fiscal period. c. on the date of issuance. d. every six months on the date interest is paid. Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 74. The sale of bonds above face value a. is a rare occurrence. b. will cause the total cost of borrowing to be less than the bond interest paid. c. will cause the total cost of borrowing to be more than the bond interest paid. d. will have no net effect on Interest Expense by the time the bonds mature. Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Page 5 of 11 ACCT 112: Ch 11 75. Bond interest paid is a. higher when bonds sell at a discount. b. lower when bonds sell at a premium. c. the same whether bonds sell at a discount or a premium. d. higher when bonds sell at a discount and lower when bonds sell at a premium. Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 76. Bond Corporation issues 5,000, 10-year, 8%, €1,000 bonds dated January 1, 2020, at 103. The journal entry to record the issuance will show a a. debit to Cash of €5,000,000. b. credit to Bonds Payable for €5,150,000. c. credit to Bonds Payable for €5,030,000. d. credit to Cash for €5,150,000. Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €1,000  5,000  103 = €5,150,000 (Face val. B/P x Nmbr. B/P iss. x S.P. = Cr. to B/P) 77. Rikki Company received proceeds of €188,000 on 10-year, 6% bonds issued on January 1, 2020. The bonds had a face value of €200,000, pay interest annually on December 31, and have a call price of 101. Rikki uses the straight-line method of amortization. What is the amount of interest Rikki must pay the bondholders in 2020? a. €11,200 b. €12,000 c. €13,200 d. €10,800 Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €200,000 .06 = €12,000 (Face val. B/P x Int. rate = Int. pd.) 78. A HK $600,000 bond was retired at 102 when the carrying value of the bond was HK $622,000. The entry to record the retirement would include a a. gain on bond redemption of HK $12,000. b. loss on bond redemption of HK $10,000. c. loss on bond redemption of HK $12,000. d. gain on bond redemption of HK $10,000. Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: HK $622,000 – (HK $600,000  1.02) = HK $10,000 gain [Carry. val. B/P – (Face val. B/P x Sell. price) = Gain on redemp.] Page 6 of 11 ACCT 112: Ch 11 79. Brooks Company received proceeds of €188,500 on 10-year, 8% bonds issued on January 1, 2018. The bonds had a face value of €200,000, pay interest annually on January 1, and have a call price of 101. Brooks uses the straight-line method of amortization. Brooks Company decided to redeem the bonds on January 1, 2020. What amount of gain or loss would Brooks report on its 2020 income statement? a. €9,200 gain b. €11,200 gain c. €11,200 loss d. €9,200 loss Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: €200,000 – {€11,500 – [(€11,500/10) x 2]} = €190,800; (€200,000 x 1.01) - €190,800 = €11,200 Carry. val. B/P – {Dis. B/P – [(Dis. B/P/ Nmbr. yrs.) x 2]} = Carry. val. B/P; (Face val. B/P x Sell. price) – Carry. val. B/P = Loss on redemp. 80. Choe Company has HK $1,500,000 of bonds outstanding. The unamortized premium is HK $19,600. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption? a. HK $4,600 gain b. HK $4,600 loss c. HK $15,000 gain d. HK $15,000 loss Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (HK $1,500,000 + HK $19,600) − (HK $1,500,000  1.01) = HK $4,600 gain [(Face val. B/P + Prem. B/P) – (Face val. B/P x Sell. price) = Gain on redemp.] 81. The current carrying value of Lane’s $800,000 face value bonds is $797,000. If the bonds are retired at 103, what would be the amount Lane would pay its bondholders? a. $797,000 b. $800,000 c. $820,910 d. $824,000 Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $800,000  1.03 = $824,000 (Face val. B/P x Sell. price = Amt. pd.) 82. Robin Corporation retires its £800,000 face value bonds at 104 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is £829,960. The entry to record the redemption will include a a. credit of £2,040 to Loss on Bond Redemption. b. debit of £2,040 to Loss on Bond Redemption. c. credit of £32,040 to Premium on Bonds Payable. d. debit of £32,000 to Premium on Bonds Payable. Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (£800,000  1.04) − £829,960 = £2,040 loss [(Face val. B/P x Sell. price) – Carry. val. B/P = Loss on redemp.] Page 7 of 11 ACCT 112: Ch 11 83. Which one of the following amounts increases each period when accounting for long-term notes payable? a. Cash payment b. Interest expense c. Principal balance d. Reduction of principal Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 84. In the statement of financial position, mortgage notes payable are reported as a. a current liability only. b. a noncurrent liability only. c. both a current and a noncurrent liability. d. a current liability except for the reduction in principal amount. Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 85. A mortgage note payable with a fixed interest rate requires the borrower to make installment payments over the term of the loan. Each installment payment includes interest on the unpaid balance of the loan and a payment on the principal. With each installment payment, indicate the effect on the portion allocated to interest expense and the portion allocated to principal. Portion Allocated Portion Allocated to Interest Expense to Payment of Principal a. Increases Increases b. Increases Decreases c. Decreases Decreases d. Decreases Increases Ans: d, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 86. The entry to record an installment payment on a long-term note payable is a. Mortgage Payable Cash b. Interest Expense Cash c. Mortgage Payable Interest Expense Cash d. Bonds Payable Cash Ans: c, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 87. Autumn Company purchased a building on January 2 by signing a long-term €630,000 mortgage with monthly payments of €5,400. The mortgage carries an interest rate of 10 percent. The entry to record the first monthly payment at January 31 will include a a. debit to the Cash account for €5,400. b. credit to the Cash account for €5,250. c. debit to the Interest Expense account for €5,250. d. credit to the Mortgage Payable account for €5,400. Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €630,000 .10  112 = €5,250 interest (Mortg. x Int. rate x Time = Int. exp.) Page 8 of 11 ACCT 112: Ch 11 88. Lui Company purchased a building on January 2 by signing a long-term HK $480,000 mortgage with monthly payments of HK $4,500. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be a. HK $480,000. b. HK $479,500. c. HK $476,000. d. HK $475,500. Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: HK $480,000 .10  112 = HK $4,000 interest; HK $480,000 − (HK $4,500 − HK $4,000) = HK $479,500 [(Mortg. x Int. rate x Time = Int. exp.; Mortg. – (Pymnt. – Int. exp.) = Mortg. after pymnt.] 89. Harris Company borrowed €800,000 from Liber Bank on January 1, 2019 in order to expand its mining capabilities. The five-year note required annual payments of €208,349 and carried an annual interest rate of 8.5%. What is the amount of expense Harris must recognize on its 2020 income statement? a. €68,000 b. €56,070 c. €43,127 d. €49,659 Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: €208,349 − (€800,000 .085) = €140,349 principal reduction; €800,000 − €140,349 = €659,651; €659,651 .085 = €56,070 [Ann. pymnt. – (N/P x Int. rate) = Princp. reduc., 2019; N/P – Princp. reduc., 2019 = Carry. val. N/P, 2019; Carry val. N/P, 2019 x Int. rate = Int. exp., 2020] 90. Harris Company borrowed $800,000 from Liber Bank on January 1, 2019 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 8.5%. What is the balance in the notes payable account at December 31, 2020? a. €800,000 b. €507,372 c. €659,651 d. €664,000 Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: €208,349 − (€800,000 .085) = €140,349 principal reduction; €800,000 − €140,349 = €659,651 balance 12/31/19; €208,349 − (€659,651 .085) = €152,279 principal reduction; €659,651 − €152,279 = €507,372 balance 12/31/20 [Ann. pymnt. – (N/P x Int. rate) = Princp. reduc., 2019; N/P – Princp. reduc., 2019 = Carry. val. N/P, 2019; Ann. pymnt. – (Carry. val. N/P, 2019 x Int. rate) = Princp. reduc., 2020; Carry val. N/P, 2019 = Princp. reduc., 2020 = Carry. val. N/P, 2020] 91. In a recent year Luke Corporation had net income of $250,000, interest expense of $50,000, and a times interest earned of 10. What was Luke Corporation’s income before taxes for the year? a. $550,000 b. $500,000 c. $450,000 d. None of these answer choices are correct. Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 10 = ($250,000 + $50,000 + tax exp)  50,000; Tax exp = $200,000; Inc before tax = $250,000 + $200,000 = $450,000 [Times int. earn. = (Net inc. + Int. exp. + Tax exp.) ÷ Int. exp; (Times int. earn. x Int. exp.) – (Net inc. + Int. exp.) = Tax exp.; Net inc. + Tax exp. = Inc. before tax] Page 9 of 11 ACCT 112: Ch 11 92. The adjusted trial balance for Otam Corp. at the end of 2020 contained the following accounts. 5-year Bonds Payable 8% €1,650,000 Interest Payable 50,000 Notes Payable (3 mo.) 40,000 Notes Payable (5 yr.) 145,000 Mortgage Payable (€10,000 due currently) 300,000 Salaries and Wages Payable 18,000 Taxes Payable (due 3/15 of 2021) 25,000 The total noncurrent liabilities reported on the statement of financial position are a. €1,945,000. b. €1,935,000. c. €2,095,000. d. €2,085,000. Ans: d, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: €1,500,000 + €150,000 + €145,000 + €290,000 = €2,085,000 (B/P + Prem. B/P + N/P + Long term mortg. = Long term liab.) 93. The 2020 financial statements of Barker Co. contain the following selected data (in millions). Current Assets £ 75 Total Assets 140 Current Liabilities 40 Total Liabilities 90 Cash 8 The debt to assets ratio is a. 64.3%. b. 53.3%. c. 28.6%. d. 147.4%. Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: £90  £140 = 64.3% (Total liab. ÷ Total assets = Debt to assets ratio) 94. Which of the following statements concerning leases is true? a. A lessee records a lease liability and an asset for all leases. b. The appearance of the account, Leased Liability, on the statement of financial position, signifies a lease term of less than one year. c. The portion of a lease liability expected to be paid in the next year is reported as a current liability. d. Present value is irrelevant in accounting for leases. Ans: c, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 95. Each of the following may be shown on a supporting schedule instead of on the statement of financial position except the a. current maturities of long-term debt. b. conversion privileges. c. interest rates. d. maturity dates. Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Page 10 of 11 ACCT 112: Ch 11 96. The times interest earned is computed by dividing a. net income by interest expense. b. income before income taxes by interest expense. c. income before interest expense by interest expense. d. income before income taxes and interest expense by interest expense. Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 97. In a recent year Chandler Corporation had net income of €150,000, interest expense of €40,000, and tax expense of €20,000. What was Chandler Corporation’s times interest earned for the year? a. 5.25 b. 4.75 c. 3.75 d. 4.25 Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (€150,000 + €40,000 + €20,000)  €40,000 = 5.25 [(Net inc. + Int. exp. + Tax exp.) ÷ Int. exp. = Times int. earn.] 98. A major disadvantage resulting from the use of bonds is that a. earnings per share may be lowered. b. interest must be paid on a periodic basis. c. bondholders have voting rights. d. taxes may increase. Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 135. Each payment on a mortgage note payable consists of a. interest on the original balance of the loan only. b. reduction of loan principal only. c. interest on the original balance of the loan and reduction of loan principal. d. interest on the unpaid balance of the loan and reduction of loan principal. Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 136. Able Electronics Company issues a $1,000,000, 8%, 20-year mortgage note on January 1. The terms provide for annual installment payments, exclusive of real estate taxes and insurance, of $101,852. After the first installment payment, the principal balance is a. $1,000,000. b. $920,000. c. $978,148. d. $898,148. Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,000,000 − [$101,852 − ($1,000,000 .08)] = $978,148 [Mortg. – (Ann. pymnt. – {(Mortg. x Int. rate) = New mortg.] 137. The debt to assets ratio is computed by dividing a. long-term liabilities by total assets. b. total debt by total assets. c. total assets by total debt. d. total assets by long-term liabilities. Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Page 11 of 11